ML19262C206.pdf - Nuclear Regulatory Commission

4

AMENDMENT 35

INSERTION INSTR _UCTIONS

FOR REVISION TO THE LICENSE APPLICATION

The following text, tables, and exhibits are to be inserted inthe License Application-Operating License Stage. These pages areeither replacement pages or new pages as indicated below.

All replacement pages which differ from ex1. ting pages areidentified with the amendment number and date in .he ' wer righthand corner. Bars located in the margin of a parcicular pageindicate material which is new in the admendment indicated at thebottom of the page.

Remove Old (Pages) Insert New (Pages)

- LILCO letter SNRC-459in front of Tab LICENSEAPPLICATION

Title page August 28, 1975 Title page Amended January14, 1980

Amended License Applica- Amended License Applica-tion (6 pages) tion (6 Pages)

Affidavit Andrew W. Wofford Affidavit Joseph P. Novarro1972 Annual Report 1975 Annual Report1973 Annual Report 1976 Annual heport1974 Annual Report 1977 Annual Report

- 1978 Annual ReportExhibit B (3 pages) Exhibit B (6 pages)

- Tab EXHIBIT CC-1 through C-13-

LILOO Prospectus dated-

October 30, 1979 withSupplementC-14 through C-20-

Attachment A to Question-

4.C - Testimony of RaymondJ. Forrer pages -1- and 12through 20

Exhibit No. 13 (2 pages)-

Exhibit No. 14 (Schedule 1-

and Schedule 2)Exhibit No. 15 (Schedule 1-

and Schedule 2)Exhibit No. 16 (Schedule 1-

and Schedule 2)Exhibit No. 17 and Exhibit

-

= No. 18r.s . ,

,:r -~ '

1945 052-

1 Amendment 35 - January 198060 0 2 07 0 Clj${}

Remove Old (Pages) Insert New (Paqqs)

Attachment B to Question-

4.C - Te_'timony of ZviBenderly (21 pages)

- Exhibit No. 56 andSchedule 1Schedule 2 and Technical-

Appendix page 1 of 4Technical Appendix page 2-

of 4 through page 4 of 4- Attachment C to Question

4.C - Opinion No. 79-14(52 pages)

- Appendix A Schedule 1 andAppendix A Schedule 2page 1

Appendix A Schedule 2-

page 2 through page 7Appendix A Schedule 3-

(6 pages)Appendix B Schedule 1 and-

Appendix B Schedule 2 page 1Appendix B Schedule 2-

page 2 through page 5Appendix B Schedule 3-

page 1 and page 2- Appendix B Schedule 3 ||

page 3 and Appendix Ctitle pageState of New York Public-

Service Commission Case27374 (3 pages) throughState of New York PublicService CommissionCases 27374 and 2737b(4 pages)

C-21 through C-23-

THESE INSTRUCTIONS ARE TO BE FILED IN FRONT OF TAB - LICENSEAPPLICATION.

066 *.

2 Amendment 35 - January 1980

BEFORE THE

UNITED STATES NUCLEAR REGULATORY COMMISSION

DOCKET NO. 50-322

IN THE MATTER OF

LONG ISLAND LIGHTING COMPANY

AMENDED

LICENSE APPLICATION

UNDER THE ATOMIC ENERGY ACT OF 1954

AS AMENDED

FOR

SHOREHAM NUCLEAR POWER STATION

UNIT 1

August 28, 1975

Amended: January 14, 1980 |

|945 054Amcndment 35 - January 1980

BEFORE THE

UNITED STATES NUCLEAR REGULATORY COMMISSION

DOCKET NO. 50-322

IN THE MATTER OF


AMENDED

LICENSE APPLICATION

Pursuant to the Atomic Energy Act of 1954, as amended,and its implementing regulations, Long Island Lighting Company(Applicant or LILCO) submits this Amended Application for theclass 103 facility operating license, as well as the byproduct,source, and special nuclear material licenses, necessary forLILCO to own and operate a nuclear electric generating unitlocated in the Town of Brookhaven, Suffolk County, New York,known as Shoreham Nuclear Power Station Unit 1 (the facility).The facility will be an integral part of LILCO's total operatingsystem.

A description of the facility and a discussion of thetechnical qualifications of LILCO and its principal contractorsare contained in the Final Safety Analysis Report submittedherewith.

I. INFORMATION INCLUDED

This Amended Application consists of: (1) the informationrequired by 10 C.F.R. g 50.33 which is set out below; (2) thetechnical information and safety analysis . report required by10 C.F.R. 8 50.34(b) which is set out in a separate documententitled " Final Safety Analysis Report, Shoreham Nuclear PowerStation Unit 1, Long Island Lighting Company," forwarded herewithand made a part hereof; (3) the environmental data required by10 C.F.R. 8 50.30(f) which is set out in a separate documententitled " Environmental Report - Operating License Stage, ShorehamNuclear Power Station Unit 1, Long Island Lighting Company,"forwarded herewith and made a part hereof; and (4) the PhysicalSecurity Plan required by 10 C.F.R. g 50.34 (c) , forwarded here-with and made a part hereof.

Amendment 35 - January 1980

1945 055

-2-

OII. INFORMATION REQUIRED BY 10 C.F.R. 0 50.33

(a) Name of Applicant

Long Island I.ighting Company

(b) Address and Principal Office of Applicant

250 Old Country RoadMineola, New York 11501

(c) Description of Business

LILCO supplies electricity ana gas in Nassauand Suffolk Counties and the Fifth Ward of the Borough of Queens,New York City, all of which are on Iong Island in the State ofNew York, except that electric energy is not supplied in theIncorporated Villages of Freeport and Rockville Centre in NassauCounty and in the Incorporated Village of Greenport in SuffolkCounty. LILCO's service area consists of 1,230 square miles

| with an estimated population of 2,884,601 persons as of January 1,1979.

The proposed nuclear generating facilit*f is a necessarypart of LILCO's continuing construction of facilities to provideelectric energy to meet increasing demand and to offset increasingdifficulties in obtaining fossil fuel.

The business of LILCO is further described in the annualreports attached as Exhibit A below.

(d) (1) Not applicable.

(d) (2) Not applicable.

(d) (3) (i) State of Incorporation

LILCO is a public utility corporation organized under theTransportation Corporation Law of the State of New York.

(d) (3) (ii) Directors and Principal Officers

All principal officers and directors of LILCO are citizensof the United States of America. Their names and resident addressesare stated in Exhibit B to this Application.

(d) (3) (iii) Absence of Foreign Control

LILCO is not owned, controlled, or dominated by an alien,a foreign corporation or a foreign government.

1945 056

Amendment 35 - January 1980,

-3-

(d) (4) Absence of Agency

LILCO is filing this Application solely for its ownpurpose and is not acting as an agent or representative ofanother person.

(e) Licenses Sought

LILCO is hereby applying for such licenses as may benecessary to the ownership, possession, use and operation ofShorehan Nuclear Power Station Unit 1 as decc.ibed in thisApplication, which facility is to be used as a part of LILCO'selectric utility plant for the generation of electric energy,including the following licenses:

Class 103 Facility Operating License

A construction permit (No. CPPR-95) for a class 103facility was issued to LILCO for the Shoreham Nuclear PowerStation Unit 1 on April 14, 1973, and was amended en May 14, |1979. This amended construction permit provides for a latestdate of completion of the facility by December 31, 1980.Pursuant to 10 C.F.R. EE 50.51 and 50.56, LILCO requeststhat upon substantial completion of construction of ShorehamNuclear Power Station Unit 1, a class 103 facility operatinglicense be issued for the facility. This license is requestedto be issued for a period of 40 years.

Byproduct, Source, and Special Nuclear Material Licenses

Pursuant to 10 C.F.R. Parts 30, 40 and 70, LILCO willneed such byproduct, source, and special nuclear materiallicenses as are necessary to authorize it to acquire, deliver,receive, possess, use and transfer such materials (and withrespect to byproduct materials, also produce and own suchmaterial) in connection with the operation of Shoreham NuclearPower Station Unit 1. It is requested that these licenses begranted for a term consistent with the class 103 facilityoperating license requested above.

LILCO has combined its applications for these licenses inthis single Application as permitted by 10 C.F.R. 8 50.31.

1945 057v,,


-4-

(f) Financial Qualifications

Facility Costs

The estimated cost of the comple',ed facility is $1,581,000,000.The associated cost for the transmission facilities is $23,571,000.

The estimated cost of plant operation for the first five years isas follows:

(7/Mos)

Year 1 2 3 4 5 6

(Thousands of Dollars)

Fuel 16,182 27,600 29,106 32,998 37,922 43,705

Operations & 10,127 29,224 27,755 29,508 33,820 33,820Maintenance

The estimated cost of shutting down the facility and main-taining it in a safe shutdown condition involves a $9,000,000(1975 dollars) one-time cost and a $30,000 per year annual costbased on the entombment concept as described in Section 5.9 ofthe Shoreham Environmental Report-Operating License Stage.

The Applicant is financing these costs in the ordinarycourse of its business. It is anticipated that the necessaryfunda will be provided from internal sources, principally

I depreciation accruals.

The Applicant is financially qualified to engage in theproposed activities as shown by its last four consecutive AnnualReports, submitted as Exhibit A to this Application. Additionalfinancial information is presented in Exhibit C.

Insurance Program

LILCO is carrying the maximum property damage insurancepresently available for the facility through the American NuclearInsurors (ANI) and the Mutual Atomic Energy Reinsurance Pool (MAERP) .In addition to the coverage available through ANI and MAERP, it isLILCO's intent to seek from other available insurance markets anyadditional amounts of coverage necessary to protect its investment.

LILCO also will purchase nuclear liability insurance| coverage from ANI, the Mutual Atomic Energy Liability Undensriters

(MAELU), or any other acceptable insurer, in such form and in suchamount as will meet the requirements of 10 C.F.R. Part 140. Thisinsurance will be i:. effect at least as of the date of shipment ofthe first fuel bundles from the seller's facilities to the Shoreham

'

"i'*'1945 058'


-5-

Pursuant to the terms of 10 C.F.R. E 140.20, LILCO willalso execute with the Nuclear Regulatory Commission an indemnityagreement as required by S 170 of the Atomic Energy Act of 1954,as amended.

(h) Scheduled Completion Dates

The facility is scheduled to be operational by the Springof 1981. The latest date for completion of the facility isDecember 31, 1980, as stated in CPPR-95, as amended on May 14, 1979.

(i) Regulatory Agencies and News Publications

Regulatory agencies with jurisdiction over the rates andservices incident to the proposed generation, sale and distributionof the facility's electric energy are:

New York Public Service CommissionEmpire State PlazaAlbany, New York 12223

Federal Energy Regulatory Commission |825 North Capitol Street, NEWashington, D. C. 20426

The following is a list of trade and news publicationswhich circulate the area where Shoreham Nuclear Power Station |Unit 1 will operate and which are considered appropriate to givereasonable notice of this Application to those municipalities,private utilities, public bodies and cooperatives, which mighthave a potential interest in the facility:

Newsday The New Haven Register550 Stewart Avenue Register Publishing CompanyGarden City, N. Y. 11530 367 Orange Street(516) 737-4444 New Haven, Conn. 06503

(203) 562-1121The Daily News (L.I. Edition)220 E. 42nd Street The DayNew York, N. Y. 10017 47 Eugene O'Neill Drive(212) 949-3602 New London, Conn. 06320

(203) 443-2882Bridgeport Post & Telegram410 State StreetBridgeport, Conn. 06602(203) 333-0161

|

1945 059


-6-

(j) Restricted Data

No Restricted Data or other classified defense informationis involved in this Application, and it is not expected that anywill become involved. Nonetheless, pursuant to 10 C.F.R. @ 50.37,LILCO hereby agrees that it will not permit any individual to haveaccess to Restricted Data until the Civil Service Commission shallhave made an investigation and report to the Commission on thecharacter, associations, and loyalty of such individual and theCommission shall have determined that permitting such person tohave access to Restricted Data will not endanger the common defenseand security.

III. INFORMATION REQUIRED BY 10 C.F.R. @ 50.33a

The pertinent antitrust information was filed April 14, 1971.

IV. COMMUNICATIONS

All communications to LILCO pertaining to this Applicationshould be sent to:

Andrew W. Wofford, Vice PresidentLong Island Lighting Company175 East Old Country RoadHicksville, New York 11801

cc: Edward M. Barratt, Esq.General CounselLong Island Lighting Company250 Old Country RoadMineola, New York 11501

Edward J. Walsh, Esq.General AttorneyLong Island Lighting Company250 Old Country RoadMineola, New York 11501

1945 060Original Dated: August 28, 1975

Amended: January 14, 1980 Respectfully submitted,


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''h.e yj) . ' " - /.'? , tat o'

JO PH P. NOyARRO

i/Amendment 35 - January 1980

AFFIDAVIT

STATE OF NEW YORK): ss: Shoreham

COUNTY OF SUFFOLK)

JOSEPH P. NOVARRO, being duly sworn, states that he

is Project Manager of the Shoreham Project within Long Island

Lighting Company; that he is authorized on the part of said

Company to sign and file with the Nuclear Regulatory Commission

the foregoing Amendment No. 35 to the License Application,

Shoreham Nuclear Power Station, Docket No. 50-322, consisting

of an amended License Application and accompanying exhibits;

that Amendment No. 35 was prepared under his supervision and

direction; and that as of this date, the statements contained

therein are true and correct to the best of his knowledge,

information and belief.

k ( (Y?ALD21f/ / JOSEPH P. NOVARRO

V /(

Sworn to before me this.

14th day of January, 1980

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DIRECTORS and OFFICERS

ODIRECTORS

EDWARD C. DUFFY ROBERT G. OLMSTEDRetired Vice Chairman of the Board President. Island Capital Corp.Long Island Lighting Company Investments

"^ ~

DOUGALL C. FRASER PresidentPresident. Abingdon Investment Corp- Long Island Lighting CompanyInvestments

EBEN W. PYNENATHANIEL M. GIFFEN Senior Vice PresidentChairman of the Board and First National City BankChief Executive OfficerSuffolk County Federal Savings and E. CLINTON TOWLLoan Association Member of the Board of Directors

Grumman Corp.ManufacturingLIONEL M. GOLDBERG

Vice President. Alexander & Alexander,Inc. JOHN J. TUOHY'"*#*"#* Chairman of the Board

Long Island Lighting CompanyJOHN D. 'MXWELLVice-Cha',-ma. and Director, Kollmorgen Corp.; PHYLLIS S. VINEYARDVice President, Powers Chemco. Inc. President, Suffolk Community CouncilManufacturing Voluntary Non. profit Planning Agency

OFFICERS

JOHN J. TUOHY CHARLES R. PIERCEChairman of the Board Presidentand Chief Executive Officer

J AMES W. DYE, JR. JOHN J. RUSSELLSenior Vice President - Operations, Vice President - Customer RelationsTransmission - Distribution and Purchasing

ANDREW W. WOFFORDFRANK C. MACKAY Vice President - Project ManagementSenior Vice President - Commercial Operations

EDWARD W. EACKER***"'''

THOMAS H. O'BRIENSenior Vice President - Finance MICHAEL CZUMAK

ControllerWILFRED O. UHLSenior Vice President RAYMOND J. FORREREngineering and Project Management Assocaste Controller

JOSEPH G. ACKER JOHN J. KEARNEY, JR.

Vice President -Transmission - Distribution and SecretaryService Operations

KATHLEEN M. BROWN#** ' *"I 8* * '* **7GRANT BROWN

Vice President - Employee Relations

CHARLES J. DAVISVice President - Engineering EDWARD M. BARRETT

General Counsel

IRA L. FREILICHER EDWARD J. WALSH, JR.Vice President - Public Affairs General Attorney

JOHN R. GUMMERSALL, JR. FRANCIS M. WALSHVice President - Operations and Construction General Claims Attorney

1945 063

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Celebrated as the poet ofdemocracy, Whitman told us thatin the most common of humanactivities are found the essentialelements of the meaning of life. Wehave tried to show in this year'sAnnual Report, through thepeople and places of Long Island,together with Whitman's words,how men and women, freed byenergy from the drudgery ofsurvival, better their lives inmyriad ways: by a quiet walk onthe seashore, through theconfident satisfaction of a job I Iperformed well, through theexhilaration of physical movement,

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Thia year, in additht to the discussionof LII.CO's opera:ians, our Annual Ra- hport lecles at examplas of leadership p'Sca Lcng Ishud, from the past aa tin 9% psent. g

Ocr coverilkstrates the dangers of ,

whalisj, a major Long W.and indnetry 9 dwhJoh m:pplied gwwbg America with '

wh n13 cil forlighting t=til the hteWh. L" CGnt''rt, tWO of the McStp;oaliig ew;2 gy u,wces availabler.cw c ad (ct the ktn:3 are shownd-no; nuclear power and solar+ miri. A traspoon citu2n!u.m fuel, '

niMm cd here in McDowcake" form,een nMimately yield as rauch energya J ) gc1kna cf oil or 356 poundaef . &

"a ; narch for energy souces .le In more than Irr'J,000 years ano,viu 2 ann dlwovered wood could beS >&i Water's force was harnessedne> t foUowed by the capture of

1

ernTf in windmilla. Coal was the fuel yth?I fued the ir.dustrial Revolution, {b+eoslag the primari resource b-1^00. Pay years later, en and naturalgu hd replaced coal as the snajorsources of the world's energy. Like theence- Abundant whale, now a pro-tected species, fossil fuels were longregexdad es L:axhaustible.

A ann ~e new way to use these -fueIs was c rm-S Siwith Edison's in.verdien of the electriclight balbinW9. Our reliance en eles-tricity willincreare fu the years ahead, as thisform of energyis used to meet a widerrrnge cf needs. By the year 2000, elec- -tricity may acccunt for as much as50% of total United States energy use.P.s production will rely to a great ex-

1945 067tent en new sources of fual, su,'ple-tienting diminishing ter4 plies of oilattd natural gas.

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EXHIBIT B


BOARD OF DIRECTORS

William J. Casey

Business Address: * Rogers & Wells200 Park AvenueNew York, New York 10017212-972-7089

Residence: Glenwood RoadRoslyn Harbor, N. Y. 11576516-621-9332

Wi lliam J. Catacosinos

Business Address: * Chairman and Chicf Executive OfficerApplied Digital Data Systems, Inc.100 Marcus BoulevardHauppauge, N. Y. 11787516-231-5400

Secretary: Ms. Marion Grant

Residence: Mill Neck, N. Y. 11765516-922-4630

Edward C. Duffy

Residence: *133 Marshall Avenue !

6- 52 050b'

|

Summer Residence: Mason Drive, RD #1 Box SOACutchogue, N. Y. 11935516-734-6300

Winter Residence: 6140 Midnight Pass RoadSarasota, FL 33581813-349-5180

|945 070-

* Denotes mailing address |


-2-

Winfield E. Fromm

Business Address: * Group Vice PresidentInstruments and Systems GroupCutler-Hammer, Inc.One Huntington Quadrangle - Suite 3S12Melville, N. Y. 11747516-293-8901

Secretary: Mrs. Edie Corl516-293-8902

Resi.lence: Laurel CourtRFD #3Lloyd Harbor, N. Y. 11743516-427-4821

Nathaniel M. Giffen

Business Address: * Chairman of the Board andChief Executive OfficerSuffolk County Federal Savingsand Loan Association2100 Middle Country RoadCentereach, N. Y. 11720516-585-6300

Secretary: Mrs. Nancy Schechter

Residence: Levon LaneMiller Place, N. Y. 11764

| 516-473-6019

Lionel M. Goldberg

Business Address: *Vice PresidentAlexander & Alexander, Inc.One Huntington QuadrangleMelville, N. Y. 11747516-249-1500Mrs. Loretta Roth

Residence: 32 Pearsall Avenue $ \Glen Cove, N. Y. 11542 Sb

| 516-676-1221 )%N

| * Denotes mailing address

Amer' ent 35 - January 1980

-3-

John D. Maxwell

Business Address: ChairmanKollmorgen Corporation31 Sea Cliff AvenueGlen Cove, N. Y. 11542516-448-1001

Secretary: Mrs. Sandra Flynn

Residence: *High Farms RoadGlen Head, N. Y. 11545

!516-448-1002

Charles R. Pierce

Business Address: * Chairman of the Board andChief Executive OfficerLong Island Lighting Company250 Old Country RoadMineola, N. Y. 11501516-228-2026

Secretary: Mrs. Hazel Morel

Residence: 21 Wayside LaneLloyd Harbor, N. Y. 11743516-423-2709 |

Eben W. Pyne

Business Address: * Senior Vice PresidentCitibank, N.A.One Citicorp Center153 East 53rd StreetNew York, N. Y. 10022212-559-9528

Secretary: Miss Eileen Vandenberg

Residence: Willets RoadOld Westbury, N. Y. 11568516-333-2084

Apartment: 200 East 66th StreetNew York, N. Y.212-688-1978

1945 072 !* Den. tes mailing addresso


-4-

I Wilfred O. Uhl

Business Address: * PresidentLong Island Lighting Company250 Old Country RoadMineola, N. Y. 11501516-228-2100

Secretary: Miss Ann Dunn

Residence: 28 Elmwood CourtPlainview, N. Y. 11803516-681-0229

Phyllis S. Vineyard

Residence: *10 South Brewster LaneBellport, N. Y. 11713

| 516-AT6-0269

| January 31, 1979

| * Denotes mailing address

~

1945 073 O


OFFICERS

NAME TITLE ADDRESS

Charles R. Pierce Chairman of the Board 21 Wayside Laneof Directors and Chief Lloyd Harbor, N.Y. 11743Executive Officer 423-2709

Wilfred O. Uhl President 28 Elmwood CourtPlainview, N.Y. 11803681-0229

Charles J. Davis Senior Vice President- 5 Brookside DriveEngineering & Project Oyster Bay, N.Y. 11771Management 922-3210

728-6317 (summer)

James W. Dye, Jr. Senior Vice President- 12 Summit CourtOperations, Transmission / Oyster Bay, N. Y. 11771Distribution and 922-4742Purchasing

Frank C. Mackay Senior Vice President- 923 Southern DriveCommercial Operations Franklin Square,N.Y. 11010

561-8084

Thomas H. O'Brien Senior Vice President- 21 Hilton AvenueFinance Garden City, N.Y. 11530

741-2433

Joseph G. Acker Vice President- 15 Teal CrescentTransmission / Distribution Great River, N.Y. 11739and Service Operations 277-5555

Hugh P. Boylan Vice President - 22 Peterborough DrivePurchasing Northport, N.Y. 11768

261-2461

Matthew C. Cordaro Vice President- 10 Triangle CourtEngineering Ft. Salonga, N.Y. 11768

757-9871

Ira L. Freilicher Vice President- 63 Old Farm RoadPublic Affairs East Hills

Roslyn Heights, N.Y. 11577484-2045

John R. Gummersall, Vice President- 141 Glenlawn AvenueJr. Operations and Sea Cliff, N.Y. 11579

Construction 759-9657

1945 074,

-

Amendment 35 - Ja..uary 1980

hNAME TITLE ADDRESS

Matthew S. Procelli Vice President- 8 Mountain View CourtEmployee Relations Northport, N.Y. 11768

757-3734

John J. Russell Vice President- 44 Mole PlaceCustomer Relations Amityville, N.Y. 11701

691-4799

Andrew W. Wofford Vice President- 11 Chanticleer CourtProject Management Huntington, N.Y. 11743

367-4374

Edward W. Eacker Treasurer 22 Smith StreetGlen Head, N.Y. 11545759-0254

Michael Czumak Controller 246 Soundview RoadHuntington, N.Y. 11743423-5166

Raymond J. Forrer Associate Controller 50 Relda StreetPlainview, N.Y. 11803

| 935-1667

John J. Kearney, Secretary 35 Russell RoadJr. Garden City, N.Y. 11530

| 746-7642

Kathleen M. Brown Assistant Secretary 671 Clinton Avenuei Uniondale, N.Y. 11553I 489-7527

Edward M. Barrett General Counsel 332 Southdown RoadLloyd Harbor, N.Y. 11743

| 421-3223

Edward J. Walsh, General Attorney 72 Brook StreetJr. Garden City, N.Y. 11530

746-2682

Francis M. Walsh General Claims Attorney 124 Seaman RoadJericho, N.Y. 11753

| 931-4404

|||-

1945 075Amendment 35 - January 1980

. J

-

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,

e

,

m

9

0

=

1945 076

'

.

) i

EXHIBIT C

ADDITIONAL FINANCIAL INFORMATION

Long Island Lighting Company forwarded to the NRC Staff via

its letters SNRC-378, dated April 19, 1979 and SNRC-453 dated

January 4, 1980, the additional financial information requested

in the January 23, 1979 NRC letter from Mr. S. A. Varga to

Mr. A. W. Wofford. That additional financial information has

been reproduced herein as Exhibit C cxcept in the case of

certain bulky testimony and exhibits from New York Public

Service Commission Cases 27374 (electric) and 27375 (gas),

which is incorporated by reference to SNRC-378 and SNRC-453.

