BEFORE: Chairman William W. Redman, Jr. VOLUME 12 ...

. PLACE: Commission Hearing Room, Raleigh, NC

2 DATE: September 13, 1991 DOCKET: E-7, Sub 487

3 TIME IN SESSION: 9:30 a.m. - 12:30 p.m.

4 BEFORE: Chairman William W. Redman, Jr.

Commissioner Sarah Lindsay Tate 5 Commissioner Julius A. Wright

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IN THE MATTER OF:

Duke Power Company General Rate Increase

g VOLUME 12

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APPEARANCES:

FOR DUKE POWER COMPANY:

Steve C, Griffith, Jr., Senior Vice President & General Counsel

14 Ellen T. Ruff, Deputy General Counsel Karol P. Mack, Senior Attorney

15 Duke Power Company 422 S. Church Street

15 Charlotte, North Carolina 28242

- and -

Clarence W. Walker, Attorney at Law Myles E. Standish, Attorney at Law

19 Kennedy, Covington, Lobdell & Hickman 3300 NCNB Plaza Charlotte, North Carolina 28280

FOR THE CITY OF DURHAM

W. I. Thornton, Jr., City Attorney Gayle Moses, Assistant City Attorney

23 101 City Hall Plaza Durham, North Carolina 27701

Continued)

NORTH CAROLINA UTILITIES COMMISSION

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APPEARANCES: (Continued)

FOR

FOR

FOR

FOR

CAROLINA UTILITY CUSTOMERS ASSOCIATION, INC.:

Sam J. Ervin, IV, Attorney at Law Byrd, Byrd, Ervin, Whisnant, McMahon & Ervin, P. 0. Drawer 12 69 Morganton, North Carolina 28655

NORTH CAROLINA INDUSTRIAL ENERGY CONSUMERS:

Thomas W. Steed, Jr., Attorney at Law Moore & Van Allen P. 0. Box 26507 Raleigh, North Carolina 27611

- and -

William A. Chesnutt, Attorney at Law McNees, Wallace & Nurich P. O. Box 1166 Harrisburg, Pennsylvania 17108

SOUTHERN ENVIRONMENTAL LAW CENTER;

Derb S. Carter, Jr., Staff Attorney Southern Environmental Law Center 137 East Franklin Street, Suite 404 Chapel Hill, South Carolina 27514

- and -

Jeffrey M. Gleason, Staff Attorney Southern Environmental Law Center 201 West Main Street, Suite 14 Charlottesville, Virginia 22901

CONSUMERS;

Karen E, Long, Assistant Attorney General NC Department of Justice P. 0. Box 629 Raleigh, North Carolina 27602

(Continued)

P.A.


Ill

1 APPEARANCES; (Continued)

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FOR THE USING & CONSUMING PUBLIC:

3 A. W. Turner, Jr., Staff Attorney James D. Little, Staff Attorney Public Staff - NC Utilities Commission P. 0. Box 29520

5 Raleigh, North Carolina 27626-0520


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I N D E X

William R. Stimart Direct (Standish) 2 Cross (Ervin) 32 Cross (Long) 67 Cross (Turner) 73

Thomas S. Lam Direct (Turner) 9 0 Cross (Ervin) 102

E X H I B I T S

ID AD

Stimart Exhibits 1 - 3 ' 3 85

Stimart Supplemental Exhibit 1 3 8 5

AG Stimart Cross Exhibit 1 70

Denton Exhibits 1 - 4 -- 85

Lam Appendix A 91

Exhibits TSL-1 thru TSL-4 91


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E-7, Sub 487

CHAIRMAN REDMAN:

Let' s come

Duke to call their

MR. STANDISH:

VOLUME 12

on the record,

September 13, 1991

please.

next witness, please.

Mr. Chairman, Duke would

R. Stimart.

WILLIAM R. STIMART

CHAIRMAN REDMAN:

Please have

Let me ask.

on the cross with

that has been nega

MR. TURNER;

There's no

; Being first

fied as foil

a seat.

Mr. Little had

Mr. Stimart.

ted, and we will

call Mr.

duly sworn

ows :

I'd ask

William

testi-

asked to go first

And I assume that

proceed as

need for us to go first

people particularly want us to.

CHAIRMAN REDMAN:

Very good.

Mr. Ervin,

MR. ERVIN:

We haven't

CHAIRMAN REDMAN;

I 'm sorry.

in moving this thi

:UCA.

sworn him and have him give

I just -- I'm

Tg right along.

normal.

unless

his --

really interested


, Mr. Standish, would you --

DIRECT EXAMINATION

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BY MR. STANDISH:

ft Mr. Stimart, could you state your name and

address for the record?

fl. My name is William R. Stimart. My business

7 address is 422 South Church Street, Charlotte, North

Carolina.

ft Mr, Stimart, did you cause to be prepared

and filed in this docket 19 pages of direct testimony

11 and Stimart Exhibits 1, 2 and 3?

12 A- yes,Idid,

13 Q. Did you cause to be prepared and filed Stimart

14 Supplemental Testimony which consisted of four pages

15 of testimony and Stimart Supplemental Exhibit 1?

15 fl. Yes,Idid.

17 ft If I were to read those questions to you

18 today, would your answers to those questions be

19 the same other than with respect to the items that

20 you will update in your summary?

21 A. Yes.

22 MR. STANDISH:

23 Mr. Chairman, I would request that Mr. Stimart's

24 direct testimony and supplemental testimony be copied


1 into the record as if read from the stand and Stimart

2 Exhibits 1 through 3 and Stimart Supplemental Exhibit

1 be marked for identification.

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CHAIRMAN REDMAN:

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e And the request is granted.

STIMART EXS. 1 - 3 & STIMART SUPPLEMENTAL EX. 1

IDENTIFIED

(REPORTER'S NOTE: The prefiled testimony

of William R. Stimart will be reproduced in

the record at this point the same as if the questions

11 had been orally asked and the answers orally given

12 from the witness stand.)

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IA

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Q.

A.

Q.

A.

Q.

A,

TESTIMONY OF

W. R. STIMART

FOR

DUKE POWER COMPANY

NCUC DOCKET NO. E-7, SUB 487

PLEASE STATE YOUE NAME, ADDRESS AND POSITION WITH DUKE POWER COMPANY.

My name is William R. Stimart and my business address is 422 South

Church Street, Chari-OLte, North Carolina. I am Vice President, Rates

and Regulatory Affairs of Duke Power Company.

STATE BRIEFLY YOUR EDUCATION, ACCOUNTING BACKGROUND AND PROFESSIONAL

AFFILIATIONS.

I am a graduate of the University of Illinois, holding a degree of

Bachelor of Science in Accounting. I am a Certified Public Accountant,

with membership in the American Institute of CPA's and the North

Carolina Association of CPA's. I am also a member of the Committee on

Corporate Reporting of the Financial Executives Institute (FEI) as weii

as a member of the Accounting Research Committee of the Edison Electric

Institute,

PLEASE DESCRIBE YOUR BUSINESS BACKGROUND AND EXPERIENCE.

Upon graduation from college in 1953, I joined Arthur Andersen & Co., an

international firm of Certified Public Accountants. During the

following eleven years, I worked almost exclusively with public

utilities in the areas of audit, accounting, finance and regulatory

matters. From 1964 to the spring of 1971, I was associated with

Ayrshire Collieries Corporation in varying positions, the last of which

1 was Controller. I joined Duke Power in May 1971 as Assistant Treasurer,

2 was elected Treasurer in April 1972, Controller in October 1976 and Vice

3 President, Regulatory Affairs in October 1979, I became Vice President,

A Rates and Reguiatory Affairs in August 1990.

5

6 Q. ARE YOU FAMILIAR WITH THE ACCOUNTING PROCEDURES AND BOOKS OF ACCOUNT OF

7 DUKE POWER COMPANY?

8 A. Yes. The books of account of Duke Power Company follow the uniform

y classification of accounts prescribed by the Federal Energy Regulatory

Commission (FERC) and by the National Association of Regulatory Utility

Commissioners (NARUC).

MR. STIMART, HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION?

Yes. I have testified on financial and accounting matters in all of the

Company's general rate cases since 1973. I have also testified in

connection with numerous applications by the Company to adjust its

electric rates and charges based solely on changes in the cost of fuel.

PLEASE SUMMARIZE BRIEFLY WHAT YOUR TESTIMONY IN THIS CASE WILL COVER,

My testimony will cover the results of the Company's operations under

present and proposed rates on the basis of an adjusted historical test

period using the 12 months ended December 31, 1990. I will also discuss

the additional revenue required as a result of the commercial operation

of the Bad Creek Pumped Storage facility. The Company's operating

results and the data required under NCUC Rule Rl-17(b) of the

Commission's Rules and Regulations are set forth in Stimart Exhibits 1,

2 and 3,

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Q.

A.

Q.

A.

1 Q. WERE STIMART EXHIBITS 1, 2, AND 3 PREPARED BY YOU OR AT YOUR DIRECTION

2 AND UNDER YOUR SUPERVISION?

3 A. Yes, these exhibits were either prepared by me or at my direction and

A under my supervision. The North Carolina retail jurisdictional amounts

5 were developed in part by direct assignment of costs and in part by

6 allocations based on demand, energy and customer data.

7

8 Q. ARE THE CAPITAL AND OPERATING EXPENDITURES REPRESENTED ON THESE EXHIBITS

9 REASONABLE?

10 A. Yes. The Company has in place various budgeting, planning and review

11 procedures to establish and monitor the capital and operating budgets as

12 well as actual expenditures. The system of internal accounting controls

13 provides reasonable assurance that all transactions are executed in

14 accordance with management's authorization and are recorded properly,

15 The system of internal accounting controls is annually reviewed,

16 tested and documented by the Company's Internal Audit Department to

17 provide reasonable assurance that amounts recorded on the books and

18 records of the Company do not contain significant errors or

19 irregularities. The books of account of Duke Power Company are audited

20 - on a regular basis by the FERC staff for compliance with FERC accounting

21 requirements. In addition, the FERC staff examines the Company's

22 accounting policies, practices, procedures and internal controls. The

23 Public Staff of this Commission and the staff of the Public Service

24 Commission of South Carolina aiso examine our books and records.

25 In addition, independent certified public accountants perform an

26 annual audit to provide assurance that internal accounting controls are

27 operating effectively and that the Company's financial statements are

28 accurate.

7

1 Q. PLEASE EXPLAIN WHAT IS PRESENTED ON PAGE 1 OF STIMART EXHIBIT 1 ENTITLED

2 "OPERATING INCOME FROM ELECTRIC OPERATIONS".

3 A. Page 1 summarizes the Company's electric operations for the test period

A ended December 31, 1990 for total Company and North Carolina retail

5 operations before and after the necessary accounting adjustments. It

6 also shows the rate of return on North Carolina retail rate base before

7 and after the proposed increase.

8 The Company accounts for distribution plant and revenues from

9 kilowatthour sales on a jurisdictional basis. All other items are

10 accounted for on a system basis. Lines 1 through 11 under Column 1 set

11 forth the actual operating revenues and expenses from the Company's

12 books for the twelve months ended December 31, 1990. Actual operating

13 revenue and expenses for North Carolina retail electric operations are

14 shown in Column 2.

15 Column 3 summarizes the accounting adjustments allocated to North

16 Carolina retail necessary to correlate the cost of service with adjusted

17 end-of-period rate base, and to reflect a representative level of

18 operations which includes the Bad Creek Pumped Storage Facility in cost

19 of service. These adjustments are shown on Stimart Exhibit 1, page 3

20 and are explained later in my testimony.

21 Column A shows adjusted North Carolina retail operations before the

22 proposed increase.

23 Column 5, line 1 shows the additional revenue requirement of

2A $222,594,000, as developed on page 2 of Stimart Exhibit 1. This is the

25 increase necessary to cover the Company's cost of service, including a

26 rate of return on common equity of 13.50%. Column 5 also shows the

27 effect of the revenue increase on general taxes and income taxes.

1 Column 6, line 11 shows adjusted operating income after the

2 proposed increase. Line 12 shows adjusted North Carolina retail rate

3 base. Dividing operating income by rate base produces the 11,03% rate

A of return which the Company is seeking in this case, as shown on line

5 13.

6

7 Q. PLEASE EXPLAIN IN GREATER DETAIL HOW THE NORTH CAROLINA RETAIL AMOUNTS

8 IN COLUMN 2 WERE DETERMINED.

9 A. First, wholesale electric operations were separated from total electric

10 operations leaving total retail electric operations in North and South

11 Carolina. Next, North Carolina retail electric operations were

12 separated from total retail electric operations. A detailed review of

13 revenue and expense items resulted in the direct assignment of some

IA items. Those revenue and expense items which could not be directly

15 assigned were allocated using applicable "per book" allocation factors.

16 The same process was used to determine the North Carolina retail rate

17 base components set forth on pages A, Aa, Ab, Ac and Ad.

18 Production and transmission demand-related items were allocated

19 using demand factors based on peak responsibility. Energy-related items

20 were allocated using factors developed from annual kwh sales adjusted

21 for losses for the test period.

22 The accounting adjustments in column 3 on pages 1, A, Aa and 4b

23 were directly assigned or allocated using factors from the per book

2A jurisdictional cost study.

1 Q. WITH REFERENCE TO THE ALLOCATION OF PRODUCTION AND TRANSMISSION

2 DEMAND-RELATED ITEMS, WHAT IS MEANT BY "PEAK RESPONSIBILITY"?

3 A. "Peak responsibility" means the determination of the demand for

4 electricity that each jurisdictional rate class places on the production

5 and transmission system during the time of system peak. During the test

6 period, the summer coincident peak occurred on July 11, 1990 at 5:00

7 p.m. As discussed in Mr, Denton's testimony, the Company has used the

8 summer coincident peak allocation method in its cost studies since 1970.

9

10 Q. PLEASE EXPLAIN WHAT IS PRESENTED ON PAGE 2 OF STIMART EXHIBIT 1.

11 A. Page 2 sets forth the calculation of the additional revenue requirement

12 necessary to produce a 13.50% rate of return on common equity using the

13 fonnat required by NCUC Rule Rl-17(b)(9)e. To develop this figure,

14 North Carolina retail rate base of $A,669,92A,000 was allocated to its

15 capital source components of long-term debt, preferred stock and common

16 equity. This allocation was based on capitalization ratios as of

17 December 31, 1990 of AO.50% long-term debt, 9.68% preferred stock, and

18 A9.82% common equity.

19 The amount of operating income needed to cover interest and

20 preferred dividends applicable to North Carolina retail rate base was

21 computed using the embedded cost of long-term debt and preferred stock

22 as of Itecember 31, 1990. These amounts are shown in columns 5 and 8 on

23 lines 1 and 2. Operating income needed to cover long-term debt interest

2A and preferred stock dividends was deducted from total operating income

25 of $382,903,000 shown in column 5 on line A to derive operating income

26 remaining for common equity before the proposed rate increase shown in

27 column 5 on line 3.

10

1 Q. HOW WAS THE ADDITIONAL REVENUE REQUIREMENT OF $222,59A,000 SHOWN ON LINE

2 8 OF PAGE 2 DETERMINED?

3 A. As I stated earlier, the proposed increase is predicated on a rate of

^ return on common equity of 13.50%, shown in column 7, line 3. Applying

5 the 13.50% rate of return to that portion of the North Carolina retail

6 rate base financed by common equity, shown in column 6, line 3, produces

7 an operating income requirement for common equity of $31A,085,000, shown

8 in column 8, line 3.

9 The tuLdi operating income requirement shown in column 8, line A is

10 the sum of the requirements for long-term debt, preferred stock and

11 cornmon equity. Comparing the operating income requirement of

12 $515,132,000 to the operating income before the proposed increase of

13 $382,903,000, in column 5, results in an additional operating income

14 requirement of $132,229,000 as shown on line 6. To realize this

15 additional operating income the Company must collect in revenues the

16 increase in gross receipts taxes (3.22%), state income taxes (7%) and

17 Federal income taxes (3A%) totaling $90,365,000.

18 Adding the additional operating income requirement of $132,229,000

19 and the additional taxes of $90,365,000 produces the additional revenue

20 requirement of $222,59A,000.

21

22 Q. MR. STIMART. WHAT ARE THE EMBEDDED COST RATES FOR LONG-TERM DEBT AND

23 PREFERRED STOCK?

2A A. The long-term debt embedded cost rate of 8.78% is the weighted composite

25 cost of the Company's outstanding long-term debt (excluding current

26 maturities) as of December 31, 1990, The embedded cost rate also

27 reflects the cost of related debt discount, premium and issuance

28 expenses. The preferred stock embedded cost rate of 7.74% is the

, 7

11

1 weighted composite dividend rate of all of the Company's outstanding

2 issues of preferred and preference stock (excluding current sinking fund

3 requirements) as of December 31, 1990.

4

5 Q. PLEASE TURN TO PAGE 3 OF STIMART EXHIBIT 1 CAPTIONED "DETAIL OF

6 ACCOUNTING ADJUSTMENTS," AND EXPLAIN THESE ADJUSTMENTS.

7 A. Page 3 sets forth the individual accounting adjustments to revenue and

8 expenses (including income tax effects) for North Carolina retail

9 electric operations which were shown in summary total on page 1 of

10 Stimart Exhibit 1 in column 3. The totals on line 20 of page 3 are the

11 amounts carried forward to page 1 of Exhibit 1.

12 Line 1 is the additional North Carolina retail revenues and gross

13 receipts taxes required to reflect the annualization of rates in effect

14 at December 31, 1990 and the proposed fuel rate.

15 Line 2 adjusts fuel expense in the test period to reflect the

16 generation mix, quantity of fuel, and price of fuel as shown on Stimart

17 Exhibit 2, which is discussed later in my testimony.

18 Line 3 adjusts revenue, fuel expense and gross receipts taxes to

19 reflect the expected annual level of kilowatthour (KWH) sales resulting

20 from growth in the number of customers during the test period.

