ML18230A823

Carolina Power & Light Company - Testimony of Mr. Sam C. Hammond, Accounting Manager - Utilities Division

ML18230A823
Person / Time
Site:	Harris
Issue date:	06/09/1977
From:	Hammond S State of SC, Public Service Commission
To:	Office of Nuclear Reactor Regulation
References
18361, 18387
Download: ML18230A823 (18)

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'CAROLXNA POWER AND LXGHT CO., XNC.

DOCKET NOS. 18,361 and 18,387 THSTXMONY OF MR. SAM C. IIAPNOND ACCOUNTING MANAGER UTXLXTXI."S DIVISION 1 Q. MR. HAMMOND, WOULD YOU PLEASE STATE YOUR NAME, ADDRESS AND 2 OCCUPATION?

3 A. My name is Sam C. IIammond and I reside in Chapin, South Carolina.

4 1 am employed by t: he South Carolina Public Service Commission, Utilities Division, as Account.ing Manager.

6 Q. WOULD YOU PLI'.ASE STATE YOUR "EDUCATXONAL BACKGROUND AND YOUR 7 EXPERIENCE.

8 A. I received a B. S. Degree in Business Administration wit.h an 9 Accounting Major from t: he University of Southern Mississippi 10 in 1949. Since that time, I have spent: approximately 21 years in auditing wit:h 15 years in State Government and 6 years 12 in private industry. In addition to my auditing experie.,ace, I have also served as Comptroller for a textile plant: and Comptroller for a small conglomerat:e corporation that had various interest:s. I have been with this Commission for the p st five 16 years and in my present position as Account:ing Manager for the 17 past four years.

18 Q. WHAT XS TIlE PURPOSE OF YOUR TESTIMONY XN THIS PROCHEDXNG?

19 A. The purpose of my testimony .i s t'o: et fort h in summary form 20 Staff's findings and recommendations resulting from our study 21 and examinat:ion of tl>e books and records of t: he Company concerning 22 the present: rate ca' 'I'he' finding lnd rcco)mnondations 23 are set forth in detail in t: he report: of t: he Utilitics Division with attached exhibits.

Q. MR. HAMMOND, I SIIOW YOU THE REPORT WITH ATTACHED EXHXBITS TITLED 2 "CABOT XNA POWER AND LXGHT CO., XNC., BATH CASH 1976, DOCKET NOS 3 '8,361 and 18,387, REPORT OF UTXLXTXHS DIVISION, SOUTH CAPOLXNA 4 PUBLXC SERVICE COMMXSSXON." WAS. THXS 141'"PORT PRI'PARED BY 'OU 5 OR UNDER YOUR DXRECT SUPERVISION?

A. Yes, it was, with the exception of the Electric.Department's section of the report.

8 Q. (MARK FOR IDENTIFICATION), WOULD YOU EXPLAIN THE CONTENTS OF THIS REPORT' 10 A. As outlined in the index to Staff's report, Pages 1 through 36 contain an analysis of the report, with the remaining pages 37 12 through 91 containing supporting exhibits. My testimony will be keyed basically to Exhibit A shown on page 37 of the report, 14 which is titled 0 eratin Experience, Rate Base and Rate of Return. The Return on Rate Base in Exhibit A is shown for per 16 book operations for Total Company and S. C. Retail. In addition, 17 Staff has shown Rate of Return for normalized operations for Total, Company, Total Wholesale, Total Retail and S. C. Retail 19 both before and after the requested increase. All exhibits in 20 Staff's r<'.port utilize a test, year ended December 31, 1975, 21 unless otlierwise .indicated.

22 Q. DO YOU HAVE ANY FURTIIER EXPI ANATXON OF I.;XIIXBXT A?

23 A. Yes.'taff prepared, this Exhibit per books in compliance with this Commis ion's directive issued November 13, 1974, 25 concerning components to be included in calculating Total Income 26 for Return and Bate Base for electric utilitios. The Exhibits 27 format is as follows:

Column (1): The Company's Per Book Operations are shown for test year 1975.

Column (2): Staif's Accounting and Pro Forma Adjustments. made to normalize the operations of the Company, which are shown separately in Exhibit A-l.