1945 077s ,

.

C-1 Amendment 35 - January 1980

QUESTION 1.a.

Indicate the estimated annual cost by year to operate the subjectfacility for the first five full years of commercial operation.The types of costs included in the estimates should be indicatedand include (but not necessarily be limited to) operation andmaintenance expense (with fuel costs shown separately), depre-ciation, taxes and a reasonable return on investment. (Enclosedis a form which should be used for each year of the five yearperiod). Indicate the projected plant capacity of the unit foreach of the above years.

RESPONSE

See the attached forms for the response to question 1.a. foreach of the five years beginning 1981.

O

1945 078

OC-2 Amendment 35 - January 1980

ATTACHMENT FOR ITEM NO. 1_a_

ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATINGUNIT: SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1

FOR THE CALENDAR YEAR 19_8_1

(thousands of dollars)

Operation and maintenance expensesNuclear power generation

Nuclear fuel expense (plant factor 66%). $ 16182. . . . . . .

Other operating expenses 5896. . . . . . . . . . . ....

Maintenance expenses _4231. . . . . . . . .. . . . ....

Total nuclear power generation 26309. . . ....

Transmission expenses 100. . . . . . . . . . . . . . ....

Administra+ive and general expenses

Property and liability insurance . 3100. . . . . . . . . . .

1620Other A.&G. expenses . . . . . . . . . . . . . ....4720Total A.&G. expenses . . . . . . . . . . . . . . .

TOTAL O&M EXPENSES 31129. . . . . . . . . . . ....

Depreciation expense 32300. . . . . . . . . . . . . . . ....

Taxes other than income taxes15800Property taxes . . . . . . . . . . . ... . . . . . . . .11053Other . . . . . . . . . . . . . . . . . . . . . ....

Total taxes other than income taxes 26853. ....

Income taxes - Federal 2427. . . . . . . . . . . . . . ....

Income taxes - other -. . . . . . . . . . . . . . . ....

Deferred income taxes - net 19520. . . . . . . . . . . . ....

Investment tax credit adjustments - net (2000). . . . . . ....

Return (rate of return: 10.20 %) . . . 155978. . . . . . . . . . .

TOTAL ANNUAL COST OF OPERATION $266207

1945 079.


ATTACHMENT FOR ITEM NO. 1.a.

ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GEtiSRATINGUNIT: SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1

FOR THE CALENDAR YEAR 19_8_2


Operation and maintenance expensesNuclear power gencration

Nuclear fuel expense (plant f actor 66 %) . . . . $ 27600. . . .

16442Other operating expenses . . . . . . . . . . . . . . .12782Maintenance expenses . . . . . . . . . . . . . . . . .

Total nuclear power generation 56824. . . . . . .

107Transmission expenses . . . . . . . . . . . . . . . . . .

Administrative and general expenses

3250Property ar.d liability insurance . . . . . . . . . . . .4676Other A.&G. expenses . . . . . . . . . . . . . . . . .792TTotal A.&G. expenses . . . . . . . . . . . . . . .

64857TOTAL O&M EXPENSES O. . . . . . . . . . . . . . .

55300Depreciation expense . . . . . . . . . . . . . . . . . . .

Taxes other than income taxes28900Property taxes . . . . . . . . . . . . . . . . . . . . .14824Other . . . . . . . . . . . . . . . . . . . . . . . . .

Total taxes other than income taxes I372I. . . . .

Income taxes - Federal '. 2628. . . . . . . . . . . . . . . . .

-

Income taxes - other . . . . . . . . . . . . . . . . . . .

Deferred income taxes - net 29534. . . . . . . . . . . . . . . .

Investment tax credit adjustments - net (2000). . . . . . . . . .

Return (rate of return: 10.20 g) 147329, , , , , , , , , , , , , ,


~u

1945 080



ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATINGUNIT: SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1

FOR THE CALENDAR YEAR 1983


Operation and maintenance expensesNuclear pcwer generation

Nuclear fuel expense (plant factor 71%) $ 29106. . . . . . . .

Other operating expenses 15941. . . . . . . . . . . . . . .

Maintenance expenses 11814. . . . . . . . . . . . . . . . .Total nuclear power generation 56861. . . . . . .

Transmission expenses 114. . . . . . . . . . . . . . . . . .

Administrative and genera' expenses

Property and liability insurance . 3400. . . . . . . . . . .4441Other A.&G. expenses . . . . . . . . . . . . . . . . .7841Total A.&G. expenses . . . . . . . . . . . . . . .

TOTAL O&M EXPENSES 64816. . . . . . . . . . . . . . .


Taxes other than income taxesProperty taxes .' 30900

. . . . . . . . . . . . . . . . . . . .14667Other . . . . . . . . . . . . . . . . . . . . . . . . .

Total taxes other than income taxes 45567. . . . .

3262Income taxes - Federal . . . . . . . . . . . . . . . . . .

Income taxes - other -

. . . . . . . . . . . . . . . . . . .

Deferred income taxes - net 33734. . . . . . . . . . . . . . . .

Investment tax credit adjustments - net (2000). . . . . . . . . .

Return (rate of return: 10. 2' % ) 138251. . . . . . . . . . . . . .


,

1945 081C-5 Amendment 35 - January 1980


ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATINGUNIT: SHOREHAM NUCLEAR PONER STATION, UNIT NO. 1




Nuclear fuel expense (plant factor 74%) . . $ 32998. . . . . .

Other operating expenses 16948. . . . . . . . . . . . . . .

Maintenance expenses 12560. . . . . . . . . . . . . . . . .

Total nuclear power generation 62506. . . . . ..

Transmission expenses 121. . . . . . . . . . . . . . . . ..


Property and liability insurance . 3570. . . . . . . . . . .

Other A.&G. expenses 4721. . . . . . . . . . . . . . . ..

Total A.&G. expenses . 577T. . . . . . . . . . . . ..

TOTAL O&M EXPENSES 70918. . . . . . . . . . . . . ..

Depreciation expense 55300. . . . . . . . . . . . . . . . . ..

Taxes other than income taxesProperty taxes 33100. . . . . . . . . . . . . . . . . . . ..

Other 16082. . . . . . . . . . . . . . . . . . . . . . . ..Total taxes other than income taxes 47132. . . ..

Income taxes - Federal 40'726. . . . . . . . . . . . . . . . ..

Income taxes - other -. . . . . . . . . . . . . . . . . ..

Deferred income taxes - net 28734. . . . . . . . . . . . . . ..

Investment tax credit adjustments - net (2000). . . . . . . . ..

Return (rate of return: 10.20 %) 129683. . . . . . . . . . . . ..


1945 082 O



ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATINGUNIT: SHOREHAM NUCLEAR POWER STATI'1N , C'!IT NO. 1




Nuclear fuel expense (plant factor 78%) $ 37922. . . . . . . .19399Other operating expenses . . . . . ..........14421Maintenance expenses . . . . . . . ..........71742Total nuclear power generation . . . . . . .

136Transmission expenses . . . . . . . . ..........


3750Property and liability insurance . . ..........4922Other A.&G. expenses . . . . . . . .......... EI77Total A.&G. expenses . . . . . ..........

80550TOTAL O&M EXPENSES . . . . . ..........

55300Depreciation expense . . . . . . . . . ..........

Taxes other than income taxes 35400Property taxes . . . . . . . . . . . .......... 16631Other . . . . . . . . . . . . . . . ..........

Total taxes other than income taxes 52031. . . . .

59985Income taxes - Federal . . . . . . . . ..........

-

Income taxes - other . . . . . . . . . ..........

16834Deferred income taxes - net . . . . . . ..........

(2000)Investment tax credit adjustments - net ..........

122329Return (rate of return: 10.20 %) . . . . ..........

$385029TOTAL ANNUAL COST OF OPERATION

.

''- 1945 083

C-7~ Amendment 35 - January 1980


ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATINGUNIT: SI*C?.EHAM NUCLEAR PGt SU STATION, UNIT NO. 1

FCR THE CALENDAR YEAR 19_86_


Operation and maintenar.ce expensesNuclear power generation

Nuclear fuel expe..se (plant factor 78%) . . $ 43705. . . . . .19399Other operating c:-:penses . . . . . . . . . . . . . . .14421Maintenance expenses . . . . . . . . . . . . . . . . .

Total nuclear power generation 77373'. . . . . . .

136Transmission expenses . . . . . . . . . . . . . . . . . .


3949Property and liability insurance . . . . . . . . . . . .5411Other A.&G. expenses . . . . . . . . . . . . . . . . . 933170tal'A.&G. e::penses . . . . . . . . . . . . . . .

87012TOTAL O&M EXPENSES O. . . . . . . . . . . . . . .


Taxes other than income taxes 37900Property taxes . . . . . . . . . . . . . . . . . . . . . 12079Other . . . . . . . . . . . . . . . . . . . . . . . . 5IY75Total taxes other than income taxes . . . . .

66054Income taxes - Federal . . . . . . . . . . . . . . . . . .

-

Income taxes - other . . . . . . . . . . . . . . . . . . .

16834Dcferred income taxes - net . . . . . . . . . . . . . . . .

(2000)Investment tax credit adjustments - net . . . . . . . . . .

114974Return (rate of return: 10.20 %) . . . . . . . . . . . . . .

$393153TOTAL ANNUAL COST OF OPERATION

1945 084-

OC-8 Amendment 35 - January 1980

QUESTION 1.b.

Indicate the unit price per KWh experienced by each applicanton system-wide sales of electric power to all consumers forthe most recent twelve month period.

RESPONSE

For the twelve (12) months ending January 31, 1979, the KWhunit price experienced by each applicant on the LILCO systemwas 5.8 cents.

1945 085.

'

.


QUESTION 2

Indicate the estimated costs of permanently shutting down thefacility, statino what is included in such costs, the acsumptionsmade in estimating the costs, the type of shutdown contemplatedand the expected source of funds to cover these costs.

RESPONSE

The Long Island Lighting Company has reviewed the variousalternatives for decommissioning an 850 MWe boiling waterreactor (BWR) plant at the end of its useful life. Theyrange from mothballing the plant nearly intact to completedismantling of the plant and removal of all structures toone foot below grade level. Selection of the best techniqueto use will naturally depend on many factors which can onlybe properly evaluated at the time of decommissioning. Estimatesof the costs of various alternatives can be made, however, basedon the actual costs experienced in the decommissioning of severalcivilian reactors.

Three different levels of decommissioning were considered andthe estimated cost (1975 dollars) were obtained for each:

(1) Mothballing

Leaving the plant essentially intact after flushing,

all systems and removing all loose radioactive items,

and wastes, providing a security fence around theplant, and maintaining a perpetual around-the-clockguard and watchman service, with semi-annual inspec-tion of the plant performed.

Decommissioning Cost: $ 3,500,000' Annual Charges After Decommissioning: 80,000/ yearI

(2) Entomoment

Leaving all buildings intact; flushing and diamantlingsystem piping; isolating, sealing, and entombing thereactor pressure vessel; providing closed shield housingsaround major radioactive items such as the turbine generator,heat exchangers, moisture separators, etc.; removing allpiping and other loose radioactive items and wastes; providinga security fence and performing semi-annual inspection ofthe plant.

Decommissioning Cost: $ 9,000,000,

'

Annual Charges After Decommissioning: 30,000/ year g

1945 086


(3) Complete Dismantling

Removal of the plant down to one foot below gradelevel, leaving the subgrade foundations essentiallyintact, backfilling to grade level, and restorationof landscaping to the approximate original condition.

Decommissioning Cost: $54,000,000

These numbers snow the range of decommissioning costs for theShoreham Unit. A 1977 Atomic Industrial Forum report, AIF/NESP-009SR, "An Engineering Evaluation of Nuclear Power ReactorDecommissioning Alternatives" indicated that the cost ofdecommissioning could be reduced if the plant were first moth-balled or entombed, and then left in that condition for a periodof time before dismantling. This approach to dismantling appearspreferable to LILCO at this time. The Applicant will continueto monitor industry developments and, at an appropriate time, adetailed decommissioning plan will be submitted to the NRC.

The source of funds will come from internal cash generation plusexternal financing as required.

1945 087

'

,


QUESTION 3

Provide an estimate of the annual cost to maintain the shutdownof the facility in a safe condition. Indicate what is includedin the estimate, assumptions made in estimating cost and theexpected source of funds to cover these costs.

RESPONSE

Annual costs to maintain the shutdown of the facility in a safecondition, a description of what is included in the estimate,and assumptions made in estimating costs are included in responseto Question 2.

The source of funds will come from internally generated cashplus external financing as required.

O

.

I945 088 qC-12 Amendment 35 - January 1980

QUESTION 4.a.

Provide copies of the prospectus for the most recent securityissue and copies of the most recent SEC Form 10-K. Providecopies of the preliminary prospectus for any pending securityissue. Submit copies of the Annual Report to Stockholderseach year as required by 10 CFR 50.71(b).

RESPONSE

The below listed documents are herein provided:

1. Prospectus dated October 30, 1979 and Supplement datedNovember 20, 1979.

2. SEC Form 10-K for the fiscal year ended December 31, 1978

3. LILCO Annual Report for 1975




NOTE: Item 1 is provided herein.Items 2 through 6 have been submitted via the LILCOletter SNRC-378 dated April 19, 1979.

1945 089

gy;.{-rAVIr@ Amendment 35 - January 1980-3

QUESTION 4.b.

Describe aspects of the applicant's regulatory environmentincluding, but not necessarily limited to, the following:prescribed treatment of allowance for funds used duringconstruction and construction work in progress; form of ratebase (original cost, fair value, other) ; accounting fordeferred income taxes and investment tax credits; fueladjustment clauses in effect or proposed; historical;partially projected, or fully projected test year.

RESPONSE

The following describes various aspects of LILCO's regulatoryenvironment:

1. The test year now utilized for rate making purposes inNew York State is the 12 month period at the end of acalendar quarter no earlier in time than 150 days beforethe date of filing. This test year is to be fully adjustedto show the operating results for the first 12 months duringwhich the proposed rates will be in effect. There havebeen no restrictions placed on the types of adjustmentwhich may be made to the test year to make it representthe future period.

2. There are certain items included in construction work inprogress (CWIP) on which allowance for funds used duringconstruction (AFC) is not calculated, since they are eithertoo small or are of too short a duration in time. Theseitems are often referred to as "non-interest bearing" CWIP.Currently the average balance for these items is $45 millionon the electric side of the business and $4 million on thegas side of the business. AFC generally would be calculatedon the remainder of CWIP unless the Commission decides topermit some of it to be included in rate base. (Suchpermission is normally only granted to enable a utilitycompany to continue its financing program). The Companyis presently allowed to include $300 million of electricand $4 million of gas CWIP in its rate base.

3. In New York, the rate base is normally the average plant inservice at original cost, less the accumulated depreciationreserve, less the deferred taxes on plant-related items, plusan allowance for. working capital and any CWIP which theCommission has'Illowed to be included.

1945 091


O4. The Commission permits deferred tax treatment on some of

the differences between book and tax depreciation whichproduces something which can be described as between flow-through accounting and normalized accounting. There is alsodeferred income tax treatment for the investment tax creditin excess of the first 4%. The Company also capitalizes aportion of its AFC net of income taxes.

5. The Commission permits both electric and gas fuel adjustmentclauses. The electric fuel adjustment clause includes thecost of fuel, excluding the cost of fuel used to make salesfor resale, plus the cost of economy purchases and the costof fuel included in non-economy purchases. The Commissionalso permits deferred fuel accounting so that fuel expensesand fuel revenues may be more closely in phase with eachother.

O

@sb%.

N

O


QUESTION 4.c.

Describe the nature and amount of the applicant's mcqt recent raterelief action (s). In addition, indicate the nature and amount of anypending rate relief action (s). Use the attached form to provide thisinformation. Provide copies of the submitted financially-relatedtestimony and exhibits of the staff and company in the most recentrate relief action or pending action. Furnish copies of the hearingexaminer's report and recommendation, and final opinion last issuedwith respect to each participant, including all financial exhibitsreferred therein.

RESPONSE

4.c. Rate Developments

Granted Electric GasTest year utilized 12/31/77 (a) 12/31/77(a)Annual amount of revenue increase

requested-test year basis (000's) $ 147,100 $23,900Date petition filed 5/31/78 5/31/78Annual amount of revenue increase

allowed-test year basis (000's) $ 26,000 16,580Percent increase in revenues allowed 3.3% 9.1%Date of final order 4/27/79 4/27/79Effective Date 5/04/79 5/04/79Rate base finding (000's) $1,558,728 238,761Construction work in progress included

in rate base (000's) S 300,000 4,120Rate of return on rate base authorized 10.26% 10.26%Rate of return on common equityauthorized 13.7% 13.7%

Revenue Effect (000's)Amount received in year granted $ 15,300 7,200Amount received in subsequent year $ 25,700 16,900

Pending Requests Electric Gas.

Test Year 6/30/79(b)

Amount $25.6 million None

Percent 2.5%

Date filed 9/21/79

Date by which decision must jg4} 093be issued 8/80


O4c. Rate Developments

Pending Requests (Cont.) Electric Gas

Rate of Return on Rate BaseRequested 10.49%

Rate of Return on Common EquityRequested 13.7%

Amount of Rate Base Requested $1,684,859

Amount of CWIP included inRate Base $300 million

NOTES:

(a) The Public Service Commission of the State of New York(PSC) in making its final determination recognized certainmajor adjustments to the 12/13/77 test year and concludedthat such adjustments created a new test year, calledthe rate year, the 12 months ended 4/30/80.

(b) The test year of 6/30/79 has been adjusted to a rateyear of 4/30/81.

%%

Sbb

%)%

N

O4

.


The following financially-related testimony and exhibits of Staffand Company witnesses in rate cases 2737? (electric) and 27375 (gas)have been previously submitted via LILCO letter SNRC-378 datedApril 19, 1979 except for items C.1 and D which are provided herein:

Financially-related testimony and exhibits of Staff and Companywitnesses in rate case 27374 (electric) and 27375 (gas) willconsist of:

A. Prepared testimony and prepared exhibit #196 ofVincent A. Macri, Chief Utility Financial Analyst,Utility Finance Section, Office of Accounting andUtility Finance, N.Y. State Public Service Commission,Empire State Plaza, Albany, N.Y. 12223, datedOctober 1978 for the Staff:

Exhibit #196 contains the following:

1. LILCO - Cash Funds Requirements Excluding the Trustsfor the years 1979 and 1980

2. LILCO - Capital Structure - June 30, 1978 - Pro Forma3. LILCO - Average Capital Structure for the Rated Year4. LILCO - Moody's Utility Common Stocks - Average Long

Term Debt Positions5. LILCO - Moody's Utility Common Stocks - Average

Preferred Stock Positions6. LILCO - Moody's Utility Common Stocks - Average

Common Equity Positions7. LILCO - Cost of Long Term Debt - June 30, 1978 - Pro

Forma8. LILCO - Cost of Preferred Stock - June 30, 19789. LILCO - Financial Statistics

10. LILCO - 1978 Yields for Long Island Lighting11. LILCO - Moody's Utility Common Stocks - Financial

Statistics12. LILCO - Moody's Utility Common Stocks - Financial

Statistics - 197613. LILCO - Moody's Utility Common Stocks - Financial

Statistics - 197714. LILCO - Moody's Utility Common Stocks - Financial

Statistics - Current15. LILCO - Flowthrough Electric Utilities - Financial

Statistics for 197616. LILCO - Flowthrough Electric Utilities - Financial

Statistics for 197717. LILCO - Flowthrough Electric Utilities - Financial

Statistics - Current18. LILCO - Standard & Poor's 400 Industrials - Financial

Statistics19. LILCO - Moody's Utility Common Stocks - AFC as a

Percentage of Earnings

.


O20. LILCO - Flowthrough Electric Utilities AFC as a

Percentage of Earnings21. LILCO - Common St ock Issuances 1976 - $20,000,000

or more22. LILCO - Common Stock Issuances 1977 - $20,000,000

or more23. LILCO - Common Stock Issuance in 1078 - $20,000,000

or more24. LILCO - Derivation of Formula for Converting Investors

Expected Return to Required Return on Equity25. LILCO - Divisors Necessary to Convert Total Return

to Required Return on Equity at Given Market to BookRatios * (* Assume 66% payout ratio)

26. LILCO - Average Capital Structure and '. c c t Rates forthe Rate Year

27. LILCO - Pre-Tax Rate of Return28. LILCO - Pro Forma Pre-Tax Coverage for the Rate Year29. LILCO - Pre-Tax Coverage Based on the 10% Limitation

of Other Income30. LILCO - Moody's Utility Common Stocks Pre-Tax Coverage

for the Twelve Months Ended December 31, 197731. LILCO - Flowthrough Utilities Pre-Tax Coverage for the

Twelve Months Ended December 31, 197732. LILCO - Moody's Utility Common Stocks Pre-Tax Coverage |h

for the Twelve Months Ended June 30, 197833. LILCO - Flowthrough Utilities Pre-Tax Coverage for the

Twelve Months Ended June 30, 197834. LILCO - AFC as a Percentage of Earnings for the Rate

Year

B. Financially-related testimony and exhibits of company witnessesin rate cases 27374 (Electric) and 27375 (Gas) :

1. Thomas H. O'Brien2. Raymond J. Forrer3. Roger F. Murray the 2nd4. Zvi Bendry (testimony and exhibit #64 which contains

Schedules 1 and 2 and a Technical Appendix)

C. The Hearing Examiner's report and recommendations, and finalopinion last issued with respect to each participant, includingall financial exhibits referred therein consists of thefollowing:

1. Recommended Decision by Administrative Law Judge DavidSchechte Issued 2/13/79 - Case 27374 and 27375

2. Opinion and Order Determining Increased RevenueRequirements - Issued 4/27/79, Case 27374 (ElectricRates) and 27375 (Gas Rates). (Attachment C to question4C provided with this submittal)

1945 096C-19 Amendment 35 - January 1980

D. Financially-related testimony and exhibits of Companywitnesses in support of the pending rate case:

1. Raymond J. Forrer (pages 1 and 12 through 20 andExhibits 13 through 18.

2. Zvi Benderly (testimony and exhibit 56 which containsschedules 1 and 2 and a technical appendix).

1945 097


ATTACHMENT A TO QUESTION 4.C

TESTIMONY OFRAYMOND J. FORRER

1 Q. Please state your name and business address.

2 A. Raymond J. Forrer, 250 Old Country Road, Mineola, New York

3

4 Q. What is your position with Long Island Lighting Company?

5 A. I am Associate Controller, a position I have held since 1974.

6

7 Q. Have you testified in other proceedings before this Commission?

8 A. Yes. I have testified in several of the Company's rate proceedings

9 including its last electric and gas rate Cases 27374 and 27375,

10 in Case 27136, in Case 80003 "Jamesport Siting Application", and

11 in case 26798 " Empire State Power Resources. Inc."

12-

13 Q. Hr. Forter, I show you a two page document entit. led "Long Island

14 Lighting Company - Balance Sheet." Was this document prepared

15 under your direction?

16 A. Yes..

17

18 Q. I that this document be marked for identification as it

19 No. 1. Mr. rer, would you please explai t Exhibit No.

20 1 shows?

21 A. It shows the Balance She the ny as of December 31, in each.

22 of the years , 1976, 1977 and 1978 and as une 30, 1979

23 ex med from the book: of the Company by PSC prime accu..

24

1945 098'

'

NOTE: Pages 2 through 11 inclusive have been omitted intentionally.

-1- Amendment 35 - January 1980

RAYMOND J. FORRER

O1 cf which is entitled " Net Utility Plant - Electric - Bo'k Cos

2 o lant and Accumulated Depreciation - Monthly Balances !

3 1, 19 to April 30, 1981." The second page refers to Net

4 Utility nt - Common." The third page refers to eferred

5 Taxes - Elec c." Was this document prepared der your

6 supervision?

7 A. Yes.

8

9 Q. I ask that this document be arke as Exhibit 12 for identifi-

10 cation. Mr. Forrer, what doe is Exhibit show?

11 A. Page I shows monthly bala s after Rs for the period May 1, 1980

12 to April 30, 1981, in ' e various elec ic property accounts and

O13 accumulated depreci ion, including that p tion of common plant

14 from page 2 whi is allocated to electric ope ations. Page 2

15 shows the re ted common plant and accumulated de ciation balances.

16 The resu shown on es.ch page is net utility plant. e 3 shows

17 mont'. balances in the various deferred federal income t it=ms

18 f electric oparations. Also shown on the bottom of each p

19 is the sverage annual balances for each of the items stated abov

~20

21 Q. I show you a two-page document entitled, "Long Island Lighting Company

22 - Weighted Average Cost of Senior Securities at June 30, 1979."