21 To determine additional revenue due to customer growth, an

22 end-of-period level of customers for residential, general and street

23 lighting rate schedules was developed using regressions over the 36

2A month period January 1988 through December 1990. The end-of-period

25 level of customers was compared to the actual number of customers billed

26 each month to yield monthly increases or decreases in number of

27 customers. The monthly increases (or decreases) in number of customers

28 were multiplied by the applicable average monthly KWH consumption per

12

1 customer to derive the annualized change in KWH consumption based on the

2 number of customers at the end of the test period,

3 Line A reflects adjustments to revenue, fuel expense and gross

A receipts taxes to normalize weather conditions experienced during the

5 test period. Because of milder than normal temperatures, actual KWH

6 sales were lower during the test period than they otherwise would have

7 been. Our Forecasting Department determined the effect that temperature

8 variances had on KWH sales. The change in KWH sales was then priced out

9 for each customer class during the test period at the rates in effect at

10 the end of the test year to obtain the adjustment to revenue. For

11 customer classes other than residential, the average price per KWH for

12 each respective class was used to develop the revenue resulting from

13 changes in KWH sales. For the residential class, the change in KWH

14 sales for each rate schedule within that class was apportioned to

15 specific blocks within the rate structure according to test period usage

16 patterns. The rate for each block was then applied to the KWH sales

17 assigned to the block to determine the adjustment to residential

18 revenue. The related fuel expense and gross receipts taxes due to this

19 adjustment in KWH sales were then calculated.

20- Line 5 reflects the annualization of depreciation expense, using

21 current depreciation rates, to the year-end level of plant in service at

22 December 31, 1990. The Company provides depreciation for major

23 production facility additions from the point in time that they go into

24 service. Depreciation for all other plant additions is based on the

25 average of beginning and year-end balances. Because a year-end rate

26 base is used in this proceeding, it is necessary to annualize

27 depreciation expense to reflect a full year's level of depreciation on

28 plant in service as of the end of the test period.

13

1 Line 6 adjusts depreciation expense to reflect the Company's

2 proposed depreciation rates and nuclear decommissioning expense. The

3 Company employed Foster Associates, Inc. to assist in the preparation of

4 a depreciation rate study. This study, which is included in Item 10 of

5 the NCUC Form E-l filed in compliance with Rule Rl-17(b), serves as the

6 basis for the proposed rates.

7 The following table sets forth the Company's current and proposed

8 depreciation rates:

9

10 Function Present Proposed Difference

11 Production

12 Steara 3.57% 2.57% (1.00%)

13 Nuclear

14 Decommissioning 0.67% 1.61% 0.9A%

15 Investment 3.33% 3.09% (0.2A%)

16 Total Nuclear A.00% A.70% 0.70%

17 Hydraulic 1.50% 1.98% 0,A8%

18 Other 0.00% 0.7A% 0.7A%

19 Transmission 3.00% 2.57% (0.A3%)

20 Distribution 3.A0% 3.59% 0.19%

21 General 5.A8% 3.59% (1.89)

22 Total Utility 3.68% 3.69% 0.01%

23 Based on the study year of 1990 (actual balances at year-end 1989

2A plus estimated 1990 plant additions and retirements) the change in the

25 total composite depreciation rate was only 0.01%. This change includes

26 the proposed change in decommissioning expense. In the past, a .67%

27 rate for decommissioning was included in the A% nuclear depreciation

28 rate. The change in decommissioning results in a $32,OAS,000 increase

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1 in depreciation expense. This is offset however by a $31,55A,000

2 decrease in other depreciation for a net increase in depreciation

3 expense of $A8A,000.

4 The following table sets forth the components of decommissioning

5 expense included in cost of service in this proceeding:

6

7 (Dollars in Thousands)

8 Unit

9 Oconee 1

10 Oconee 2

11 Oconee 3

12 Oconee ISFSI

13 McGuire 1

14 McGuire 2

15 Catawba 1

16 Catawba 2

17 Total

18

19 *1990 Dollars

20 The study supporting the annual decommissioning expense is included

21 in Item 10 of the NCUC Form E-l filed in compliance with Rule Rl-17(b).

22 Tl16 amounts in the study are based on the prompt dismantlement method of

23 decommissioning because the Nuclear Regulatory Commission (NRC) requires

24 total funding as of the date of termination of the operating license of

25 each unit. In order to minimize costs, Duke decided to utilize a

26 combination of internal and external funds to fund the decommissioning

27 of its seven nuclear units. The NRC requires external funding for

28 decommissioning the contaminated portion of each unit. The external

11

:ands)

Total Cost*

$16A,792

158,311

202,855

21,750

171,2A6

186,265

23,A76

26,163

$954,858

Annual

System

$10,491

10,101

12,218

1,325

8,950

9,29A

1,199

1.271

$5A,8A9

Cost

fL c

$

ii

. Retail

6,526

6,283

7,600

82A

5,567

5,781

7A6

791

34,118

15

1 fund amount is based on estimates contained in the site-specific studies

2 done by TLG Engineering, Inc, in 1989 and 1990 for each Duke nuclear

3 unit. The external fund will be tax qualified to the extent possible

A under IRS rules and guidelines. The cost of decommissioning the rest of

5 the plant will be funded internally and accrued based on a sinking fund

6 methodology amount. Duke has selected Wachovia Bank & Trust Co. as the

7 trustee for the external funds.

8 Line 7 annualizes the increases in wage rates and related fringe

9 benefit costs that occurred during the test period. This adjustment

10 takes into account only those wage adjustments actually granted during

11 the year. It does not include the annualization of wages for new

12 employees. This adjustment also reflects the change in payroll taxes

13 due to test period wage increases and the change in the FICA tax base.

IA Line 8 reflects the adjustment to annualize O&M expenses other than

15 fuel, purchased power, wages and benefits based on growth in customers

16 during the test period. The annualization factor of .783A% was derived

17 by taking the increase in end of period customers over the 13 month

18 average number of customers. This factor was then applied to test

19 period O&M expenses excluding fuel, purchased power, wages and benefits

20 to calculate the adjustment,

21 Line 9 is a provision for the annual impact of inflation on the

22 Company's expenses occurring after December 31, 1990. The compound

23 annual growth rate in the Consumer Price Index (CPI) from December 1986

2A to December 1990 was A.830A%. This adjustment was calculated by

25 applying the A.830A% to test period O&M expenses excluding fuel,

26 purchased power, wages and benefits. Because the. proposed rates will

27 not be effective until almost a full year after the end of the test

28 period, this adjustment is necessary to make test period O&M expenses

12

16

1 representative of the expenses which will be incurred while these rates

2 are in effect.

3 Line 10 adjusts the income tax provision for the tax effect of the

4 annualization of interest expense reflected in the adjusted cost of

5 service,

6 Line 11 adjusts test period operating expenses, primarily operating

7 materials and supplies, to reflect the continual rise in unit costs

8 which occurred during the test period. The percentage increase of the

9 year-ena url over the average CPI for the test period of 2.68% was

10 applied to test period O&M expenses excluding fuel, purchased power,

11 wages and benefits. This adjustment annualizes the effect of inflation

12 which took place throughout the test period.

13 Line 12 adjusts the levelization of the Catawba purchased capacity

14 costs. This adjustment incorporates into the levelization the current

15 per KW level of purchased capacity payments as well as the current

16 deferred balance. The adjustment also reflects an extension of the

17 levelization of the capacity payments to the Cooperatives to October 31,

18 2001 the last year of any calculated capacity payments to the Catawba

19 buyers which is already the levelization period of the capacity payments

20 to the Municipal owners. This adjustment recognizes that all of Duke's

21 customers will benefit from the sale of Catawba, not just those

22 customers receiving service during the buy-back period.

23 Line 13 annualizes the license fee the Company pays to the NRC.

24 During the test period NRC operations were A5% funded by utilities.

25 Beginning in 1991 100% funding by utilities will be required causing

26 Duke's payment to the NRC to more than double.

13

17

1 Line IA adjusts test period expenses to reflect a provision for

2 incremental operating expenses related to expansion of the Company's

3 demand side programs in conjunction with its least cost planning.

4 Line 15 adjusts cost of service to reflect the operation of the Bad

5 Creek Pumped Storage Facility. This adjustment includes operation and

6 maintenance expenses, depreciation and property taxes.

7 Line 16 reflects a three-year amortization of the start up costs of

8 the Bad Creek Pumped Storage Facility consisting of depreciation and

9 carrying costs.

10 Line 17 annualizes the Company's Interconnection Agreement with

11 Nantahala Power & Light Company. The Nantahala system was connected to

12 the Duke system on October 1, 1990. Therefore, the test period only

13 reflects three months of service to Nantahala.

14 Line 18 reflects the annualization of a new fifteen-year Purchased

15 Power Agreement with R. J. Reynolds for the purchase of 45 MW from the

16 Tobaccoville Cogeneration Facility,

17 Line 19 annualizes test period property taxes on plant in service

18 at December 31, 1990. Property taxes for calendar year 1990 were

19 assessed based upon property balances at the end of 1989. Likewise,

20 property taxes for calendar year 1991 will be assessed based upon

21 property balances at the end of 1990. This adjustment increases

22 property tax expense in the test period to the year-end level of

23 investment.

24

25 Q. PLEASE EXPLAIN WHAT IS PRESENTED ON PAGES A THROUGH Ad OF STIMART

26 EXHIBIT 1.

27 A. Page A shows total Company and North Carolina retail components of

28 original cost rate base. The total Company amounts were taken from the

IA

1 Company's books as of December 31, 1990. The procedure used to

2 determine North Carolina retail rate base was discussed earlier in my

3 testimony. The North Carolina retail net plant in service amount of

4 $4,522,720,000 is an increase of $866,612,000 (24%) over the amount

5 determined by the Commission in the Company's last general rate case,

6 Docket No. E-7, Sub 408.

7 Pages Aa, 4b, Ac and Ad are details of components making up

8 original cost rate base as of December 31, 1990. On each of these four

9 pages, the first column shows the total Company book amounts at

10 December 31, 1990; column 2 reflects the amount for North Carolina

11 retail electric operations and column 3 sets forth the accounting

12 adjustments.

13 As shown on line 8 of page A, the Company is not seeking any

IA Construction Work in Progress in rate base in this proceeding.

15 Page Aa is a summary of the Company's investment in electric plant

lb in service as of December 31, 1990 by functional classification. The

17 adjustment in column 3 reflects the addition to plant in service of the

18 Bad Creek Pumped Storage Facility.

19 Page Ab details accumulated depreciation for each of the classes of

20 * electric plant in service. Current depreciation rates for each class of

21 property are shown at the bottom of the page on lines 8 through 15. The

22 provision for depreciation is recorded using the straight-line method

23 for each functional classification of plant. The Company uses the

2A composite method of depreciation under which the original cost of

25 property retired, together with removal cost less salvage, is charged to

26 accumulated depreciation. The accounting adjustments in column 3 are

27 the same amounts as the depreciation expense adjustments made to cost of

15

19

1 service to annualize depreciation for year-end plant and the Bad Creek

2 Pumped Storage Facility.

3 Page Ac is a summary of the Company's investment in materials and

A supplies as of December 31, 1990 included in rate base.

5 Page Ad reflects the working capital investment included in rate

6 base. Investor advanced funds on line 2, column 2 were calculated using

7 the lead-lag method applied to per books cost of service amounts.

8 Line 3 of page Ad reflects the net of tax unamortized bond

9 reacquisition premiums the Company incurred in refinancing its higher

10 cost debt. These premiums are being amortized over the terms of the new

11 bonds.

12 Line A of page Ad shows the Company's investment in miscellaneous

13 deferred items required for the day-to-day operation of the Company.

IA

15 Q. PLEASE EXPLAIN PAGES 5, 5a, 5b AND 5c OF STIMART EXHIBIT 1.

16 A. These pages contain the Company's financial statements as of

17 December 31, 1990. These pages are basically self-explanatory and are

18 filed as required by NCUC Rule Rl-17(b).

19 Q. WHAT LEVEL OF FUEL AND PURCHASED POWER HAS THE COMPANY INCLUDED IN ITS

20 COST OP SERVICE?

21 A. As shown on Stimart Exhibit 1, page 1, column 6, line 2 the Company's

22 cost of service includes $A82,873,000 of fuel consisting of system

23 average base fuel costs, nuclear fuel disposal costs calculated at 1

2A mill per KWH of net generation, and an adjustment to reflect the North

25 Carolina retail level of line loss. These amounts are set forth on

26 Stimart Exhibit 2, page 1.

27 Purchased power on Stimart Exhibit 1, page 1, column 6, line 3 of

28 $271,008,000 consists of non-fuel costs of purchased power from our

16

20

1 Catawba joint owners of $266,056,000 plus $A,952,000 of non-fuel

2 purchased power and net interchange,

3

4 Q. WHAT SPECIFIC KWH SALES AND FUEL FACTOR WERE USED TO DEVELOP BASE FUEL

5 COSTS?

6 A, The KWH sales component as shown on Exhibit 2, page 1, consists of the

7 following:

8 N.C. retail test period actual A0,160,7A6,000 KWH

9 N.C. retail weather adjustment 14A,A05,000 Kwn

10 N.C. retail customer growth adj. 318,061,000 KWH

11 Total A0.623,212.000 KWH

12 The development of the fuel factor of 1.1833 cents per KWH is shown

13 on Stimart Exhibit 2, page 2.

IA

15 Q. PLEASE EXPLAIN THE CALCULATION OF THE 1,1833 CENTS/KWH FUEL FACTOR SHOWN

16 ON PAGE 2 OF EXHIBIT 2.

17 A. Coal generation (line 1) represents the residual generation needed for

18 the Company to meet its generation requirements after considering the

19 available generation from nuclear, hydro and interchange.

20 Nuclear generation (line 5) reflects a 63.8% capacity factor based

21 upon the five-year industry average capacity factor for pressurized

22 water reactors, weighted by size, as reported in the latest NERC

23 Generating Availability report.

2A Conventional hydro generation (line 7), reflects a median level of

25 generation based on 31 years of history.

26 Net pumped storage (line 8) was calculated using the past three

27 calendar years' experience level.

17

21

1 Test period purchased power and net interchange were adjusted to

2 reflect changing contractual purchases under the Catawba Interconnection

3 Agreements.

4 Oil and gas generation (line 2) is a two-year average. Intersystem

5 sales (line 19) and company usage (line 21) are test period actual

6 amounts,

7 Total generation (line 18) was calculated by applying a five-year

8 average line loss factor to adjusted KWH sales. The KWH sales include

9 adjustments to per book KWH salts Tor weather, customer growth, and the

10 change in KWH sales resulting from the Catawba Interconnection

11 Agreements. The system line loss is shown on line 20,

12 Line 22 shows adjusted KWH sales for calculation of the fuel

13 factor.

IA The resulting generation based on the adjustments set forth above

15 was priced as follows:

16 1. Coal generation was priced at the actual test period burned unit

17 price.

18 2. Nuclear generation was priced at current prices reflecting

19 refuelings during 1991.

20 3. Oil and gas generation was priced at the two-year average actual

21 burned price.

22 A. Light off, purchased power, interchange in and interchange out and

23 intersystem sales are test period actual amounts.

2A 5. Catawba purchase amounts are calculated in accordance with the

25 Catawba agreements and reflect only the fuel portion of these

26 costs.

18

22

1 Q. WHAT IS PRESENTED ON STIMART EXHIBIT 3?

2 A. Exhibit 3 shows the Company's actual fuel expense and generation for the

3 test period. This same data was filed in Docket No. E-7, Sub A81, the

4 Company's current fuel cost adjustment proceeding under NCGS 62-133,2.

5 The Company's proposed experience modification factor (EMF) is shown on

6 page A3 of Exhibit 3 and the EMF interest factor is shown on page AA.

7 The EMF and EMF interest factor determined by the Commission in Docket

8 No. E-7, Sub A81 will continue in effect through June 1992.

9

10 Q. MR. STIMART, DOES THIS CONCLUDE YOUR TESTIMONY?

11 A. Yes, it does.

19

23

&CLtsL^»

1 SUPPLEMENTAL TESTIMONY OF

2 WILLIAM R. STIMART

3 FOR

4 DUKE POWER COMPANY

5 NCUC DOCKET NO. E-7, SUB 487

6 Q. PLEASE STATE YOUR NAME, ADORESS AND POSITION WITH OUKE POWER

7 COMPANY.

8 A. My name is William R. Stimart and my business address is 422 South

9 Church Street, Charlotte, North Carolina. I am Vice President,

10 Rates and Regulatory Affairs of Duke Power Company.

11 Q. ARE YOU THE SAME W. R. STIMART WHOSE DIRECT TESTIMONY AND EXHIBITS

12 WERE FILED IN THIS DOCKET ON APRIL 12, 1991?

13 A. Yes.

14 Q. WHAT IS THE PURPOSE OF YOUR SUPPLEMENTAL TESTIMONY?

15 A. The purpose of my supplemental testimony is to present three

16 additional adjustments to the cost of service.

17 Q. PLEASE EXPLAIN STIMART SUPPLEMENTAL EXHIBIT 1.

18 A. Stimart Supplemental Exhibit 1 presents the revenue requirement

19 impact of the three additional adjustments which the Company is

20 proposing at this time. Page 1 summarizes the three adjustments

21 which are presented in detail on pages 2, 3 and 4.

22 Q. WHAT IS THE FIRST ADJUSTMENT?

23 A. The first adjustment, presented on page 2, reflects the annual

24 level of capacity billings by Duke under the contract between

25 Carolina Power & Light Company (CP&L) and Ouke for the sale to

26 CP&L of 400.000 KW (Schedule J) of capacity.

24

1 Approval of the contract must be obtained from the Federal

2 Energy Regulatory Commission (FERC). Billing under this contract

3 was not reflected in the direct testimony and exhibits filed in

4 this Docket because of the uncertainties gurrounding approval by

5 the FERC.

6 On December 5, 1988, Ouke filed the Schedule J contract with

7 the FERC. On March 17, 1989, the FERC issued an order which

8 accepted Schedule J for filing and set for hearing the question

9 whether its rates are just and reasonable. This action allowed

10 the contract to go into effect so that the transaction could

11 begin, in accordance with the terms of the contract, on January 1,

12 1992, subject to refund if the FERC later determined, after

13 hearing, that the rate should be lower.

14 Hearings were held before a FERC Presiding Administrative Law

15 Judge in January 1990. Intervenors in the case have taken the

16 position before the Law Judge that Schedule J should be rejected

17 in its entirety or that the rate should be lowered. Though the

18 Law Judge was directed to issue an initial decision in May of

19 1990, to date no such decision has been issued and the matter

20 remains before him. Any such decision will be subject to the

21 normal FERC review and appellate processes before It becomes a

22 final order of the Commission.