Column (3): Staff's computation of, Total Income for Return and Hate Base for Total Company after Accounting and Pro Forma Adjustments.

Column (4): Staff's Rate of Return computation for Total,Nholesale 10 after allocation of Accounting and Pro Forma Adjustments.

Column (5): Total Company Retail Operations are shown after allocation of Accounting and Pro Forma Adjustments.

Column (6)- S. C. Retail Operations are shown as allocated from Total Company per books.

16 Column (7): Staff's Accounting and Pro Forma Adjustments -allocated 17 to S. C. Retail Operations.

Column (8): S. C. Retail Operations are shown after Accounting 19 and Pro Forma Adjustments but prior to the effect 1

20 of the requested increase.

21 Column (9)- The effect oi the requested increase of 9(2,487,000 22 and the related state and federal tax effect; 23 Column (10): Staff's Computation of the normalized test year 24 for S. C. Retail after giving effect to the requested 25 increase.

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Q i WOULD YOU PLF>>AS E E>>LABORATF>> ON THE CALCULATIONS XN EXH I BIT A IN THE. SAME FORMAT AS YOU HAVE OUTLINED?

3 A. Shown in Column (1) are the results of per book operations for the test year, including those components for Total Xncome for Return and Original'ost Rate Base as outlined in this Commission's I

directive of November 13, 1974. Staff computed Net Operating Xncome of 4110,866,000 which is the same as that shown on Davis Exhibit Ol, Page 1 of 8. From this amount, Staff deducted Interest on Customer Deposits of pl62,000 which, in effect, 10 allows this amount as an operating expense. Also included is Customer Growth, Allowance for Funds During Construction 12 and Income Tax-Credit, producing Total Income for Return of 13 $ 191,447,000. Davis Exhibit fjl shows Total Income for Return 14 per books of $ 167,018,000. The difference is due to Staff's 15 inclusion of A.F.D.C. at the per book amount rather than the adjusted amount. Staff's adjustment to A.F.D.C. is shown in 17 Column (2).

Sta.ff computed an Original Cost: Rate Base for Total Company 19 per books of $ 2,307,158,000. The Company's computation on J

20 Davis Exhibit 56, page 2 of 3, shows a total Rate Base of

$ 2 307 558,000 g g ~ The difference is attributable to Work.ing 22 Capital'Allowance computation. Staff's computation of Working 23 Capital is included as Exhibit A-3. Also, a reconciliation of differences in computations for Total Income for Return and Rate 25 Base is included as Exhibits A-4 and A-5, respectively.

26 Staff's computation produced a Rate of Return for Total Company 27 Per.Books of 8.30$ .

NOULD YOU NON EXP J AIN TI3E ACCOUNTING AND PRO FORHA ADD UST1:.ENTS FOUND XN COLUMNS 2 AND 7 OF YOUR EXHIBIT AP 3 A. The Company's test year operations were normalized by Adjustments 1 thxough 13. 'Shown in Column 2 is the Total Company Adjustment and Column 7 includes that portion of the Adjustment allocated to S. C. Retail Operations ba..ed on the Company l s Jurisdi.cti.onal Allocation Study. The Company's and Staff 's Adjustments axe presented sepaxately in Exhibit A-l con -isting.

of pages 1 thxough 9 and are explained in detail in the 10 analysis to Exhibit A-l.

/ Since the adjustments are explained in Staff's report, X will discuss only those which differ 12 from the Company's.

13 Adj. 2 0 & M Expense'djustments Xn Account 8930, "Mi.scellaneous General Expenses," the Company included $ 366,793 for "National and Tiocal Institutional. Advertising Expenses".

16 Of this amount, $ 37,747 was attributable to E>>exgy Co>>servation.

17 Staff agrees with advertising to conserve energy, but is of the opinion that advertising to promote the Company a>>d its image 19 should be borne by the stockholders rather than the ratepayers.

20 As a resuIt, Staff made an adjust)nent to decrease 0 6 M Expenses by ($ 329,046) on system total.. Thi - has the ef.,ect of t rans-22 ferring Xnstitutional Advertising, excl.udi ng Conservation, to below 23 the-line for rate )naking purposes. Staf f allocated the S. C.