23 Was this prepared under your directica?

24 A. Yes.

1945 099 g--


RAYMOND J. FORRER

1 Q. I ask that this document be marked as Exhibit 13 for identification.

2 Would you please explain this Exhibit?

3 A. Exhibit 13 shows that at cf June 30, 1979, the weighted average

4 cost of long-term debt was 7.86% and the weighted average cost

5 of preferred stock was 8.02%.

6

7 Q. I show you a two-page document entitled, "Long Island Lighting

8 Company - Estimated Cost of Senior Securities, Capital Structure,

9 and Rate of Return." W' s this prepared under your direction?a

10 A. Yes.

11

12 Q. I ask that this document be marked as Exhi'ait 14 for identification.


14 A. Exhibit 14, Schedule 1 of 2 shows that the estimated changes in the

15 senior securities during the period of July 1,1979, and April 30,

16 1981, and the cost of those changes. It reflects the pending sale

17 in October 1979 of $14.4 million of authority financing notes and a

18 proposed sale in May,1980 of $85 million of General and Refunding

19 Bonds at a cost of 10%. Also, an expected sale in December,1980 of

20 $70 million of General and Refunding Bonds at an estimated interest

21 rate of 10%. The schedule also indicates a refunding of the

22 Series A ist Mortgage Bonds of $20 million at a 3% rate in

23 September, 1980. The resulting weighted aversge cost of debt at

24 April 30, 1981, is 8.16%. The Exhibit further reflects (a) the

13 Amendment 35 - January 1980..

1945 100

RAYMOND J. FORRER

1 recent issuance of Preferred Series S $75 million, with proceeds

2 to the Company of $73,715,000 at a cost of 9.97% and (b) an

3 adjustment for the Series Q Preferred Stock Amortization of

4 the redemption premium as per Case 27236. The Preferred Stock

5 has been reduced for the sinking fund requirements relating to

6 the Series L stock in July, 1979; Series Q in June, 1980; Series

7 L in July, 1980; and Series M in November, 1980. The weighted

8 average cost of Preferred Stock at April 30, 1981 is 8.56%.

9

10 Schedule 2 of 2 reflects the estimated capital structure, cost

11 rate, and the return components for long-term debt, Preferred

12- Stock, Common Equity and customer deposits as estimated for the

13 rate year ending April 30, 1981. In addition to the additional

14 bonds and preferred stock noted on Schedule 1, this schedule

15 reflects (a) a planned issue of $120 million offering of

16 common stock in November 1979, (b) a proposed $88.8 million

?7 offering of common stock in November, 1980, (c) proceeds of

18 $2 million from the sale of shares of common stock under the

19 Employee Stock Purchase Plan and (d) proceeds of $16 million

20 from the sale of shares of common stock under the Automatic

21 Dividend Reinvestment Plan during the rate year. Finally,

22 it reflects additional retained earnings of $58.7 million

23 and the estimated changes of $0.2 million to the capital stock

24 expense.


1945 101.

,

RAYMOND J. FORRER

1 Q. What else does Exhibit 14 show?

2 A. It shows the capitalization ratios of the capital structure and

3 the cost rates for each of the senior securities, 9% for customer

4 deposits and 13.7% for common equity. It also shows the resultant

S return components yielding a total required rate of rr. turn of 10.49%.

6

7 Q. Mr. Forrer, would you comment or. the apparently high common

8 equity in the Company's capital structure?

9 A. Although the common equity ratio in the Company's capital structure

10 seems high, two factors must be considered. First, in acccrdance

11 with past rate case treatment, the Resources and Construction Trust

12 have been excluded from the capital structure for rate purposes.

13 Second, theoretically, the Company could decrease the amount of

14 common equity by selling more long-term debt. But as shall be

15 demonstrated later on in my testimony, bond indenture coverage is

16 below acce . table levels, even with the full rate relief requested.

17 Therefore, the sale of additional bonds to reduce the common equity

18 might not be feasible. Other possibilities of reducing the common

19 equity ratio are to increase use of the Trusts as a financing vehicle

20 and to sell more Preferred Stock. With respect to the Trusts,

21 these were created to finance nuclear fuel and the construction

22 of the Company's share of Nine Mile Point 2 nuclear unit. It is

23 possible for the Company to borrow from the Trusts for "Other

24 Corporate Purposes" but this is merely another temporary expediency

Amendment 35-da9dhykb15

.' '

RAYMOND J. FORRER

O1 for financing and does not have a material effect on our

2 financing program. As far as Preferred Stock is concerned, the

3 preferred stock ratios are near maximum levels. In addition,

4 without rate relief the amount of Preferred Stock that could

5 be issued may be limited by the Certificate of Incorporation

6 coverage test. For the recently issued Series S 9.8% preferred,

7 the coverage was 1.51 times. The minimum required is 1.50 times.

8

9 Q. I show you a two-page document entitled, "Long Island Lighting

10 Company - Fund Requirements and Financing." Was this prepared

11 under your direction?

12 A. Yes.

13


15 Would you plear; explain this Exhibit?

16 A. Schedule 1 of the Exhibit shows the fund requirements, internal

17 cash generation, and financing for the calendar years 1979, 1980

18 and for the twelve months ended April 30, 1981. The Exhibit

19 shows the funds required for our construction program and nuclear

20 fuct and Nine Mile Point #2 expenditures to be financed through

21 the resources and constraction trusts. Also, the funds required

22 for sinking funds and bond redemption. Funds derived from internal

23 sources are shown without rate increases requested in this case.

24 The financing program including resources and construction trust

O.' 16 Amendment 35 - January 19803-

l945 103

RAYMOND J. FORRER

1 financing is shown in the section headed " Funds Provided."

2 Schedule 2 of the exhibit is similar to Schedule 1 except

3 that I have assumed the rate increase requested in this

4 filing to be effective May 1,1980.

5

G Q. I show you a two-page document entitled, "Long Island Lighting

7 Company - Bond Indenture Coverage and Ratio of Earnings to Fixed

8 Charges (SEC Coverage)." Was this prepared under your di-ection?

9 A. Yes.

10



13 A. Schedule 1 of the Exhibit reflects the computation of the bond

14 indenture coverages and ratios of earnings to fixed charges at

15 December 31, 1979, December 31, 1980, and April 30, 1981. The

16 coverages are based on available income stated in the Schedule

17 and proposed bond financings. Schedule 1 is tabulated with-

18 out rate increases while Schedule 2 reflects the requested

19 rate increase effective on May 1,1980.

20

21 Q. Mr. Forrer, on Exhibit 16 you show the forecasted G&R bond

22 indenture coverage for the years 1979, 1980 and the rate year

23 respectively as 2.23 times, 2.02 times and 1.99 times without

24 rate relief and 2.23 times, 2.17 times and 2.22 times wi_th

17 Amendment 35 - January 1980*

.

~ .

1945 104

RAYMOND J. FORRER

O1 rate relief. Do any of these calculations include bond sales

2 that will take place subseque st to the particular 12 months

3 period?

4 A. No. All calculations include only the annualized interest on

5 all bonds outstanding at the conclusion of the particular 12

6 month period. For example, the coverages for the year 1979

7 do not reflect any interest on bonds to be issued in 1980. If

8 I were to include the interest on the first bond issue in the

9 spring of 1980 in the 1979 calculation, the resultant coverage

10 would be 2.05 times. In Opinion 78-1, the Commission, in

11 establishing rate levels for the Company utilized as its criteria

12 a coverage of 2.3 times for the rate year including the first

13 issue of bonds to be sold after the rate year. It is clear that

14 the Company will not meet this standard at any time. Further-

15 more, the bond indenture coverage throughout the entire period

16 is approximately at the levels which the Commission has con-

17 sidered appropriate for granting interim rate relief. This

18 coverage situation will be exacerbated by the fact that egenses

19 in this presentation are based upon the levels found appropriate

20 by the Commission in the Company's most recent rate decision,

21 Opinion 79-14, issued April 29, 1979 in order to reduce the

22 controversial issues. As Associate Controller, I am familiar

23 with the Company's proposed 1980 budget and I can state that,

24 despite the strictest controls possible, it appears most likely


1945 105. ,

~. .-

'

RAYMOND J. M RRER.

I that actual expenditures for operation and maintenance for the

2 year 1980 and at least the first four months of 1961 will anceed

3 those reflected in the Company's filing. Thus, all of the

4 financial criteria reflected in my exhibits are conservative

5 in that they present an optimistic view contrasted to what will

6 probably occur.

7

8 Q. Mr. Forrer, I show you a one-page document entitled, "Long Island

9 Lighting Company - Internal Cash as a Percent of Capital Expend-

10 itures and Dividends Paid as a Percent of Cash Income." Was

11 this document prepared under your supervision?

12 A. Yes.

13


15 Would you kindly describe this Exhibit?

16 A. The Exhibit shows internal cash as a percent of capital expend-

17 itures and dividends paid as a percent of cash income for the

18 year 1979,1980 and the twelve months ended April, 1981. The

19 data shown on this Exhibit were extracted from Exhibit 15. The

20 top half of the Exhibit assumes no rate increase and the bottom

21 half of the Exhibit assumes the proposed rate increase effective

22 May 1, 1980.

23

24 Q. Mr. Forrer in computing the percentage of dividends to the amount


1945 106.

e

'

RAYMOND J. FORRER

O1 of internal cash generation as reficceed on Exhibit 17, what common

2 stock dividend rates did you assume?

3 A. Beginning in August, 1979, I used a quarterly rate of 44 1/2c per

4 share, the most recent quarterly payment. I used this rate for

5 the November 1,1979 and February 1,1980 common stock dividend

6 payments. Beginning with the May 1, 1980 dividend, I assumed

7 quarterly payments would be 46 1/2c per share. As can be seen

8 from Exhibit 17, dividends paid would exceed cash income for the

9 rate year if no rate relief is granted and will amount to more

I f, than 95% of cash income even if full rate relief is granted.

11

12 Q. Mr. Forrer, I show you 6 one-page document entitled, "Long Island

13 Lighting Company - Allowance for Funds Used During Construction

14 as a Percent of Income for Common Stock." Was this document

15 prepared under your supervision?

16 A. Yes.

17


19 Would you kindly describe this Exhibit?

20 A. This Exhibit shows the Allowance for Funds Used During Construction

21 (AFC) as a percent of income for common stock for the years 1979,

22 1980 and the twelve months ended April, 19d1. The top half of the

23 Exhibit assumes no rate relief. The bottom half of the Exhibit

24 assumes the proposed rate increase effective May 1, 1980.

O20 Amendment 35 - January 1980

, ' . [...;,

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Exhibit 14Schedule 1 of 2P.S.C. Case No.Witness: Forrer

LONG ISLAND LIGHTING COMPANYESTIMATED COST OF SENIOR SECURITIES, CAPITAL STRUCTURE

AND RATE OF RETURN$(000)

Estimated Cost of Senior Securities as of April 30, 1981 Amount Rate CostLong-Term Debt

As of June 30,1979 - (As Per Exhibit 13 Page 1 of 2) $1,264.230 7.86% $ 99.375Authority Financing Note Issue - October 1979 14,400 7.38% 1,066Scod Issue May 1980 85,000 10.00% 8,5 00Refund Series A September 1980 (20,204) 2.95% (596)Bond Issue December 1980 70,000 10.00% 7, 000

$1,413,426 8.15% $1,15,345

Preferred Stock

As of June 30,1979-(As per Exhibit 13 Page 2 of 2) $ 380,510 8.02% $ 30,516

Adjustment for Series Q - As per Case 27236 2,158 1,178-

Refunding of Series L - July 1979 (1 , 04 9) 7.41% (78)New Series S Preferred - September 1979 73,715 9.97% 7,350Refunding of Series Q - June 1980 (4,280) 8.41% (360)Refunding of Series L - July 1980 (1,049) 7.41% (78)Refunding of Series M - November 1980 (1,998) 8.41% (168)

$ 448,007 8.56% l_,3_8,360

3945 1 0


.

9

LoNo ISIAND LIoHTINo COMPAPY_FSTH*ATED COST OF SENIOR TECUSITIES, CA PITAL STTG*P'JPS_

A N D fu\ TE O F t'ET L n.';

4(005)

Ca pital TotalIong Tern Pm fe rre d Capi al 2tock Hetained Custome r Opital.

De bt St: ;4. _ Stock Ex pe nse Eculty Ntal Depo sit s 1:ation

As of June 30, 1979 $ 1,275,375 $ 383,m3 $ 710,e55 $ (27,919) $ 331,602 $ 1,014,538 $ 8,175 $ 2,637,036Esticated char.ces thru April 30, 1980 14,400 75,950 I n ,025 (1,270) 58,269 141,024 - 279,374

Inlance As of April 30, 1983 e 1,< o4.r|3 $ ,8. , n ys i ce,e,o # 29,1.w i - 3,4, c z i : 1. 2 v5 , > o z_ 30,13 e 2, w ,410_

my 1990 g 1,37,,775 3 4c2,eg3 3 343,375 ; ,29,126) ; 398.89 $ 1,216,583 $ 8,175 $ 3,c64,431

June 1980 1,37_,,775 453,093 S48,875 (27.013) 363,774 1,2]3,621 8.175 3,0 % ,669July 1990 1.374,775 457,048 848,875 (2d,930) 400,396 1,220,341 S.175 3,060,339August 1990 1,374,775 457,048 853,890 '23,671) 417,599 1,242,613 8,175 3,0S2,616eptemter 1980 1,354,775 457,043 553 S90 .23.773) 411,093 1,236,215 8,175 3,036,213

octc oer 1930 1,354.775 457,043 d5 3, E 90 23,676) 421,332 1,246,546 S 175 3,c66,544Navecter 1930 1,354,775 455,04S 946,685 (29,814) 430,993 1,347,c64 8,175 3,165 S62De cembe r 1930 1,424,775 455,0W 946,6?5 ( 2),715 ) 411.391 1,323,351 6,175 3,216,359

January s 91 1,424,775 455,04S 9',6,635 f29,616) 430.S75 1,%7,944 8, l't5 4423,235,jS4Fe br'm ry 1,31 1,424,775 455,048 951.700 (29,558) 447,6 4 1,j69,766 6,175 3,257,

4 H . 794 1, !r.6, c 3 3 6,175 3,244,031Tp' N , M 1 )mrch 1981 1,424,775 455,cgg 451,720

~% , ,j. , DJ,ra , g, ) , , - 3 / , 'i ' 0 1-+ ,117 , 912 c, # , .aEleven Months Total in , ,^ c a , ) N 5,o;s,r 3 g,j, 3,0j

April 19y1 1, ,,2., , 7 75 ,g , g ,3 g,1, fg ; .j,;u2) .,q3,c13 1, j 73,73 c,175 ), gS g , ygAprii 19bo 1.2 @ ,775 462,803 ?44, u '] (21,193) 94,?71 1,2:5.562 8,17s 2,966,410

Total April 1930 and 1931 2,71~,'50 91 t , ff 1, 7 p ,5 g 4 s 3, o i , c g, a 2, g g , .,13 1g, g g u ;, , $ g ,,- -

April 1980 and 1931 AveraEe 1,w 7,275 Asa,o7x m ,290 <s ,270) 419,2gs 1,p.S,~,9 8,175 t.112,682.

Tuolve F.onths Total $16, o 13, ~- 5 ,,d5.b01 f.' o ,75 0, o ho E5 0, % 41 $5,000,475 (15,406.171 $95,100 $ [T ,607,4 72

Annual AvveraEc 1/12 $ 1,384,933 $ 456,950 $ 695,837 $ (29,237) $ 417,248 $ 1,293,848 $ 8,175 $ 3,133,956

In ti o s . 44.195 14.56% 40.97% 0.26% 100.00%

cor.t mctors 8.167 8.56% 13.7 f 9.0 5neturn components 3,61% 1.25T 5.61% 0.025 10.495

5.m."' W Ug. n. -a

. P R E.>

9 .- c2Amendment 35 - January 1980 31; n.- '

'd ~ ,o t_so r's *5% n

O'1

M

M

M

O O O

Exhibit No. 15Schedule 1 of 2P.S.C. Case No.Witness: Forrer

LONG ISLAND LIGHTING CCMPANYFUND REQUIREMENTS AND FINANCING

$(000)

Without Rate Increase12 Mos. Ended

1979 1980 April 30, 1981

Funds RequiredConstruction Expenditures $370,170 $350,793 $318,358Nine Mile Point #2 30,568 30,700 32,400Nuclear Fuel 17,988 20,004 20,560Bokum Advances 21,000 0 0

Allowance for Funds (79,931) (101,356) (106,750)Preferred Sinking Fund 1,070 7,850 7,850

let Mortgage Bond Redemption 0 20,000 20,000

Total Funds Required S360,865 S327,991 $292,41a

Internal CashNet Income $171,525 $198.794 $196,697Preferred Dividend Payment (32,433) (37,739) (37,512)Common - Dividend Payment (89,155) (109,906) (118,458)Depreciation 54,106 57,175 58,333

Deferred Taxes (73) (5,852) (5,901)Other - Working Capital (67,268) 2,129 2,726Allevance for Funds (79,931) (101,356) (106,750)

Total Internal Cash $ (43. 229) $ 3,245 $(10,865)

Funds Provided - Financing

Bonds $100,000 $155,000 $155,000Notes 10,569 2,700 2 '/00Trust Proceeds 69,556 50,704 52,960Preferred 75,000 0 0

Common - Stock 120,000 88,800 88,800- Employee & ADRP 17,888 18,020 18,020

Short Term 11,081 9,522 (14,197)

Total Funds Provided - Financing $404,094 $324,746 $303,28 :

Total Funds Provided $360,865 $327,991 $292,418

1945 \\2,

-.



LONG ISLAND LIGHTIFG COMPANYFUND REQUIREMENTS AND FINANCING

$(000)

Assuming Rate

Increase (5/1/80112 Mos. Ended

1980 April 30, 1981

Funds ReaniredConstruction Expenditures $350,793 $318,358Nine Mile Point #2 30,700 32,400Nuc1 car Fuel 20,004 20,560Bokum Advances 0 0Allowance for Funds (101,356) (106,750)Preferred Sinking Fund ?,850 7,850let Mortgage Bond Redemption 20,000 20,000

Total Funds Required $327,991 j,292,418

Internal CashNet Income $207,339 $214,627Preferred Dividend Payment (37,739) (37,512)Common Dividend Payment (109,906) (118,458)Depreciation 57,175 58,333

Deferred Taxes (1,009) (2,724)Other - Working Capital 2,275 1,956Allowance for Funds (101,356) (106,750)

Total Internal Cash $ 16,779 $ 9,472

Funds Provided - Financing

Bonds $155,000 $155,000Notes 2,700 2,700

Trust Proceeds 50,704 52,960Preferred 0 0Common - Stock 88,800 88,800

- Employee & ADRP 18,020 18,020

Short Term (4,012) (34,534)Total Funds Provided Financing $311,212 $282,946

Total Funds Provided $327,991 $292,418

O'

i945 l13Amendment 35 - January 1980


LONG ISLAND LIGHTING COMPANYBOND INDENTURE COVERAGE AND RATIO OF EARNINGS

TO FIXED CHARGES (SEC COVERACE)$(000)

Bond Indenture Coverage Without Rate Increase 12 Mos. Ended1979 1980 Apr. 1981

Income Available For Coverage

Electric Operaciag Income Before Income Tax $166,852 $166,794 $164,358Cas Operating Income Before Income Tax 29,192 38,194 37,756Other Income Allowed 19,604 20,499 20,211

Total Income Available $215,648 $225,487 $222,325

Mortgage & C&R Bond InterestBonds Existing @ June 30, 1979 $ 96,680 $ 96,680 $ 96,680New $85 Million 010% Hay 1980 - 8,500 8,500

$70 Fullion 010% Dec 1980 - 7,000 7,000Refund - $20 Millica Series A 3% - (600) (600)

Total Bond Interest $ 96,680 $111,580 $111,580

Identure Coverage - Times Earned 2.23 2.02 1.99

Ratio Of Earnings To Fixed Charges

Income Available for CoverageElectric Operating Income Before Income Tax $166,852 $166,794 $164,358Cas Operating Income Before Income Tax 29,192 38,194 37,756Allowance for Funt's Used During Constr. 79,931 101,356 106,750Other Income and Deductions 4,086 4,476 4,436

Capitalized Trust Interest 24.125 33,38_3_ 36,849_Total Income Available $304,186 $344,203 S350,149

Fixed Charges

Interest on Bonds $ 94,772 $102,734 4107,701Interest on Notes 6,697 8,752 8.752Amortization DD&E - Premium Net 931 1,022 1,060Interest on Losas 4,908 4,047 3,964Other Interest 843 953 1,026Capitalized Trust Interest 24,125 33,383 36,849

Total Fixed Charges $132,276 $150,891 $159,352

Coverage - Times Charges Earned 2.30 2.28 2.20

1945 114.



LONG ISLAND LIGHTING COMPANYBOND IDENTURE COVERAGE AND RATIO OF EARNINGS

TO FIXED CHARGES (SEC COVERAGE)S(000)

Assuming Rate Increase (5/1/80)Bond Indenture Coverage 12 Mos. Ended

1980 April 30, 1981Income Available for Coverage

Electric Operating Income Before Income Tax $182,030 $187,438Gas Operating Income Before Income Tax 38,194 37,756Other Income Allowed 22,022 22,519

Total Income Available $242,246 S247,713

Mortgage & G&R Bond InterestBonds Existing @ June 30, 1979 $ 96,680 $ 96,680New $85 Million @ 10% May 1980 8,500 8,500

$70 Million 010% Dec 1980 7,000 7,000Refund - $20 Million Series A 3%

_$111,HO, $111,580(600) (600)

Total Bond Interest

Indenture Coverage - Times Earned 2.17 2.22

ORatio of Earnings to Fixed Charges

Income Available for CoverageElectric Operating Income Before Income Tax $182,030 $187,438Gas Operating Income Before Income Tax 38,194 37,756Allowance for Funds Used During Construction 101,356 106,750Other Income and Deductions 4,476 4,567Capitalized Trust Interest 34,458 _ 37,908__

Total Income Available $360,514 $ 374,419~

Fixed ChargesInterest on Bonds $102,734 $107,701Interest on Notes 8,752 8,753Amartization DD&E - Prem Nat. 1,022 1,060Intercat on Loans 3,750 3,248Other Interest 953 1,026Capitalized Trust Intere3t 34,458 37,908

Total Fixed Charges $151,669 $159,695

Coverage - Times Chargt:s Earned 2.38 2.34

1945 115


Exhibit No. 17P.S.C. Case No.Witness: Forrer

LONG ISLAND LIGHTING COMPANYINTERNAL CASH AS A PERCENT OF CAPITAL EXPENDInfRES

AND DIVIDENDS PAID AS A PERCENT OF CASH INCONE$(000)

Without Rate Increase1979 1980 12 Mos. Ended

Internal Cash as a Percent of Capital Expenditures April 30, 1981Funds Required $360,865 $327,991 $292,418Sinking Fund a-d Redemption (1,070) (27,850) (27,850)

Total Capital Expenditures $359,795 $300,141 $264,568

Internal cash $(43,229) $ 3,245 $ (10,865)

Percent (12.0) 1.1 (4.1)

Dividends Paid as a Percent of Cash IncomeNet Income $171,525 $198,794 $196,697Depreciation 54,106 57,175 58,333Deferred Taxes (73) (5,852) (5,901)Allowance for Funds (79,931) (101,356) (106,750)

Total Cash Income $145,627 S148,761 $142,379

Dividends Paid $121,588 $147,645 $155,970

Percent 83.5 99.2 109.5

Internal Cash as a Percent of Capital Expenditures Assuming Rate Increase (5/1/80)Funds Required $327,991 $292,418Sinking Fund and Redemption (27,850) (27,850)Total Capital Expenditures $ 300,141 $264,568

Internal Cash $ 16,779 $ 9,472

Percent 5.6 3.6

Dividends Paid as a Percent gf Cash IncomeNet Income $207,339 $214,627Deprecia tion 57,175 58,333Deferred Taxes (1,009) (2,724)

Allowance for Funds (101,356) (106,750)Total Cash Income $162,149 $163,486

Dividends Paid $147,645 $155,970

Percent 91.1 95.4

Note: All Data On This Exhibit Extracted From Exhibit 15.

1945 116,

*


Exhibit No. 18P.S.C. Case No.Witness: Forrer

OLONG ISLAND LIGHTING COMPAN_Y

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTIONAS A PERCENT OF INCOME FOR COMMON SIDCK

$(000)

Without Rate Increase 12 Mos. Ended1979 1980 April 30, 1981

Income for Commonincome (Exhibit 16 Schedule 1 of 2) $304,186 $344,203 $350,149

Fixed Charges (Exhibit 16 Schedule 1 of 2) (132,276) (150,891) (159,352)

Federal Income Tax (386) 5,483 5,900

Preferred Dividends (33,021) (37,663) (37,452)

Income For Common $138,503 $161,132 $159,245

Allowance for Funds Used During Construction $ 79,932 $101,356 $106,750

Percent 57.7 62.9 67.0

Assuming Rate Increase (5/1/80)12 Mos. Ended

1980 April 30, 1981

Income for CommonIncome (Ey.hibit 16 Schedule 2 of 2 $360,514 $374,419Fixed Charges (Exhibit 16 Schedule 2 of 2) (151,669) (159,695)Federal Income Tax (1,505) (97)Preferred Dividends (37,663) (37,452)

Income For Con: mon 3169,677 S177.175

Allowance for Funds Used During Construction $101,356 $106,750

Percent 59.7 60.3

1945 117 O'


ATTACHMENT B to QUESTION 4.C ,

1 TESTIMONY

2 OF

3 ZVI BENDERLY jg4

5 Q. Will you give your name and address, please?

6 A. My name is Zvi Benderly. My business address

7 is 80 Broad Street, New York City.