23 Duke will begin billing under the terms and conditions of

24 Schedule J on January 1, 1992, but, as noted, the transaction is

25 subject to final FERC approval. Therefore, the Company is now

26 proposing that these billings be reflected as a reduction in the

27 cost of service. However, rather than reducing base rates, the

28 Company proposes to treat the Schedule J amounts as a rider to the

29 2

25

1 rate schedules so that rates may change without a general rate

2 case in the event that FERC alters the agreement or fails to

3 approve it in a final order.

4 Q. WHAT IS THE SECOND ADJUSTMENT THAT THE COMPANY IS PROPOSING AT

5 THIS TIME?

6 A. The second adjustment reflects the Company's four year contract to

7 purchase 200 MW of capacity from Nantahala Power and Light Company

8 (Nantahala). At the time of filing, FERC had not approved the

9 contract. However, on May 31, 1991, the FERC issued an order

10 approving the contract and billing under the contract began in May

11 1991, Under the contract, Duke purchases power from Nantahala,

12 who in turn purchases such power from a third party - the

13 Tennessee Valley Authority (TVA). The contract provides for a

14 reservation charge and a wheeling charge. The reservation charge

15 is the same as the reservation charge paid by Nantahala to TVA.

16 This purchase should now be reflected as an additional cost of

17 service.

18 Q. WHAT IS THE THIRD ADJUSTMENT THAT THE COMPANY IS NOW PROPOSING?

19 A. The third adjustment, which is presented on page 4 of my

20 Supplemental Exhibit, reflects the accounting for postretirement

21 benefits other than pensions as required by Statement of Financial

22 Accounting Standards No. 106 (SFAS 106). In the past, consistent

23 with generally accepted accounting principals at that time, the

24 Company has accounted for these benefits on a pay-as-you-go basis.

25 SFAS 106 requires that the Company must accrue, during the years

26 that the employees render the necessary service, the expected cost

27 of providing those benefits to employees. The amount of the

28 adjustment is based on the cost determinations reflected in the

29 3

26

1 Company's recently completed actuarial study undertaken to

2 establish compliance with the current accounting requirements.

3 Q. DOES STIMART SUPPLEMENTAL EXHIBIT 1 REFLECT ANY CHANGE IN THE

4 REVENUE REQUIREMENT SOUGHT BY THE COMPANY IN THIS PROCEEDING?

5 A. No, not at this time. The Company will file updated adjustments

6 at the time of hearing which will incorporate the decreased cost

7 of service reflected in Stimart Supplemental Exhibit 1.

8 Q. DOES THIS CONCLUDE YOUR TESTIMONY?

9 A. Yes.

10

8

9

10

27

Q. (Mr. Standish) Mr. Stimart, have you prepared

a summary of your testimony?

A. Yes , I have.

. Q. Could you please give that summary?

c A. Yes. My testimony covers the financial results

fi of the company's operations under the present and

_ proposed rates based on the adjusted historical

test year ended December 31, 1990, These results

are set forth in Stimart Exhibit 1.

The exhibits start with actual calendar year

11 1990 revenues and expenses. Adjustments were then

12 made to reflect wage increases granted during the

13 year, inflation, growth, normalized weather, and

to correlate depreciation and property taxes with

15 the end of period plant.

16 The test year Catawba levelization was adjusted

17 to incorporate the current per KW level of purchased

13 capacity payments as well as the current deferred

19 balance. An adjustment was also made to extend

20 the levelization of the capacity payments to the

2i Cooperatives to the year 2001, the last year of

22 capacity payments to Catawba joint owners.

23 Adjustments are made to the test year to

24 reflect known changes, the most significant being


6

7

8

9

10

11

28

-, the inclusion of Bad Creek Pumped Storage Facility

2 in rate base. Adjustments were also made to reflect

.3 depreciation and operating expenses associated with

4 Bad Creek.

c In addition to reflecting Bad Creek in cost

of service, an adjustment was made to defer and

amortize the costs incurred relative to Bad Creek

between the commercial operation dates of each unit

and the time such costs are reflected in rates.

Bad Creek Unit 1 and 2 was declared commercial

operation on May 15, 1991. Unit 3 was declared

12 in commercial operation on September 3, 1991 , and

13 Duke expects Unit 4 in commercial operation by

14 September 20th, 1991.

The actual in-service cost of Bad Creek is

15 now expected to be one billion and seven million

17 rather than the one billion sixty-one million reflected

ig in the company's original filing

19 Additionally, test year cost of service was

20 adjusted to reflect the company's proposed depreciation

2i rates and nuclear decommissioning expense

22 As shown on Stimart Exhibit 1, page 2, pro

23 forma test year operating income as filed produces

24 a return on common equity under present rates of


15

29

1 181,856,000 or a rate of return of 7.82%. This

2 is the level of return facing the company without

3 this requested increase.

4 I then calculated the additional revenue

c requirement assuming a 13.5% return on equity.

g This additional revenue requirement as filed was

7 222,594,000 and was based on the company's capital

g structure and embedded cost rates as of December

9 31, 1990.

10 On August 19, 1991, I filed supplemental

11 testimony and Stimart Supplemental Exhibit 1,

12 reflecting three additional adjustments to cost

13 of service. Those adjustments were:

14 One, to reflect annual capacity billings

15 by Duke under the contract between Duke and CP&L

16 for the sale to CP&L of 400 megawatts of capacity.

17 Two, to reflect the company's four-year contract

18 to purchase 200 megawatts of capacity from Nantahala

19 Power & Light.

2 0 And three, to reflect the accounting for

21 post-retirement benefits other than pensions as

22 required by the Statement of Financial Accounting

23 Standards Number 106. This statement requires the

24 company to change from a pay-as-you-go basis to


30

1 an accrual basis of accounting for these costs.

2 Due to recently developed uncertainties

3 concerning the date the company will realize collec-

4 tions under the Schedule J contract, the company

c is now proposing that the Schedule J rider not be

g reflected in the cost of service in this proceeding.

7 We propose to record any collections pursuant to

8 Schedule J in a deferred account. When the uncertainty

9 surrounding this contract is resolved, we will submit

10 a proposal for a rider to rates to reflect the amounts

in the deferred account and to reflect future

12 collections under Schedule J.

13 Incorporating the 13.17% return on equity

14 recommended by Dr. Ibbotson reduces the company's

15 indicated cost of service by 12,925,000,

15 The change in return on equity also impacts

17 the calculation of the Catawba purchased capacity

18 levelization. This reduces the costs by 2,777,000.

19 In our original filing, we proposed an adjust-

20 ment to provide for post-test period inflation.

21 The North Carolina retail portion of this adjustment

22 is 13,130,000. Since cost increases and decreases

2 3 have occurred since we filed our original testimony

24 which are now known changes and should be considered


31

1 by this Commission in determining the cost of service

2 These cost increases include wage increases actually

3 granted between January 1 and July 31, 1991, and

4 the associated increases in benefit and payroll

5 taxes. The North Carolina retail portion of this

5 increase is 10,638,000.

7 Subsequent to the original filing, we received

g final bills from the NRC for their fiscal year ended

g September 1991, Reflection of the actual billed

10 amounts increases North Carolina retail expense

U by 2,513,000.

12 As a part of the company's cost containment

13 effort, we have eliminated personnel positions and

14 reduced contractor services. The impact on North

15 Carolina retail annual expenses is a reduction of

16 2,443,000.

17 The total of these known changes in cost

18 is 10,808,000, leaving an adjustment of 2,322,000

19 to cover other increases in costs since the end

20 of the test year which have not been specifically

21 identified.

2 2 In July, the General Assembly passed a law

2 3 increasing the state income tax rate from 7% to

24 7.75% effective for taxable years beginning on and


32

1 after January 1, 1991. In addition, a temporary

2 surcharge -- surtax was imposed for four taxable

3 years beginning in 1991. The surtax is 4% in '91,

4 3% in '92, 2% in '93 and 1% in '94. We are proposing

5 to recover the aggregate amount of the surtax through

5 a three-year amortization. The impact of the tax

7 increase and the surtax on pro forma cost of service

3 at present rates is 3,625,000.

g In view of the Commission's decision to separate

10 the determination of the fuel factor from the prudency

11 issue, we are recommending a change in the nuclear

12 capacity factor to 72%. A 72% capacity factor is

13 more reflective of our recent experience in the

14 operation of our nuclear units.

15 Q. Does that complete your summary, Mr. Stimart?

16 A. Yes , it does .

17 MR. STANDISH:

18 Mr. Stimart is available for cross-examination.

19 CHAIRMAN REDMAN:

20 Thank you, Mr. Standish,

21 Now we call on Mr. Ervin of CUCA.

22 CROSS-EXAMINATION

23 BY MR. ERVIN:

24 Q. Mr. Stimart, let me start by referring you


33

, to the last paragraph on page 5 of your summary

2 where you discuss the 72% nuclear capacity factor

^ recommendation that you make there.

. A. Yes.

t- Q. The -- do I understand that language correctly

, to mean that the company is now proposing to establish

-j the fuel cost included in its rates based upon a

« 72% capacity factor rather than the 63.8% capacity

n factor utilized in your initial prefiled testimony?

10

11

12

15

16

A. That' s correct for this proceeding.

o. And the rates set in this proceeding will

-- the fuel cost component set in this proceeding

13 will remain in effect, will it not, until the time

14 that the company next applies for a rate change

under 62-133.2?

A. That' s correct.

17 Q. So that this change is -- would have an actual

13 effect on the company's rates beginning on the date

19 that it went into effect when the Commission enters

20 an order, correct?

2i A. That's correct.

22 Q- Now, what does that change -- what effect

2 3 does this change have on the company's overall level

24 of fuel expense that is being requested in this


34

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

case,

wind

as a

A.

Q-

A.

4.

0-

and what, if any, overall fuel factor do you

up with excluding EMFs set in other proceedings

result of this change?

If you will look at Stimart Exhibit 1.

Stimart Exhibit 1?

I'm sorry. Stimart Exhibit 4. Stimart Exhibit

Is that in your supplemental testimony, Mr.

Stimart? Yes, I'm with you.

thine

A.

n.

A.

o.

A.

0-

fl.

c

fl.

I'm sorry, Mr. Stimart. I may not have some-

everybody else has.

What number did I quote you?

I don't have a Stimart Exhibit 4.

I'm sorry. Stimart Exhibit 3.

Thank you.

Three. We'll get it right yet.

Stimart Exhibit 3, page 1 -- page 2,

Page 1,

All right.

It summarizes the different factors. You'll

notice that on line 9 we had a base fuel factor

of 1,

Q.

1833.

Yes, sir, the same number that you proposed

in the recent fuel proceeding.


5

10

11

35

A. That ' s correct,

0. All right, sir.

3 fl. That figure will become with a possible slight

4 variation 1.09. Now, I am not exactly precise because

when you change the capacity factor for all the

5 nuclear, that changes Catawba. That changes all

7 the retained amounts. And there's another adjustment

3 unrelated to this one that has to do with the retained

9 capacity by the co-ops which will also affect this

calculation that the Staff is proposing that we're

agreeing to. So it's either going to be -- it's

12 going to be between 1.09 and 1.10.

13 Q. All right. Do you propose to file any

14 supplemental exhibits at some point that show that

15 with more specificity?

16 A- Yes, we will.

17 Q. And would that be filed with your rebuttal

18 testimony?

19 fl. That will be filed with my rebuttal testimony.

20 Q. And, of course, you have served as the company' s

21 witness on fuel matters for a fair amount of time,

22 haven't you, Mr. Stimart?

2 3 A, Yes,

2 4 Q. The -- based upon everything that you know


36

1 about the company's nuclear operations, the projections

2 - - I ' m trying to run through a great deal of stuff

3 that I was going to ask you and apparently I may

4 not need to. Based on everything you know about

5 the company's nuclear operations, do you believe

6

7

8

9

10

that the company can obtain or achieve this 72%

capacity factor from now until next year when the

next 62-133.2 proceeding occurs?

A. Yes, I believe so.

Q. And i f you would --

11 fl. (Interposing) What I would propose --

12 Q. -- explain your answer for me -- what' s the

13 basis for your belief in that respect?

14 fl. We are running well above that so far this

15 year. We know of no major outages other than we

do have one of the McGuire units still to be refueled

17 and the steam generators worked on and one of the

18 Catawba units. As far as 1992 is concerned, while

19 we will have five refuelings as I recall, there' s

20 nothing -- no one at this time that should be an

21 abnormally extended outage other than what we' ve

2 2 been experiencing in the last couple years.

2 3 0- As you mention yourself, in recent years,

24 the last four years, the lowest capacity factor


16

37

1 you've had was 72%; is that right?

2 fl. I believe that's right. What I -- I developed

3 this figure from looking at the past five years,

4 and that has two excellent years in it, two good

years and one low year, ranging between 61 and

77, as I recall.

Q. I take it from the fact that you have not

mentioned the price issue that you continue to believe

that the other components of your fuel expense as

10 shown on Stimart Exhibit 3, page 2, particularly

11 the oil and gas cost and the coal cost ought to

12 remain as they are in your original exhibits?

13 A. In the calculation of that factor, I have

14 used the twelve months ending July for coal cost.

15 Q. Twelve months ending July --

16 A- Yes.

17 Q- '91?

18 *. '91.

19 Q. And have you continued -- have you used an

20 updated two-year period for oil and gas cost, as

21 we11?

22 A. I don't believe I changed that. I believe

23 the only one I changed was the coal.

2 4 Q. What number do you get when you update your


9

10

1 coalcostas shown -- or as you testified to?

2 A. 1.703 cents.

3 Q. So it's slightly lower than the figure that

4 was included in your original fuel proposal?

5 fl. Ibelievethat's correct.

5 Q. And the 1.703 number that you have testified

7 to is the twelve month burned cost for the year

8 ending July 30, 1991?

A. That' s correct.

Q. And the number that you had proposed for

11 an oil and gas cost was 6.886 cents per kilowatt

12 hour; is that correct ?

13 A. That's correct. And the updated figure,

14 I stand corrected, is a two-year current average,

15 and that becomes 7.192.

16 Q- 7.192?

17 A. That's correct.

18 Q. And that is a figure based upon the company's

19 burned oil and gas cost for the two-year period

20 ending July 30, 1991?


22 ?• Do coal costs and oil and gas costs have

2 3 seasonal fluctuations to some extent, Mr. Stimart?

24 A. The coal fl-uctuates more with what extent


8

9

10

39

, we're in the spot market versus contract market.

2 Not too long ago, we were 100% contract, and the

3 only time the price changed was when we had contract

. renegotiations. As we become dependent more on

our coal, our production in coal is increasing,

6 and rather than sign more long-term contracts, we're

7 starting to use the spot market more. The spot

market does seasonably vary a fair amount.

o. And what times of the year, if any, do you

wind up entering the spot market for purposes of

11 purchasing coal?

12 fl. We're trying to control the use of the spot

13 market when we anticipate the prices being the lowest.

14 But that doesn't always work out that way. Sometimes

15 it varies depending on how well the nuclears do

15 or don' t run. If we have an extended period of

17 outage on nuclears, which means we have to run our

18 coal units more than planned, that drives our inven-

19 tories down. And, therefore, we then go into the

2 0 spot market to bring up our total inventory. We

2i try to maintain a pretty level of -- a constant

22 level of coal in inventory.

23 Q. So you wind up going into the spot market

24 during periods of time when your coal usage is greater


4

5

6

7

8

9

10

40

, than average on a monthly basis; is that a fair

2 statement?

3 A. No, I would say --

Q. (Interposing) It's not a fair statement.

What --

fl. It generally follows. We get like 2.3 million

or 2.4 million tons in inventory. If the nuclears

for some reason are not available to us, we run

the coal inventory to, say, a million and a half.

And rather than letting it get too low, we will

11 then get into the spot market.

12

13

14

Q. And I believe you testified a moment ago

that the prices on the spot market fluctuate; is

that not true?

15 fl. Oh, yes. I would say we' ve seen fluctuations

15 from five to eight dollars a ton.

17 Q. And the extent to which you - excuse me -

18 wind up going into the spot market to some extent

19 is not entirely price based as you originally testified;

20 is that not true?

2i fl. Well, we try to coordinate when we -- when

22 we think the spot market will be the softest so

23 we can get the best prices, but that doesn't always

24 work out because if the nuclears and coal is not


8

9

10

41

1 as we estimated, that ' s right, we may have to go

in when we don't count on it.

Q. So that on occasion you' re required to enter

4 the spot market in times when you otherwise would

5 prefer not to; is that correct ?

5 fl. That's correct.

7 Q. And there' s no -- excuse me, Mr. Chairman,

There are -- so that the results of your

entries into the spot market or your forays into

the spot market vary from time to time, correct?

11 fl. That' s correct. If you recall, I don't know

12 if you participated in those earlier hearings.

13 That was one of my concerns with the Public Staff

14 using a spot point or a spot month for pricing coal

15 because it would be influenced by how heavily we

16 had been into the spot market the last few months

17 because we use a moving average for pricing coal.

18 And if we' ve been heavily into the spot the past

19 three months, we would get a distortion as to that

20 current month. And vice versa, if we haven' t been

21 in, then you see more impact of our contract.

2 2 We are shooting to achieve somewhere around

23 20% in the spot market on an ongoing basis.

24 o. Of course, the Public Staff is continuing


42

, to propose the use of what amounts to a month --

2 monthly or spot coal price in this case, aren't

3 they?

4 fl. I believe that's correct; although, I was

5 thinking -- I don't know if it was the last fuel

5 proceeding, they went along with our twelve month

7 suggestion.

3 Q. To your knowledge, have they gone along with

9 your twelve month suggestion in this proceeding?

10 A. I don' t believe so. I think they've used

11 the latest month available.

12 Q- Does it refresh your recollection if I tell

13 you that my recollection is that they used the July

14 '91 burned coal price?

15 fl. That's what I remember, yes.

16 0. And the use of a July ' 91 monthly burned

17 cost or the use of any other monthly burned cost

18 -- it's not peculiar to July. The use of any monthly

19 burned cost has this risk of distortion that you

20 testified to a moment ago, does it not?

21 fl. Yes. But I think in fairness to the Staff,

2 2 it may well be a current month is more indicative

2 3 if there has been a dramatic shift in the market

24 such as we have experienced in the past. We' ve


43

1 had a few occasions as you remember where dramatic

2 things have happened and we get a new plateau.