Retail portion of the adj>>stnent by>>se of: the Cornp~ny's 25 Jurisdictional. Allocation Study. The !'act.or computed ('r S. C..

26 Retail was 16. 144 or ($ 53, 108) .

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Also included in Account ff930, "Miscellaneous General Expenses", for the test year were Dues .to various Chambers of Commerce totaling $ 11,614. Staff feels that these expenditures are not necessary to electric operations and has excluded this amount from 0 s M Expenses. S. C. Ref ail 0 & M Fxpenses were decreased by ($ 1,874).

Ad'. 5 State Income Tax Adjustments State Income Taxes were adjusted by Company and Staff to reflect the State Xncome Tax effect of Revenue and Expense 10 Adjustments. The Company's computation resulted in a decrease to State Xncome Taxes of ($ 1,620,568) for Total System <<nd

($ 481,268) for S. C. Retail. Staff's Adjustment to Revenue 13 and Expense items produced a decrease of ($ 1,944,826) with

($ 477,969) apportioned to S. C. Retail.

15 Ad '. 6 Federal Income Tax Adjustments 16 Federal Income Taxes were also adjusted to reflect the tax 17 effect of all revenue and expense adjustments. Company 18 Adjustments resulted in a projected decrease to Federal Xncome 19 Taxes cf ($ 23,254,922) for Total System and ($ 3,619,140') for 20 S. C. Retail. Staff's adjustments produced a decrease to 21 Federal Income Taxes of ($ 22,935,761) for Total Syst: em and 22 ($ 3,594,332) for S. C. Retail. The difference is attributable 23 to the tax effect of 0 s M Expense Adjustments made by Staff whic 24 were not made by the Company.

25 Ad'.,7 Provision for Deferred Income Taxes Adjustments 26 Xncluded as an adjustment to Deferred Income Taxes is a proposal I

27 by the Company to iaormalize the tax benefits of certain items 28 which have previously been "flowed-through" to the bonefit of

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current ratepayers. These items consist of (1) the tax effect of capitalized items (Property Taxes and Pension Costs) which are deductible ior tax purposes totaling $ 3,279,000 for Total Company and (2) a portion og the tax benefits arising from the difference between book depreciation and accelerated depreciation totaling $ 12,335,000. The tax benefits arising from both of the above-mentioned items have previously been under the "flow-through'" method, thereby reducing the current book income taxes and increasing Net Operating Income. The 10 proposed adjustment requires an increase to Deferred Income Taxes in the amount of $ 15,614,000 for the test year for Total ompany.

12 By this normalization method taxes are not deferred for future 13 ratepayers. Over the life of the asset, taxes will be normal 14 as if th~ Company had used straight-line depreciation.

15 For purposes of our presentation, Staif disallowed a portion of the adjustment for capitalized items totaling $ 3,279,000.

17 Though Staff is basically in agreement with the normalization 18 method of accounting, we ieel that a change to full normalization is a burden on the current ratepayer.

20 Since the Company was actually under the Partial "flow-,

through" method during the test year, Staff used, to some extent, 22 the. same treatment for rate-making purposes, and would 23 recommend that the Company achieve full normalization for, future rate-making purposes. Therefore, Staff's adjustmcnt 25 totals $ 12,335,000 for Total Company nnd $ 2,197,325 for S. C.

26 Retail.

27 Ad'. 12 '- Materials and Supplies Ad ustmc>>ts 28 Included in Account N155 as a part of Materials and Supplies for the tost year was "Merchandise" of $ 8,222. Since Materials and Supplies is a part of Rate Base upon which investors, are entitled to earn a rate of return, Staff has eliminated "Merchandise" as being unrelated to the sales of electricity.

Staff computed an allocation factor of .1556 for S. C. Retail from the Company's Jurisdictional Allocation Study. Amount allocated to S. C. Retail was $ 1,279.

As a part of the Company's last rate application, Docket'os.

17,134 and 17,336, before this Commission, an adjustment was proposed to increase fuel supply to an August, 1974, price 10 level based on a 1973 test year. The adjustment was proposed due to the rapidly rising prices of coal. Since the price of coal has been decreasing, Staff feels that a similar adjustment should be made to reflect that decrease for this proceeding.