8 Q. What is your occupation?

9 A. I am an economist and Vice President employed

10 by National Economic Research Associates, Inc.,

11 Q. Please describe your education and employment

12 background.

13 A. I received a Bachelor of Science degree in Civil

14 Engineering in 1957 from the Technion, Israel Institute

15 of Technology. In 1958, I entered New York University

16 Graduate School of Engineering where I received, in 1959,

17 a Master of Science degree in Civil Engineering. I have

18 held a professional engineering license in New York State

19 since 1963 and in New Jersey since 1968. Since 1966,

20 I have been enrolled in New York University Graduate

21 School of n sines: Administration and I received a Macter22 of Business Administration degree from that institution

23 in 1967. My major areas of concentration were Corporate

24 Finance and Quantitative Analysis. In addition, I have

25 completed all courses and examination requirements for

26 a Ph.D. degree in Finance and Operations Research and


n 'O.1';D,

,

-2-

1 am currently working on my dissertation.

2 From 1960 to 1968, I was employed by Alexander

3 Potter Associates, a consulting engineering firm in New

4 York City. In my capacity as a project engineer, I

5 directed engineering and economic studies of civil engi-

6 neering projects related to public works improvements

7 in the United States and abroad. These studies involved

8 the areas of water pollution control, water resources,

9 land development and urban planning.

10 During the period 1968-1969, I served as an engi-

11 neering economist with Public Service Electric and Gas

12 Company in New Jersey. In this capacity, I prepared

13 financial and economic analyses relating to utility

14 revenue require.ments and studies dealing with profit-

15 ability and economic choice as applied to public utilities.

16 During my employment at Public Service, I conducted cost-

17 benefit analyses and empirical studies pertaining to

18 t he measurement of the cost of capital.

19 Since joining National Economic Research Associates,

20 Inc., in 1969, I have concentrated on the financial anal-

21 ysis of regulated industries. I have prepared empirical

22 studies concerned with estimating the cost of capital

23 and the fair rate of retu:n for regulated enterprises.

24 These studies included collection, statistical analysis

25 and interpretation of financial data and the construction

26 of econometric models. I have participated in preparing


D'S DW

-3-

1 direct and rebuttal testimonies pertaining to the fair

2 rate of return to be allowed to regulated companies.

3 I am a member of the American Finance Association,

4 the Western Finance Association and the Operations Re-

5 search Society of America.

6 Q. Have you ever testified before a regulatory agency

7 in the past?

8 A. Yes. I have presented testimony before the Federal

9 Energy Regulatory Commission, the Federal Maritime Com-

10 mission, and the regulatory agencies in the following

11 states: Arkansas, Connecticut, Massachusetts, Michigan,

12 Minnesota, Nevada, New Hampshire, New Mexico, New York,

13 Rhode Island, Vermont, and Virginia. This testimony

14 was presented on behalf of the following companies:

15 Boston Edison Company, Central Vermont Public Service

16 Company, Consolidated Edison Company, Consumers Power

17 Company, Long Island Lighting Company, subsidiaries of

18 Middle South Utilities, Minnesota Power & Light Company,

19 subsidiaries of New England Electric System, Niagara

20 Mohawk Power Corporation, subsidiaries of Northeast

21 Utilities, Northern States Power-Minn., Pacific Gas and

22 Electric Company, Public Service Company of New Hampshire,

23 Public Service Company of New Mexico, Sierra Pacific

24 Fower Company, and Virginia Electric and Power Compariy.

25 0. _ What is the purpose of your testimony in the pre-

26 sent proceeding?

I945 120Amendment 35 - January 1980

nie: Tin'

-4-

1 A. The purpose of my testimony in th!s proceeding is h2 to examine the cost of common equity capital for Long

3 Island Lighting Company (hereinafter referred to as

4 LILCO).

5 Q. Have you prepared an exhibit in conjunction with

6 your testimony?

7 A. Yes. In support of my testimony, I have prepared

8 Exhibit 56 , consisting of 2 Schedules and a Technical

9 Appendix.

10 Q. Was this exhibit prepared by you or under your

11 supervision?

12 Q. Yes, it was.

13 Q. Please define the term "the cost of equity capital."

14 A. The cost of equity capital, in my view, is a market-

15 oriented concept and, therefore, should be determined

16 within the context of the marketplace. It is the minimum

17 c u r r e r.t rate of return required by investors on their

18 investment in a firm's common shares for them to be will-

19 ing to buy or continue to hold those shares. Based on

20 this minimum rate, investors determine the price they

21 are willing to pay for the firm's common shares and there-

22 by they establish the terms at which a firm can acquire

23 new equity capital from the public. This minimum rate

24 is, generally, referred to be economists as the firm's

25 "barebones" cost of equity capital, raarket capita iog } j26 rate, or investor's discount rate.

.

Amendiaont 35 - January 1980

n O r a'

-5-

1 Since investors are the sole suppliers of equity

2 capital funds to the firm, the firm must pay the going

3 rate for these funds in the marketplace in order to induce

4 investors to buy or to continue to hold the firm's shares.

5 Thus, the firm must hold out to investors the prospect

6 of carning at least the minimum return which they (the

7 investors) require. This minimal return is the barebones

8 cost to the firm of obtaining equity capital.

9 The price which investors are willing to pay for

10 a firm's common stock depends upon the present value

11 of expected future earnings from an investment in the

12 stock. The present value is determined by applying the

13 appropriate discount rate to investors' expected future

14 returns--returns which are comprised of dividends and

15 proceeds from the sale price of the common stock. As

16 is indicated in a subsequent part of the testimony, the

17 discounted cash flow (DCF) method for estimating the

18 "barebones" cost of equity is predicted on this theoret-

19 ical proposition. The appropriate discount rate is the

20 same as the rate of return investors require on the price

21 they pay for the common stock. Therefore, the terms

22 investors' discount rate, market-capitalization rate

23 of return, and "barebones" cost of equity capital are

24 all synonymous.

25 It is important to note here that the investors'

26 discount rate--the market-required rate of return--or,


1945 122 nera'

-6-

1 alternatively, the barebones cost of egrity, is deter-

2 mined in the market by the relative riskiness of the

3 firm's common stock as perceived by investors. The rate

4 of return investors require on their investment in a

5 particular common stock takes into account the return

6 available from investments in other common stocks, bonds

7 and other investment media, weighing these returns against

a the relative risks involved. In other words, a market-

9 required rate of return for a particular firm is the same

10 as the returns investors require on their investment in

11 the common stock of other firms or enterprises of similar

12 perceived risks.

13 The barebones cost of equity capital is alterna-

14 tively defined as the minimum rate of return on equity

15 capital investment required by a firm to bring its market

16 price into equality with its book value. If investors

17 expect that a firm will fail to earn a return on its

18 equity capital at least equal to its barebones cost of

19 equity, the market price of the firm's common stock will

20 decline to a level below its book value, thus effecting

21 the process of dilution whenever the firm has to issue

22 new common stock. A mathematical demonstration of this

23 point is shown on the Technical Appendix in my exhibit.

24 The cost of equity ccpital (as distinguished from

25 the barebones cost of equity) is that minimum rate of

25 return which the firm must earn on its equity investment

Apendment 35 - January 1980-

n/Gr.6

-7-

1 if it is to attract equity capital withcut diluting the

2 equity of existing shareholders. It is equal to the

3 investors' discount rate or the barebones cost of equity

4 capital adjusted for the costs of issuance and market

5 pressure effects which are incurred when new common stock

6 is issued.

7 The cost of equity capital reflects the capital

8 attraction rate. If the capital attraction rate is

9 actually earned, the financial integrity of an enterprise

10 is preserved. An allowed rate of return on common equity

11 which is, at least, equal to the cost of equity capital

12 affords the f.irm an opportunity to be able to issue new,

13 equity capital without diluting the equity investment

14 of existing stockholders.

15 In summary, since it is my view that the cost

16 of equity capital is a market-oriented concept, my ap-

17 proach to determining the cost of equity is based on

18 an assessment of current investors' requirer.ents as re-

19 flected in their behavior in the marketplace. Such deter-

20 mination embodies the evaluation of investors' expected

21 return and their perception of the risks attendant with

22 their investment.

23 Q. Are you aware that, in this proceeding, the Company

24 is filing for rates based on a return on common equity

25 capital of 13.7 parcent? 1945 124

26 A. Yes, I am. It is my understanding that the Company,

,


n/Gr.a'

-8-

1 in its effort to mitigate controversy surrounding this

2 proceeding, is asking for'the same rate of return on com-

3 mon equity capital which it was allowed by this Commission

4 in its last rate case. In that last case, the Commission

5 concluded that 13.7 percent is a fair return on LILCO's

6 common equity (see Opinion 79-14, page 44). According

7 to the studies delineated in my present testimony, a return

8 on common equity capital of 13.7 percent is below the cur-

9 rent barebones cost of equity for LILCO. Moreover, it is

10 significantly below the rate of return required by LILCO

11 to attract equity capital without diluting the equity of

12 existing shareholders.

13 0 What approach are you using in your present testi-

14 mony as to the cost of equity for LILCO?

15 A. My approach as to LILCO's cost of equity capital

16 is based on the discounted cash flow (DCF) analysis. .I

17 should point out that in rate-of-return testimonies which

18 I present in other jurisdictions, I rely principally on

19 the price-book approach. I have testified before this

20 Commission, in a number of cases, as to the cost of equity

21 capital, relying on the price-book approach. The price-

22 book approach attempts to identify the risk and other

23 factors besides expected rates of return on equity which

24 affect the price-book ratios of electric utilities. The

25 C$mmission, however, has found that this particular ap-

26 Proach requires "further refinement" before it can be

8J25Amendment 35 - Janu y

n!sr a'

-9-

1 reliably used for estimating the cost of equity capital.

2 It is for this reason, therefore, that my testimony in

3 this proceeding does not rely on the price-book approach.

4 However, it is important to note here that the DCF method

5 for estimating the cost of equity capital and the price-

6 book approach are based on the same theoretical principles.

7 Q. Before proceeding with the presentation of your DCF

8 analysis of the cost of equity for LILCO, please describe

9 in general terms the DCF method.

10 A. According to the DCF theory, and as demonstrated

11 on the Technical Appendix in my exhibit, the value which-

12 an investor will put on a share of stock is given by

13 the following simplified formula:

14 D

~915

16 In this formula, P is the price of the stock. It depends

17 on D, which is the expected dividend per share over the

18 coming year. It also depends on k, a discount rate ap-

19 plied by the investor to all future dividends; this dis-

20 count rate is the rate of return the investor requires

21 on this stock in light of the cost of money and the rela-

22 tive riskiness of the stock, and this discount rate k

23 is known as the barebones cost of equity capital. P

24 also depends on g, which is the average long-term growth

25 rate in dividends which the investor expects.

26 What this formula tells us is that if the investor

1945 126Amendment 35 - January 1980

-nie rra

-10-

1 expects dividends of D per share in the first year, and

2 if he expects that dividends will grow at an annual rate

3 of g over the indefinite future, then the discounted

4 present worth (using k as the discount rate) of the entire

5 expec ted future flow of dividends will be P, the price

6 the investor is willing to pay for the stock.

7 We can solve the above formula for k, the

8 barebones cost of equity, and we get:

9 Dk=p+g

10

11 Thus, in order to know k at any given point in time,

12 we need information about D, P and g at the same point

13 in time. Information about P, the price of the stock,

14 is readily available for listed securities. Information

15 about D, the dividend expected by investors over the

16 coming year, can usually be estimated with a fair degree

17 of accuracy. However, there is a problem in estimating

19 g, for g is the long-term growth rate in future dividends

19 which investors expect, on the basis of which they were

20 willing to pay the price P for the stock. It should

21 be noted that in estimating g, we are not forecasting

22 the future. Rather, we are attempting to ascertain what

23 investors are forecasting. This objective is fairly

24 difficult to obtain even in relatively normal times.

25 In past periods, prior to che emergence of the energy

26 crisis, it was possible to argue that investers were

1945 127:Amendment 35 - January 1980

n/G r:D.'

-11-

1 probably forecasting a continuation of past trends.

2 Even so, there was often considerable disagreement among

3 analysts as to precisely what growth rate investors were

4 actually expecting; these differences often meant spreads

5 of several percentage points among alternative estimates

6 of the cost of equity.

7 In present circumstances, the difficulties in

8 objectively estimating the growth rate which investors

9 are now forecasting are even greater due to the unsettled

10 state of money markets and utility finances over the

11 past several. years. It is possible, however, to make

12 certain reasonable assumptions about investor expecta-

13 tions and, thus, arrive at an estimate of the growth

14 factor to be included in the DCF method for estimating

15 the investors' discount rate.

16 0 Please indicate the approach you have taken in this

17 proceeding in implemanting the DCF approach as to the

18 barebones cost of equity capital for LILCO.

19 A. As indicated earlier, to examine the barebones cost

20 of equity according to the DCF method, it is necessary,

21 first, to measure the recent level of prices; second, to

22 estimate the reasonably expected dividends per share in

23 the next 12 months; and, third, to add an estimate of the

24 growth which investors are currently expecting.

25 Q. How did you determine the apprcpricte dividend-

26 price ratio for LILCO to be used in the DCF model?


1gf{ }29'

nieTR

-12-

1 A. It is generally agreed that in deriving the

2 dividend-price ratio component of the DCF formulation,

3 one should not analyze spot market data only, but rather

4 the yield component should be calculated based on recent

5 data, over a representative period of time.

6 During the first half of 1979, the price of LILCO

7 common stock fluctuated between S18.25 and $15.13. The

8 average of the monthly high-low prices of LILCO common

9 stock in the first half of 1979 was about $17. This aver-

10 age price of LILCO's common stock during the first half

11 cf 1979 reflects the level of pricts at which LILCO's com-

12 mon stock traded before the Three Mile Island incident,

13 as well as the utility stock market reaction to the acci-

14 dont and its recovery which has since taken place. I

15 should also note that most recently the price of LILCO's

16 cor.mion stock has been about $17. 5. According to the DCF

17 theory as shown on the Technical Appendix in my exhibit,

18 the dividend-yield component of the DCF model is derived

19 on the basis of the indicated dividend rate over the coming

20 year, rather than on the past 12 months actual dividend

21 rate. The indicated dividend rate for LILCO over the com-

22 ing 12 months is $1.76. The coming 12 months period is

23 taken starting at the second quarter of 1979. Thus, the

24 dividend-price ratio for LILCO, based on the indicated

25 dividend for the 12 months period indicated above, is a

26 little over 10 percent even on the basis of a price of


"""'1945 129

-13-

1 $17.5. In my view, therefore, the proper level or the

2 dividend yield to be used in the DCF model in determining

3 the barebones cost of equity for LILCO is at least 10

4 percent.

5 O. Please address yourself to your estimation of in-

6 vestors' expectations of future growth for LILCO.

7 A. The growth component of the DCF model reflects

8 investors' expectations as to future long-term growth

9 in dividends per share. For electric utilities having

10 a relatively st<.ble payout ratio, growth in dividends

11 per share will, on average, be the same as the growth

12 in earnings per share. Since earningn of electric utili-

13 ties are regulated, future growth in earnings per share

14 will be derived fro.n future growth in book value per

15 share. An implicit assumption here is that investors

16 do not expect the rate of return earned by the regulated

17 company to increase continually into the indefinite future.

18 Growth in the book value per share and, consequently,

19 in dividends per share can arise from two basic sources:

20 the retention of earnings and the sale of neu common

21 stock at not proczeds above book equity per share.

22 As I have indicated earlier, it is very difficult

23 to objectively estimate the future growth rate investors

24 expect the company to experience. A plausible assumption,

25 in today's circumstances with respect to LILCO, as to

2C the estimate of inventors' expectations of future growth

jgjg }}} Amendment 35 - January 1980

n!OT.a

-14-

1 is that investors anticipate that growth will occur

2 through retained earnings.

3 It is a mistake to make a DCF calculation in LILCO's

4 case on the basis of a projection into the future of past

5 net increases in book value for several reasons. The first

6 of these is that growth from retained earnings in a partic-

7 ular year can be distorted if the company engages in mas-

8 sive sales of new common stock at not proceeds either above

9 or below book value per share. Iloweve r , focusing for the .

10 moment on past sales of stock at less than book value,

11 it is implausible to assume that investors expect LILCO

12 to incur significant dilution into the indefinite future

|h13 when issuing new common equity capital. In order to assume

14 that investors expect LILCO to incur dilution in the future

15 on a continuous basis when issuing new equity capital,

16 one must also assume that investors expect regulation to

17 be unable or unwilling to take measures to prevent repeated

18 economic confiscation of LILCO's stockholders' equity,

19 when the Company seeks to raise equity capital in order

20 to meet its public utility obligations. Former Chairman

21 Kahn has pointed out how foolhardy and counter-productive

22 it would be for a Commission to persist too long in forcing

23 a utility to sell additional shares at a discount, below

24 bech value, and we must assume that a rational investor

25 will have confidence that a rational Cemmission will not

26 do it.

1945 131

; Amendment 35 - January 1980

I1 O r,a'

-15-

1 The same point is applicable when past sales of com-

2 mon stock have been made at a substantial premium. Since

3 the Commission avowedly now seeks to arrive at substantial

4 Parity between price and book, it would be irrational for

5 the investor to project continual sales at a premium over

6 the indefinite future and, thus, to estimate growth by

7 Projecting past increases in book value derived from both

8 reinvested earnings and sales of stock at a premium.

9 It seems clear that predicating a future growth esti-

10 mate on a projection into the indefinite future of sales

11 of stock at either a discount or a premium is to ignore

12 the pronounced goal of the New York Commission and build

13 in a distortion, whether on the upside or the downside.

14 It would be irrational. I will assume, therefcre, that

15 investors, in formulating their expectations of future

16 growth for LILCO, will anticipate that growth will occur

17 through retained earnings.

18 Q. Have recent past sales of LILCO stock resulted in

19 dilution?

20 A. Yes. Sincc 1974, LILCO experienced massive sales

21 of new common stock below book value. These sales of LILCO's

22 common stcck have resulted in substantial dilution. With

23 the exception of 1977, LILCO has issued each year new equity

24 at net proceeds per share substantially below book value

25 since 1974. For example, when LILCO issued 6.4 million

26 shares on October 18, 1978, its book value per share was


r1 O l' a',

, . ' '

-16-

1 $19.58, while its net proceeds from the sale were about

2 $16.81. Considerably larger dilution was incurred by LILCO

3 as a result of the sales of new common equity in 1974 and

4 in 1975.

5 The substantial dilution suffered by LILCO in 1974

6 and in 1975 more than wiped out the growth from retained

7' earnings, thus, giving rise to a decline in total ocok

8 value per share. Even in 1977, when LILCO was able to

9 sell new common equity capital without incurring dilution,

10 net proceeds per share were only slightly above book value

11 per share. (Net proceeds per share were $18.47, while

12 book value per share was S18.34.) Each of the sales of

13 new common equity yielding net proceeds below book value

14 constituted economic confiscation of LILCO's existing

15 stockholders' equity--a phenomenon which investors will

16 not expect to repeat itself, on a continuous basis, into

17 the indefinito future.

18 Q. You said that there are several reasons why rational

19 investors would not calculate LILCO's long-term future

20 growth rate in dividends per share based on historic net

21 increases in book value per share. The first reason you

22 gave is that a reasonable investor would not assume that

23 the Commission would, into the distant future, require

24 LILCO to market its shares on a confiscatory basis. What

25 are the other reascns?

h26 A. The second reason is that LILCO's basic method of

, Amendment 35 - January 1980.. ;>< . .

,

n /e l' n

1945 133

-17-

1 marketing its common shares--rights offerings--involves

2 a distribution of value to its stockholders which is con-

3 cealed by such an application of the DCF method. The

4 easiest way to see this is to put ycurself in the position

5 of a stockholder who, at intervals of about one year, is

6 given rights to buy additional shares at a discount below

7 market. Those rights, under the rules of the NYSE, are

8 listed and immediately saleable and, indeed, a very large

9 volume of them are sold. The investors pockets the pro-

10 ceeds. Of course, in the odd case, the market for the

11 stock can go down so far that the rights can become worth-

12 less, but this very rarely happens.

13 It is easy to see, in the case of the stockholder

14 who sells the rights that there is that extra value of

15 rights which is being distributed; in the case of those

16 stockhelders who exercise the rights there is exactly the

17 same value distributed to them but they realize it in the

18 form of additional shares of stock.

19 There are still other respects in which LILCO's

20 method of marketing shares involves distribution of value

21 which does not show up in the traditional DCF calculations.

22 One such distribution occurs under LILCO's dividend rein-

23 vestment plan, under which a shareholder is able to pur-

24 chase additional shares at market with no brokerage com-

25 mission. This is no small matter--in recent years, 500,000

26 and more shares have been distributed in that way annually,

gmendment35-January 1980nie. r .T

t

-18-

1 even though not all investors take advantage of it.

2 Another distribution takes place under the Employee

3 Stock Purchase Plan, where shares are sold at a discount

4 of at least 10 percent below market to employees. The

5 amounts per employee are limited, but the Company has'been

6 selling between 80,000-100,000 shares per annum for several

7 years. The value of the discount goes to the employees

8 in the first instance as a kind of fringe benefit. In

9 other words, this dilution of the book value of the utock

10 is reflected in any calculation of net growth in book value,

11 but is really an employee benefit and should not be con-

12 sidered a negative eleraent with respect to expected growth.

13 Q. Please continue with your estimation of investors'

O14 expectations of future growth for LILCO.

15 A. For the reasons I have given, a rational investor

16 would expect that future growth will be due to growth from

17 retained earnings. The growth from retained earnings will,

18 depend on the rate of return which investors expect the

19 company to earn on its equity capital. It is, of course,

20 very difficult to ascertain directly what rate of return

21 on equity itvestors expect the company will be earning

22 over time.

23 LILCO carned over 13.2 percent return on average

24 book equity in 1975, and over 14 percent return in both

25 1976 and in 1977. In 1978, earnings per share declined

26 to a level of $2.44 indicating a return on average book

Amendment 35 - January 1980' *

,

n/B ra'1945 135

-19-

1 value per share of about 12.9 percent. The decline in

2 earnings per share has continued during 1979 to a level

3 of $2.36 for the 12 months ended June. This level of

4 earnings reflects a return on average book value of about

5 12.2 percent.

6 However, from the point of view of projected future

7 level of earnings, a reasonable investor in LILCO would

8 pay great attention to the 13.7 percent return on common

9 equity allowed by this Commission in its most recent deci-

10 sion (April 27, 1979). In recent months, value Line and

11 other financial analysts have been projecting 1979 earn-

12 ings per share at the S2.60 to 52.65 level--a return on

13 common equity of about 13.3 percent.

14 It would appear, therefore, that an acsumption that

15 investors expect LILCO to earn, on average, a return of

16 13 percent on its book equity is ultraconservative and

17 underestimates investors' expectations. With an indicated

18 dividend per share of $1.76 and earnings of $2.51 (which

19 is 13 percent of the average book value of $19.34 in the

20 12 months ended June 1979), the retained earnings would

21 be S0.75, representing an expected growth rate from

22 retained earnings of about 3.9 percent.

23 As shown on Schedule 1 of my exhibit, such an esti-

24 mate of expected fature growth ic quite conservative in

25 light of the actual growth in book value due to retained

26 earnings experienced by the Company. In the period,

Amendment 35 - n ry 0

nie:1' EL'

-20-

1 1965-1972, growth from retained earninge had been at the

2 rate of about 4.5 percent, except in the recession of 1970,

3 when LILCO's earnings per share experienced a decline.

4 In 1973 and 1974, when another decline in earnings had

5 been experienced, the growth from retained earnings was

6 no more than about 3.2 percent. However, it is unreason-

7 able to assume that investors are forming their expecta-

8 tions as to future growth by confining themselves to the

9 dismal earnings picture experienced by LILCO and the elec-

10 tric utility industry as a whole during the 1973-1974

11 period. In 1975, the growth in LILCO's book value per

12 share due to retained earnings was about 4.7 percent,

13 rising to a rate of growth of about 5.6 percent in 1976

14 and 5.4 percent in 1977. In 1978, due to the depressed

15 level of earnings, growth from retained earnings declined

16 to about 4 percent. A 3.9 percent estimate of investors'

17 expected future growth in dividends per share for LILCO

18 is, likewise, on the conservative side when compared with

19 the 5 percent growth in dividends per share currently pro-

20 jected by Value Line over the 1982-1984 period.