3 And then, obviously, I wouldn't be arguing for a

4 twelve-month average when we know something dramatic

5 has happened and the current month is more representa-

c tive going forward.

7 Q. But at this point, at least, you are continuing

3 to believe that a one-year burned cost is the way

9 that these prices ought to be set; is that not true?

10 A- That' s correct. We have not seen any dramatic

11 shift. And using the twelve months tends to get

12 a reasonable blend of spot purchases into the figure.

13 Q. All right. Now, you use a two-year average

14 for oil and gas. Why do you use a two year there

15 rather than a one year?

16 fl. Mainly because the oil and gas is used in

17 our combustion turbines, and there's such an erratic

18 useofour combustion turbines that we get a distortion

19 of the cost when you convert that to a price per

20 kilowatt hour burned.

21 Q. I s t h a t a particular danger if one was to

22 use a monthly spot price for oil and gas?

2 3 fl. Yes, we may have no generation. We go months

24 and no generation . to negative generation to plus


44

1 generation. We get all combinations in the running

of our CTs.

Q. And oil and gas prices tend to fluctuate,

4 as well, do theynot?

5 Yes, they do.

Q. And how does the company buy the gas that

it uses -- uses in its combustion turbines? Does

it buy it from LDC? Does it transport it? How

does it get its gas?

10 A. We buy it from the local gas distribution

11 companies.

12 Q. Off of a tariffed rate?

13 fl. Yeah. Well, it's mainly -- we -- it's mainly

14 available to us off season -- of peak, so it's an

15 energy-type rate. It's not a contract rate.

16 Q. You buy under the standard interruptible

17 rates that an industrial customer of a fairly low

18 priority would buy off of?

19 A. It's my understanding it's pretty close to

20 that. I'm not exactly sure.

21 Q. But it's your -- it's your understanding

22 that, essentially, you are buying off of regular

2 3 gas company tariffs?

24 fl. I'm not positive if we are or not. I just


45

, know that it's -- it's a non-demand charge rate

2 basically an energy rate on off season for them.

3 Q. And obviously that gas is not available at

. some times of the year, correct?

fl. That's correct.

Q. And when gas is unavailable, you then use

oil in your CTs; is that not true?

A. If that's what we need to run. We try to

a avoid running them.

10

12

14

15

n Well, I'm assuming in my question that you

11 wind up running your CTs occasionally.

A. Yes.

13 Q. Assuming that you wind up running your CTs

occasionally, at this point gas is the preferred

fuel when it's available?

15 A. Yes, itis.

17 0- And, therefore, you would use oil only to

18 the extent that gas was not available, correct?


20 Q- And the extent to which you used oil in your

2i combustion turbines would vary not only with the

22 price but also with the availability of natural

2 3 gas; is that not true?

24 A. That' s correct.


8

9

10

11

46

1 Q. And the two-year average -- I assume one

2 of the purposes of the use of the two-year average

3 to determine these oil and gas prices is to pick

4 up various scenarios under which you used oil or

5 you used gas in your CTs; is that not true?


-, 0- In your original prefiled testimony, Mr.

Stimart, you made essentially two major adjustments

to your level of sales and, therefore, to your level

of revenues; is that not correct?

fl. Yes.

12 Q. One for weather annualization?

13 fl. Yes.

14 Q. And the other for customer growth?


15 o. And the purpose of the weather annualization

17 as you state in your prefiled testimony is to set

18 rates based upon the hypothetical and rarely realized

19 level of normal weather; is that not true?

20 A- 1 don't think I would describe it the way

21 you've described it, but it is a weather adjustment

22 based on what is characterized as normal weather.

23 Q. All right. That answers my question and

24 I won't haggle with you on the characterization


47

, of i t anymore. The other one is an adjustment for

2 growth in the number of customers, correct?

A. That' s correct.

n. And what that adjustment -- and I realize

there are differences of opinion between you and

the Public Staff as to how that adjustment ought

7 to be computed. But that adjustment is intended

8

13

14

to pick up the increased sales resulting from increased

g numbers of customers; is that not correct?

IQ fl. It's intended to do two things- And that

11 is, boththe number of customer and usage. Generally

12 within the time frame that we're looking at within

a twelve - month period, statistically we generally

can't identify any pattern, change in the usage.

15 So what we end up with is normally an adjustment

15 that picks up just number of customers.

17 o. And without getting into a great, long

discussion of regression techniques, in essence,

19 what you do in this customer growth adjustment is,

20 first of all, determine what is believed to be an

2i appropriate number of customers for each rate schedule;

22 isthat not true?


24 0. And then determine the amount of revenues


48

, to be derived from those additional customers and

2 the amount of additional expenses that would be

3 required to serve those additional customers? Is

4 that not basically an accurate depiction of what

c happens in the customer growth adjustment?

A. The Staff' s calculation is directed more

in that direction on the expense side. We don' t

attempt to capture specific costs attributable to

the -- those specific customers being added. We

have another entry or adjustment that we make

11 independent where we take a combination of factors,

12 customer kilowatt hour usage, employees, and make

13 a separate adjustment for annualizing our O&M expenses.

14 We don11 try to directly relate that to just the

15 number of customers.

6

7

8

9

10

16 Q. My questions to you about this area, and

17 they're going to be relatively brief, but I'm directing

18 my interest at this point to the revenue side of

19 the question so that your difference with the Public

Staff on that issue I don't think would come into

it.

22 So put ting the expense issue to one side,

23 what you do on the revenue side is to determine

24 how much revenue would be derived from these additional


20

21

49

1 customers; is that not true?

2 A. That ' s correct. We do do some more detailed

3 analysis on the industrial group. We go in and

look in greater detail since a lot of that is hand

record maintained.

Q. Yes, sir.

7 A. And identify specific customers added and

8

9

10

deleted during the year.

Q. Yes, sir.

A. So we don' t work for aggressions on the larger

11 industrial group.

12 Q- Butatanyrate, what you are -- the revenue

13 adjustment that is made as part of the customer

14 growth adjustment focuses upon the additional customers

15 that begin to take service during the test period

15 and not on existing customers who are served throughout

17 the test period; is that not true?

18 A. The intent of the adjustment is to capture

19 an annualization of our test period revenue. And

20 there's two pieces to that. One would be increasing

2i level of customers.

2 2 Q- Yes , sir,

23 A. And the other would be level of usage per

24 customer.


4

50

1 Q. All right.

2 A. And as I say, we've not made an adjustment

•3 for usage because we haven't been able to identify

that in that short of time frame that there is,

5 in fact, a trend up or down in usage. So what we

6 end up with is an adjustment that creates a mathematical

7 level of customers such as if you take the residential,

typically in more recent years, the trend line has

shown that the theoretical number of customers is

more than we have on the books. So we annualize

15

16

8

9

10

11 based on that computed level of customers.

12 Q- As a practical matter, you do not make any

13 effort to adjust the revenues that you derive from

14 existing customers except for weather; isn't that

true?

A. That' s correct. We do look at that but

17 have not had any indication that there's a dramatic

18 movement. For instance, in the case of industrials,

ig I looked at 1990 compared to 1989. I did not see

20 any particular pattern in total usage one way or

2i the other, so we did not make an adjustment.

22 Q. When you say -- if you would -- do you have

23 your Statistical Supplement up there, Mr. Stimart?

24 If you will turn to page 15, you will see


51

3

4

5

6

7

8

9

10

11

12

13

14

18

19

20

21

22

23

ie , information on industrial sales, don't you, at thi

2 top of the page?

A. Yes.

0. And as I believe other witnesses have previously

indicated in this proceeding, the number of -- the

level of industrial sales fell by a very small amount

that statistically may not be very significant from

1989 to 1990; is that not true?

fl. That's correct.

o. The only other time in this whole time frame

that industrial sales as a group fell were in the

-- at the time of the 1982 recession; is that not

correct?

fl. That ' s correct. Now, keep in mind that we

15 have made two adjustments to those figure you see.

16 Q- Yes, sir

17 A. We've weather adjusted them, and we've also

increased it for the addition of new industrial

customers. So what you see there as a relationship

is not what's reflected in our cost of service.

Our cost of service reflects a higher industrial

level of sales.

Q. These right here that we're looking at from

24 the Statistical Supplement, this is actual information;


52

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

is

A.

of

is

that not true?

That's correct. But I 'm saying is

service is not based on that. Our cost

based on a pro forma level of sales.

increased that figure for both weather and

adc

0.

ed.

Under the parameters that we've

within the last five minutes; is that

Mr.

A.

Q-

Stimart?

Yes, that's correct.

And we've already been

ments cover and what they don

A.

Q.

That's correct.

Actually, from 1989

our cost

Df service

We have

customers

discussed

not true,

over what those adjust-

t; isn't that right?

to 1990, there was a

decline -- a slight decline in the level of

sales; is that not true?

fl.

Q.

of

in

That's correct.

And during 1990 or

1990, it is true, is it

this state had a period

recession; isn't that right?

fl.

in

Q.

industrial

a significant portion

not , that the economy

in which it

That's true, but it certainly is not

those statistics.

Well, we might disagree about that,

entered a

reflected

Mr. Stimart.


53

•i But the numbers are there, aren' t they?

2 fl. Well, if I go from 25,934 to 25,894, I don't

3 see much of a recession in those figures. Plus

4 if you figure I adjusted them for weather and growth

on top of that, I clearly will have an increase.

So I wouldn't say that those figures reflect a recession

7 Q. When you say you would have an increase over

8

10

12

14

16

22

1989, are you referring to the 1989 actual figures

g or an adjusted 1989 set of figures?

A. I'm saying I would have an increase over

11 what is shown there as actual for 1990.

Q. So we -- your comparison when you said you

13 would have an increase is going from actual to adjusted;

is it not correct?

15 fl. I'm sorry. Would you repeat that?

g. When you said there would be an increase

17 in industrial sales from 1989 to 1990, you were

18 referring to a change beteen actual numbers and

19 adjusted numbers, correct?

20 MR. STANDISH:

2i I don't think that was his testimony. I

think he said there was an increase from actual

23 1990 to what is being shown in this case.

24


54

1 MR. ERVIN:

2 Mr. Chairman, I think if I have mischaracterized

3 his testimony, I think the witness has the ability

to tell me that.

CHAIRMAN REDMAN:

Well, I think the witness will teil you that

1 shortly,

g MR. ERVIN:

g I think he will, too, I've had enough experience

IQ conversing with Mr. Stimart over the years that

11 i f l make a mistake in my questions, it is invariably

12 pointed out to me.

13 THE WITNESS:

14 I was saying that the 1990 figure of actual

15 is below what we have got in cost of service.

15 0. (Mr. Ervin) Yes, sir. Because of the two

17 adjustments that you've made to it?

18 fl. Customer growth and weather, yes.

19 g. And, of course, the effect of those adjustments

2 0 was to increase residential sales over the actual

2i 1990 level, as well; isn't that true?


23 g. But you didn't adjust industrial sales for

24 increased usage by existing customers not caused


55

, by weather, did you?

2

4

6

7

8

9

10

13

14

18

19

20

A. That's correct, we did not

., g. And during a recession -- and we can argue

about the severity of the one that was -- began

c in 199 0. During the recession of 1990, one of the

things that happens to industrial sales is that

they -- or industrial production is that it declines;

isn't that right?

A. That ' s correct.

g. And when there's lower industrial production,

11 there tend to be lower kilowatt hour sales to

12 industrial customers; isn't that right?

A. That' s correct.

g. And I believe without going back through

15 all that information, it was pointed out in some

15 of the company's annual reports and other documents

17 that the recession that occurred in 1990 or began

in 1990 lowered the company's sales to industrial

customers; isn't that true?

A. Yes.

2i 0. And when we say it lowered sales to industrial

2 2 customers, we are essentially talking about lowered

23 sales to existing industrial customers; isn't that

24 correct?


4

5

6

7

8

9

10

56

, A. That's correct.

2 g. Those are the same customers whose usage

3 was not adjusted by either the customer growth adjust

ment or the weather normalization?

12

14

15

16

21

A. That' s correct.

n. Now, during 1991 , it's true, is it not, that

there has been some recovery in the level of industrial

sales?

fl. I know we're showing an increase in sales.

To what extent that's weather sensitive or an improve-

11 ment in the economy, we don' t have any analysis

that would show that.

13 g. Typically, residential customers are more

sensitive to weather than industrial customers;

isn't that true?

A. That' s correct.

17 g. And as a general proposition, you would agree

18 with the statement implicit in my question?

19 A. For the seven months ended July 1991?

20 0. Yes, sir.

A. Our total industrial sales are basically

22 flat for 1990.

23 g. What are you reading from, Mr. Stimart?

24 A. Our monthly financial statements.


57

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

g.

repc

fl.

MR.

The company

rts, does i t not

Yes, it does.

ERVIN:

May I approac

CHAIRMAN REDMAN:

Q-

You may.

(Mr. Ervin)

a document and ask

the company's 1991

holders?

fl.

g.

a fc

A.

(\

see

Yes, it is.

periodically puts

p

h the witness, Mr.

out quarterly

Chairman?

Mr. Stimart, I would hand you

you if that is

second quarter re

And I'll direct you to -- this

Ider type of document, isn't it?

Yes.

If you look

something that

from Mr. Lee, don't

A.

Q-

of

that

fl.

0.

Yes.

And in that

things that are

right?

Yes.

And I'll --

not a copy of

port to share-

is essentially

on the first inside page, you'11

is a brief letter

you?

to shareholders

letter there is a discussion

pertinent to the

in the interest

company; isn't

of time, I'll


58

, point one sentence to you, and then you can -- I ' 11

make you the offer other lawyers have made other

witnesses and you can read any other part of it

. that you want to.

,- But it does say that earnings per share of

, common stock total 61C in the second quarter, up

7 from 52C a year ago, A special note was a 2.9 increase

8

10

11

12

13

14

15

20

21

22

in industrial sales. Sales specifically to textile

g customers rose by 3.1%, the first quarterly increase

for this important group since the fourth quarter

of 1989.

That's what it says, isn't it?

A. Yes. But the problem is the percent of increase

to what quarter, I'm just saying that for the first

seven months in 1991, our sales to industrials are

15 slightly down from a year ago

17 g. The comparison that is incorporated in the

18 document that we're looking at is a comparison of

19 the period -- three month period ended June 3 0,

1991, to the comparable period ended June 30, 1990;

isn't it?

fl. That's correct.

23 g. All right. It is true, is it not, Mr. Stimart,

24 that slowly but s.urely that economic conditions


59

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

in

fl.

o.

the

far?

fl.

g.

fl.

would

is

o.

--

area are improving?

I hope so.

That's been your observation, isn't i

I see a lot of conflicting literature.

That's why I said slowly.

Certainly just looking at our sales to

show the industrials through seven months,

clearly over half of the year, are,

so

month

I

31

fl.

Q.

fl.

pe

Q-

When -- you're talking about

in fact,

t, so

date

which

down.

there in the

that we can get clear on the record the

period that you're talking about.

believe, that from January 1 of '91

of

riod

period

A.

g.

in

ha

1991 sales were flat as compared

July -- or January 1, 1990, to J

All right. So we're talking --

(Interposing) The seven months

•

seven-

You testified,

through

to what?

July

uly 31, 1990.

of the

So we're talking about the two seven-

s both ending July 31; is that correct?

That's correct.

test

month

Now, the recession that has been in existence

this state sort of picked up steam

If o f 1990, didn't it?

in the second


60

1 A. I can't say whether it did or not.

2 g. So you don't have any recollection of whether

3 the second half of 1990 was more impacted by the

4 recession than the first half?

c A. I'd have to go back and look at our sales

trend. That doesn't particularly register with

me.

g. So it' s your testimony before this Commission

that economic conditions were uniform in North Carolina

11

12

13

6

7

8

9

1 0 throughout 1990?

fl. No, I didn't say that.

0. You don't have any recollection of what period

of the year they were better and what periods of

14 the year they were worse?

15 fl. I 'm just looking at the first seven months

15 in '91 compared to 1990 relevant to your line of

17 questioning as to the test period, which was 1990.

13 g. As a matter of mathematics, Mr. Stimart,

if it were true that industrial sales declined over

2 0 the course of 1990 so that they were higher in the

2i first part of the year and fell in the second part

2 2 of the year, the -- there would be an increase in

23 industrial sales if the first seven months of 1991

24 were identical to the first seven months of 1990?


19

8

9

10

11

61

•i Isn' t that just mathematically true?

2 A. You'll have to give me that one again.

3 g. Assuming for purposes of discussion --

fl. (Interposing) I thought the original line

c of questioning was that '91 has improved over 1990

6 and I was just quoting our actual results in '91

7 compared to ' 90. That's all I was trying to point

out.

0. And what I'm trying to do is put that

or at least from one person's perspective, put those

in context, Mr. Stimart.

12 What I 'm -- the period that you have cited

13 t o u s i s a seven-month period at the beginning of

14 1990 and a seven-month period at the beginning of

15 1991; is that not true?

A. That' s correct.

17 g. The period of your comparison does not include

18 the time from August 1 , 1991 , to December 31 , 19

19 -- excuse me. I'm sorry. The period that you' re

20 citing to us does not include the time from August

2i 1, 1990, until December 31, 1990, does it?

2 2 A- That' s correct, it does not.

23 0. So that if industrial sales were on a declining

24 trend through 1990, in other words, they were higher


16

8

9

10

62

1 at the first part of the year than they were at

2 the end of the year, assuming that hypothetically,

3 if industrial sales in the seven-month period ending

4 July 30, 1991, were equal to the level of industrial

5 sales in the seven-month period ending July 30,

g 1991, does that not mean that there was an increase

7 in industrial sales in the early part of 1991 over

the period from August 1, 1990, through December

31, 1991? I hope I've stated that correctly.

CHAIRMAN REDMAN:

11 I hope the witness can understand that question.

12 The Chair is having a little difficulty with those

13 dates.

14 MR. ERVIN:

15 And I'11 have to say, I'm having trouble

15 figuring out a way to phrase it, so we're all suffering

17 equally, I'm afraid.

18 o. (Mr. Ervin) Do you understand my question,

19 Mr. Stimart?

20 A- 1 guess I' d have to see the total layout

2i of the figures. You're making an assumption as

2 2 to the severity of what happened in the second half

23 of '90 and the severity of the change that took

24 place in ' 91 . And until I see the total layout


10

11

13

14

16

18

19

63

of those figures, I can't tell you one way or the

other,

0. So you don't -- you can' t answer my question

because you don't want to accept one of the premises

of the question; is that it?