Staff has, therefore, adjusted the end of year coal inventory 15 to April 30, 1976 average cost per ton which were the latest

~ 16 figures available at the time of preparation of this report.

17 Even though this adjustment emcompasses a known change occurring 18 beyond the test year, Staff has, in previous cases, accepted 19 adjustments .for known changes up to the date of'filing a rate 20 application. Staff is of the opinion that this adjustmcnt is 21 necessary to more accurately reflect future expectations of 22 coal prices.

23 The revaluation of the ending .inventory to April 30, 1976 average cost ($ 25.57) per ton dec:reascd ending inventory by 25 ($ 1,339,212). Staff computed an allocation factor of .1454 from the Company's Jurisdictional Allocation Study resultinq in 27 a decrease to inventory allocated to S. C. Retail of ($ 194,721).

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Q. MR. HAMMOND, WOULD YOU SUMMARIZE THE EFFECT OF THE PREVXOUSLY MENTXONJ D ADJUSTMENTS ON TOTAL COMPANY AND S.C. RETAXL OPERATXONS?

A. Column 3 reflects Staff's computation of a normalized year after adjustment for total company and included in Column 8 is S. C. Retail Operations as adjusted. The net effect of all Accounting and Pro Forma Adjustments decreased Total Xncome for Return by ($ 55,991, 000) and decreased Rate Base by

($ 33,015,000) for Total Company. Therefore, Rate of Return after adjustments is decreased from 8.30% to 5.96%-

10 After Adjustments were allocated to S. C. Retail Operations, Total Income for Return is decreased by ($ 8,853,000) while Rate 12 Base is decreased by ($ 4,811, 000)r Rate of Return after Adjustments for S. C. Retail is decreased from 8.69% to 6.17%.

14 WOULD YOU PLEASE DESCRXBE COLUMN I9?

A. This is the calculation of the effect of the requested iiicrease.

16 Based on the proposed rates, it is projected that the Company 17 would receive $ 22,487,000'dditional gross annual revenues.

18 The requested increase is summarized on Exhibit C. After the related tax effect of $ 11,528, 000 the Company would have 20 additional Xncome Available for Return of $ 10,959,000 21 Q. WOULD YOU NOW SUMMARXZE COLUMN I'10?

22 A. Column f;10 reflects a normalized year's operations for S. C.

23 Retail <<fter the proposed increase. Based on Total Xncome for 24 Return of $ 31,672,000 and Rate Base of $ 334,611,000~. Rate of Return is projected at 9.47% afLer the requested increase.

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~ ~ ) e 1 Q. MR. HAMMOND, DOES THXS CONCLUDE YOUR rES rXMONY ON EXIIXBXT A?

21 A. Yes, it does.

Q. DO YOU HAVE ANY COMMENT ON ANY OF TIIH OTIIHR EXIIXBXTS CONTAXNHD XN STAFF'S REPORT' 5 A. Shown on Exhibit H, Staff has allocated the S. C. Retail Rate Base, as 'found appropriate in Exhibit A, according to the respective capitalization ratios. Based oq this allocation, the Return on Common Equity after the proposed increase is 12.90%.

This'ompares with a Return of 12.18% shown on Davis Exhibit g6, 10 Page 3 of 3.

Also, for Commission information purposes, included on 12 Page 2 of Exhibit H is a computation for Return on Common 13 Equity without the adjustment for full normalization as proposed by the Company. This method would afford the same treatment 15 as used by the Company in prior rate proceedings. This method 16 produces a Return on Common of 14.76% after the requesed increase.

17 Q. MR. HAMMOND, DO YOU IIAVE ANY COMMENTS NXTII REFERENCE TO THE 18 PROCEDURES FOR XMPLEMENTXNG THE FUEL ADJUSTMENT CLAUSE PROPOSED 19 BY THE COMPANY'S DAVXS HXHXBXT 3, RIDER NO. 39?

20 A. Yes, the Staff recognizes that various procedures for implementing 21 an Automatic Fuel Adjustment are utilized by one or rare utilitics 22 under the jurisdiction of this Commission. Any procedure will 23 consist, of four related but separate steps.