21 0 Are there any other factors which should be considered

22 in analyzing LILCO's cost of equity capital?

23 A. It is generally agreed that it is desirable to have

24 the market price of the utility's stock at least moderately

25 above the book value so as to make it possible for the

25 utility to sell new shares without diluting the equity

1945 137.

~


IlGir.n

-21-

1 of its existing stockholders. The issuance of new stock

2 involves certain expenses, and often results in a temporary

3 downward market pressure on the price of the stock. As

4 shown on Schedula 2 of my exhibit, costs of issuance and

5 market pressure for the last four issues of new comcon

6 stock by LILCO were, on average, about 7 percent.

7 There is a lot of dispute with respect to market

8 pressure and there is an especial controversy whether :on-

9 clusions drawn from companies with direct offerings are

10 applicable in cases of rights offerings. But, in this

11 instance, it is not necessary to enter into that contro-

12 versy because it is so clear from the data which I already

13 have introduced that 13.7 percent return is significantly

14 below the Company's cost of equity capital. That conclu-

15 sion is evident when we consider that the proper dividend

16 yield for LILCO in a DCF formulation is at least 10 per-

17 cent and that an ultraconservative estimate of future long-

18 term growth is, at least, 3.9 percent.

19 Q. Does this complete your testimony?

20 A. Yes, it does.

21

22

23

24

25

1945 I3826


n tC r. a'

Exhibit No. 56P.S.C. Case No.Witness: Benderly

LONG ISLAND LIGHTING COMPAN'l

SCHEDULE 3 1 AtID 2AND A TECHNICAL APPENDIX

,

1945 139


niell'.n*

Schedule 1

IDNG ISLAND LIGHTING COMPANY

1965 - 1978

Growth fromDividends Average Retained Retained

Earnings Paid Book Value Earnings EarningsYear per Share per Share oer Share per Share cer Share

---------------- ( Do ll a r s ) ------------------ (Percent)(1)-(2) (4) + (3)

(1) (2) (3) (4) (5).

1965 $1.56 $0.98 $12.62 $0.58 4.601

1966 1.67 1.06 13.18 0.61 4.63

1967 1.80 1.14 13.80 0.66 4.70

1958 1.86 1.22 14.42 0.64 4.44

1969 1.04 1.28 15.07 0.66 4.33

1970 1.91 1.33 15.74 0.58 3.68

1971 2.03 1.37 16.42 0.71 4.32

1972 2.18 1.41 17.24 0.77 4.47

1973 2.02 1.45 17.99 0.57 3.17.

1974 2.03 1.46 18.04 0.57 3.16

1975 2.31 1.49 17.50 0.82 4.69

1976 2.52 1.54 17.56 0.92 5.58

1977 2.59 1.51 18.32 0.96 5.35

1978 2.44 1.68 18.91 0.76 4.02

Source: Lcng Island Lighting Company, annual reporta, variousissues.

; ,


n.e. n1

Schedule 2


Subscription offerings

. TotalFlotation Costs

Date of Number Flotation Market andProspectus of Shares Costs Pressure Market Pressure

(3) + (4)(1) (2) (3) (4) (5)

8/27/75 3,988,040 4.33% 3.03% 7.36%

7/28/76 4,633,104 2.26 6.95 9.21

7/20/77 5,443,723 1.55 4.31 5.86

10/18/78 6,402,515 2.00 2.03 4.03

2 1945 141


n!Ott'.Ei

Technical AccendixPage 1 of 4

Mathematical Derivation of theTraditional Discounted Cash Flow (DCF) Model

and a Demonstration That When the Expected Rate of Returnon Common Equity is Equal to the Investors'

Discount Rate the Market F;2 cWill Equal Book Value Per Share

Definitions:

P = Current price of stock, or present valueof expected future dividends.

Bo. = Current book value per share.

k = Investors' discount rate or barebones costof equity capital.

De = Most recent cash dividend.g = Investors' expected future constant grcwth

rate in dividends.

r = Expected rate of return on common equity hcapital.

E = Earnings per share.

) = Retention ratio.

RE = Retained earnings,

t = Time index. (c = If 2, J,...=)

.The following formulation assumes that investors

expect dividends to increase at a constant rate ; into the

indefinite future. The current stock price is the present

worth.of all expected future dividends:

D D D2 3

(1) P* = + + + ....(1+k) (1+k)* (1 +k) ' |9k5 jf}

',

,,,

O


nie!r'n

Technical AccendixPage 2 of 4

Assuming a constant expected growt h rate in divi-

dends, we can write:

(2) D , = D, (1+g)

D , = D , ,(1+g ) *

D, = D,(1+g)3, etc.

Equation (1) becomes:

0,(1+g) D (1+g)* D , (1+g) '(3) P' = . _ _ + + + ....

(1+k) (1+k)* (1+k)'

or

.. O,(1+g)#(4) P,= E

t=1 (1+k)*

It can be shown that Equation (4) can be simplified

as follows:

U2

(5) P,=k-g

or

D(6) k = -- + g

'' 1945 143

Equation (6) is, of course, the well-known and

most:often used DCF formulation for estimating the barebones.

,,

cost of equity capital.

Let un now assume that investcra expect the firm

to earn a constant rate of return en equity capital r and


nietTin

.

Technical AppendixPage 3 of 4

that they expect the firm to retain a constant fraction b

of itt; :arnings as well.

The expected earnings per share in time t are

equal to the product of the expecte~d rate of return on

equity capital r and the beginning-of-the-period book value

per share:

(7) E = rB,,y

The dividends per share in time t are expected to

be:

(1-b)r3(8) D = (1-b)E =g ,

The retained earnings during time c are, thus,

equal to:

'9) reg =Eg g = rB _3 (1-b)rB _3-D -

g g

RE = brBt t-1

Assuming that inves tors expect growth to occur

through retained earnings, we conclude that the investors'

expected future growth rate g can be expressed as:

RS,(10) g= = br"

1945 1443 2-2

O

Amendment 35 - January 1980t t..

Technical Acce-dixPage 4 of 4

Substituting Equations (8) and (10) into Equation

(5) , and letting t=1, we get:

(1-b)rB o

(11) P,=k - br

or

P(12) _1 = (1-big,

B, k - br

s

If investers expect the firm to earn a' rate of

return on its common equity cepital which is equal to their

required rate of return or discount rate, then:

r=k

Equation (12) becomes:

(13) bl = (1-5)r , (7-b)r , yB, r - br (1-b)r

Equation (13) indicates that, according to the

traditional DCF theory and method for estir.ating the bare-

bones ccst of equity capital, if investers expect a company

to earn on its equity capital the same rate of return as

they require in the marketplace, then market price and bcokvalue will tend to be in equality.

1945 145


nie/r'a

ATTACIIMENT C to QUESTION 4.CSTATE Or I;EW YCnK

FUBLIC SER'/ ICE CO:*.MlSSION

OPINION NO. 79-14

CASE 27374 - LO :G ISLMD LIGHTING CO2TANY - Electric Rates

CASE 27375 - LONG ISIJdiD LIGHTING C01.TAUY - Gas Ratos

OPINION AND OR702 DEiERMIli1NGREVENUE PIQUI!SMENT

: -

-.

1945 146

Issued: April 27, 1979 Amendment 35 - January 1980

CASES 27374 and 27375

TADLE OF COSTENTS

Pagg qAPPEARANCES

BACKGP.OUUD OF THE CASE 2

CONSTRUCTION EXPE;iDITURES 5

LILCO's Exceptions 6

Updated Forecast Issue 6

Eevised CVR Issue 7

Neu llaven/Stuyvesant 9

OPERATING REVESUES 10

Sales Forecasts 10

Meter Tarapering 10

Uncollectibles 11

OPERATING EXPENSES 12

Overhaul Expense 14

Major Maintenance Project Expense 15

Tree Trimning Expense 16

Administrative and General Expense 17

Customer Accounts Expense 18

Personnel 18

Equipment 19

Advertising and Public Affairs E:: pense 20

Research and Development Expense 21

1945 147Storm Damage Reserve and Accrual 22

Injuries and Damages Reserve and Accrual 23

Amortization of Unfunded Pension Liability 24

Wage and Inflation Index 25

Labor Productivity 27


#''CASES'27374 and 27375 ,

Page,,

DEPRECIATIOt; 287

28Gac Depreciation _n:

Production Structures 28

Steel Transmission Mains 29

Cathodic Protection Devices 29

Electric Street and Parkway Lighting 30

Electric Production Structures 31

Environmental Control Equipment 32

PROPERTY TAXES 33

FEDERAL INCOME TAX 35

Trust Interest Deductions 35

TRASOP Tax Credits 36

Gas Department Ta:t Credits 37

Earned Vacation Deduction 38

Amortization of Deferred Taxes 39

Revised Computations 39

RATE BASE 39

Deferred Tax Credits 39

Shoreham Switchyard 41

Rate Base Capitalitation Adjustments 42

ALLOWED RETURN 43

CONCLUSION 45

ORDER 47

1945 148APPENDICES

DISSENTS

:-ii- Amendment 35 - January 1980

CASES 27374 r.nJ. 27375 gs

STATE OP df.*4 YORK9PUBLIC SET.VICE COMMISSION

9 S

APPEAPANCES 9

Joel Blau, Jeri Eisenberg and Sam Laniado, StaffCounsel, Ucwced Read, Assistant General Counsel,Nelson A. F.cckefel:er r;mpire State Plaza, AgencyBuilding No. 3, Albany, New York 12223, for thePublic Service Commission.

Edward M. Barrett, General Ccunsel (by Calv - E.Rafuse, Jr., J c.v.e s J . Stoker,I1!, Edward J. Walsh,Jr.., and David K. Nadano, of Counscl) 250 OldCountry Road, Nincola, New York llS01,for theLong Island Lighting Cc:apany.

Reilly, Like & Schneider, Esgs. (by Irving Like,Werner G. Zumbrunn, and nichard Hand, of Counsel)200 West Main Street, Babylon, New York, for theCounties of Nassau and Suffolk.

Rosemary Pooler, Executive Director (by Jamcs F.Warden, Jr., David Sch2iccel, and John Rosenberg,of Counsci) 99 Washington Avenue, Albany, New York,for the New York State Consumer Protection Board. hBruce D. A2 pert, Deputy Town Attorney, Town Hall,Main Strect, Ecmpstead, New York ll550,for theTown of Ecmpstead.

William J. Schickler, Sunrise Highway at Pond Road,Oakdale, New York ll768,for Suffolk County WaterAuthority.

Howard L. Blau, Esq., 380 North Brcadway, Jericho,New York 11753, for the Oil Heat Institute of LongIsland, Inc.

Marcia Slatkin and Van Howell, P.O. Fox CO, Shoreham,New York, ll706,fer r.fo GrSound Community EnergyProjects.

,

Kenneth J. Uces, Associate General Onynsel, 245 ParkAvenue, New York, N.Y. 10017,for Dooz-Allen & Eamilton,Inc.

Neil Noland, Co-Chairman and Ewa Reid, Co-Chairperson,box 3977, Sag Harbor, N.Y., 11963,for Long IslandRatepayers Association.

1945 149


c., S 2 '!: / / an . 2 '/ Ti 5 C

%LILCO, staf f, ':cascu and Suf folk counties, Long [

Island concuncr Action und the Town of Hempstead have sub- %mitted briefs objecting to a variety of the Judge's recom-monded dispositions of revenue issues.1! U

BACKGROUND OF THE CASE

In previous LILCO electric rate cases, we found it

necessary to depart from our usual rate caso standards to

determine the revenues required by this company to providarelichie service in light of its nassive construction

program, dominated by the ShorehcIn nuclear generatingstation.2/ In those cases, we found that the company wasplagued by extrema cash flew problems that threatened its

ability to borrcw the funds necessary to finance its con-struction pregram. In those circumstances, we found it

necessary to adopt such special measures to improve cashflow as tcmporary rates, inclusion of construction work in

progress (CNIP) in rate base, and interperiod tax allocations.

As a result of thcsc actions, LILCO no longer faces suchsevere financing problems. Its indenture coverage ratio isno longer close to the limit of 2.0 times. In fact, because

~T/ Soma parties sunaleting briefs violated Section 2.7 of ourRules of Procedure by excessive incorporations by referenceto carlier briefs, serving us with an inadequate number ofcopies of their briefs, and exceeding authorized page limits.Rule 2.7 (c) (3) clearly states that briefs to the Concissionshould be self contained. Given the ciret= stances of thiscase, some waiver of the 50-page limit would have been granted.In the future, morcover, we will expect parties burdened bythe requirements of Section 2.7 to seek waivers of the pagelimits as provided by Section 2.7 (f) of our Rules and notattempt to ciret= vent the rules by incorporation by reference.Briefs not conforming to our rules are subject to rejection.

-2/See Case 27136, Lena Island Lightinc Company - Electric Rates,18 NY PSC (Opinicn he. 76-1, issuca January 9, 1978,mimeo p. 2-5); Case 26887, Lgn_g Island Lichting Ccapany -Electric Rates, 16 MY PSC 497 (1976); anc Case 26552,

.

Long Bland Lichtine Ceruany - Electric Rates, 15 SY PSC 15-(T9 7Ti-- Lx L:o ' s lEs t gaa rate increase came in Case 27087,Lona Island Lichtinc Ccmeany - Gas Rates (Order issuedAugust 5, 1977). 1945 151

~2- Amendment 35 - January 1980

STATE OF NEW YOnKPUDLIC SERVICZ CC:IIISSION

COMMISSIONERS:

Charles A. Zielinski, Chairman OEdward P. Larkin, dissentingCarmel Carrington Marr QHarold A. Jerry, Jr. 9Anne P. Mead, discenting

'Kcren S. Burstein, discenting 9Richard S. Bower

CASE 27374 - LOiG ISLAND LIGHTING CO:1P7J:Y - Electric Rates

CASE 27375 - LONG ISIJdiD LIGHTING COMPIliY - Gas Rates

OPINION NO, 79-14

OPINION AND ORDER DETERMININGREVENUE REQUIRDIENT

(Issued April 27, 1979)

BY THE COMMISSION:

On May 31, 1978 Long Island Lighting Company filed

tariff revisions designed to increase its annual electric

revenues by $147.1 million (18.51) and its annual gas revenues

by $23.9 million (13.1%) . By various orders, we suspended

the effective date of the proposed revisions to April 28,

1979 in orde: to examine their propriety in public hearings.

Upon consideration of an extensive record compiled during 42

days of evidentiary hearings, Administrative Law Judge David

Schechter issued a recommended decision on February 13,

1979. The Judge found that the company had shown a need for

rate increases designed to produce $52.3 million (6.6%)

additional annual electric revenues, and $15.7 million

(8.6%) additional annual gas revenues, in order to earn a

10.13% overall return on its investment.

1945 150t

4


bCASI:S 27374 and 27375 f Dg

interest on trust financed construction is not considcredfor indenture coverage purposes, but is considered for SEC

coverage purposes, LILCO's indenture coverage ratio has been

higher than its SEC (or book) coverage ratio. Moreover,

LILCO has, in recent years, earned returns on equity thathave appro::imated those we have allowed in deciding its ratecases.

Ilonetheless, the company chose to present and

argue its case here in a manner similar to that crployed in

previcus cases. A major portion of its proposed electric

increases would result from inclusion of an additional $400millicn of construction work in progress in rate bare which

the company seeks to justify on the basis of alleged nccessity

to improve its interest coverace, and the ratios of the

allcuance for funds used during construction (AFC) to not

income, the market price to book value of its stock and internal

funds to construction c::penditures. Staff has argued that

the company's target ration are overly conservative; that

existing ratios can be improved by alternative strategies;and that the rate increases sought by the company are

greater than what is needed to achieve even LILCO's targetratios. A key part of staff's argument relics on the relation-

ship it found between the AFC to net income ratio (which can

be reduced by increasing the amount of CWIP in rate base)

and the cost of equity capital to the company. Staff believes

that if we included an additional $200 million of CNIP inrate base, we could reduce significantly the return on

equity that we would otherwise have to allow in this case.

Finally, various intervenors tock the position that LILCO's

. financial position was now strong enough to allow us to

measure LILCO's revenue requirement by application of our

usual rate case standards, and without cash flow allowances.

The principal cause of LILCO's financing problems

in recent years has been its construction cf the 820. megawatt

Shoreham nuclear generating station at a cost of something


1945 152

C. : " '. *i . : ';Y

lihu S1. 3 bi ?.lica. Staff and tbc Cot.ntics of r escu and

Suffolk raire several iscucs concerning the Ecor, Allcn S

Her.ilton (D22:) rcpert on the Shoreham project. Ly order

issued July 11, 1970, we directed that the BAII report be

evaluated in this proceeding to deterr.cno what rate impact,

if any, would result from the consultant's findings. The

BAH project manager testified z..id was cross-examined on the

report and tuo LILCO witnesses testified and were cross-

c::amined on several aspects of the Shorcham project. The

subject is not discasced in the recermended dacicion. es(qStaff and the Counties call for a Cor.nission x,

proceeding to address the issue of whether Shorchau costs

have boon incurred prudently and to dotcrnine to what extent \QLILCO's ratepayers should be asked to support Shorcham _

expenditures. For reasons that will be set forth in more D3

detail in a subsequent order, uc have decided that an UD

investigation of the Shorchen project, along the lines g

suggested by staff and the Countics is necessary. We shall, Q

therefore, institute a proceeding shortly for that pulpose.

The scope of the investigation and the iscucs to be con-

sidered will be delineated in the order establishing the

case.

LILCO believes it will complete construction of

the Shoreham pli.nt and that it will be ready for service as

early as Septc2ber, 1980. In view of Shorehan's imminent

completion, and our review of LILCO's financing opportunities,

we have decided not to adopt the recemmendations of the company,

our staff, and the Judge that vc include additional CWIP in

rate base.1/ We did add CNIP to rate base in LILCO's lastelectric rate case, but only after uc found that there was a

" compelling necd" to do so because the integrity of electric

service on Long Island was at stake.2/ That need no longer exists.

~1/The proximity or uho Shcreham completion date leads us toconclude that staff has also overestimated the extent towhich investers discount Arc earnings and thus the extent towhich the ecuity :.cturn allevanca can be reduced when cashflou allcuances are provided. Our allowed return does notassucc any additional cash flow allowances. gg

2/ Case 27136, Long Island Lichtino, supra, mimeo p. 4.1945 153

-4- Amendment 35 - January 1980,

.

y.....m.. ., ; 3 * . ..,g.t ., =i ,.,, e - .

. ..s

Evcn .though we do nc,t prmCc addi ional cnu. flo i allowances

here, we : ill fi:c rates u.at vill allcw LIL"O to generate

earnings zufficient to attract the capital needed to finance

p.tv ined construcf ion, meet its nernal operating expenses, andprovide its investors with a reacenchle opportunity to earn

a fair return in the period during which the neuly authorized

rates will be in effect as we arc obligated to do.l' With this/

background in mind, we turn to the parties' specific exceptions

to the Administrative Law Judge's reccamended decision.

CONSTRU: TIC:: E%P: HON URE9

The amount of LILCO's constructicn expenditures in

1972, 1979 and 1980 will increase the company's revenuo

requiremont directly, to the extent the expenditurcs relate

to plant that will go into service by the end of the rate

year, and indirectly, to the extent they affect its tax

liability and the cost of capital. There are three issues /223don exceptions: es

1. Will LILCO's actual construction oexpenditures throegh the middic of ^hh1990 vary from its rate case estimatesby the same percentage as its actual Obexpanditures varied from its budgetforecasts in the period 1973 to 1977?

.

2. Should a revised construction expendi-tures forecast, excluded frcm the recordby the Judge, be relicd on for ratemakingpurposes?

3. Should enpenditures for pursuing thelicensing of the proposed NewHaven /Stuyvesant generating facilitiesbe considcred for ratcnaking purposes?

~1/Tnis standard J.s embocied in our Statenent of Policy onTest Periods in Major Rate Prococ3Ehes, issuec I;ovamber 23,197T (minco p. 3) Accorc: Case 21037, Central Hudsen Gas& Electric Coro. - Electric Entes, 17 NY FSI! 401 TBf77);

~

Cases 2/094-s, Oranac & Eockland Utilities, Inc. - Flectricand Gas Pates. ~17 21Y PSC (Opinion No. 77-14, issuedOctocer 7, 1977, mimeo. p'. 3-4); Cases.27108-9, EcchesterGas & E l e c t r i c _C o_r. o . - E.' e c t r ic._n_r d G c s _R_a te s , l~/ NY 55C~. - _-

3-

(Opinion no. 77-18, inst:ct ;;o;ct1cr 1, 19,/ / , mimeo. p. 5);Cases 27 215--7, Mincarn I:: hawk I car Corn. - Electric, StreetLichti".c, and Ce s hat.es",~~E NY 15! (Opinion I;o. 78-14,

,.issucc June 43, 1573, nimeo. p. 3).

-5- Amendment 35 - Janur.ry 1980

1 OAR 1RA

Ct. SIT 27374 c.nd 27375

LI LC O ' ': Teoc. ticr.s--

. ._

The first two issues are raised in LILCO's exception

to Judge Schechter's adcption of staff adjustments to LILCO's

construction expenditure forecast. Staff argued that LILCO's

actual construction expenditures through mid-1980 can be

expected to vary from its foreuast by the sane ratio that

LILCO's budget forecasts varied from the actual expenditures

in 1973-77.1/ Per this reason, staff witness Edwards testifiedthat the company's forecast of its construction expenditures

should be reduced by about $110 million. This testimony

resulted in rate base and ocpreciation accrual adjustments

by staff that ucre accepted by the Judge.2/LILCO encepts on two grounds. First, it argues

that staff's reliance upon the c:mpany's own original con-

struction foreccst is in error because that forecast has

been updated. Second, it argues that the staff's CVR's are

too large because conditions in 1978-80 are unlikely to

result in the same construction delays the company experienced

in 1973-77.

Uedated Feracast Issre. Judge Schechter refused

to admit LILCO's updated construction forecast when the q

company declined to extend the suspension period for the 45 CEE$P'additional days deemed necessary to give staff and interested f

members of the public an opportunity to review and rebut the f EUevidence presented. On exceptions, the company urges us to RSER

consider the excluded evidence. While LILCO's arguments in 6~~3

support of its updated estimates may have some merit, we g3pgcannot ignore the fact that staff and other interested 6 9

parties have not had an opportunity to review and rebut the 6 063L,

'

1/The measure or tne dif crence is the ratio of the actualexpenditures to the forecast expenditures and, in thiscase, was called the " construction variance ratio," orCVR.

-2/In addition, staff'a rate of return witness based histestimony on this revised forecact cf constructionrequirements. 1945 155

-6- Ame,ndment 35 - January 1980

Cl.( "E 27:74 and 272.75.

basi.; for the ne'> figurec. W. can 9 Da lictle cisht to theraw, entcsted escircctes whleb are Leiere us as an offer of

proof. The Judge's decision precluding adniscion of the newestimates was proper and concistent with recent decisions wehave made on the use of revisof. forecasts for ratemakingpurposes.1/

Revised CVR Issue. LILCO's second argtr. ant is

bar. d on evidence in the record. Its witness p.:ncented a

revised electric conciruction c::panditure forecast, acceptingsubstantial portions of staff witness Edwards' forecast, Q\

n

but making adjustments bsued largely on revised ' long-terp{4 b \*Q3(more than one year) CVR's, as shown below: \, (g

<9lons -Ter;_ CVR Ccrearison f

.StaffandALJ.9M-

-LILCO

--

New Production (mostly Shorcham) 103S 122.0LOtner Production 30% 64.9%Transmissicn 65a 84.9%Distribution BOL 106.4's

LILCO contended that the 1973-77 CVR's will producea more accurate forecast only if the 1978-80 pericd is com-parable to 1973-77. It urged that the 122% ratio for new

production properly reficcts Shorehan cost overruns and thatits other long-term CVR's are more accurate because they areadjusted to eliminate the effect of 1973-77 construction delaysattributable to unforeseen declines in load growth and problems

l_/See Cases 2 /215- 7, Nicacra Mohavk, sucra, (mimeo p. 4-6),where a sales forecast re elsion was e::ciuded frca the recordand not othersisc considered for ratemaking purooses, andCase 27296, National Fuel Gas - Pates, 18 NY PSC(Opinion 78-h , issued Decermer M , 1978, nimeo p T5')-

where construction expenditure forecast revisions ucrenot used to estimate rate base. See also Case 27136, LongIsland Lightinc, supra (mimeo p. 10-12) where un t=testeusales forecent reFision was not used tc estimate operatingrevenue.

1945 156-7- Amendment 35 - January 1980

00 D Wmpy \

D ,nCAba 2737/. and 27375oh b , _,

in octaining regulatory permits. The corpany's witness

testificd that these factors are not likely to delay con-

struction scheduled for 1975-80.