A, I just haven't got enough data.

g. All right. So it's your testimony then --

and I'll quit beating this horse for a while. It's

g your testimony then that there -- that in your opinion.

the level of industrial sales to existing customers

in the test period is representative of the level

12 of the sales to be expected from those same customers

in the future?

A. In what period of time?

15 g. Let me try to rephrase my question, Mr. Stimart.

We've agreed, have we not, that neither of the sales

17 adjustments that have been made to the test period

would affect the level of sales to existing industrial

customers? That's essentially -- I think we agreed

2o on that, didn't we?

2i fl. We make two adjustments. We make a weather

adjustment, and we make a customer -- what we' re

23 attempting to do is get a -- what we say is a repre-

24 sentative test period of kilowatt hour sales.


6

7

8

9

10

64

1 0. I mean tha t's the ultimate objective of

2 the whole process, isn't it?

3 A. That' s correct. And the preciseness of the

4 calculation has been as we generally look at usage

5 on a short time period such as a year, we do not

see a trend in usage. We looked at ' 90 compared

to '89. We did not see a particular trend. As you

pointed out in the Statistical Supplement, the difference

between the industrial from '89 to ' 90 is hardly

noticeable. Based on that observation, we conclude

11 that 1990's kilowatt hour sales are a representative

12 level of kilowatt hour sales.

13 Now, it may be there were some trends within

14 that twe Ive-month period up or down, but we' re not

15 setting rates based on the trend. We're setting

15 them based on what took place during the whole twelve

months.

18 g. So that the essence of your testimony on

19 this issue is that in your opinion the sales to

20 existing customers, existing industrial customers

2i during the test period are reflective of a representative

2 2 level of sales to those customers for ratemaking

23 purposes?

24 fl. Yes. We think the test period kilowatt hour


65

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

sales

period

Q,

have p

A.

Q.

- and

don't

retail

fl.

0-

is a representiative normal level for that

of time.

Except as adjusted in the manner that you

reviously described?

That's correct.

As a matter of sheer information, Mr. Stimart

I'm almost finished - you show in your exhibits,

you,an estimated amount for the North Carolina

portion of Bad Creek?

Yes.

And that's shown on Stimart Exhibit 4, page

-- Stimart Exhibit 1, page 4a?

fl.

Q.

your

isn't

there

fl.

Q.

fl.

g.

A.

0.

of all

That's correct.

That amount was not known at the time that

original testimony and exhibits were filed;

that right? In other words, what you've got

is an estimate?

That's our estimate that --

(Interposing) What I wanted to know --

(Interposing) That's correct.

-- is the final -- what's the final figure?

The final figure is 626,595,000.

And that's the North Carolina retail portion

—


66

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

A.

Q.

fl.

Q-

(Interposing) Yes,

-- four Bad Creek

Yes.

it is.

Units?

All right. Including the

to come into service next

A. Well, if things

commercial today.

Q.

my 1

have

the

told

been

A,

MR.

Congratulations.

Several other wi

Friday?

go well

tnesses

one that's anticipated

today, it will be

this really is

ast question, Mr. Stimart. Several other witnesses

been asked if the

status of the CP&L

at the time Mr.

any changes in that

There has been no

ERVIN:

y know anything more about

capacity sale than we were

Lee test ified. Have there

situation?

changes

Thank you, Mr. Stimart.

CHAIRMAN REDMAN:

had

you

MR,

Thank you, Mr. Erv

Mr. Gleason, I

-- you did not have

do not have any cross

CHESNUTT:

That's correct. 1

in.

believe

any. I

for Mr.

waived

to my knowledge.

you indicated you

mean, Mr. Chesnutt,

Stimart.

off yesterday morning.


1

2

3

4

5

6

7

8

9

10

11

67

I believe.

CHAIRMAN REDMAN:

Mr. Gleason.

MR. GLEASON:

I have none.

CHAIRMAN REDMAN:

I still had you five minutes down there.

MR. GLEASON:

I might save that for a later witness, if

I can.

CHAIRMAN REDMAN:

12 We had some phone calls some of us needed

13 to make here. Let's go off the record just a second-

14 (DISCUSSION HELD OFF THE RECORD)

CHAIRMAN REDMAN:

Let's take a 15 minute break.

17 (A RECESS WAS TAKEN)

18 CHAIRMAN REDMAN:

ig Let's come back on the record, please. Ms. Long

20 CROSS-EXAMINATION

21 BY MS. LONG:

22 0- Good morning, Mr. Stimart.

2 3 A. Good morning.

24 g. I notice from my calendar, it' s Friday the


15

16

68

1 13th. So perhaps we should both approach the day

2 with trepidation.

3 Let's see. In the company's or in the Public

Staff's or in anyone's lead-lag study, the intent

of the study, is it not, sir, is to measure the

difference in time between cash is advanced and

7 when it has to be spent or when revenues come in

8

9

10

14

and when they must go out?

fl. That's correct, to figure out what the capital

requirement necessary is to fund the business on

11 its day-to-day operations.

12 Q. All right. A large source of the company's

13 cash is, of course, money that comes in through

electric revenues billed to customers?


15 g. And because electricity is a commodity that ' s

17 sold in measured amounts, billing is in arrears,

18 is it not?


20 0- S o that, in fact, the cost or the expense

2i is incurred before the revenues come in?

22 A- That' s correct.

23 n. The actual cost of doing the billing, the

24 bookkeeping and the salaries and those kinds of


1

69

costs are not reflected in lead-lag, are they?

2 A. They are part of our operating expenses that

3 we put a lead-lag on if that's your question.

g. Okay.

fl. In other words, the people who do the billing

are paid, and we put a lag on the salary for those

7 people.

Q g. I see. They are paid before the revenues o

g come in to cover that expense?

IQ A. That' s correct.

11 g. The company generally does most of its billing

itself, does it not?

fl. Yes.

g. You recently, though, apparently started

15 a program where someone else was allowed to do a

little bit of billing for you. Do you recall that?

fl. That's in reference to the credit card?

13 g. (Ms. Long nods head.)

fl. Yes.

g. And that, as I understand it, is a program

2i where people may pay their electric bill using their

22 VISA or Mastercard bill; is that right?

23 fl. I'm hesitating because I'm not clear as to the

24 total scope of it, whether it was restricted to


12

13

14

16

17

19

20

5

6

7

8

9

10

70

, just deposits or whether it also applied to payment

2 of bills.

^ g. All right. Are you aware whether you came

* before the Commission and asked permission for that?

fl. Yes, we did.

g. Was there an order issued?

fl. I believe there was.

g. All right.

fl. I was thinking it was presented on a Monday

morning presentation to the Commission.

11 g. Okay. That' s fine. Let me hand you something,

12 Mr. Stimart, and this is all I have to ask you

13 about. This is another handout that I'll request

14 be identified as Attorney General Stimart Cross-

15 Examination Exhibit Number 1.

16 AG STIMART CROSS EXHIBIT 1 (Identified

17 MS. LONG:

18 It is -- the exhibit is two pages from a

ig periodical. Mr. Stimart has the exhibit and the

20 periodical in front of him

21 g. (Ms. Long) For the record, Mr. Stimart, what

2 2 is the periodical?

23 fl. CONSUMER REPORTS dated September 19, 1991.

24 g. And the second page of the exhibit, which


71

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

is

is

it

fl.

Q.

or

the back cover -- inside back cover of the magazine

a feature which is entitled "Selling It," is

not?

Yes.

Okay. The bottom left-hand page of that

left-hand corner of that page talks, in fact.

about Duke's credit card option for paying, does

it

fl.

Q.

you

not?

Yes, it does.

And it indicates, does it not, that when

pay with a credit card you incur a service charge

that escalates from $7 up to $4 extra for each S100

over $400; is that right?

A.

Q.

That's correct.

Who gets those monies, those service charge

mo nies?

A. It's my understanding it goes to the service

company that renders the -- handles the processing,

not

Q-

A,

Q.

A.

I 'rti

Duke Power.

Who is the service company? CMS A/R Services?

Yes, that's correct.

Who are they? Do you know?

I do not. They are the credit card processor.

-- I can't tell you who they are.


72

, We are relooking at this whole process as

2 a result of the recent developments and are reassessing

whether to restrict it to, say, just deposits for

the convenience of customers where deposits are

5 critical or to just cancel the whole program.

6

8

g. Okay. Were you, like me, broad-sided by

-. someone in a public place who flashed the magazine

in front of you or me and either laughed or got

g angry depending on their particular frame of mind

IQ that day?

11 A. I'm sorry. I don' t understand your question.

12 g- Okay. I don't want to testify. How were

13 you made aware of the controversy about this program?

14 fl. I'm working from memory that there might

15 have been a complaint filed with the Commission

15 when they got -- or else, we got a phone call.

17 They were surprised when they got their bill and

18 found out they had a service charge for using the

ig credit card in this manner.

20 Q- Okay. And it is that complaint that is causing

21 you to re-evaluate?

2 2 A- Yes.

2 3 g. Okay. When you re-evaluate, do you intend

24 to send it to CONSUMER REPORTS and let them know


73

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6

7

8

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10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

that it's fixed?

fl.

MS.

I don' t know how they

LONG:

Thank you. That's all I

CHAIRMAN REDMAN:

Mr. Standish. Oh, I'm

better let -- for some reason I

out

MR.

tho

was

BY

g.

to

we

to

the Public Staff, but I see

Mr. Turner.

TURNER:

Thank you, sir.

I think it's this mac

se who are more technically

hiding me.

got

have.

this

sorry.

thought we

that'

hine

able

CROSS-EXAMINATION

MR. TURNER:

Mr. Stimart, I've just

try to clarify, as much as

stand on several things.

It is my understanding

contest the depreciation

got

anyt

that

s not

besid

than

a few

hing

Duke

adjustment

McLawhom has made; is that correct?

A.

o.

That's correct.

But I also- understand that

article or --

I guess we

had zeroed

the case.

e me that

I use that

questions

else, where

is going

that Mr.

there will be


74

1 a rebuttal witness on depreciation; is that correct?

2 A. That ' s correct.

3 g. Okay. So I'm going to defer all my depreciation

4 questions then to that witness.

5 Now, with regard to Ms. Peedin's testimony,

5 I understand that there are two items that are in

7 some controversy. The first item are the bond

3 reacquisition premiums. And as I understand it,

9 the company agrees that there should be some allocation

10 of those premiums between utility and non-utility

11 areas; is that correct?

12 fl. That's correct,

13 g. But the company and the Public Staff have

14 not reached an agreement yet on the number that

15 we're talking about, the allocation percentage;

15 is that correct?

17 fl. That's correct. There was a misunderstanding

18 where the Staff took their figure for utility/non-

ig utility. They went to an income tax analysis that

20 w e do where for what I'd characterize as above

21 and below the line calculations on allocations,

22 we treat CWIP as non-utility because we are accruing

23 AFUDC on it. And it's not in rate base in any given

24 proceeding at the time that the proceeding is going


75

, on. For tax purposes, we treat that as non-electric,

2 so that would have the appearance as getting some

^ of the carrying costs and the call premiums allocated

4 to it rather than to electric. So it gave them a

5 percent somewhere around 60, as I recall -- 60 or

6

8

9

10

11

7 0 percent for electric. Whereas, if you look at

7 our balance sheet and go down the assets side and

identify what monies we've invested relative to

the electric business, you' d find it's more like

9 7 or 9 8 percent of our business. A very small

amount is non -- non -- truly -related to electric

12 operations.

13 g. Okay. During the break, Public Staf f' s

14 accountants were asking -- they said they still

15 have not yet received your -- Duke's figures and

15 calculations and all on that. Do you have any idea

17 when you might be able to provide that to the Public

18 Staff accountants?

19 fl. We should be able to do that this morning.

20 Q- This morning. Okay. And the reason is because

2i obviously if we can reach an agreement before Ms.

2 2 Peedin comes on the stand, then she can update on

23 the stand and explain that agreement to the Commission.

24 All right. I understand there is also a


8

9

10

11

12

76

, disagreement on Ms. Peedin's adjustment regarding

2 interest on long-term debt and dividends on preferred

3 stock; is that correct?

4 A. That's correct. That's an old -- old item

5 that we've presented in our cases for some years

5 that the Staff has taken the position that the debt

7 should get the interest -- interest lag. And we' ve

contended that as part of the return for -- from

operations and that it should all get a zero lag.

The Commission has pretty much followed the practice

of the Public Staff on that issue.

g. As a matter of fact , the Commission has followed

13 the Public Staff's position on that for about the

14 last five rate cases, hasn't it?

15 A. It has been at least the last two or three,

i 6 y e s

17 g. Okay. And the reasons for your position

18 this time in the case, are they the same philosophical

19 reasons that you've expressed in the previous cases?

2 0 fl* Yes

2i g. Okay. I need to touch base with you on the

22 other post-retirement benefits. Just a couple of

23 questions

2 4 How does the company plan to invest the funds


77

, collected from the ratepayers for other post-retirement

2 benefits prior to the payout of those benefits to

3 retirees?

4 A. We will definitely invest them in outside

5 funds and probably designate a fund manager just

5 as we've done with our decommissioning and pension

7 fund to the extent that we can take a tax deduction

3 and minimize the tax requirements on that funding.

g In other words, within the umbrella of the pension

10 tax laws, there is some -- some margin that you

11 can invest post-retirement benefits and not have

12 the income taxed.

13 Beyond that, we have not looked at the total

14 economics. It's the same dilemma you have with

15 funding of decommissioning. From a conservative

15 standpoint, to invest the funds in other than utility

17 operation takes it out of the aspect of putting

18 monies in -- more additional in utility property.

19 On the other hand, if we were to put them into a fund

2 0 managed such as a pension fund that relieves them

21 from the electric operation gives them what some

22 people might consider a more assured availability.

23 On the other hand, we probably cannot earn in that

2 4 fund management fashion as much as we could earn


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

if

So

we

put

0.

we left the monies in

it's a tradeoff that

-- in the

we will

have not made that decision yet

My preference, of

them all in external

However the funds

course,

funds.

electric business.

have to make, and

-

would be that we'd

are invested, whether they're

internal or external, will the r

the

fl.

the

be

Q.

Bad

cos

fl.

Q-

by

A.

benefit of the return

Yes, they would.

calculation of the

funded.

Okay. I have a

atepayers be given

earned on the funds?

And that would roll into

total dollars that have to

series of questions about

Creek, and then I think I'm finished.

Your -- in your summary.

t of Bad Creek at 1.007 billion

That's correct.

Do you have those plant

unit?

For Unit 1 and 2 the amount

Unit 3 is 98,314,000,

For

Q-

a total of 1 ,700,288,

Could you give me

please, sir.

fl. 86,055,000. •

and Unit

000.

the one

you gave a total

; is that right?

costs broken down

becomes 822,119,000.

4 is 86,055,000.

for Unit 4 again.


79

1 g. Okay. Now, there is still a matter that

2 is contested dealing with the Bad Creek deferred

cost; is there not?

fl. That is correct.

8

9

10

11

3

4

5 n. And that's a matter not only of Mr. Maness'

5 testimony, but I believe Mr. Phillips also addresses

7 that in his testimony, does he not?

fl. I know one of the Intervener's witnesses.

I did not think it was Mr. Phillips. I thought

it was somebody else.

g. It's Mr. Baron.

12 A- Yes , that' s correct.

13 g. I stand corrected.

14 The company is proposing in this case to

15 recover the capital cost incurred as a result of

15 the operation of the Bad Creek plant prior to the

17 date of the Commission' s order in this case; is

18 that correct?


20 0- And those are called deferred costs, right?

21 A. The Commission has ordered that we defer

22 them, yes.

23 g. Okay. And the term "deferred cost" derives,

24 does it not, from the fact that the costs are incurred


80

, prior to the date the rates are charged but are

2 deferred for both accounting and ratemaking purposes

until after the rates are charged; is that correct?

fl. I'm sorry. Say that -- repeat that again.

g. The term "deferred cost" comes from the fact

that the costs are incurred prior to the date that

-j rates are changed but are deferred for both accounting

8

10

11

and ratemaking purposes until after the rates are

9 o changed; is that correct?

fl. That's correct.

o. Okay. So basically these are expenses which

12 were incurred prior to the date rates are changed

13 but will be recovered from ratepayers in the future;

14 is that right?

15 fl. Yes. I hesitate to totally acknowledge the

15 definition of expenses as you are characterizing

17 them in that they are really capital costs. What

18 we're talking about is the depreciation and the

19 return on investment. And the thing that brings

20 this calculation about is that under the standard

2i ratemaking criteria, you would declare a unit commer-

22 cial when it goes into service for accounting purposes,

2 3 for ratemaking purposes. And, in essence, the Commis-

24 sion is saying it's in service when they set rates.


6

7

8

9

10

11

12

13

, Therefore, there is a -- there is a cost there unless

2 it's captured falls through the crack. So the

3 Commission, in essence, is saying that we'11 declare

4 it commercial and capture as part of the cost the

5 plant up until we set rates. It's almost a form

of CWIP if you want to call it that. Characterizing

it as deferred just happens to be because of the

mechanical way in which we capture the cost.

g. Well, that's true, but the order of the

Commission was necessary in order for the company

to defer those costs for accounting purposes, was

it not?

fl. That's correct.

14 g. And the order that we' re talking about is

15 Sub 484; is that correct?

A. I don' t have that in front of me. That sounds

17 right.

18 o. Will you accept that subject to check?

19 A. Yes.

20 Q- Would it be fair to say that if the Commission

21 had not issued that order in 4 84, a strong case

22 could be made that any attempt to recover in the

2 3 future for costs actually related to past operations

2 4 would amount to some form of retroactive ratemaking?


16

1 fl. 1 would suggest the reverse, that what the

2 Public Staff is proposing is retroactive ratemaking

3 and that their benchmark for determining the recovery

to deferral is their recommended return of their

witness being applied back to the service state

of the units. I would say what we * re proposing

7 has been pretty well accepted by this Commission

3 ever since McGuire 2 going back to 1984 and also

g by the Commission in other cases and quite commonly

10 accepted across the country.

11 g. But regardless of that, you would agree that

12 the accounting order is essential in establishing

13 the foundation of the recovery of the deferred cost,

14 would you not?