24 These are (1) determining the cost to be passed through;(2) 25 distributing those costs to the rate payers; (3) collecting the 26 distributed'costs from the ratcpayers; and (4) accounting for 27 the related expenses and revenues that are produced by the 28 transaction. Xt is the Accounting Staff's recommendation that the procedures outlined in Commis'sion Order No. 19,002 in Docket, No. 18,632 be followed. - Xn other words, each month's fuel cost above base is charged to that month's usage and, billing of revenues is deferred 60 days to enable the Company to use actual costs. The Company should use an expense deferral or a revenue accrual method to account for any lag in collections. Hr. Harris of the Staff will testify subsequently regarding the proper components of the clause.

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uestion 410.9 Complete the attached form entitled, "Financial Statistics," for th

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most recent 12-month period and for the years- ended December 31, 1975 and December 31, 1974.

~es onse See following page.

ATTACHMENT POR ITEM NO ~ 4LO ~ 9 FINANCIAL STATISTICS Twelve Months Ended 84rrh 32 December 3L 1977 L976 L975 L974

{dollars in millions Earnfngs available to common equity $ 104.6 $ 91.4 $ 69.4 51. 6 Average common equity (Daily Veighted Average) $ 780.1 $ 748.0 627.2 537.7 Race oE return on average cocznon equity L3,4L'/ l.2. 227, 11. 077. 9.602 Times total taterest earned before PIT:

Cross income (fact. AFDC) + current and deferred FIT i total interest charges +

amortization of debt discount aad expense 3.02 2. 77 2.09 2.02 Times Long-term tnterest earned befoze FIT:

Cross income (fncl. AFDC) + currenc aad deEerred FIT 0 long-term interest'charges

+ amortization of debt discount and expense 3.09 2. 81 2. 18 2. 2l, Bond ratings (end of period)

Standard and Poor's A A A Moody's Baa Baa Baa Times intezest aad pzeEezzed dividends earned aEter FIT:

Cross income {tncl. APDC) 0 total interest charges + amortization of debt discount and expense + pzefezred dividends 1491 1. 79 1. 60 l. 53 APUDC $ 50.0 $ 48.8 $ 59.9 $ 54. 6 Net income after preEerred dividends $ 104.6 $ 9l.. 4 69.4 51. 6 79 47.807. 53. 39!. 86.31%

L05.8'10.875 Market price of common $ 22.375 $ 24.125 $ 20.00 Book vaLue of common $ 23.31 $ 22.76 $ 22.02 $ 23.35 Market-book ratio {end of period)* .960 1.060 .908 .466 Earnings avail. for common less AFDC +

depreciacfon and amortization, deferred (Non-Curreac) taxes, aad tnvesc. cax credit adjust.-deferred $ 226.4 $ 196. 7 $ 103. 5 $ 47.3 Common dividends $ 59.L $ 56.8 $ 46. 2 $ 37.4 Ratio 3.828 3. 466 2.241 L.266 Short-term debt Bank loans $ 50.3 Commercial paper 81. 3 Capt talizatton (Amount)

Long-cerm debt $ l,, l,03.5 $ 1, 103.4 $ 1,155.2 1,034.l.

Pzefezred stock & Preference stock 336.0 336. 0 336.0 288.1 Common equity 842.5 II 69 . 6 725.9 548.5

$ 2,28L.O 82."59.0 82.207.2 42.870.7 Capt tal fzation (Percent)

Long-tern debt 48.4 48.8 52. 3 55.3 Preferred stock & Preference stock 14.7 14.9 L5.3 L5. 4 Comzoa equf ty 36.9 36.3 32. 4 29. 3 l.00.0 LOO.O 100. 0 LOO. 0

• If subsidiary compaay, use parent's dace.

In addition to providing responses to the preceding specific questions, review the previously submitted financial information and provide up-dated information in any areas where material changes have occurred or where new information is available.

~r.es~onSe Response provided on pages 1, 2, 3, 3A, 4, 4A, 4B, 4C, 4D, 5, 5B, SC, 5D, 5E and 6.