Progress
Energy
Transmission Formula Rate
2008
Annual Update
Preliminary Challenges
of
Florida Municipal Power Agency
and
Seminole
Electric Cooperative, Inc.
1. In the Annual Update, PEF has erroneously included in the term “Long Term Interest Expense” (on line 16 of page 4 of Exhibit PEF-2) certain interest on short-term indebtedness. Such interest on short-term debt, in the amount of $2,199,543, is interest on short-term debt owed to associated companies and should be excluded from the aforementioned line of the formula rate. Under the formula rate template, the cost rate for long-term debt is one component of the overall rate of return allowed on rate base. (See Annual Update, Exhibit PEF-2, page 4, lines 24-27.) As further set forth in the formula rate template, the cost rate for long-term debt is to be determined as the ratio of interest on long-term debt to the average balance of such debt. (See Annual Update, Exhibit PEF-2, page 4, lines 16, 20, and 24.) While long-term debt interest expense under the formula rate template may include interest on long-term indebtedness to associated companies as recorded in Account 430, such long-term interest expense under the formula rate template does not, and should not, include interest (even if it is recorded in Account 430) on Notes Payable to Associated Companies recorded in Account 233 or Accounts Payable to Associated Companies recorded in Account 234 because of their short-term nature (payable either on demand or no more than one year from date of issue or creation). The inclusion of interest on such short-term indebtedness to Associated Companies is inconsistent with the proper calculation of the cost of long-term debt (see Annual Update, Exhibit PEF-2, page 4, lines 16, 20 and 24) and the debt component of the capital structure under the formula rate (id., page 4, line 20 and page 2, lines 37-41), both of which include only the Advances from Associated Companies recorded in Account 223. PEF’s responses to SECI information request items 3.3 and 3.5 clearly establish that the $2,199,543 of Interest on Debt to Associated Companies recorded in Account 430 (see PEF 2007 FF1, page 117, line 67) and included in “Long-Term Interest Expense” on Exhibit PEF-2, page 4, line 16 is related to short-term indebtedness to Associated Companies and, therefore, should be excluded from the long-term debt cost calculation consistent with the formula rate template.
2. a. PEF has erroneously included in the transmission-related rate base an allocated portion of the Account 190 balance associated with its Self Insured Medical Reserve, allocated using the labor factor (see Exhibit PEF-5, pages 1 and 3, line 190). While this ADIT item may correctly reflect a book/tax timing difference, it should not be allocated to transmission under the formula rate template unless and to the extent that (i) the substantial unfunded reserve associated with the underlying expense accrual charged to O&M expense is being deducted contemporaneously from rate base, and (ii) the other requirements set forth in paragraph 2.b., below, are satisfied. PEF’s responses to SECI information request items 6.1 and 6.4 provide the nature of, the accounting for, and the level of such unfunded reserves – apparently only $26 million out of $223,494,763 as of December 31, 2007, being funded. Without synchronicity in the treatment of the ADIT and the unfunded reserves, there is an improper skewing of the cost effect in the formula rate template calculations of the underlying cost.
b. More generally, “expenses” that are actually just accruals of estimated future costs should not be recovered in the formula rate unless and until such associated unfunded reserves are deducted from rate base to avoid uncompensated use of customer-supplied capital. Furthermore, the accuracy of the estimates of future costs upon which such accruals are based must be subject to scrutiny. Consistent with FERC’s treatment of “PBOPs” in formula rates, such accruals should not be allowed unless (i) prior FERC approval is obtained, (ii) the resulting collections from customers are placed in a funded reserve with customers receiving credit for the earnings on the fund or the unfunded reserve is deducted from rate base, and (iii) there is assurance that, if the accruals exceed the actual future costs, over-collections will be refunded.
3. PEF has failed to include certain revenue credits in the net transmission revenue requirements as required by the formula rate template. The formula rate requires that all amounts recorded in Account 454 – Rent From Electric Property (see Exhibit PEF-3, page 1) associated with electric property allocated directly (e.g., transmission plant) or indirectly (e.g., general plant based on the labor factor) should be treated as a revenue credit and allocated accordingly under the formula rate for consistency in cost allocation. PEF should have included, but did not include, allocated portions of the following revenue credits in Account 454 in determining the transmission revenue requirements:
a. GPC J/O I/C P-11 Rent Common Plant Labor
b. Corporate Allocation Sublease Revenue Labor
c. General Leases – Real Estate Labor
d. Parking Lot Rent Labor
PEF conceded this principle in its response to SECI information request item 4.5.
4. The detailed amounts shown for Account 935 for 2006 and 2007 provided in response to SECI information request item 8.1 do not agree with the amounts shown for Account 935 in the PEF 2007 FF1 (page 323, line 96). These discrepancies need to be reconciled. SECI and FMPA are awaiting supplemental information promised by PEF.
5. PEF’s depreciation expense related to general plant is excessive because it wrongly includes a $400k “adjustment” to record in 2007 depreciation on a telecom switch that should have been recorded in three prior years. This expense adjustment is an impermissible out-of-period adjustment that constitutes retroactive ratemaking. The general plant depreciation reserve, however, should include the effect of this adjustment to prevent over-recovery of capital related costs due to this record-keeping error.
6. PEF failed to include revenue credits reflecting the use by its distribution business unit of transmission structures (poles/towers) through “under building.” To the extent that PEF does not record intra-company revenues to reflect such use, PEF should have imputed an appropriate intra-company transfer of costs/revenues between the transmission and distribution functions to reflect the value to the distribution function of PEF’s distribution under-build attachments to its transmission structures. Such imputed transfer of costs/revenues should be based on the higher of: (i) the highest charge by PEF to a third-party for distribution under-build attachments to its transmission structures; (ii) the charge for such attachments as set forth in the applicable PEF Tariff; or (iii) to the extent neither (i) nor (ii) is applicable, a charge based upon fair and reasonable apportionment of transmission costs to such distribution under-build attachments.
7. a. SECI and FMPA are awaiting supplemental information regarding PEF’s accounting for PESC charges for 2007, which information may give rise to an additional challenge of such charges/accounting.
b. PEF failed to include the direct labor expense charges from PESC recorded in each functional O&M expense account, other than for the A&G expense accounts, in the PEF direct labor expenses used to calculate the wage and salary allocation factor in the formula rate template, thus not properly allocating the labor and other overhead expenses, including those charged by PESC, to the various functions.
8.
PEF has improperly allocated to the transmission
function some or all of a $6.1 million expense related to a