15 A. I t ' s o n e o f t h e components that was utilized,

i6 yes-

17 g. Without it, would you have been able to do

18 it? It was an essential element, was it not?

ig MR. STANDISH:

2 0 Mr. Chairman, I don't know if Mr. Turner is

21 asking Mr. Stimart a legal question, an accounting

22 question or what. I believe that he's asking him

2 3 a legal question, and I don't believe Mr. Stimart

24 is a lawyer.


1 MR. TURNER:

2 Mr. Chairman, I --

3 CHAIRMAN REDMAN:

4 Mr. Turner, are you asking him an accounting

5 question or a legal question?

5 MR. TURNER:

7 I'm asking an accounting question,

g CHAIRMAN REDMAN:

g Well, I think he can respond to an accounting

IQ question.

11 THE WITNESS:

12 I think that the receiving of the order from

13 the Commission just establishes the ground rules

14 as we go forward. Certainly we could have deferred

15 those costs until the hearing recognizing that the

15 hearing was some six months away at which time the

17 Commission could rule on it.

18 I n t he past where we have asked for the

19 Commission's approval to follow that accounting

20 has generally been to clear any uncertainty if there

21 happened to be any financings that were going on

22 in that interim time and as to whether the dollars

23 would have been material. But we could very well

24 have just gone ahead and deferred the dollars and


84

1 just made them an issue of this case.

2 Q- (Mr. Turner) Do you believe than an accounting

3 order, such as the one that the Commission issued

4 in 484 in this case, do you believe that that type

5 of accounting order alone gives the company an

unrestricted right to recover deferral costs in

rates?

A. No. But I would say that order in conjunction

g with the Commission's past practice certainly is

10 what we as accountants would rely on in following

11 that method of accounting. If this was the first

12 time that was ever done, there would be a lot of

13 question as to what the outcome might be.

14 g. The only thing I 'm trying to establish is

15 that although the order allowed an accounting treatment

16 it did not approve any actual ratemaking treatment,

17 did it?

18 fl. That's correct. But, again, we're not working

19 in a vacuum. We are dealing with past practices.

2 0 We are recognizing that generally those orders are

21 issued and that something -- unless something very

22 unusual happens, the Commission is going to follow

2 3 through on its past practice.

24


1 MR. TURNER:

2 No further questions.

3 CHAIRMAN REDMAN:

4 Now, Mr. Standish.

5 MR. STANDISH:

5 Mr. Chairman, we have no redirect. We would

7 like to move into -- have admitted evidence Stimart

3 Exhibits 1 through 3 and Stimart Supplemental Exhibit

g 1. We would also like to move into evidence Denton

10 Exhibits 1 through 4, which I'm not sure were ever

11 formally admitted into evidence,

12 CHAIRMAN REDMAN:

13 I think they were, but out of an abundance

14 of caution, we'll accept them all.

15 STIMART EXHS. 1 - 3 , STIMART SUPPLEMENTAL EXH.1 &

16 DENTON EXHS. 1 - 4 (Admitted)

17 CHAIRMAN REDMAN:

18 Are there questions from the Commission?

19 Commissioner Wright.

20 COMMISSIONER WRIGHT:

21 I wasn't here this morning, Mr. Stimart.

2 2 What did you all talk about ? I'm just --

23 THE WITNESS:

24 We're raising the nuclear capacity factor


8

9

10

86

1 to 72%.

2 COMMISSIONER WRIGHT:

3 Inoticedthatinyour summary.

CHAIRMAN REDMAN:

Mr. Stimart, did I understand you to tell

-- explain to the Attorney General that this credit

7 card option payment plan was approved on a Monday

morning Staff Conference here or --

THE WITNESS:

I was thinking it was presented at a Monday

11 morning conference. I'd have to double check that.

12 CHAIRMAN REDMAN:

13 Well, the reason why I'm wondering is I'm

14 trying my best to remember whether or not I was

15 present for that, and that if I was present, whether

-- how it was -- whether or not it was presented

in such a manner as to reflect that you were going

18 to be allowed to charge on credit cards without

19 these -- and whether or not the service charges

20 were presented to us.

21 THE WITNESS:

22 It's my understanding that at the time we

23 discussed this extensively internally as to whether

24 -- what was the form of notification to a customer


16

17

8

9

10

-, that that service charge was going to be his respon-

2 sibility. Now, I didn't sit on any of the presen-

3 tations, but I was told that that -- that was part

4 of the routine procedure that he would be advised

5 that he would -- ho would see that charge.

5 CHAIRMAN REDMAN:

7 Well, that's what we said about the 900 numbers,

too. We didn't get the word out too well on that

one.

I -- these credit card companies, if you

11 utilize most of them, you would have to pay them

12 a fee anyway, would you not? Some of them will

13 do it for nothing. But sometimes there's anywhere,

14 depending on how big the customer is, 1%, 2%

15 that the merchant would have to pay. Right?

16 THE WITNESS:

17 That's correct.

18 CHAIRMAN REDMAN:

19 And then they get another percentage on what

20 they -- if you don't pay your bill on time from

21 the consumer?

22 THE WITNESS:

23 That's correct. It may be that there is

24 a restricted area for application where people have


88

, problems trying to get downtown to make deposits

2 to get service turned on, something of that nature.

3 But it may have an application that -- and that' s

. what we're looking at now.

CHAIRMAN REDMAN:

Well, what I -- most of these charges

7 the thing I'm concerned about, most of these charges

8

9

10

in addition to having Commission approval require

are at least controlled by law, particularly

the cap on the interest rate that can be charged,

11 Now, the -- these companies, as you well know, most

12 of them are coming out to where you have to pay

13 a charge now that I fought against once before in

14 the legislature of upwards of 15, 2 0 dollars for

the card. And then they get interest. Then the

15 merchant pays them to use the card. I'm trying

17 to figure out what the final rate would be for somebody

18 with $100 bill here -- would be if they had to finance

19 the thing out. I'm getting upwards of 30%.

20 THE WITNESS:

2i I think you're probably right. On the other

2 2 hand, talking to the controller of one of the major

2 3 companies that underwrites credit cards, they have

24 staggering bad debt .losses.


89

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

CHAIRMAN REDMAN:

I 'm

or

to

by

I 'm

trying

not --

the ere

sure they do.

to conclude

whether or not

dit card fees

legislation to where

That's the

And

--

I will

minutes

lunch hour.

on

MS.

to

to

THE

Are

question I 'm

check our Monde

and find out

however.

But I guess the question

in my own mind

the surcharge

that are paid

that can even

having in my

y morning Staff

is whether

in addition

are covered

be done.

own mind.

Conferences

more about this over the

there any other questions or questions

the questions from the

Ms.

LONG:

Mr.

Long.

Stimart, what

the credit card comp

credit cards?

WITNESS

It's

Duke.

MS. LONG:

All

*

Commission?

fee does Duke

any to have bi

have to pay

lis charged

my understanding there's no charge to

right.

CHAIRMAN REDMAN:

Very good. You're excused, Mr. St imart.


6

7

8

9

10

12

13

90

1 (WITNESS EXCUSED)

2

3 CHAIRMAN REDMAN:

4 Let's go off the record for a second here.

5 (DISCUSSION HELD OFF THE RECORD)

CHAIRMAN REDMAN:

Public Staff, would you please call your

witness.

MR. TURNER

The Public Staff's first witness is Tom Lam.

11 THOMAS S. LAM; Being first duly sworn, testified

as follows:

DIRECT EXAMINATION

14 BY MR. TURNER:

15 g. Mr, Lam, would you state your name and business

15 address for the record, please.

17 A. My name is Thomas S. Lam. I'm an engineer

18 with the Public Staff. My address is 430 North

19 Salisbury Street, Raleigh, North Carolina.

2 0 Q- And did you cause to be filed in this case

21 on August 28th of this year testimony consisting

22 of nine pages, one appendix and three exhibits?

2 3 A. Yes, sir.

24 g. And then subsequent to that at the request


91

1 of the Commission Staff, was a fourth exhibit filed

2 to be attached to your testimony?

3 fl. Yes.

4 0. Do you have any corrections to that testimony?

fl. No, I don't.

g, If those questions were asked to you today,

7 would your answers be the same?

A. Yes, they would.

MR. TURNER:

10 Mr. Chairman, I ' d request that the testimony

11 be read into the record as though given orally from

12 the stand and that the exhibits be marked as they

13 were premarked with the prefiled testimony.

14 CHAIRMAN REDMAN:

15 Your request is granted.

15 LAM APPENDIX A, EXHIBITS TSL-1 THRU TSL-4

17 (IDENTIFIED

18 (REPORTER'S NOTE: The prefiled testimony

19 of Thomas S. Lam will be reproduced in the record

20 at this point the same as if the questions had been

21 orally asked and the answers orally given from the

22 witness stand.

23

24


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

Q.

A.

Q.

A.

Q.

A.

Q.

A.

92

WILL YOU STATE YOUR NAME AND ADDRESS FOR THE RECORD?

My name is Thomas S. Lam. My business address is 430 North

Salisbury Street, Raleigh, North Carolina,

WHAT IS YOUR POSITION WITH THE PUBLIC STAFF?

I am an engineer in the Electric Division of the Public Staff

representing the using and consuming public.

WILL YOU BRIEFLY DISCUSS YOUR EDUCATION AND EXPERIENCE?

My education and experience are outlined in AppendixA to my

testimony. .

WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?

The purpose of my testimony is to present the Public Staff's

recommended cost-of-service methodology and base fuel factor. The

Public Staff recommends use of the summer/winter peak and average

methodology for jurisdictional and fully distributed cost

allocation purposes. Calculation of the base fuel factor is

fourfold: (1) modification of the Company's prefiled nuclear

capacity factor to 68.82%, which Is an average of the latest NERC

5-year nuclear capacity factor of 65.57% and the Duke's latest

five-year (1986-1990) average system nuclear capacity factor of

72.06%; (2) recommendation of the company's fuel calculation

methodology and an update of the Company's fossil fuel prices;

(3) presentation of the resultant fuel factor recommended by the

Public Staff; and (4) presentation of the fuel factor based upon

the latest NERC 5-year nuclear capacity factor of 65.57%.

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1 COST OF SERVICE

2 Q. WHAT IS THE SUMMER/WINTER PEAK AND AVERAGE METHOD?

3 A. It is a method of computing an allocation factor for production

4 plant that uses both the summer and winter peaks and recognizes

5 that a portion of production plant is related to energy production

6 or average demand. For Duke, this method allocates approximately

7 60% of production plant based on the average demand (energy) or

8 load factor. The remaining 40% of the plant Is allocated by

9 average of the summer and winter peaks.

10

11 Q. WHY IS THE SUMMER/WINTER PEAK AND AVERAGE METHODOLOGY BEING

12 RECOMMENDED BY THE PUBLIC STAFF IN THIS CASE?

13 A. Summer/winter peak and average (SWPA) allocation 1s being

14 recommended for two basic reasons. The first reason is that under

15 this methodology both seasonal peaks are considered in determining

16 the availability of generating units and system capacity

17 requirements. The two seasonal peaks are typically very similar

18 In size and must be met using the same production plant. The

19 second reason 1s that when there Is a basic need for new capacity.

20 there are generally three types of units to consider. These are

21 peaking units. Intermediate or cycling units, and base loaded

22 units. The selection of the type of unit is an economic one based

23 on the energy (kWh) requirement or the number of hours a unit must

24 operate each year. If little energy is required, the peaking

25 units are cost Justified due to their low capital cost as compared

26 to large base load units. If, however, much energy Is needed, the

27 lower energy cost (1/kWh) of capital-Intensive base load units

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94

1 makes them more desirable. It is, therefore, logical to conclude

2 that, while some of the production plant cost is incurred because

3 of the one-hour summer and winter peaks, some plant cost is also

4 incurred because of the energy or hour-use requirement of the

5 plant. The Commission has followed this reasoning in the last

6 three electric general rate cases, which are CP&L Docket No. E-2,

7 Subs 526 and 537, and VEPCO Docket No. E-22, Sub 314.

8

9 Q. WHAT HAS THE COMHISSION SAID IN ITS ORDERS WITH REGARD TO THE

10 SUMMER/WINTER PEAK AND AVERAGE COST ALLOCATION METHODOLOGY?

11 A. The Commission's order of August 5, 1988, in Docket No. E-2,

12 Sub 537, states:

13' Without baseload plants, CP&L would simply not be able 14 to serve its high load factor customers. It is only 15 appropriate that high load factor customers pay their 16 share of the cost of the base load plants built 17 primarily to serve them. The Commission is reluctant 18 to shift the cost of these production facilities to 19 further burden lower load factor customers, thereby 20 reducing their load factors and, ultimately, CP&L's 21 system load factor still further. 22 23 In its latest electric general rate order of February 14, 1991,

24 in Docket No. E-22, Sub 314, the Comniission states:

25 In Its Order dated December 5, 1983, in Docket 26 No. E-22, Sub 273, the Company's last rate case, the 27 Commission concluded that the cost allocation method 28 utilized for ratemaking purposes should recognize the 29 energy-related port1on of product1 on plant. 30 Essentially, the Commission reasoned that not all fixed 31 costs (for production plant) represent the cost of 32 meeting system peak demand, and that a significant 33 portion of fixed costs represents the cost of producing 34 kWh during many hours of the year and of producing such 35 kWh at a lower fuel cost per kWh. The Commission 36 continues to be persuaded In this proceeding that the 37 cost allocation method utilized herein should recognize 38 the energy-related portion of production plant fixed 39 costs.

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1 The Commission has also concluded in the previous rate 2 cases that the cost allocation method utilized for 3 ratemaking purposes should continue to recognize peak 4 responsibility as the basis for allocating the demand-5 related portion of production plant, and that peak 6 responsibility should include both the summer peak and 7 the winter peak. Essentially, the Commission reasoned 8 that the most significant capacity requirements placed 9 on the system were heating and cooling season loads, 10 and that while both types of loads were similar in 11 their impact on system capacity loads, the customer mix 12 contributing to the heating season load is 13 significantly different from the customer mix 14 contri but 1ng to the cool 1ng season 1oad. The 15 Commission continues to be persuaded in this proceeding 16 that the cost allocation method utilized herein should 17 recognize both the summer peak and the winter peak as 18 a basis for allocating the demand-related portion of 19 production plant fixed costs. 20 21 The Commission concludes in this proceeding that the 22 SWPA method will best recognize the requirement that 23 demand-related production plant fixed costs be 24 allocated based on peak responsibility. The method 25 also recognizes that not all production plant fixed 26 costs are demand-related, and it recognizes that 27 energy-related production plant fixed cost should be 28 allocated by kWh energy. The Commission concludes that 29 the SWPA method 1s the most reasonable and appropriate 30 method for determining jurisdictional and customer 31 class cost of service. 32 33

34 Q. IN REVIEWING THE COMPANY'S FILED SUMMER/WINTER PEAK AND AVERAGE

35 COST-OF-SERVICE STUDY. DID YOU FIND AN ERROR?

36 A. Yes, I did.

37

38 Q. WHAT WAS THAT ERROR?

39 A. In reviewing the company's filed summer/winter peak and average

40 cost study, I found that the company had used an Incorrect

41 allocation factor for most production related expenses.

42 Specifically, in the Duke SWPA, the average summer/winter

43 coincident peak (ASWCP) demand allocator was used in place of the

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96

1 SWPA demand allocator for all production related expenses except

2 for production plant. The use of the ASWCP allocator for demand-

3 related components in a SWPA cost-of-service study is incorrect.

4

5

5 Q. HAS THE PUBLIC STAFF CORRECTED THE COMPANY'S SUMMER/WINTER PEAK

7 AND AVERAGE METHODOLOGY?

8 A. Yes, I have adjusted all of the affected production plant and

9 production expense demand allocators, as filed by Duke in its

10 summer/winter peak and average study (SWPA). The SWPA methodology

11 as adopted by the Commission for CP&L and VEPCO uses the SWPA

12 demand allocator for allocating production plant and related

13 expenses. The remaining components (non-demand related) of the

14 SWPA study are the same as those used in the summer coincident

15 peak study. The Public Staff adjusted per book summer/winter peak

16 and average cost-of-service study summary is Included as

17 Exhibit TSL-1. This study also contains other adjustments as made

18 by Public Staff witness Maness.

19

20 Table No. 1 compares the returns of Duke's per books SCP study and

21 the Public Staff's adjusted per books SWPA study.

22

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97

TABLE NO. 1

Rates of Return (%)

5 6

7

8

9

10

11

12.

13

14

15

16

17

18

19

20

21

22

23

24

25

26

SWPA

SCP

NC Retail

10.3885

10.2321

NC Residential

9.8093

8.9206

NC General Service

12.1064

10.2249

NC Lighting

6.7687

10.2537

NC Industrial

10,0612

12.8494

Q.

A.

WHAT SHOULD THE COMMISSION DO TO ENSURE FAIRNESS IF IT ELECTS

TO RETAIN THE SUMMER COINCIDENT PEAK (SCP) ALLOCATION

METHODOLOGY?

The Commission, if It elects to retain the SCP niethodology,

should, for Increased fairness, at least ensure that each class

1s allocated only Its fair share of purchased (Catawba

Contract) and generated nuclear energy based on each class's

allocated share of rate base production plant as filed in the

Ouke Per Book SCP study. This SCP study shows that the

residential class 1s allocated 24% of rate base production

plant costs, general service 19.3% of costs, and Industrial

18.9% of costs. Thus, residential should be allocated 24% of

purchased and generated nuclear energy, general service 19.3%,

and industrial 18.9%. As it now stands, residential receives

20.1% of total nuclear energy, general service 17.8%, and

Industrial 23.5%. This adjustment 1s fair because no class

would willingly sell off Its low-cost nuclear energy charging

only for fuel and O&M costs without recovering associated

demand charges (rate base and production costs) of these plants

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98

1 from the purchasers of this energy. This adjustment to the SCP

2 methodology, however, is decidedly inferior to adopting the

3 SWPA methodology for Duke, as the Commission has done for the

4 other major electric utilities.

5

6 BASE FUEL FACTOR

7 Q. WHY ARE YOU RECOMMENDING A NUCLEAR CAPACITY FACTOR OF 68.58% IN

8 THIS PROCEEDING?

9 A. Duke's annual capacity factor for the past five years has been

10 outstanding, averaging over 72% for the period (Exhibit TSL-2).