We think it would be foolish to project that

Shoreham expenditures will be less than 10C3 of LILCO'soriginal forecast, as arsumed by staff and the Judge.

LIL'.O's cost overruns at Shoreham; its past tendency to

uncV.rectim.te Shorcht.a c-xpenditures; and its inability to

keep project expenses v.ithin fcrecasr_s are well docunentedin the record in this case, in previces cases, and in the

Boor, Allen, & Hanilton study we ordercd. Tha record suggests

that past CVR's on production plant have rarely been lessthan 100.07., and have often substantinlly excccded 100.0t.

In light of the record, it seems sensible to us to adopt

LILCO's 122.0L CV:t. We observe, however, that this issue

concerns almost exclusively a project that vill nct be in

rate bene in the period for uhich we are setting r:tes. |hTherefore, LILCO's noi production CVR will be relevent for

ratemaking purposes only to our forecasts of rate year

financial position and tax liability and not otherwise.1/For the other categories, we are persuaded that

the staff construction expenditure estinates, as mcdified by

the Judge, are more accurate than LILCO's. LILCO makes

a plausible case for a scmewhat higher transmission CVR on thcground that its Article VII cases were subject to delays

during the 1973-77 period. But staff correctly points out

that the Judge had already allowed 100% of the Shorchamrelated transmission far:j lities expenditures, so the remaining

amounts for transmission subject to a louer CVR ere de

minimis in any event. With respect to distribution expendi-

tures, LILCO's argument is, at best, tenuous. It contends g7

1/As ecmputed in Appenc1x A, Schedule 3, page 4, the increase~ in Shoreham investment, which accrues AFC not of tan, increases

tax e:: pense by 0765,000. This interparied tax allocation forShoreham was authcrised in Case 268G7, Long Island Lighting,supra, 16 NY PSC bl7{,


. M NCASES 27 374 and 27 37 5

o B B{f( f0 Dfu

u

that distribution expenditures will be higher than staffratherexpects because they vary with growth in customers,

than load, as utcff assunes. Even if LILCO were correct,

we observa that the ccupany has been rcvicing dounward theexpected numhcr of customers en its systen. Since load on

its system is also declining, we enn find no substance inLILCO's position hr.re.

New Haven /Stu/vesa gA major portion of staff's brief on exceptions is

devoted to an argunent that LILCO's planned licensingcxpenditures on the New 1:aven/Stuyvesant generating project(including approximately $28 million already spent) shouldnot be reccgnised for ratemaking purposes because there is"no necd" for the New Haven /Stuyvcsant plants. Various

intervenors, and the Counties, which propose a similar

adjustment for Janesport, h2ve endorsed the staff proposal.The Ui.cdom of the New Haven /Stuyvesant Article

VIII applicntion ir certainly cpen to question. LILCO'sdecision to spend $23 million on a second Article VIII

application before a decision on its first one is evenrendered is causa for justifiable concern. Yet, this rate

case clearly is not the propar procedural vehicle to test

the wisdom of those expenditurcs. Our revenue requirement

deterninntion here does not reflect the New Haven /Stuyvesant

expenditures as operating expenses or as part cf rate base.And they have not affected our decisions en the cash flowissues in this case. While it could be argued that these

expenditures have caused a marginal increase in LILCO's costof capital, that amount would be difficult to quantify preciselyand, in any event, likely to be so small as to be relativelyinsignificant.

1945 158-

Amendment 35 - January 1980_g_v.

aa a - rg 3 :

b d2 7 ' 'i o and 27075CJ. SJ.7 ,S.ka.aoo o

The ultimate determination regcrding the need for

new electric generating facilities is, under Article VIII

of the Public Service La:, largely a natter for the Boa d

on Electric Generation Siting and the En'.ironment, rather

than the Public Servic: Cc:: mission . he record necessary to

determinc. Uhether the ::cu Haven /Stuyvesant geaerating plants

should be built is in Siting Doard Cacc 80000, and that

procce: ling has barely bc;un.

Our rejectica of the staff adjustment in this case

should not be construed as a tacit approval of the expenditures

for the 'ew Haven /Stuyvesant application. If the application

is denied, the recovery of these er.penditures in future rates

would depend on a finding, in seme future rate case, of the

prudenca of seeking a certificate in the first instance.

OPERATING REVF' lies

Sn]en For_eccatsStarf, the Counties and the Judge have accepted

the cccpany's final electric and gas sales revenue forecasts.

On enceptions, LILCO proposed two adjustments, one increasing

gas revenues by $549,000 to reflect the changed temperature

setting for S.C. 5 temperature control customers, and a

seccnd reducing electric revenues by $2.2 mi.llion because of

a recently discovered S.C. 2 MRP billing error. We havereviewed these adjustments, which were not opposed by any

party, and have found them to be proper. They will be

recognised in cur revenue determination.,

'Meter Tampering

In order to reduce losses from meter tampering and,

theft of service, LILCO has instituted a regular meter

tampering program with an estimated annual cost of $736,000,

consisting largely of payroll expense. The program is

9: 1945 159-


D*R} D 'S d bC;.5.f_ 27274 nd 273T

.d.R!IumJu o

expectc6 to convert the cost of come amour.t of hii:vatt-

hours of electricity and cubic feet of gas that would othe:. cise

be " lost and unaccounted for" into revenue. LILCO concededthat the progran therefore required some revenue offset to

the costs it estimated. The precise amount of revcnuas that

the progra:a ni ght produce is somewhat speculative, becausethe c xtent of rcater tarpering and the amount that will be

recovered as a . result of the progren oro ur.known. LILCO

said it was wil.1.ing to esse:rn that the progrc:a vcaid produce

revenue equal to its cost. However, staff, using company

surplied revenue and c:: pense estimates frcn its pilot meter

tampering program in offect in 1977 and 1973, constructed a

" cost benefit index" indicating that LILCC has recovered 2.1

revenue dollars for every dollar previoucly spent on mater

tampering investigations. Staff argued that a fully develcped

program could be expected to bc even more productive and

therefore proposed an adjuctment contempinting recovery of

2.5 dollars in revenue for every dn11ar spent on the program.

The Judge adopted the staff adjustrent and the company has

excepted.

Staff's adjustment is correct in principle. But

its estimate of probable revenues is based on tenuous estimatos

of past expenditures. LILCO developed a revised projection,

reflecting its actual 1978 cxperience with the tampering

program, that suggests a $1.1 million revenue recovery.

This ir approximately $350,000 more than its original estimate,

and about $900,000 less than the staff estinate. In light

of the weaknces in the data staff relied upon here, uc adept

the company's revised estimate.

Uncollectibics

Judge Schechter estimated that .576% of the company's

additional revenues would be uncollectible. LILCO objects,

1955 1: D-11- Amendment 35 - January 1980

G. . : 27/71, 0 Y '75D 9' ~

. S~}aclsining thnt the Judge h(.s given no explanc *.n for s!s use

of this ratio. The cczpany proposed a ':igure of .59'2. In

1970, its 1cuest ratio .as .5711, and recent ratios have been

in cxcess of .6005.

It appears that the company has bcon experiencing

an increasing uncollectible ratio. In Case 27136, we uscd

the .5360 ratio e:cperienceu for the 12 r.onths cMed June 30,

1976, and notcd that the previouc ratio had beca .5114.

Trcreasing uncc11ectibleg are a mtter of particular concernto us bccause they incrchse the cost of service for allcustomers. The probleu can and should be ameliorated through

improved collection and customer relarions efforts by the

company. Eccaure ve are providing an additional onpanse

allo.n.nce for therc- functions, we believe that LILCO should

be able to hold its future uncollectibles ratic to the .594%

figure assurnd in the original filing.

O P E R ;.T I n G E X_P D;:S C S

Large parts of the racord in this prccacding were

devoted to analysis of the principles underlying the assertions

by various vitnesses that differing proposed operating

expense allowances were reasonable. Staff and the intervenors

2cund that there was inadequate record support for expense

allcwance increases in the amounts sought by the ccmpany.

LILCO objected to many of the adjustments they proposed on

the ground that establishing proper expense levels is,

absent a showing of imprudence, a ratter of management

discretion and contrary proposals constitute an unwarranted

intrusion upon managen.ent prerogatives.

Management prerogatives have their place--but it

is not in the determination of what expense allewances are

reasonable for ratemaking purposes. That is our obligation.

Management has the opportunity to prove to us that its

1945 161.


CAO:S 27374 cnd 27375

D 0 0 '% k' m

. A kWgu oproposed expense clicwances are reasonable and not excessive.

Staff and intervenors have an cpportunity to challenge thoseexplanationc and suggest alternative allowances. The ultinate

decision as to what is reasonable is ours. And the PublicService Law provides that a reasonable amount is that which

will enable the company to provide safe and adequate serviceat just and reasonable rates.

The allowances we provide in these cases will be

based on our analysis of the evidence presentcd by all ofthe parties and sufficient to enable LILCO to provide normal

service. He shall not provide expense allowances for claimed

abnormal, so-called " backlog,'' activities which may occurin the rate year. This decision is based on an important

regulatory principle that is applicable to all companies

under our jurisdiction: when circumstnnces have allegcelyrequired a utility to adopt an austerity progran, we expectto see evidence that those circumstances hnvc diminishedstockholders' returns before nanagement cuts back on expon-diturcs necessary to maintain safe and reliable service. Thatevidence has not been presented here. We expect LILCO, and

all other companics, to follow this princip3e in theiroperations. In our view moreover, it is not within management'sprerogatives to avoid the st. itory obligation to provide

safe and adequate service in order to provide investors whatmanagement deems to be an adequate return.

In this OpAnion we will discuss only the expenseitems contested in the briefs on exceptions.1[ We adopt theallowances recommended by our staff for the other expenseitems becaus.o we believe staff approached the overall questionof expense allowances by seeking conscientiously to balancethe consumer's interest in good service with their interest in

reasonable rates. While the expense allowances recommended.

1/Our specific ad]ustments are set out in the Appendices. 945 162


c;. O ? *i 2 7 ' cn -1 2 '! L7 5 i.

D{by various intervenors, nctrbly the Countics, vare cc:c sion-

ally below thout reconmended by staff or the C dge, the

basis for their argue.cnts was, in large pa 1, the inadcquacy

of LILCO's proof. The defect in this approach, and in the

" budget overestination factor" adjustmants proposed by the

Countics as well, is that both igno;e the relationship of

operating expense ellowances and Go quality of constrer

service. The " budget overectiration factor" approach is

furthur flawed by its sponscr's failure to establish the

comparnbility of tha historic period 1.e used to develop the

factor c.nd the poJiod for which we are setting rates. The

record as a v; hole, including service cenplaints at the

public statement hearings, the testitony of our staff, our

public files of consumer ccmplaints (of whieb ue take officiz.1

noticc), and even the testimony of the Counties' own rate of

return uitness, provide a:c.ple prcof that LILCO must improve

its servi.cc performance. It is the consumer who suffers

f rota tervica cuthrcks, and it is the consur.or we nust protect

by assuri:.g that the cerpany's rates are sufficient to produce

the revenue necessary to ucet nounl operating expenses.

Overhr.ul Ezcence

Judge Schechter adopted the major overhaul expense

allowance LILCO proposed on the ground that it was necessary

to provide for the normal level of three generator overhaula

per year. But he rejected the company's request for an

allowance sufficient to cover a second periodic overhaul for

two specific units. LILCO contended that the two unitsinvolved will receive an extra periodic overhaul in the rate

year because the first Shorchan overhaul will disrupt the

ordinary maintenance schedule for the following year. The

Judge accepted LILCO's argument but concluded that it provedonly that this was an abnormal expense. He therefore adopted

1945 163 (II.

.

'"-14- Amendment 35 - January 1980

D}} &C1. ids 27374 cad 27375

staff's proposal to cr.ortize it, as an unn.'ual expense, over

five years. LILCO, staff, and the intervenors each except

to aspects of the recommendation.

Uc will affirm the Judge's resolution of those

issues. LILCO's c::ception is unpersuasive because, in the

end, it fails to show how a decision to allcw full recovery

of all norir.nl periodic overhculs, and a:rortice the two

unusual periedic overhauls in unfair. The mere fact that

the two unusual overhauls will occur in the rate year does

not require their cost to be built permanently into LILCO's

rates. Staff cad the Countics obscrve en c::coptions that

one of the three major overhauls schedulco for the rate year

is cn Far Rockauay Unit 1;o. 4, a job that wac deferred from'

a previcus year. They contend, therefore, that this it a

" backlog" adjustment that should be disregarded for purposes

of establishing a normal rate year expense level. Their

argument ignores the undisputed fact, relied on by the

Judge, that the normal cativity level for LILCO is three

major overhauls per year. As the company notes, if it were

not overhauling Far Rockcway Unit 1:o. 4 in the rate year, it

would be overhauling none other unit.

Ma-jor Maintenance Project Exocnse

Judge Schechter rejceted the company's request for

a $500,000 allowancc for major maintenance projects. He

termed the projection " speculative" and a " contingency

requcst uitnout reasonable basis or foundation." In its

brief on exceptions, the company arguas that its exhibit

listing a dozen planned major maintene.nce projects between1978 and 1982, ranging in cost from $250,000 to $1,050,000,provides a reasonc.ble basis for its request. We agrca that

the company has provided a reasonable basis for somecontingency arcunt to cover the kinds of projects listed in

1945 164'


Cl .:: 5 2 / 3 7 a and 27375 FD 9'b l S

D@hb ,$ A Jo

the enhibit. What the company has failed co prove, however,

in that these projects will increasa its operating cxpenses

by the $500,000 it claius. If, for example , the work involved

were to be performed by LILCO's owr, crews, without overtime,

there v;ould be no increase in total operating cxpenses. In

these circirr. stances, ve :.ust rely on uhat guidance the

record gives as to the company's past experience. The only

exarple of actual rajor :.~.aintenance experditures LILCO has

provided is the replacsment of the turbine shaft at Port

Jeffeison No. 1 in 197S, which added about $200,000 to its

annon1 operating enpenses. We will linit our allowance to

that amount.

Trce Tri:.ninc Dmense

Judge Schechter rejected LILCO's request for

increases in its trae trimming expense allowance. Thecompany introduced evidence to prove that $2.3 million

should be spent on tree trimming in order to keep service

interruptions caused by untrimmed trees during the next twelve

months at the norme.lized 1977 level, i.e., 11.6 interrup-

tions por 100 circuit miles per year. The Judge found

LILCO's evidence on the service interruption trend unpersuasive

and concluded that there vould be 11.5 iaterruptions per 100

circuit railas in the next twelve months without additional

expenditures for tree trimming. Since this interruption

rate was below the one the cercpany had chcracterized as

" nor.nal , " the Judge rejected LILCO's proposal.

On exceptions, LILCO denics that it characterized

11.6 interruptions as a " normal" level. While its evidence

showed that 11.6 vias the 1977 normalized level of interruptions

the company argues that the evidence used by the Judge to

forecast the level of interruptions in the next twelve months

implies a normalized 1977 level of 10.8 interruptiens per

year. The company's point here is persuasive. There is a

: 1945 165.


<9 y -mar oD 0 D

. d| .

\j ;C.;SES 27374 and 27375_noc o

somewhat vorsening trend which tends to shou that LILCO'sAs apast tree trinming ef forts have been inadequete.

result, consttacrs have received leas reliabic service. We

will allow the cenpany enough to reverse the deterioratingtrend. The evidence relicd on by the Judge shows a normalized1977 cutage rate (10.3) that should be our target here ifservic2 in to be in prove _6. Using the assumptions in LILCC'sorigi.'.nl presentation, we esti=nte that an additional

'

$000,000 will be sit 7ii cient to reach this target. I:e will'

make no specific separate allowc.nce, however, for emergercytree trimming, or to fill fequests for tree trimming bycustomerc. The increased preventive tree trimming centemplatedby cur allouance should reduce the need for cmcrgency andrequest trce trimming activities, which tend to increasc whenpreventive trinming is deferred.

Admin."..trati.e cn3 Ceneral EnocnseJudga Schcchter adopted staff's estimate of LILCO's

rate year administ):e.tive and general expense, which wasdaveloped by multiplying LILCO's actual 1977 payrol? by a1.118 vage increase factor and other cxpenses by a 1.15inflation factor. LILCO objects to the reconmenced allowancebecause some 1978 actual figures are greater than the company'sestimates for the rate year. It suggests that this proves

that its original forecast is reascnable. LILCO made this

same argument to the Judge. He rejected it because the

specific expense increases cited by the company tended to beoffset by other spccific staff allowances that exceededthose sought by the company. LILCO's exception ignores the

Judge's reasoning, which we find to be basically sound,particularly in the absence of a showing that the specificexpense increases are necessary. LILCO's exception is

,

therefore denied. 945 166

-17- Amendment 35 - January 1980*

,

A

Cn3Ed 27374 and 27375

D y)O' 1 )Cv

*Ju"3~~b'Customer ?.ccounts E:.: cense. .

Personnal. Judge Schechter refected most of the

company's request for a $2.0 uillion increase in its expenses

for custcmcr accounts personnel. LILCO claimed thtt additional

personnel were needef to improve its ,bil]ing, collection andconsea.cr relations functions. The Ju(;e adopt;d staff

adjur., mants climintting the requestcd allc..ancas (c.:ccpt for

the meter t npering proga.a) on the ground t'aat the ccmpany

did not noot ita burden of proving the "fansibility" of

these hirings and that the beneficial results of the hirings

were "clusive." LILCO has e::cepted.

Our reading of the record indicates that staff

and LILCO failed to Join this issue properly. The compar.yintroduced substantial evidence to shou that its past billing

collection, mater reading, and complaint-handling efforts

have been in:Gequetc. Evidence from cur ccmplaint files and

|hthe public statenent hearings confirms LILCO's claims. 2ct

tha company failed to show hcw the additional money it

recuested would be spent to improva its shortcomings.

Staff, on the other hand, focused on the reasonab3eness of

past expenditures as a measure of what should be allowed

here and ignored LILCO's poor service performance under

previous budgets.

It is obvious to us that the company must take

action to reduce the number of unread meters, unattended

past due bills, and unanswered consuc.cr complaints. 1.nd it

seems clear that such measures will not be costless, Evt

the company's presentation gives us no assurance that thcse

problems will be attacked properly. Providing an allowance

so that more money can be spent for additional pceple does

not assure that available personnel will be properly trained

and managed so they can be used productively. Indeed, staff

has argued that if the dollars spent in'the past for overtine

and part-time help were used instead to finance a properly


1945 167

CASES 27374 and 27375

trained and managed workforce, service could to improved

without additional cost. We ere left, therofera, with an

important issue to resolve and insufficient guidance from

the litigants on the costs and benefits of their respectivo

propocals. If uc rdept the full c::pcnse allc cnce LILCO has

rcqucsted, it may involve more costa to consun.ers in rates

than benefits in improved service. Converscly, the allouances

recerecended by cteff provide the bene. fit of screwhac lowe2.

ratea with the potential cost that thocc ratec vill bc .

insufficient to improve service and end consuner dissatisfaction.

In thoce circums.tances, our recolution of the

difference between staff and LILCO muct be a compromise.

LILCO requented an increase of about $2.8 million, including

$736,000 for the meter tampering program. P.ccegnizing that

the scre personnel con be uced fer various cuctemer accounts

functions, we will approve a total allowance equal to half

the requested aucunt. LILCO is free to appropriato this num

for hiring, training or management in the meter reading,

billing, collections, customer relations, and tampering

investigations functions within this category as it sees

fit. Eut the corapany will be required to report to our

consumer service staff regularly on its efforts to improve

service and the program of expenditures it is undertaking

to do so.

Equipment. Judge Schechter fcund an $S2,000 staff

adjustment to clininnte the increase in die annual cost of

payment processing equipment " inappropriate." che $82,000

was originally described as the additional rent for new

equipment, but the ccmpany witness provided no basis for his

estimate of the rcntal cost of a new machine. Mot until its

initial brief did LILCO indicate that it had purchased the

equipment instead. On exceptions, staff complains mostly

about the manner in which LILCO's evidence in support of..

1945 168


CASES 27374 and 27275

D**D D 'l~ h Ao f . 2 dY bwe

thin allowance was presented. According to staff, LILCO

failed to recognine the trade-in value of the old machine or

other ravings the new purchase might producc. In response,

LILCO claims that the $82,000 reflects the trada-in value of

the old machine, that its original rent expense cutimate is

apprenimately equal to the a:.nua] carrying chsrgac cn the

purchr.ced equipment, and that no suving.e. are anticipated as

a result of the purchare becauce the ncw machine will do

essentially the umc t.ork as the mcchine it has reple.ced.

In light of the erguments, we find that the

Judge's conclusion in correct.

Advarticing and Public Affr. irs Ex.)es..se

Judge Schechter detc mined that LILCO'c advertising

and public affairs ellowance should be lim 2.ted to .075% of

its revenuen, the name ratio we adopted in Case 27136, t.hc

last LILCO clectric rate cacc. nc also rccc..= ended (.ddiLicnal

allowances of $156,000 for arca 6c.velopment, $90,000 for

internal communications and $18,000 for library matcrials.

LILCO, Staff, and the intervenors have all excepted to

varicus aspects of the Judge's recorcendation. The company

arguco that the .075% allowance will not be enough to cover

the cost of conveying all the information it would like to

convey, and that it intends to spend more than the allowed

amount in the rate year. We considered and rejected this

same argument in Cace 27136 and do so again here. Staff

objects to the separate, add 3tional allowance for area

devolcpment advertising on the ground that this activity was

intended to be covered by the percentage allowance limits

specified in our P_olicy Statement. ! Staff is correct.It also objects to the incroaced allowance for internal

communications because of the company's alleged failure to

demonstrate that improvement is needec and can be achieved

1945 1691/17 IFliP.SC 1-R.


CASES 27374 ano 27375

'

only through additic..,.1 cxpenditures.' It claims the baseyear level of intern,1 c^* inications expense adequately

provides for the cost of reasonable empicyee bulletins anumeetings as veil cs union news letters. We agree. Finally,

staff argues that the increase in expense, frcu $2,000 to$20,000, for materials and supplies given to libraries isuns ti:morted. He vicr this final itcu as something close to

a choritable contribution. The amount invelved is so smallthct uo sea little point to requiring utilitics to provide" support" foritsolonhasthetotalamountforcontributionsof this nature is reasonable. Staff has not attacked theallowance on this ground. This staff exception is therefore

denied.

F.ercarch and Developrcnt E::conce

Judge $chechter adopted two staff adjustments, one toeliminate estin.ded payment.s to the Erceder heactor Corporati.on(for 'che Clinch River project) and the other to reduce thaesti:..ated LILCO centribution to ESEERCO to reflect delays invcrious ESECRCO projects. On exceptions, LILCO argues that

it is_i_f the Breeder Reactor Corporation demands payment,contractually obligated to make the papnent. While this may

be true, it offers no evidsnce that the BRC is likely tcdemand payment this year. The Clinch River project remains

in suspension. LILCO's exception is therefore denied.Staff's ESECRCO adjustment was correct when it was made.But in its brief opposing exceptions, staff concedes thatrecent changes in ESEERCO funding require a r' ..h: tion of its$220,000 original adjustment to $50,000. '2P o chis modifica-

1/.at '# sue.-tien, we adopt the Judce's resolution ci~

1945 170

1/In accorcance with the principles of nulti-year planningand financing of research and development programs we-

announced in Case 27154, 1977 Lono Rance Electric Plans,18 NY PSC (Cpinion 7 8-3, issuea 2. arch 6, 1976) thecompany wi1T ultimately bc reinbursed for these amounts ifthey are propcr'' spent.


, , . , . , , . t 7 a , n. c n u s.,1 >, 1 0- . -

.....:.. o

D**D "QTW $We sJuU . . 2Storm Dc: w e Eccerve and Actrual

The enormoua expenditures LILCO incurred to effectrestoration of service after the devastating 1978 ice stc.c.sare duly noted in the record. LILCO cequested that it be

allowed to amortize over a thrca-year period the entra-ordinary $2.8 mi.llion net cost of the ice stcras. It alsc

souglW an increase in its reser~a far storm decago bccauseits eny.osure ecs inct e:.s' d whcn th . cei.ctibie amount on itsinsurance was raised fron $3 tillion to P5 millica lastyear. Judoc .3chachter approvcd the arc.ortization rec uestbi.t rejected the plea to increase storn dar. age rocerve by$500,000 on t ha ground that his special amortization allowancewould servc the same purpose. Both staff and the cc:cpanyexcept to the Jadge's rcjection of the accounting change andthe increana jn the accrual. Staff, joined by other parties,also encepts to the reco nmended special amorti zation.