11 This outstanding performance benefits the North Carolina retail

12 ratepayer but has also led to large overcollections on the part

13 of Duke. We seek to reduce the extent of the overcollection by

14 the use of both Duke's latest five-year (1986-1990) average

15 nuclear capacity factor of 72.06%, to recognize the above-

16 average nuclear performance of Ouke, and the latest NERC five-

17 year average nuclear capacity factor of 65.57%.

18

19 Q. DO YOU ACCEPT MR. STIMART'S FUEL PRICES AS FILED?

20 A. No, the Public Staff is updating Mr. Stimart's test year

21 average fossil prices. The coal price is being updated to the

22 July 1991 figure of 182.34</MBTU, the oil price Is being

23 updated to the July 1991 figure of 500.391/MBTU, and the gas

24 price is being updated to the July 1991 figure of 318.86*/MBTU.

25

26 Q. IS THERE ANY OTHER ADJUSTMENT YOU MADE TO DUKE'S FUEL FACTOR

27 COMPUTATION?

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1

2

3

4

5

6

7

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

37 Q.

38

39 A.

40

41

Yes, I also utilized Public Staff witness Turner's customer

growth and usage adjustment of 511,007 MWH.

WHAT IS THE RESULTANT FUEL FACTOR WITH THE ABOVE MODIFICATION?

The fuel factor would change from 1,1833^/kWh, as originally

filed by the Company, to 1.1412^/kWh, as shown below in

Table 2.

TABLE NO. 2

COAL IC LIGHT OFF NUCLEAR HYDRO PUMPED STORAGE PURCHASED POWER INTERCHANGE IN INTERCHANGE OUT CAT. CONT. PUR.

TOTAL LESS: INTERSYSTEM SALES LINE LOSS

SYS. MWH SALES & FUEL COST

ADJUSTED GENERATION (MWH)

31,331,034 40,184

30,698,777 1,859,100 (382,554) 672,972 529,894

(1,083,994) 7.261,089

70,926,502

(759,412) (4,403,803)

65.763.287

FUEL PRICE $/MWH

17.21 72.90

5.57

13.41 25.76 17.51 5,80

FUEL DOLLARS (000s)

$539,298 2,929 4,222

170.992

9,025 13,650 (18,981) 42,114

$763,249

(12,789)

$750,460

FUEL FACTOR CENTS/KWH 1.1412

WHAT BASE FUEL FACTOR ARE YOU RECOMMENDING THAT THE COMMISSION

ADOPT?

The Public Staff is recommending that the Commission adopt

1.1412*/kWh as the base fuel factor.

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100

1 Q. WHAT IS THE FUEL FACTOR USING ONLY THE NERC FIVE-YEAR NUCLEAR

2 FUEL CAPACITY FACTOR OF 65.57% AND THE FOSSIL FUEL PRICES FOR

3 THE MOST RECENT MONTH AVAILABLE?

4 A. The Public Staff has determined that the fuel factor calculated

5 using this methodology, which includes use of fossil fuel prices

6 for July 1991, would be 1.1749*/kWh as shown in Exhibit TSL-3.

7 This fuel factor is mgi being recommended by the Public Staff.

8

9 Q. DOES THIS CONCLUDE YOUR TESTIMONY?

10 A. Yes, it does.

11

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101

, Q. (Mr. Turner) Mr. Lam, do you have a summary

2 of your testimony?

A. Yes, I do.

Q. Would you please deliver it.

c A. My testimony recommends to the Commission

6 the use of the summer/winter peak and average cost

7 allocation methodology. The Commission has adopted

o this methodology in the last three general rate

q cases before it. These are Docket Number E-2, Subs

10 526 and 537 and E-22, Sub 314. The summer/winter

11 peak and average methodology allocates production

12 plant using both the summer and winter peaks and

13 recognizes that a portion of production plant is

14 related to energy production. The inherent respon-

15 sibility of a utility is to meet its customers energy

15 needs at all times. If a utility selects power

17 plants that only have the ability to meet the highest

18 one-hour energy demand but do not have the ability

19 to produce energy at other times as customers demand,

20 there would be an obvious energy shortfall.

2i The summer coincident peak methodology implies

22 that the peak is the only concern as it might well

23 be if the system only operated for that one hour

2 4 each year, As we know, the system must run for


102

8,760 hours each year, and there are energy needs

-, to be met for the other 8,759 hours of each year.

I also recommend to the Commission a fuel

factor of 1.1412 cents per kilowatt hour. This

c calculation uses a nuclear capacity factor of 68.82%,

6

8

14

15

16

which is an average of the latest North American

7 Electric Reliability Council's five-year nuclear

capacity factor of 65.57% and Duke's latest five-

q year average system nuclear capacity factor of 72.06%

IQ I am also using July 1991 fossil fuel prices to

11 refleet more accurately current fuel prices.

12 MR. TURNER:

13 The witness is available for cross-examination

CHAIRMAN REDMAN:

Mr. Ervin.

CROSS-EXAMINATION

17 BY MR. ERVIN:

18 Q. Mr. Lam, you talk about two questions, fuel

19 and cost allocation, correct?

20 ^ That's correct.

2i Q. Moving to the fuel issue first, you initially

2 2 proposed the fuel factor set forth in your prefiled

23 testimony and referenced in your summary at a time

24 when the company was recommending a 1.1833 cent


103

1 per kilowatt hour figure; is that not correct?


3 Q- 1 assume that you were aware that Mr. Stimart

. had changed his fuel recommendation on the stand

c this morning?

A. I was aware that he was going to make a change

Q. You were not in the room, but you knew that

« was coming

9

10

9

A. Yes, I did.

Q. And I take it from your summary that you

11 continue to recommend the factor which you set forth

12 in your prefiled testimony rather than making any

13 change to your recommendation as a result of Mr.

14 Stimart's update or alteration or however you want

15 to characterize it?

A. Yes.

17 Q. Now, you use a nuclear capacity factor of

18 68.82% in your recommendation, don't you?

19 A. Yes, I do,

20 0- You set forth as one of your exhibits, as

2i I recall. Exhibit TSL-2, the company's nuclear plant

22 performance since 1986, don't you?

2 3 A. Yes , I do.

24 Q. Do you know .what the company' s nuclear plant


104

1 performance to date in 1991 has been?

2 A. I have not checked on it.

3 Q. Do you know whether it's above or below 70%?

, A. I - - l i k e I said, I haven't checked on it.

5 I would think it is in the 70% area possibly.

5 Q. You are familiar generally with the extent

7 towhichthe company has had generating plant outages

13

in the first part of the year, aren't you?

A. I believe I'm basically familiar with it,

10 y e s '

11 Q. And if you know outages, you can sort of

12 ballpark a capacity factor, can't you?

A. You could --

14 MR. TURNER:

15 Objection, Mr, Chairman. I believe he said

15 he hadn't checked it and didn't know.

17 CHAIRMAN REDMAN:

18 I believe the Public Staff is correct. He

19 has indicated that he hasn't checked.

20 MR. ERVIN:

21 Mr. Chairman, I believe I'm -- he said he

22 didn11 know specifically, I believe I 'm entitled

2 3 to delve into the question of the extent of his

24 knowledge a little further, and that's what I'm


8

9

10

105

1 a t t e m p t i n g to d o ,

2 CHAIRMAN REDMAN:

3 Let's see how ballparkish you can get then.

MR. ERVIN:

Yes, sir. That's where I'm trying -- what

I 'm trying to find out is what kind of number he

-, can give me on that basis and how ballparkish it

is.

Q. (Mr. Ervin) You don' t have any reason to

believe, do you, that the company's nuclear plant

11 performance has been below 70%, do you?

12 A. Like I said, I would just presume it's in

13 that vicinity.

Now -- excuse me.

15 A. We'veonlybeen through the first seven months

15 of the year.

17 Q. Yes, sir. Now, the level that you utilize

18 i s a combination of two different numbers, isn't

19 it?

20 A- That's correct.

21 0. One of those is the NERC five-year average

22 as of the present time; is that not true?

23 A. That is correct.

24 Q. Apparently the average has changed recently;


14

1

106

is that not correct?

2 A. The average has been going up

3 Q. And the average has gone up for a number

^ of years, hasn't it?

A. No, not really. It has gone up in the last

two or three years. It has been rather steady.

7 Q. I assume that the fact that the average goes

8

13

up means that across the country nuclear plant perfor-

9 mance has been improving?

10 A. It would seem to indicate that,

11 Q. That would follow mathematically, wouldn't

12 it, Mr. Lam?

A. It should

14 Q. And Duke has always had, with a couple of

15 exceptions, above average plant performance, has

16 it not?

17 A. Yes, they have, and that's why we are recog-

18 nizing their latest five years.

19 Q. Yes, sir. And the --

20 A- (Interposing) Before this time, we have used

21 their total system nuclear capacity factor which

2 2 is below 72%. But we recognize that they do have

23 better than average performance, and this does

24 recognize it. But we also believe that our starting


107

, point is the NERC five-year average.

_ o. Do you know what the company's historic nuclear

2 plant performance level is?

. A. Before -- at the end of 1989 it was about

5 67%. So being up 72%, it's probably --

6 Q. ( Interposing ) Above that.

7 A. It's still 67%, a little above where it was

„ before. A change of 5% over the number of years

n that they've operated does not mean there is a great

10 change in the overall average.

11 Q. Yes, sir. But that number has been climbing

12 over the last four or five years with the company's

13 seventy-plus nuclear capacity factor; is that not

14 true?

15 A. Any time you have a number that' s above the

15 average, it's going to make the average rise.

17 0- It always works that way, doesn't it?

18 A. It should.

19 0. It's one of the few things we can be certain

2 0 about, isn't it, Mr. Lam?

21 A. It probably is.

22 0- Excuse me. Now, over the past several years,

23 the company's allowed level of fuel expense has

24 been set in proceedings conducted pursuant to 63


8

9

10

108

1 -- 62-133.2; isn't that right?


3 o. And for the first several years under the

. current fuel adjustment statute, it's true, is it

c not, that the level of nuclear plant performance

6 included in the company's normalized generation

7 mix was based primarily on the NERC five-year average?

A. That's correct.

Q. And the last , I believe, two orders that

the Commission has entered in fuel proceedings,

11 there has been a combination of Duke's specific

12 number and the NERC five-year average; is that not

correct?

A. That is what the Public Staff has recommended

15 and the Commission has accepted.

15 Q. Over the last several years, it's true, is

17 it not, that the company has tended to over collect

18 on its fuel expenses under the computation used

19 in 62-133.2 proceedings?

20 A. There has been an overcollection

21 Q. Do you recall what it was last year?

22 £• If 1 remember from the last hearing, it was

2 3 approximately 3 4 and some odd million dollars

24 Q. Do you recall what it was for any year before


13

14

7

8

9

10

109

that?

A. The year before that, I believe it was forty-

one .

0. It's true that under the procedures that

c have been followed in establishing Duke's fuel cost

5 in 62-133.2 proceedings, the company1s had substantial

overcollections every year since '87; isn't that

true?

A. I don' t know what you mean by substantial

but --

11 Q. More than $10 million?

12 A. -- if you were going to -- yes, more than

13 ten. If any company is going to operate at 7 7%

14 and the nuclear fuel factor is set below it, there's

15 going to be an overcollection. I don't believe

15 that the Commission or the Public Staff would recommend

17 the number of 77%.

18 Q. The ideal is to hit it as close as you can,

19 isn't it, Mr. Lam?

20 A. I would presume that is.

21 Q. Well, you would want all other things being

22 equal to avoid either an undercollection or an

23 overcollection, wouldn't you?

2 4 A. You do. And the only way you can possibly


8

9

10

110

-, get that is if for some reason the company operates

2 right on the money. And that doesn't happen. I

-. cannot complain when the company operates at 77%

. and the customers will collect some extra money

5 due back to them because the company has been extremely

5 efficient in their operations. It's hard to fault

7 the company for that.

We try to set the target at a level we think

they can attain and is fairly reasonable.

Q. No, I don1 t think anybody is proposing to

11 fault the company for its nuclear plant performance,

12 do you?

13 A. I don't believe so. But if you operate at

14 7 7% and we set the capacity factor somewhere below

15 that, you're going to have an overcollection. If

15 we had set the capacity factor in the years where

17 they operated at 77% at 70%, there still would have

18 been an overcollection.

19 0. It would have been smaller, wouldn't it?

20 A. Not to as great of an extent as you might

21 think it is. Yes. But it would have been smaller.

22 It still would have kept the numbers at well over

23 $10 million.

24 Q. Under the EMF procedures that the Commission


11

111

uses in fuel proceedings, we pass through these

under- or overcollections on an aggregate basis

to future ratepayers, don't we?

A. We pass it to the ratepayers that are --

Q. -- served --

A. (Interposing) Since our test years end in

7 December, typically we start passing them on in

3 July, and they are people that are six months down

9 the road from when the test period ended.

10 Q. The two bodies of ratepayers, the ones who

cause the cost to be incurred and the ones who either

12 benefit or suffer from the EMF process are not an

13 identical body, are they?

14 A. There is no identical body any time.

15 Q. That' s right.

15 A. If we ended our test year December 31st ,

17 1990, and we started refunding rates on January

18 1st, 1991, there is no guarantee you'd have an

19 identical body there.

20 Q- No/ because --

21 A. (Interposing) And there's nothing that can

22 get these numbers together that quickly,

2 3 0- Well, I mean, there is obviously no humanly

2 4 possible way to make the two groups of people identical


112

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

A.

Q.

A.

Q.

A.

0.

A.

Q.

A.

Q.

A.

Q.

peopl

from

That's correct.

People move, right?

That's correct,

People die, right?

That's correct.

New households are formed?

That's right.

New manufacturing plants open and some close?

That's correct.

So the body of ratepayers changes?

It does.

Under the EMF procedure, people in cost

3 in period B will wind up either benefiting

prior overpayments or suffering from prior

underpayments, won't they?

A,

that.

Q.

A.

is a

these

whole

Q-

And there1 s nothing that anyone can do about

Exactly. You cannot eliminate it, can you?

There is no possible way as long as there

method to try to return these funds or collect

funds from the ratepayer to make the company

when they've spent prudently for fuel.

Yes, sir. You do recognize, do you not,

Mr. Lam, that at least on an individual consumer


4

8

9

10

113

, basis, there's some fairness problem with this cost

2 shifting that occurs, don't you?

3 A. There probably is some fairness problem.

n. Because if I move into Duke's territory right

5 now and begin to take service from them, I pay a

6 rate which is lower because of prior undercollections,

7 right?

A. That's true for you and --

Q. (Interposing) I'm sorry. Overcollections.

A. And it's true for me as a CP&L customer.

11 Q. Yes, sir

12

13

16

A. If I don't use the same amount in the year,

I don't obviously either pay or collect the same

14 amount that I caused the company. It's never going

15 to be absolutely perfect, but we're trying to get

it as close as we can.

17 Q. In order to minimize the equity problem that

18 we've been talking about, right?

19 A. Right. And on the paybacks, we do know there

20 is interest paid on it, so there's going to be a

2i little -- if you use the same amount or even if

22 y o u u s e a little bit less, you're going to get paid

2 3 back basically the amount you spent and maybe a

24 little bit more.


114

1 Q. Now, on your Exhibit TSL-3, you show -- and

2 I just want to make sure I understand what you do

3 here, Mr. Lam, in light of my prior questions to

^ Mr. Stimart.

5 You show, do you not, the fuel prices in

5 dollars per megawatt hours for coal and combustion

7 turbines, don't you?

3 A. That's correct, for all the fuels there

9 basically.

10 Q. Yes, sir. I think the -- typically, the

11 disagreement winds up being about coal and combustion

12 turbines; isn't that right?

13 A. It has been.

14 Q. And you don' t know of anything that would

15 cause you to believe that the subject of the discussion

15 has changed its focus, do you, Mr, Lam?

17 A. Not so far.

18 0- Most of what you' ve been hearing in the last

19 ten minutes is reasonably familiar to you, isn't

20 it?

21 A. Yes, it has been.

22 Q- All right. The two numbers that you show

23 for coal and for combustion turbine generation on

24 Exhibit TSL-3 are, as I understand it, the company's


115

, actual burned expenses in the one-month period from

2 July 1, 1991, to July 31, 1991; is that right?

A. That' s correct.

0. They differ from the numbers included in

Mr. Stimart's original testimony and in his update

this morning and I -- are you aware that he updated

or changed his fuel cost levels in terms of coal

prices and combustion turbine prices?

g A. I understand that they are changed. We haven' t

IQ seen any paperwork, so we don't know --

11 Q. ( Interposing ) Well, would you --

12 ^ - - i n which direction they've gone.

13 Q. Would you accept my representation that he

14 lowered his coal price, I believe, to 1.703 cents

15 per kilowatt hour and raised his combustion turbine

15 amount by -- to some -- something like 7C per kilowatt

17 hour, I believe? I don't have those numbers in

18 front of me, but tha t's my recollection as to what

19 he did.

20 & That could very well be, yes.

21 Q. And are you aware that he based his coal

22 number -- Mr. Chesnutt has kindly handed me his

23 notes. They show that Mr. Stimart updated his coal

24 price to 1.703 cents per kilowatt hour and updated


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1 his combustion turbine oil and gas price to 7.192

2 centsper kilowatt hour. Will you accept --

A. I' 11 accept that subject to check,

Q. It's your understanding -- those numbers

5 are still lower than the two numbers that you use,

5 although, at least in the combustion turbine area,

7 the margin has shrunk; is that not right?

A. From what you've read, that is -- the numbers

are a little bit lower.

0- And it's you -- it's your understanding that

11 the difference between your procedures and his

12 procedures is he uses a longer period of time over

13 which to determine a burned cost; is that not right?

14 A. H i s i s b a s e d o n a twe Ive-month period. Mine

15 is based on the latest month

15 Q. They're both --

17 A. And, of course, in a twelve-month period

18 are months that over a year old today-

19 Q. Yes, sir. But they do include certain times

20 of the year that are not included in your numbers;

21 isn't that right?

22 A- Yeah. There are eleven other months that

23 are not included in my number.

24 0- Your numbers are not -- your numbers are


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-, reflective of right up-to-the-minute monthly burned

2 prices?

3 A. No, they're not really. The prices in July

4 are made up of prices of coal purchased in July,

5 June, May, April, probably back to March where you

could see some of the effect.

Q. Maybe I misstated my question to you, Mr.

Lam. What you did was the monthly burned price

in July, correct?

A. Yes. But that price is an aggregate --

11 Q. (Interposing) -- of the purchases --

12 A. - - o f t he coal purchases --

13 Q. (Interposing) -- prior to that time, correct?

A. Or at least -- probably at least three, four,

15 five months ahead of that because you put coal in

15 a big pile and you start pulling a little bit out

17 at a time. And you've got his total price in that

18 pile. And the pile is always an average price of

19 whatever coal is in it.

20 0- You don't have a pile of coal -- I mean,

21 of natural gas that you use in that manner, do you,

22 Mr. Lam?

23 A. I don't believe natural gas is used in that

24 manner. They don't -- Duke does not have any large


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-, storage facilities as far as I know to store natural

2 g a s

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Q. It is true, is it not, that the prices of

coal and the prices of oil and the prices of natural

5 gas fluctuate from time to time?

A. The prices of your oil and your natural gas

-j may fluctuate more than coal.

Q. Coal as burned on the Duke system includes

g both a contract component and a spot component,

does it not?

A. That' s correct.

12 Q. And the spot component fluctuates probably

13 more, obviously, than the contract component; is

14 that not right?

15 A. The contract component tends to increase.

15 The spot price can go wherever a spot price goes

17 depending on demand in the market and the amount

18 of coal out there on the market.

19 Q. Some of your coal price will include coal

2 0 purchased on the spot market, won't it?

21 A. It -- if they have purchased coal on the

22 spot market during that period, it will include

23 the price of spot coal,

24 g. So you don't know whether there's any spot


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, coal effect on your coal price or not, do you?

2 A. I did not go back to make a specific check

3 over the four months to see how much spot coal was

in there.

Q. Now, Duke certainly purchases spot coal on

occasion, doesn't it?

A. Yes, they do.

Q. And to the extent that your number does not

g reflect any spot coal purchases, it may or may not

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be representative of a future period; isn't that

correct?

A. It may or may not, but I don't believe that

13 they can possibly go without purchasing spot coal

14 unless -- this is -- when Duke's nuclear power plants

15 run well, they are basically only able to accept

15 contract coal unless they just plan to expand the

17 coal pile

18 Q- Yes, sir.

19 A. That's one of the effects of nuclear running

20 well. You basically have to take a certain amount

21 of your contract coal

2 2 0- So that the extent to which Duke is required

23 to purchase coal on the spot market varies with

24 the extent to which they're required to use the


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1 coal plants to generate power, right?

2 A. That's true. And it depends on the price

3 of the spot coal.

o. And there' s certain times of the year when

the coal units are used more than other times; isn't

that true?

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7 A. That ' s probably true .

Q. They' re used more in the summer and the winter

than they are in the spring and the fall; isn' t

that true?

11 A. That' s when they tend to operate more, so

12 I would presume that you may have bigger, longer

13 runs. But you also have very long runs in the spring

14 and the fall because of the prime reason that you

15 try to come down for maintenance for nuclear and

15 coal units in the spring and fall.

17 0. The amount of gas and oil that's burned in

18 the company's combustion turbine units varies on a

19 proportionate basis over the year, doesn't it?

20 A. It does. As is shown here, for the entire

21 year, there's only $3 million of oil and natural

2 2 gas burned and North Carolina 1s probably responsible

23 for approximately $2 million of that. So if there's

24 a plus or minus variation of 10 to 20 percent, you're


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1 talking about two hundred to four hundred thousand

2 dollars total in a fuel bill that's approximately

3 -- nearly $800 million. It -- you're not talking

about a lot of dollars when you're talking about 4

5 oil and gas

6 Q. You use the same pricing procedure every

7 time you testify about fuel, don't you?

3 A. The Public Staff is very consistent in its

9 pricing procedure.

IQ Q. And you have been consistent at least between

this case and Duke's last fuel proceeding; isn't

12 that right?

13 A. Yes. We try -- we're -- the only time when

14 our prices are not used is if somehow the company

15 comes below us in their request -- in their initial

16 request. And if our use raises above, we accept

17 their pricing then,

18 Q. ( Interposing) Do you recall -- excuse me.

19 A. But we still recommend our amount.

20 0- I'm sorry. Pardon me for interrupting you.

2i Do you recall what number you used for oil

2 2 and gas generation on a cents per kilowatt hour

23 basis in Duke's recent fuel proceeding?

24 A. I really don't. I believe the number --


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1 Q. (Interposing) It was over IOC a kilowatt

2 hour --

-a A. -- was higher than this.

4 Q. -- wasn1 t it? 30% -- at least 30% higher,

5 wasn't it ?

5 A. Which would have made the number approximately

7 $1 million higher than the 2.9 I have, again, on

g the basis of approximately $800 million.

9 Q. Do you recall what basis -- what monthly

10 period you utilized to select your oil and gas price

11 inthe fuel proceeding?

12 A. I would think it' s somewhere in the early

13 spring, February or March, because the hearing was

14 held in May.

15 Q. Yes, sir. And so it probably would have

16 been March or April?

17 A. I'm not sure April, but at least somewhere

18 in March, in that -- in that area.

19 0. Moving on to the cost allocation question,

2 0 Mr. Lam, It's the first time I've seen you testify

21 on this question. Is it?

2 2 A. You must not have been in the last two CP&L

23 rate cases.

2 4 Q. No, I wasn ' t.


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A. I did testify in both of those rate cases.

Q. So this is approximately the third time that

you've testified about cost allocation?

A. Yes, it is .

Q. All right. And your discussion of cost

allocation or the reasons that you recommend the

peak and average method cover about two and a half

pages; is that not right?

A. Approximately.

Q. From page 2 to about the middle of page 4?

A. Probably so.

Q. Approximately 6 0 percent -- or 50 to 60 percent

of the words that you use are quotations from orders

in Virginia Electric & Power and CP&L orders; isn't

that correct?

A. I do have quotations from those two orders.

Q. And that' s at least half of your discussion

of the question, isn't it?

A. I didn ' t count words .

Q. Well, can you count pages?

A. As far as I can see, my discussion goes back

to at least the bottom of page 5, the top of page

6, the rates of return.

Q. Of course, .pages 4 and 5 are a discussion


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1 of why you believe the company incorrectly applied

2 the method that you allocate -- the method that

3 you prefer rather than a discussion of which method

4 ought to be used; isn't that right?

A. That' s your opinion of it.

0. Do you have a different one?

A. To me, it ' s part of the cost allocation method-

D ology and discussion

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0. You haven' t quoted from any Duke orders,

have you?

11 A. No, I haven' t. Duke has had the summer CP

12 as they said, I believe, from 1970.

13 Q. All right. The Public Staff on at least

14 two other occasions has attempted to persuade the

15 Commission to use the summer/winter peak and average

16 method for Duke, haven1t they?

17 A. Yes, they have. We believe it is correct.

18 MR. ERVIN:

19 Ifl may approach the witness, Mr. Chairman.

20 Q- C Mr. Ervin) Mr. Lam, this is a copy of the

21 printed version of the Commission's Orders and Decisions

2 2 volume for 1986, isn't it?


24 Q. And if you'll look at page 302 of that document


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, or book, you'll see an excerpt from the company's

2 1986 general rate case order, won1t you?

A. Yes, it is.

o. And about the middle of the page, right above

c the language that refers to Evidence and Conclusions

, for Finding of Fact Number 9, you'11 see the Commis-

sion's discussion in -- of the cost allocation question

in the company's 1986 generai rate case, won't you?

A. That ' s correct .

o. And it says, in effect, there, does it not,

11 quote, after carefully reviewing all of the evidence,

12 the Commission concludes that it's appropriate to

13 continue use of the summer CP method for allocating

14 costs in this proceeding. The use of the summer

15 CP has been an issue in a number of Duke' s general

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rate cases. In each of those cases, the Commission

17 has decided that use of the summer CP was appropriate.

No compelling evidence has been introduced in this

case which would cause the Commission to change

20 that opinion?

2i That's what they said, wasn't it?

2 2 A. That ' s what that says .

23 Q. At least my command of English stayed with

24 me at least long enough to read that right, didn't


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1 i t 7

2 A. That' s true.

3 n. The Public Staff' s argument in favor of the

4 peak and average method have remained consistent

5 over the years, haven't they?

A. I believe they have,

Q. As part of the Public Staff's effort to remain

consistent generally, correct ?

A. Yes, we have two out of the three major

companies in North Carolina using the summer/winter

11 peak and average, and we don' t believe the Duke

12 system is really any different than the other two

13 systems.

14 0- Yes, sir. Bu tat the time oft he Commission' s

15 last order, both CP&L and North Carolina -- what

was then VEPCO and now North Carolina Power used

17 the summer/winter peak and average method, didn't

18 they?

19 A. I believe CP&L did. I can* t speak of VEPCO

because their rate case -- their last rate case

2i was back in 1982 and I can't be sure that they had

22 summer/winter peak and average.

23 Q. Does it refresh your recollection, Mr. Lam,

24 if I tell you that I believe in 1982 that the Commis-


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, sion ordered VEPCO to adopt that summer/winter peak

2 and average method?

-, A. It really wouldn' t. I hadn't looked back

4 at their order then.

5 Q. You were a participant in the company's 1990

general rate case, weren' t you? That is, North

Carolina Power's?

A. Yes , I was .

n Q. And you're aware, aren't you, that North Carolina

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Power used the summer/winter peak and average method

in its filing in the 1990 general rate case, Docket

E-2, Sub 314?

A. I believe that is true.

14 Q. I mean E-22, 314

15 A. That is true.

15 0. And the company hadn' t filed a general rate

17 case for eight years prior to 1990, had it?

A. That ' s correct.

ig Q. So that it's true, isn't it, Mr. Lam, that

20 at least by 1986 VEPCO used the summer/winter peak

2i and average method?

22 ft- I said -- as I said before, I cannot state

23 that they did or did not have the summer/winter

24 peak and average methodology in 1982.


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, '.\ So to the best of your recollection it's

2 possible that North Carolina Power adopted the summer,

-, winter peak and average or were ordered to adopt

4 the summer/winter peak and average sometime after

the Duke order in 1986?

A. There could have been no order, There was

no rate case for them to have changed their cost

„ allocation methodology.

Q. It's not your understanding that North Carolina

Power used the summer/winter peak and average method

for the first time in its 1990 general rate case,

is it?

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13 A. As I said, I do not know what they used in

14 1982. I cannot state categorically that they did

15 this or that.

15 Q. Would you accept subject to check that prior

17 to 1986 VEPCO used the summer/winter peak and average

method?

19 A. I could accept that subject to check, and

20 1 will check on it during the break.

2i Q. If you' 11 come down and correct me if I'm

22 wrong, I'd appreciate it.

23 But assuming that the information you have

24 accepted subject to- check is correct, the fact that


129

1 the two other major utilities regulated by the

2 Commission used the summer/winter peak and average

3 method hadn't changed from 1986 to 1991, has it?

4 A. No , they haven * t .

5 Q. And if my recollection is correct, one of

5 them may have picked it up after 1986; is that --

7 A. If your recollection is correct.

3 Q. And if I'm wrong, obviously, there may have

9 been one addition to the summer/winter peak and

10 average fold after 1986?

11 A. That' s true.

12 Q- The principal argument that the Public Staff

13 has used in favor of the summer/winter peak and

14 average method was consistent throughout this entire

15 period of time; isn't that right? And that's the

15 argument that some plant is energy related?


18 Q. And there' s nothing in the fundamental argument

19 that the Public Staff has advanced in this case

20 i n favor of the summer/winter peak and average that's

21 different than was the case when the Public Staff

2 2 first began recommending the peak and average in

23 the early 'SOs, is there?

24 A. I cannot say that nothing has changed. For


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, one thing, we have a different witness.

2 0. And by that you mean it's now you and previously,

for the most part, it's been Mr. Turner?

A. That's correct. Well, I -- starting from

1986 forward, I have done the last three out of

6 the four general rate cases for this Commission.

7 Q. Do you know of anything that you have said

on the subject of summer/winter peak and average

that differs dramatically from what Mr. Turner has

testified to?

A. I cannot speak for Mr. Turner. I have not

12 gone back and reviewed the volumes of testimony

13 in cost of service to see exactly what he has said

14 versus what I have said. I will say what I will

15 say, and he has said what he has said.

15 Q. And you just don't know if there's any

17 difference between the two or not, do you?

13 A. I probably think there is a difference just

because there is a difference in witnesses. We

20 do think a little bit differently.

2i Q. Now, that's an interesting topic that I don't

22 think I'm going to explore, Mr. Lam. But in spite

23 of the fact that you think there may be some difference,

2 4 you're not able to tell me of one here, are you?


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A. I don't know of a reason we need to -- whether

I can speak of a difference of what Mr. Turner said.

As I said, I have not reviewed what Mr, Turner has

said in all of the rate cases before this.

Q. But at any rate, the Commission rejected

the summer/winter peak and average for Duke in 1986,

in essence, because the Public Staff had presented

nothing new and different that would tend to

cause it to change its mind. Isn't that a fair

summary of what that order --

at that time said.

Q. And you don' t know of any new information

that the Public Staff has presented in this case,

, c do you?

A. Well, I don't remember the Public Staff --

well, I don't know what -- like I said, what Mr.

Turner said and what I said may or may not be the

same things. I have detailed my arguments here,

Q. And we' re going to get to those, Mr. Lam.

22 Don't worry.

A. And if you would care to relate to me any

sameness or differences, I could then speak of it.


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But I have not gone back and reviewed every word that

Mr. Turner has said to compare them to what I have

said.

Q. All right. In essence, the Public Staff

c argument in favor of the summer/winter peak and

, average is that some production plant is considered

7 to be energy related. Is that the fundamental point

that you try to make?

A. I'm making that point, and I also heard Mr.

Denton make that same point, too.

0- I 'm not sure -- he doesn' t agree with you

12 as to your ultimate conclusion, does he?

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A. He may not. But the conclusion is the same.

You build production plant to produce energy. If

you wanted to just meet peak, as I have said, you

15 could build 18,000 megawatts of peaking plant on

17 the Duke system. 18,000 megawatts of peaking plant

18 does not produce enough energy to supply the needs

19 of the ratepayer.

20 Q- But, obviously -- I mean, if we can agree

2i on nothing else in this discussion, we all know

2 2 that the company builds different types of plants,

23 right?

2 4 A. They build -- yes, they build different types


133

of plants because the company needs energy from

these different types of plants. As I have stated

3 before, you cannot build 18,000 megawatts of peakers

4 and supply the energy needs of your ratepayers.

5 If you were just concerned with the summer peak,

as I stated in my summary, you would build just

- peakers. Obviously, we have to meet the energy

o needs of all the customers for all hours of the

9 year

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Q. The effect of the summer/winter peak and

^ average as it is applied in this jurisdiction has

•,2 been, in essence, to say that some customer classes

are a higher load factor than other and that the

summer/winter peak and average in the Public Staff's

15 opinion properly assigns additional capacity costs

15 tothose customer classes. That's a logical corollary

17 of your position, isn't it?

13 A. It does not assign additional. It assigns

19 the correct amount of capacity cost to those classes.

20 0- lh your opinion, at any rate?

A. Yes.

2 2 0- A nd as I believe Mr. Denton said, people

23 tend to disagree over cost allocation questions,

24 don't they?


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A. That' s true. There are many cost allocation

2 methodologies,

•3 Q. And you' re not proposing, are you, or you

4 don't think, do you, that we should treat a particular

c type of plant as belonging to a particular type

of customer class? You're not saying that, are

you?

A. Basically, when any plant receives energy.

9 it receives energy from a homogeneous mix of plants

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that are on line at that time.

g. So when I -- were l a - - well, I am a customer

12 o f a Catawba buyer, so my power does come from the

13 Duke system. The power that comes into my home

in Morganton is a conglomeration of a number of

15 different sources, isn't it?

15 A. That's right- They could be Duke sources.

17 They could be purchased power at any moment of time.

18 Q. You' re not able to segregate different types

of plant and send that power to specific types of

2o customers, are you?

2i A, That is really an impossibility.

22 Q- What a particular customer takes is just

23 whatever is on the grid, right?

24 A. That' s true. It depends on what plants are


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up at that time and who they're buying from if they're

buying from anyone.

Q. And you don' t and physically can' t say that

all base load power goes to industrials or that

all base load power goes to residentials or that

all base load power goes to general service customers,

can you?

A. It's really hard to say that on the Duke

system because all the plants they have up basically

are or were base load units.

Q. But even within base load units, there are

coal units and nuclear units; isn't that true?

A. That' s correct.

Q. And there are different capacity costs and

15 different energy costs with respect to both of those

type of plants, aren't there?

A. That' s true.

Q. And you can't even say that the coal plants

go to industrial customers and the nuclear plants

go to residential customers and the combustion turbines,

2i those that there are, and the hydro units go to

22 general service customers, do you?

23 A. Well, you can't pinpoint the exact amount

24 of generation at that particular time. But you


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, can also look as in production allocators at the

2 amount of plant that any one class is responsible

-. f o r . For example, residential -- I guess, on the

s umme r/winter -- on the s umme r CP, the residential

class is responsible for paying for 24% of the

6 production plant on the Duke system, and the industrial

class is responsible for paying approximately 19%.

Yet, the residential class uses 20% of the energy,

and the industrial class uses 23.5% of the energy

produced by these plants. So you can look at different

numbers.

MR. ERVIN:

13 I' 11 stop now or keep going, whichever you' d

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rather. I'm not very close to being through is

the reason,

16 CHAIRMAN REDMAN:

17 Well, I was beginning to get that impression.

MR. ERVIN:

You can almost always get that impression,

Mr. Chairman.

CHAIRMAN REDMAN:

22 Let's go off the record.

23 (DISCUSSION HELD OFF THE RECORD

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1 CHAIRMAN REDMAN:

2 We'll break for lunch and come back at 2:00

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4 WHEREUPON, this hearing was recessed.

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CERTIFICATE

7 The undersigned Court Reporter certifies

that this is the transcription of notes taken by

her during this proceeding and that the same is

true, accurate and correct.

/f. UoeJt. Linda K. Vickery

13 Court Reporter II September 18, 1991


BEFORE: Chairman William W. Redman, Jr. VOLUME 12 ...

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Transcript of BEFORE: Chairman William W. Redman, Jr. VOLUME 12 ...