Staft's posit. ion is that the si.ur:a 6c$ age reserveexista specificn11y to cover the cost of there extraordinarys tonas ; therefore, no special ac'.ditional Ic.ortizationallo.ance is necessary. It alsc points out that with the

increase in the reserve accrual i+. is suppcrting in thiscase, the extraordinary loss of the 197C storms will beabsorbed by April, 1980--before the end cf the rate year--without a cpecial amortication. The company responds thatits territory is uniquely subject to potentially devast& tingweather. The result of the staff position is that itt.

reserve will not reach the maxinta level for at least fiveyears. In the intervening period iF will have to face thepotential of storm damage with less than adequata protection.

Where it is difficult fcr us to anticipate expenses* attributalile to extraordinary storm losses, our usualprocedure is to defer and amortine such losses fiven the


1945 171

C;JES 2737/ anf 27375 npg'u

frcquency of LILCO rate ecsos in recent years, we cuestion

whether this company needs to employ reserve accounting forstorm damage expenses any longer. The possible advantages

of deferral accounting are north investigating. For now, we

must agree with the company's position that the 1978 storms

were beyond anything we contemplated when we modified its

reserve and accrual in Case 27136. Come amortizaticn

allowance beyond the proposed incrcace in the reserve, which

we vill approve, is therefore in order. The extraordlaary

costs of the storml/ should be chargcd, in the first instance,to the ncw linit of the reserve, and the rcrasinder shoalc he

amortined over three years. This proccdure vill reduce the

amount of the amortination by $166,667 (0500,000 3 years).

In;iuries and Derages Reserve and I.ccrual

LILCO estimated its rate year injuries and dcmagesaccrual on the basis of a three-year moving average ar.dsought a $2.5 nillion al3cwance. The Judge found that

s ta f f 's estinato , based on a four-yenr average, was reecenableand adopted its $763,000 adjustment. Ee noted that staff's

method was ccuperab]e to the one we adopted in Case 27078,Lcny Island Lichtine Comany - Gas Rates. On exception.3,

the company complains that staff's method will produca" deficiencies," i.e., its injuries and damages expenses willbe recovered over nine years instead of three. It also

recomputes its estimate using staff s method to shcw that

the adjustment should only have been $129,000, rinally, it

observes that the estimate should he n.ade on the basis ofthe most recent th'ree years' experience, as we did in Case

27078. It complains that staff artificially reduced its

estimate by using a four-year average. In response, staff

argues that its decision to use a four-year average was.

1945 1721/We accept tne start's computation of this amount in

Attachment C to staff's reply brief to the Judge.4 \


Cr.ns.27374 and 27375 ! D D b

Oproper because the annual fluctuations in this account make

an average over a greater nurber of years a more reliable

estimate for ratemaking purposes. Staff also relies on the

record in Case 27078 which shows that the 1975 accrual uns

inflated by an accounting change in that year, and that our

allo nnce in that care used a normalized 1975 secrual.

Both utaff and the company departed from the

method we used in Case 27078--stc.ff by using a four-year

average and the company by using a moving average and

failing to normalize the 1975 accrual. Heither method gives

any weight to actual claims, which during the 1975-77 period

were $3.5 million, or $4.4 million less than the accruals.

Cor. paring the latesu three years, including 1978, the averace

accruals decline Lo $1.9 millior. while average claims increase

to $1.6 million. This latest experience indicates a con-

vergence of the average accruals and clairca which would |justi fy an expense allowance midway between the two averages.This :r.cthed results in an es:penso allowance which is essentiallythe same as the staff's. LILCO's exception is denied.

Amortization of Unf"nded Pension Liability

Judge Schechter rejected LILCO's proposal to

eliminate its unfunded pension liability over a ten-year(rather than thirty-year) ' period on the ground that the

company has not demonstrated either a need to reduce the

amortization period or that the reduction proposed is

" realistic." LILCO excepts on the ground that the unfunded

pension reserve is. increasing, implying that future customers

will have to pay pension costs related to service providedby LILCO employees in the past. It criticizes the recommended

decision for its failure to consider this alleged inter-

generat,ional inequity. LILCO's characterization of this


1945 173

CASES 27374 and 27375'

D**]D *D~

T lIl Ae o f6 OL.AjYTua

issue is somewhat misleading. This is not an issue of

whether future ratcpzyers vill be required to pay for the

prenent cost of service. It is an issue of whether present

or future ratepayers should pcy the ecst of past service.

Uc can find no logical reason for requiring present rate-

payers to pay all of this cost. Absent a showing that the

thirty-year amortization period, which is also used by other

utilities of this state, is improper in some way, we will

not approve a change.

Ucce and Inflation Index

LlLCO cpplied wage and inflation factors to base

year expenses to estimate expensas for the year ended June 30,1930. Staff observed that the rate yenr in this case will

cnd on April 30, 1980. It therefore argued that the company

has, in effect, clabned an allowance for two extra months of

inflation and proposed an adjustment to eliminate it. The

Judge adopted the staff adjustnant and LILCO has excepted.On exceptions, LILCO mninly points out various

reasons why its use of a rate year equal to four calendar

quartcrs was reasonable. More information was available andit made historic comparisons and analysis easier. Thecompany's reasons for adopting the year ended June 30, 1980as a test period, while logical, are irrelevant, since

neither staff nor the Judge objected to it as such. Their

adjustment is based on a strict application of the future

rate year concept--rate case allowances should be designed to

make the company whole for the first twelve months that

rates will be in effect, not the test period the companyhappens to select. LILCO makes two additional points that

are more compelling. First, the probable lhg in our approval


1945 174,,

4-

CASES 27374 and 27375h}DD D

|

of its compliancc filings, and the practice of the industryto base revenue recognition for accounting purpost; on mcLerreadings during the accounting period, Inther than on serviceestimated to have been rendered during the accounting period,means that the comoany will not recognine somc of itsadditional rato case revenue until July, 1979. Second, the

cc:many's uage and inflation index assu c.e5 a ti-1/23 increasethrough 1978 while the ratual rate, r.s T.Teasured by the GNPdeflator, was 7.45. According to LILCO, this would requireadditional allowances of $457,000 for its Electric Departrent

and $102,000 for its Gas Department.

The staff adjustments ref1cet our usual practice

and they were properly adopted by the Judge. While we see

merit in the two xclevant points nada by the company, we

will r.ot provide any additional allowances on account ofthem. The a:.tount of the revenue increase not acccunted forin the rate ycar because of regulatcr/ delaya, and delay intheir recognition for accounting purposes is not quantifiablefrom this record. LILCO's argument that it offsets, and is

thus equal to, the staff adjustment is speculative. We

would have been willing to provide LILCO with additionalallcwances to the extent it demonstrated its actual 1970unit cost increuses exceeded the 6.5% assur.ed in its presentation.But it has not done so. It did not use the GMP deflator to

develop its original estimate, so the GNP deflator cannot beused properly and reliably to revise that estimate.

LILCO's exception is, therefore, denied.

O-26- Amendment 35 - January 1980

. +

I. .

1945 175

I

CASES 27274 and 27375

b

0{{5 'OD

Labor Productivity-

LILCO'; original case included a productivity

adjust =cnt that assured it would achieve it annual force

reductions thrc_th the rnte year. The cc:.9pany offered no

evj dence that t:.;se gains could be achic"ed, nor did it

suggest where th : force reductions might take place. In

fact, LILCO's cvidcnca sho',cd probculo negative productivity

thrcuch the rate year. nonethcless, Judge Schachter adopted

the LILCO productivity adjustment.

The Counties have called the 10 profuctivity

adjusucent "artinrery" and have excepted to the Judge's

failure to adep. their productivity adjustment, based on

LILCO's historic 2.3t rate. In opposing the Counties'

exception, L7LCO paints to studies which show that its

productivity ,ill prchably decline in the rate year and that

nuch of its past productivity has been capital-related.

The Counties' cochanical application of historical

productivity rates, to adjust forecasted enpenses in a

forward-looking rate year is not a reliable measure of

expectcc productivity. At best it could be used only for

some guidance, in the abscnce of more specific analysis.

Specific adjustments to various operating expenses are a

more accurate way to reflect future productivity. Thereduction in labor expense inherent in the adjustnents

to LILCO's estimates we have adopted is about 10%. He

consider the productivity reflected in those adjustments

reasonable, and therefore make no further productivity

adjustment.


.

1945 176

CASES'27374 and 27375

l'D** D *D.N

h gc, es @

DEPRECIATIO;iGas Depreciation

Productiop Structures. The rccent retirement cf

LILCO's Bay Shore gz.s plant has led the company to seek a

change in the deprcciation rate on all its gas production

struerures. The relative position of LILCO, staf f ar.d the

Judge on this issuc are shown balou:

Current LILCO .L_L.J anf Staff

Averare Service Life 35 years 20 years 30 ysirs

Salvage Valuc (100) (5%) (101:)

Judge Schachter, relying on testimony from staff,

concluded that the recent Bay Shorc plant retirement dis-

torted ave;sge service life calculations; that the " full

band" indicated average service life ves about 30 years; and

that a more modcat average servica life reduction to 30

years and retention of a 100 negative salvage rate would

produce a reasonable depreciation accrual. On exceptions,

the company argues that the accrual rate for gas productica

structures should be the same as the rate for other gas

production accounts because (1) gas plants vill henceforth

be rctired in their entirety and (2) the trend in the gas

production plant account is towm"d a shorter average servica

life. The company's first point is irrelevant becausa no

LILCO gas plants will be retired in the forcseeable future.

Its second argument fails because it has not demonstrated

that the modest reduction in the average service life

recommended by the Judge is unsatisfactory, particularly inlight of his provision for negative salvage, which is greater

than the company's. LILCO's exception is denied.


1945 177

: ,,

. .

CASES 27374 and 27375 0} D1 p

M udk 1

Steel Transoission Mains. At various times, gas

transmission and distribution mains have been studied assimilar and different property classes for depreciation

purposes. When distributica and transmission mains were

studied as a single class, the assumed negative salvage was15%. Distribution mains are now studied separately, and the

accrual provides for 20; negative salvage. Although the

1:eighted average ncgative salvage for the two plant accounts

has been 21.40, the Judge concluded that 15% negative salvagewas fair for the transmission acccunt because the salvagestudy in the record indicated tht.t actual negative salvage

has been only 1.';. On exceptions, the company ccmplains

that because tram nission and distribution mains were in asingle account until 1968, the deta on which the 120 negativesalvage factor was dctcrmined ia cuite limited. It therefore

argues that the two accounts should be treated on the same

basis and, since the weighted cumulative average negativesalvage of the tuo accounts is negative 21.4%, a negative20% allowance for each is fair. The actual studies, although

based on somewhat limited current data, are the best evidence

available. They show that transmission negative salvage is120, less than the 150 now allowed, and far less than the

20% sought by the company. We therefore conclude that theJudge's allowance is reasonable.

Cathodic Protection Devices. LILCO has beendepreciating cathodic protection devices at the sane rate it

uses for all distribution plant, a rate reflecting a 75-year

average service life and 15% negative salvage. In this

case, LILCO requested that a special subaccount for cathodic

protection devices be established to reflect a 15-yearaverage service life and zero net salvage. The Judge rejected

the company's request end found that cathodic protection


o' 1945 178

CMF- 27374 e d 4737SD * * lD

*D

'

9'l 3moMo XX=devices 1.'ay increana the average service life of the associa edmains, as evidenced by LILCO's actual cnperience between 1971and 1977. Although it 12 true, as LILCO points out onexceptions, that theco devices probably vill not last 75years and that thcy are attached to many mains with chortlife enoectancies, they do not necessarily reduce the averageservice 2ife of the accouat as a whole. Fcr this rcason, we

rejected a similar requent to estab]ich a special ceparateaccount far cathodic prntection devices in Case 27296,National Fuel Gan - Rate 7:, 18 !;? PSC (Opinion No. 78-29,_

issucd Decenber 29, 1978, mimeo p. 30). We will adopt theJudgc's esolution of this issue.

Electric Street ar/i Parb av LichtinaAs Ln.C3's stnet lighting plant is gradually

turned over to nunicipal and state agencies, premature

retirc ents are prcducing unforeseen losses ubich thecompany now sacks to recover in rates. The cc:apany proposedto depreciate the value of the remaining street lightingplant on the assvaption that it would retire approxilaately30,000 units per year for tuo years and a lesser amount ineach of the next eight yearc with zero net salvage. Thecompany also proposed remaining life treatnent of its parkwaylighting plant, with a five year remaining life and 62% netsal age for 1-1/2 years and zero thereafter.

Judge Schechter found that the street lightingretirements were taking place much nore slowly than assumedby the company and that an amortization assuming 10% salvageand a fifteen year remaining life was more reaconable.Since the recommended decicion, however, LILCO has effectedseveral transfers of its street lighting plant. On exceptions,

the company points to its sale of 33,777 units to the Townof Oyster Bay resulting in thout $10 million of unrecoverednet plant. In light of this experience, it believes its


I945 179. . .-

CA";S 27374 and 2'1375 a q.

fw A o 11 %Goriginal remaining service life assumption pas reasonable.

Staff responds that the actual salvage value of the street

lighting plant involved in the sales to five other nunicipalitics

we approved on March 6, 1979, as well as the Oyster Bay

sale, was about 400, and that this dc.Tonstrates that its

amortination rate is r.cre reasonable than the ccmpany's.

It appears that municipalities are no longer interested in

obtaining street lighting service from LILCO, so we accept

the proposition that the company sl.ould recover its investment

over a relatively short period. Decause it seems likely

that the systems with higher salvage values will be sold

first, the 40% salvage realized frcn the recant transfers is

probably too high to expect in the future. Our allowance

will therefore assume a ten-ysar amortization period an a

250 suivage value to reflect both the evidence of quichening

sales anc recent salvage values. We leave the issue of how

and iron rhen LILCO should recover thcce costs for resolution

in the ro_c design phase of this proceeding.

In view of the uncertainties regarding projected

parkway lighting retirements and the absence of retirement

experience, the Judge adopted staff's recommendation that the_

accrual reflect a ten-year remaining life and a lot salvage

value. The difference between this accrual and the one

recommended by the company is about $200,000; it would be

greater, but the company assumed that its current suit

against the State would be successful and has reduced its

plant in service estimate to reflect the anticipated award.

Such speculation about the outcome of the suit could result

in an under accrual. He thcrefore adopt the Judge's

recommendation.

Electric Production Structures

Judge Schechter rejected LILCO's proposal to

increase its depreciation allowance to reflect a decline in-.o.,


, - . , . .C,. ,. . ,., s.: 4/e t' . _ . . . . . , . -.

u.,u .IaI a

h. LM m1* D

'

A )hD Y lD

the averare service li~fe cf its electric, productior. structures

from the current 45 years to 35 years. Instccd, he ado,r*cd

the 40-year average service lifc reco.Taended by staff. Cn

exceptions, the corpany argues that a reduction of the

average service life from 45 to 25 ycers will (1) help cicse

the $7.2 million gap between book and theoretical depreciation

and (2) give all production plant tha scne average service

life. The Ju6ge focused on the second -lustification and

found it insuflu:1 cat hertur.e, in one case, LILCO was ab.e

to tarn a production structure into a training facility

af ter the gcne.:ating unit was retired, uILCO claims that

such recycling is unlikely...in the future bccause many of ircremaining structures are the semi-outdoor type and usefulonly as c2ectric predtction structures. In reply, staff

argued thet a change in theoretical reserve resulting frcr. achange in life table does nct warrant the large reduc'icn _n

the average service life esticate sought. The results of rhe

mortality study for this accoir,t are of limited value hecr.use

of the large discoatinuitics in the observed life table. -*

agree with sta2f and accept the more gradual reduction to 40

years rather than to 35 year.<:.

rnvironmental Contr.c..l_. _"quicuentJudge Schechter adopted LILCO's pro; osal to ano.-tize

the envircrmental control cquipment at I:orthport Units 1 a.d2 over the remaining lives of those units. On exceptions,

staff argues that use of remaining service life depreciatien

should be discoura;;ed because it results in a proliferaticn

of subaccounts, each with its cun rate, and cakes review of

property accounts virtually impossible. In reply, LILCO

argues that late additions to existing plant are usually

replacement parts that extend the plant's useful life, but

these pollution control facilities vill not have the same

effect. It therefore supports the Judge's resolution of

this issue.

1945 181


GJu}D "D 9

'

h>CME 5 27374 and 27375 D Y

u & L1I0

FEDEPJ.L IUCOME TAX

Trust Interest. Deductions- - - -

A substantial part of LILCO's investment in Nine

Mile Point No. 2'and its future .an"~ car ucl requirementsc.

are being financed by the debt of LILCO's construction and

resources t):usts. Af ter detr'rnining t hnt i.ILCO vould be

deducting the interest c:' the acbt of the trusts on its own

currt:nt tax returns, Judge Sch'.chter c?ec:ided that these

deductions should be reccgnised for raterachJ ng purposes.

The Judge uns convinced that the deduci.icnu cou.16 pro;erly

be used to reCuce the ccmpany's taxes by a nemo froni LILCO's

own t&n counscl. IIis rocc5mendation that these deductionsbe used to reduce the income tax expense borne by current

con:nvrers is consistent with our gancral policy in favor of

flowing through tcx benefits to customers.

On exceptions, LILCO attacks the Judge's action on

the ground that its right to take the deduction 3 fcr the

trust interest on its tax return is too uncertain withcut a

cor.clusive IRS ruling on thia natter. k's believe that t.".e

Judge properly relied on the menorandum of LILCO's tax

counsel, as we diu when we approved the trust financing~

arrangements, as persuasive evidence that the interest is

deductible for income tcx purposes. Flouing through the

deductions arising from construction of future plant to.

reduce today's rates gives today's ratepayers the benefit of

tax deductions that could be reserved for tomorrow's rate-

paycru. Tomorrow's ratepayers vill have to pay the cash

returns on the investment in the plants involted, but we

continuu to believa this policy is reasonable, as we did in

the last LILCO electric rate case. In that case, when the

corapany sought extension of this interperiod tax allocation

to the deductions related to the Nine Mile Point 2 and

Jamesport generating facilitics, we said:

', -33- Amendment 35 - January 1980'

1945 182

CASES 27374 and 27375-D D 3. \

u

c3 c3 aa

oo o . .. .a

On exceptions, L:LCO and the Counties cc: plain hthat it is " inconsistent" to treat property taxes differently

from other enpense itcms. LILCO further claims that sinceits forecast was the "only" forecast of rato year property

ta::es in the record it must be adopted. Property tance are

annual pay.sents set by government decision and are certainlydistinguishable from most other rate year expenses. Uc have

regula"ly alloaed the second-stage filings to permit utilities.to recover prcperty tan increases.1/ LILCO's forecast of

property ta:es was not the only one in the record--staff andthe Counties both submitted forecascc--and infnrration instaff's brief opposing exceptions indicates that even the

most current enticates may turn out to be inaccurate.

Accordingly, ve will authorize a second-stage tarif f revisica

in January, 1900 to reflect actual property tax changes

through that :c.onth. We do so with two caveats: first, as in

the other cases cited in the nargin, we will permit LILCO to

recover only 903 of the increases related to higher estimated

assessments, and second, if LILCO should file another major

rate case in the next year, we will make such offsets as may

be necessary to provent an overrecovery of these expenses

resulting from overlapping rate periods.

-1/See Case 27029, Consolidr.ted Edison Comcany - Electric Rates,17 N'I PSC 241, 263 (197 N , Caces 27094-5, Orance & "ocklana.

Utilities, Inc., suora, nimeo. p. 26; Cases 27103-9,Rochester Gas ;cd Olectric Cerroret.icn, supra, mimco. p. 15;Case 27100, New Ycrk Telecnone cc mnv, 17 tiY PSC(Opinion No. 77-22, issucd Decenner 1, 1978, mimeo. p. 7);

Case 27209, Jamaica Water,Sunciv Ceccanv, 18 NY PSC _ );1978, mimeo p. 11(Opinion No. 70-24, issuec Octoccr 6,,

cases 27215-7, Niacara Mol.cwk Power Corcoration, suora, nimeop. 28; Case 27275, arooktyn Union Gas company, 18 NY PSC(Opinion No. 78-28, issuca .iovember 28, 1978, mimeo p. 19;

Case 27296, N.nticnal Fuel Gas Corcoration, 18 .iY PSC(Opinion No. 73-29, issued December 29, 1978, mimeo 26 g3

-3/.- Amendment 35 - January 1980

YbCASES 27174 an.1 27375 99@ 0D 3d e AA o

We have ext:nined tut. question of the impact of

pollution control equipment on depreciation allouances in1/three successive Niagara Mohawk electric rate cases.1 There

we decided not to depreciate the equipment over the remaining

life cf the relate.d generating plant, in part because we had

previously recognized that the expected average service life

of Eiccarc Mohawk's generating plant was reduced because of

the added equipment. Ar' pting a similar cpproach here, we

reach the same result as the Judge without assuming that the

usefulness of the Northpert units will suddenly come to an

end in 2007. A good average servicc life estimate, properly

reflecting pact and anticipated events, will, if reviewed

and updated periodically, avoid the deficiencies LILCO

clains it will expcrience if the remaining life technique is

not uced for this property. We therefore accept the Judge's

allouance, and authorize LILCO to modify its depreciation

accounting to reficct the implicit reduction in the average

service lives of its facilities. We will also expect the

compnay to analyze the effect of anvironr.mntally iaposed plant

additions en average service life in its next rate proccedingand reflect its analysis in the determination for the affected

account s .

PROPERTY TAXES

Judge Schechter rejected LILCO's estimate of its

rate year property taxes and adopted instead a considerably

lower figure that reflected historic expense IcVels, plus

allowances for known assessment and rate changes. His

adjustments reduced electric axpenne by $5 million and gasexpense by $1.3 million. He suggested that these allowances

be revised to reflect known changes up to the time of final

decision and that the company be permitted a second-stagefiling to recover further increases during the rate year.

1945 184

1/ Case 26088, 11 NY PSC 1475, 1486-8 (1971); Case 26594,15 11Y PSC 268, 275-6 (1975); and Case 27943, 16 NY PSC 908,918 (1976). -35-


CASES ??374 and 273*/5 mm c3D D 3-

4Lq- g JQW G

It has long been our policy that current taxdeductions should be reflected in currentrates. We have nade exceptions only in caseswherc~ utilities denonstrated that deferralwas necessary to protect their ability toraise necersary capital on reasonable tcrns.LILCO has failed to demonstrate that the cashflow allovrances authorized in opinion No.78-1 are inadequate, so va continue to drawthe line on interperiod tax allocations at

the Shoreha a related it.terest deductions.3/

In this decision ue have not redeced the cash flow

allowances ve. approve.d i s , oinion 1;o. 78-1. LILCO has again

fai]ed to show that those allowances are inadequate. Its

exception is therefore denied.

TRASOP Tax Credi ts

Judge Schechter, in his tax calculation, used all

avai)able tax credits to reduce tames to the 10% ntatutorylimit, without recognining any of the 1% "TFASOd" tax credits.-

LILCO is generating core tax credits than it can use on its

current tax returns, so the unused credits are carried

forward or inventoried for use in futurc years on a first-

in, first-out basis. Thus, 1% TRASOP credits generated in1977 will be used before 4% or 6% credits generated in 1978.On c::ceptions, LILCO argued that Judge Schechter's failure

to recognize the it credits gives the benefit of those

credits to consumers, rather than employees as Congressintended.. LILCO reasons that if it is to continue to be

1/ Case 27136, suura, vraer issued April 17, 1978, mimeo p. 5.Incofar as the relative burdens between today's and tonorrew'sratepayers are concerned, we observe that plant being financedtoday for the use of future ratepayers tends to cause currentratepayers to have to pay for higher returns on investment.

" /TRASOP.is the acronyn for Tax Reduction Act Stock Ownership2' Plan,'a tax progra designed te encourage corporate cmployersto buy stock for the benefit of their enployees with funds theemployer would otherwise pay in taxes.

I945 185-36- Amendment 35 - January 1980

CAS3S 27374 and 27375D"D P

D W ~

sI S }h a3S&

cligible for the investment tax credit, it must invest the

entire tax savings produced for the benefit of employees;

and if all savings are instead used to reduce consumer

rates, there will be nothing lef t for its employces unless

LILCO spends its own money, something it says it is unwilling

to do. It concludes that the Judge's approach will force it

to terminate the program.

We approvcd LILCO's TRASOP program on the assumptionthat it would benefit employees at no cost to consumers. It

now appears that there is a cost to consumers since the

existence of the TRASOP carry-forward credits bars our

recognition of other credits we could otherwise use to hold

down rates. In these circumstances, we are compelled to

adcpt staff's approach. At the same time, we must forbid

further TBASOP investments by the company until it reaches a

tax position that will enable it to use the TRASOP credits

without imposing costs on consumers. We therefore expect

that there will be no unused TRASOP tax credits available in

the rate year.

Gas Department Tax Credits

On exceptions, LILCO complains that the Judge,

without discussion, accepted staff's proposal to reduce its

Gas Department's revenue requirement by subtracting tax

credits equal to the sum of all the 19'/8 and 1979, and one-

half of the 1980 credits. The company argues that no more

than 12 months' worth of tax credits can be used in determining

the revenue requirement. It is our policy to minimise

Federal income tax.cxpense to be funded by consumers by

accounting for use of all available tax credits and

deductions.1/ These credits, adopted by the Judge, although

1945 1861/Sce Case 26538, Consolidated Edison Comoany - Electric Rates,

14 NY PSC 1503 1534 (1974) Aff'd on appeal, ConsolicatadEdison Company of Mew Ycrk, Inc. v. Public Service Cornission,385 HYS2d 209 (1976).


CAS2:S 27374 and 27375 D"m D 0 'B S

m M ej EK -

generated in prior periods, can and should be properly used

to reduca the part of LILCO's tax liability attributable to hits Gas Department in the rate year. Its exccption is

therefore denied.

Earned Vacation Deduction

The Judge resolved a dispute between LILCO and

staff regarding the amount of earned, but unpaid, vacation

pay that would ava11chle in the rate ycar as a dcduction to

LILCO's tax lichility by adopting a ctaff adjustment that

reduced the proposcd electric expense allowance by $266,000

and gas expense by S75,000. The company entinate of the

deduction was $C00,000, equal to the 1974-1978 average, plus

$72,000. The stcff esti= ate adopted by the Judge was equal

to the 1977 actual figure ($328,000) tinen itn 1.118 wage

increase factor. The actual vacation deductions taken in

recent years, shown belcu, exhibit the kind of volatility

that.usually justifies norn:.lization: h

1978 $593,0031977 828,2121976 583,7421975 390,39G1974 459,590

On the basis of these figures, LILCO's estimate,

which includes the very low 1974 and 1975 figures, cecms

low, while staff's estimate, based on the very high 1977

figure, seems high. He judge that a total deduction of

$760,000, equal to the most recent three-years experience,

times the staff's wage increase factor, is a reasonable

estimate.

.

1945 187


CASES 27374 and 27375

12ortization of Deferred Ta::es,

The Countics, in their brief on exceptions, urgo

us to require a three-year amortization of the '' excess"deferred taxes on LILCO's books that result from the reductionof the corporate tax rate frca 48% to 46%. Staff and LILCOagree that whatever the ra2rit of the Counties' position, theratecaking problens created by the tax reduction are genericand should be resolved in the context of our investigationof this matter. We agrec. The Countics' exception will

therefore be denied.

Revised Computations

Our substantial revisions to the operating revenue,

expense, rate base and return allowancco recommended by theJudge have required substantial revisions to the income taxconputationc he made. Our computations arc set out in the

appendices.

RATE EA_SE

Deferred Tan _CgditsJudge Schechter adopted a staff proposal to reduce

the rate year rate base by: (1) the shareholder half of the4% flow-through tax credits generatef by the Shorehan con-

struction; and (2) the difference betwecn the rate year~

actual flow-through crodits and the three-year average we

used to determine the " normal" level in the last LILCOelectric rate case. LILCO excepts.

The company nakes a number of arguments withrespect to the first item. First, it notes that we did not

make this rate base adjustment for the reallocated flou-

through credits in Case 27136 and that, allegedly in accordancewith the accounting procedure it negotiated with staff, thereallocated credits are " deferred credits" rather than" deferred ta:: credits" that can be deducted frca rate base.

1945 188


CASES 27374 ano 27375 uD'

syg ei - -

Second, it argues that capturing the stockholder share of gthe 40 credits to reduce revenue requirement is unfair

because it would not have adopted flow through accounting if

we had not adopted a sharing policy. Finally, it argues

that using these credits both to reduco rate base nou and to

reduce income later would be unfair. It even suggests that

this approach may be against Internal P.evenue Service

regulations.

The company says the second adjustment is also

unfair because in Case 27136 ue used an averaging approach,including credits estimated to be available in the rate

year, to increase the nominal amount of flow-through credits

when the actual amount of test period flow-through credits

available was below average. Now staff wants to use the

actual amount available when it is above average.

We believe the staff adjustments are fair and

consistent with our decision in Case 27136, where we said:

The cost of financing the Shorcham CWIP is imposinga severe burden on current ratepayers while, at thesame time, abnormally high ITC benefits generated byShoreham progress payments are providing stockholderswith an abnormally high return on equity. But LILCO'scash flow requirements prevent us from reducing theabove-the-line tax expense by allocating all of theflow through credits to the ratepayer at th.i.s time.Instead, we hold that the portion of all futureShoreham flou through credits that would be allocatedto the stockholders under our general policy shouldbe allocated to the ratepayers. This should be doneby deferring them now, for accounting purposes, andamortising them later, as an offset to the attritionproduced when Shoreham is fully included in ratebase. (Opinion Ho. 78-1, nimeo p. 23)

We have made an equitable determination that the

4% credits from Shoreham construction should be allocatedentirely to the ratepayers. There is no reason why they

- .' -,


D ^0d )[.f

W DCASES 27374 and 27375 D* )D AAo o Ju 6

should not be considered custoner-contributed capital and an

offs 7t to rate base, regardless of the manner in which they

are accounted for on the books of the company. Otherwise,

the ccapany would have free use of the customer's money.

It should be understood that we are not reducing rate base

by any part of the stockholders' credits which are not

related to Shorcham. Indeed, the staff estimate of the

accumulated rate year Shoreham credits is conservative.

Also, we see no violation of IRS regulations since the tax

credits in question are Option 3 (flow-through) credits to

which ratemaking restricticas do not apply.

The second staff adjustment is similar; like the

rate base deduction for the Shereham tax credits described

above, they represent funds available for use by the company

because of credits which normally would reduco revenue

requirement. In Case 27136, the three-year average was

expected to be the actual amount of flow-through tan credits

utilized over the period. The sarue average used in this

case is 3ess than the expected utilitation. As a result, a

rate base deduction is required to reflect the expected

excess credits available to the company. Since our revenue

requirement is considerably less than that recommended by

staff and the Judge, the impact of this treatment is relatively

small--a rate base reduction of less than $2 million. LILCO'sexcsptions are, therefore, denied.

Shorchen Switchvard

Judge Schechter adopted staff's $4 million rate

base deduction to exclude the Shoreham switchyard from plant

in service and to include it in construction work in progress,

where it would accrue AFC. He concluded that there was "no

specificity" to the company claims that the facility will be

in service in April, 1979, a year before the related Shoreham

generating facility is in service. The company excepts.

1945 190E' -41- Amendment 35 - January 1980

"

CASE 3 2i374 ano 27375

DTP}D fif

D W"d 3

Y 9

Ma u u )]u'

The Judgc incorrectly franed this isene. Staff

did not dispute the company's claim that the Shercham

switchyard would bc in service before the Shoreham generatingfacility. It argued, however, that since the suitchyard was

constructed primarily to connect the Shorcham generatingunit and the Shoreham transmission line, it should not ';r

placcd in service until the Shoreha:a generating ctation is

in service. Uhilc there is merit to staff's position, cnd

its reconnendation may be consistent with past LILCO practice,it is not consistent with Part 168.3 of our Uniform S stsmf

of Accour.ts, which requires that the coupleted portions cflarger projects be included in plant in servire. While wewould, for adequara cause, diverge from the policy of Part168.3 for ratemaking purposes, we would be willing to do soonly in cases where a major distortion in rates would occur

if ve failed to act. This is not such a case. LILCO'sexception is granted.

Rate Base Capitalization Adjustments

The company, staff, and the Judge computed LILCO'sworking capital requirements using the standard FPC formula.The Counties' witness decided, en the basis of his " balancesheet" analysis, that the FPC formula resulted in an excessiveworking capital allowance. For this reason, the Counties

except both to Judge Schechter's failure to adopt their S39million adjustment to working capital, and a similar ratebase adjustment to recognize the $6.3 million injuries anddamages resorte. Staff and the company agree that the

Counties have essentially proposed a rate base / capitalizationadjustment without adequate support. Staff's analysis

,

indicated that there is a $1 million difference between thetwo, an amount too small to justify an adjustment. Further,

LILCO and staff criticise the computation since the adjustmentwas based on a comparisen of the average balance sheet working

-42- Amendment 35 - January 19807,g

1945 191

CASES 27374 and 27375

]D D

capital for the twelve months ended Tagust, 1978 with the

rate year working capital derived using the FPC formula.

When the balance sheet working capital calculation for the

1977 bare year is cc:apared to FPC formula working capital

for the same pcried, the difference is eliminated. The

Counties' picccceal working capital adjustments arc incon-

sistent with the rationale of the FPC formula. We helieve

the LILCO and staff capitalization com,rarisons provide an

accurate measure of LILCO's rate base and working capital

requirements. The Counties''enception in denied.

ALLOU.CD. PJ7.'UP_.':.__ - _

Judge Schechter reco:::.nenned that LILCO be alloued

a 10.13% cverall return; a figure that recognizes his use of

a pro forma rate year capital structure, staff's estimates

of the cost of long-term debt and preferred stock; and a

return on equity of 13.4t. LILCO, which sought a 10.4% to

10.5% overall return allowance, and the Counties, whose

witness recommended a 9.6% overall return, have excepted to

his recommendation.

At this point in the proceeding, the differences

among the parties have largely narro.cd to the issue of what

a fair return en LILCO's common equity would be. The 12.250

allowance supported by the Counties' witness was the lowest

recommended and the 14.3% allowance sought by LILCO was the

highest. Staff recommended 13.40. Because staff and the

Judge predicated their recommendations on the incorrect

assumption that we would add $200 million CUIP to rate base,

and since there have been substantial changes in the financial

markets and in LILCO's earnings since the rate of return

testimony was developed, it would serve no useful purpose to

review in detail the positions of each of the parties. They

are fully described in the reconmended decision and based on

somcuhat stale data.-43- Amendment 35 - January 1980

1945 192

'

m av m eW~ 1 .

CASES 27374 and 27375 D D D ash_d, Aaeg

Our own rate of return analysis, using the sar.2

discounted cash flow approach used by witnesses in the case,

leada us to conclude that 13.7t is a fair all wed return on

equity for LILCO. Over the past several months the yield on

LILCO's common stock has averaged 9.50-9.75%. This is

substantially higher than the yields assuried by any witness

in the case. But it does reflect the change in interest rates

that has occurred since the rcceipt of tectimony in the case.

This yield would be consistent with a growth estimate based on

LILCO's recent experience, for it is lihc3y that there have

been changes in investor growth expectations as well.1/Witnesses in the care provided growth estiuates that ranged

from 3.5t to 5.0%. LILCO's 1978 return cnd retention ratea

make current growth e::pectations in excess of 4% seem too

high. The staff's figures on historic growth in book value

per share, a proper indicator of growth and onc which

reflects the impact of new issues as well as the effect of

return and ratantions, demonstrate that 3.5% is a better |hestimate. Investor growth expectations nre thus in the 3.5%

to 4.01 range. Combining these figures for yield and growth

produces a " bare bones'' cost of equity in the 13.0% to 13.75%

range. From this, we conclude that 13.71, which includes an

allowance for issuance costs, is a fair return on LILCO's

common equity.

An allowed return of 13.7% compares with the 13.3%

allowed in LILCO's last electric rate case, and the 13.5% wa

allowed in its last gas rate case. A higher return is now

justified by the general increase in interest rates since

then, and our decision not to add more electric CWIP to rate

base. While it is true, as Suffolk County observed, that

1/We believe rEe very recent increase in yield above thisrange relates to a downward revision in growth expectationsattributable to circumstances other 'than the change in marketinteront rates. Thus, any further increase in yieldassumptions would be matched by an offcetting reduction ingrowth expectations.

1945 193

-44- ' Amend $ent 35 - January 1980

CASES 27374 and 27375 D** D ~ #D'

N@\s,oo o ed. tru _a

13.7% is a higher return than those earned by most energy

utilities in past years, it recognizes the concerns of the

1979 investor, and sone of the unusual circumstances that

make the risk of investing in LILCO stock different from the

risk inherent in other securities.

Our overall return allowance, reflecting a 13.7%

return on equity and minor changes in LILCO's cost of debt

and financing plans since the close of the record, is 10.26t

as derived from the following table:

Amount t _ Cost Rcturn

Long-Term Debt $1,275,375 4G.0t 7.88% 3.62%Preferred Stock 337,710 14.0 3.35 1.17Customer Deposits 8,300 .3 9.00 .03Common Equity 1,103,450 39.7 13.70 5.44

Total $2,774,C35 100.0% 10.26%

CONCLUSICM

Our estimates of LILCO's probable revenues,

expenses, rate base and cost of capital for the next tuelve

months indicate a need to increase its electric rates by 3.3%

to produce about $36.0 million in additional revenue and its

gas rates by 9.1% to produce about $16.6 million. Our

computation of these rever.ne requirements is detailed in

Appendices A and B. The clectric rate increases are substantially

less than those sought by the company, or even those

recommended by our staff and the Judge, primarily because we

have concluded the company does not need cash flow allowances

to finance its construction program. Where our expense

allowances er:ceed those recommended by staff and the Judge,

we found they were necessary to enable LILCO to provide the

service to which its customers are entitled under the Public

Service Law. We have also recognized that LILCO's cost _of


1945 194

CASES 27374 cnd 27375D'D D' TV4#

iMa oJ . )] 1/ ,

capital vill be somewhat nore than either the Judge or staff

expected, because general inflation--a phenomenon cver which

neither we nor LILCO's management has much control--in the

past six months has driven interest rates much higher than

they assumed. LILCO has, in acce; dance with our November 3,

1978 Statement of Policy cn Federal Anti-Inflation Guidelines,

demonstrated that an electric rate increase of less than

7.0% ($87.7 million) would comply with the primary Federal

" price deceleration" standard. It also claimed thst a gas

rate increase as high as 13.1% ($23.9 million) would comply

with the Federal " profit margin'' standard. The authorised

electric rato increase is far.less than the increase allowed

under the Federal price deceleration guideline. By our own

computation, the authorised gas increare will exceed the

allowable increase under both the Federal " price deccleration'~

and " profit margin" anti-inflation standards. We believe,

however, that the indicated gas rate increase is not in

violation of the Federal Anti-Inflation program because the gcompany's gas operations qualify for an exception under the Wguidelines. Here, as in the recently decided nochecter Gas

and Electric Coroorntion gas rate case,1/ gas rates heldwithin the limits set by the Federal standards would result

in a gas department return on equity that would be substantially

less than the current yield on LILCO's long-term bonds.

Also, LILCO'a common stock is selling at less than 90% of

book value, just as RG&E's was. This fact is attributable

in part to the depressed earnings of its gas department in

the past. These considerations lead us to conclude that the

company's gas department should be granted an exception tothe Federal guidelines in this case for extreme hardship and

gross inequity. We are satisfied that these increases will

not hamper the nation's effort to control inflation.

-1/ Case 27372, Rocnester Gas and Electric Corcoration, 19 NYPSC (Opinion No. 79-12, issued April 13, 1979, mimeop. 50).


: 1945 i95.

CASIS 27374 and 27375

07 $1

u -

Finally, we are investigating the propriety of

LILCO's electric and gas rate design in a seccnd phase of

this procacding to determine how and from whom the ccmpanyshould receive the revenue it requires. During the pendency

of that investigation, across-the-toard increases to obtain

the additional required revenue, as proposed by staff and

reccamonded by the Judge, vill be acceptable.

The Commission orders:

1. Long Island Lighting Company is directed to

cancel immediately the suspended tariff leaves and supplementsenumerated in Appendix C.

2. The company is authorized to file amendments to

its electric cnd gac tariff schedules designed to produce anincrease in revenues in an alaount and manner consistent withthe iindings and conclusions contained in the foregoingdecision. The company shall serve copies of its compliancefiling on all parties listing appearances in this proceeding.Comments of interested parties may be filed with the Secretaryto the Com:aission within- three (3) days of service of the

company's prcposed revisions, if personally served, and

within five (5) days if served by mail. The revisions shall

not take effect until approved by the Ccamission.

3. The company is directed to report all changesin its property tax expenses through January, 1978 to theSecretary on or before January 31, 1980 and is authorized to

file tariff revisions for second-stage rate increases at

that time if necessary to recover property tax expenseincreases. The company shall serve copies of the report,and notice of any proposed tariff revisions on all partieslisting appearances in this proceeding. Comrents of interested

parties may be filed with the Secretary to the Commission-within three (3) days of service of the company's proposed

b

-47- Amendment 35 - January 19801945 196

CASES 27Ti4 and 27373

D**]D *D TI'Ns_ c o j\1 ;S_be o

revisions, if personally served, and within fivo (5) days if

served by mail. The revisions shall not tako effect until

approved by the Corraission

4. The company is directed to file with the staff

of the Consumer Service Secticas of the Power and GasDivisions a quarterly report containing the inforr.ation

doucrined in Appandix D in a form and nanner approved by

stoff.

5. Except as grantcd herein, all exceptions to

the Administrative Lt.u Judge's recoramended decision arc

denicd.

6. Except as modified herein, the findings and

conclusions of the reco.T.raended decision are adopted as partof this Opinion and Order.

7. This proceeding is continued.

By the Commission,

O(SE7.L) (SIGNED) SAMUEL R. MADISON

Secretary

91945 197

_: ''

-48- Amendment 35 - January 1980-

C. 27374 Appendix ASchedule 1

IE;G ISU.;ID LICH7I"G CO"OANYCommission Eevenue Requirenent

Electric Departr. ant(000)

Revenue Requirement por Schedule 2, Page 1 $ 25,000

Less: novenue Taxes 4.02% $1,005Advertising 0.075% 19Uncollectibics 0.594% 195 (1,219)

Operating Incone 24,781

Less: rederal Incomo Taxes 8,155

Dalance Available for Return 16,626

Adjusted Balance Available at Present nates 143,340

Total Available for Return S 159,966

Adjusted note Base per Schedule 2, Page 1 $ _1_ , 55 8 , 7 2 3

Rate of Returil 10.261

D**D *D'TV',

))_j\ _ava o

1945 198

.'

*


c. 2 / 314 ,8f::F: IstJLt'n !.tC:t7tt:C C0*.5s NY Ap;.unJ1m AStatim 2:.t of C . c.atl ] Incuia, u tc 1: un, fute of Dutura Sctbedule 2t

1%ar t.Pe 12 M utha n il.c .bne 30, 1930 Parje 1. Ele.cttic Ag.arta.cr.t

(nA)

As ris. ally

A0ju. tea 1y AI.3 As Adjust.d Commission As Adjustud Comalsaton Af ter It. atec.w ..iny * gi se r.e..t g np AT.1** g .ist=*nt. By cou .1: i. t an pat. s incre:. u

(1) (2) D8 (4) (3) (b) (7)

e. ,.an.e i y[novxu r$: a .7U~r~4 city 6 % 4,471 $ 1,212 $ 715,C21 (1) $ (3,0%) $ 742,591 $ 20 ,MO $ 001,L'el.s.s.'

s't ho r 01,u s et t a.9 Huvunusa 4,W 4 '![*1 4d 's -~

Tu.tal 7ss,172 1,212 79M .i t (3,092) 107,#92 MM O L1.122 '

p r.it i n.: ( q,g..so sti.+s.attaa a M.stntsnanco Espunsen 40s,221 (17,tti.) 451,275 (2) 3,104 454,459 17 4 4 54,L 3Ca..ritalle Co..ta1Lutlana 27J 270 273 270h ;.ra:1.Liua 50.925 (1.C72) 45.25. (3) 377 43,631 49,411

122 f0 ) (4) 1,0C9 124,510 1 015 12 h%1,b r. a (t hst %.an incca.a Tasas 137 'n? _ W',t? 7) _

6/i,R3 b 2*.0 62 p , e;Ps 1,219 E % ,qg t

(?4, * . 5)dt.a1 to.t :34

3. e .it l e..; 7 . . . m.., 141,143 25,007 li.6,9 % (d,342) 15C,C13 24,701 l as t . J'J 4

F. . .*s al la.cas T. nasa.- As Allocated 70,791 (2flM) 16,7 #=1 (3) (I,4Cl) 15.,273 0,1% 23,42's

%h- _ k2is 3 j aM /SI $ 141,110 $ 16.s2 & $ 1 5 .*e.6et,t o .e ro a ti.., I r.ermo $ ! ?1, 3 % $ 27,. c.o $ 1.-

. nt $1,190,, *J 70 $ (17,061) $1,179,t.3) (C) $ 3,2G9 $1,133,19J $1,10J,13u (C). . 4 :. a w; C(,8 t =1 132,401 ( 8,1a t) 121.217 (7) 47-J 128,696 123,0% gja6..wtan. titae ' oak in 5aagcous 7.n. 032, (2C3,000) L43,i C 's (f.) (200 C03) 3G.;,620 1C0,000

h. ma l'arcrred reder 1 Itt.o.m Taxes (2.J,7 / 3) 2,11J (194,643) (9) (3GS) (19,512) (19,$12)

a'>*) (10) 1,469 ( 2% 1(.C) $(1,414) (p t.*d) {la t. t rvJ 1..veut. Tax CruJiti, J:'s 'J. ;-) ( q) i10 -

Total _01. : j7p ,716 $ ( 2 m . t.t:2,) g ,f,:,S v ; . $ fl*5 ;tf t) [1,g ,3 g. 5(4.498) gysJ.s,

g Y'L. 9 ;. on e.1 L.it e of Pctiern a. 60s 0.41% 9.17s 13.20s*

* .cr Lale! Lit 243 Stimd414 1. Column 3."

Q'

* * c r A1.7, ed), Appendix C, Page 2. [43

=

b-

eA Amendment 35 - January 1980LD

-

* O O O

C. 27374 7.pp e.. ! '.x .t.Schedule 2

LO!!G ISLA!!D LIG*lTI!!O CO.''PANY Page 2Explanation or Cor.mitaicn Adjustnents

To Electric Operating IacenaFor the 12 Months Ending June 30, 1980

(000)

Etisct C:.Operating

Adjustment, Explanation Inc e

Operating Pcvenues,

1(a) Dec:cc.so revenue to reflect reduction of rctertempering recoveries to company revised icvel.

Increase Per ALJ $1,212Increase Per Commission 339

Com.nission Adjustment $ (873)

(b) To adjust operating revenues to correctS.C. 2 MRP billing error. (2,219) $13 ,093)

,

Effcet OnOperatingExcento

Operntion and Maintenance Egpenses

2 ( a ', Prcducti:n Exocarec

(1) L31owance for Maintenance Projectcontingencias.Per AIJ $ -0-Por Commission 200Commission Adjustment $ 200 $ (20M

(?! Roversal of .iLJ reduction of BoilerMaintenanco Projects.Per ALJ . $ -0-Per Commission 283Commission Adjustment 283 (223)

(b) Trancmission and Distribution Expenses

(1) Commission allcwance for tree trimmingexpenses.Per ALJ $ -0-Per Commission 880

Commission Adjustment 880 (CEO)

(2) Reversal of ALJ reduction of Public Worksexpenses.Por ALJ $ -0-Per Commission 173Commission Adjustncnt 173 (173'

1945 200m

h6~\Q


9'

,

C. 27374 Appendix ASchedula 2

LO??G ISL.Y D LIG!!TI::G COMP.'. W Page 3Explanation of Commis:;ien Ad3ustnents

To Electric Operating IncomoFor the 12 Months Ending June 30, 1980

' (000)(Cont'd)

Effect On Effect G..Operating Operatint-

a.d j u s tr,en t gelanation Expense Income

Mation and Mainte::anen r :censos2(c) Customer Accounts Expenses

Commission allowance for increase inCustomer Relations expcnses.

Per AIJ ( $2,19 3 - $1,13 7) $1,056Per Commin'; ion

(50% of $2,193) * 1,09GCo:amissien Adj ustment S 40 $ (40)

(d) Administrative and General Excenses

Commission reversal of ALJ adjustment toESEERCO costs tesulting from DASI,Y withdrawal.

Per ALJ $ 220Per Cor.c-ission 50

Commission 1,djustment 170 (170)

(e) Advertisina and Public 7.ffairs Expense

Adjustment to ALJ disallowance.Arca Development $ 156Emplovee Cc=monication 90*

Chang'c in nevenue 2Commission Adjtstment z.aV

Electric Portion @ 90% (223) 223(f) Storm Damarre Reserve and Accrual

Adjustment to increase reserve limit and reflectresultant lower amortization.

Per AIJ $ 601Por Commission 434Commission Adjustment (167) 167

(g) Labor Productivity

Reversal of company's productivity adjustment. 1,730 (1,730)

* Company Adjustment - Exhibit 38A $2,811

Electric 9 78% 2,193

Gas 0 22% 618

DQkeg e


1945 201

C. 273'4 Appe.9 'i:: ASchedule 2

LCt:G TSUS D 1.IGi':'I??G CO *nAt3Y Page 4ExplEEstic n or corrusraan t.c j uctr.cnt:.

to Electric Operating InccmeFor the 12 Months Ending June 30, 1980

(000)(Cont'd)

Effect On Effect OnOperating Operating

Adiuntment Exclanation Expence Income

Coeration and Maintenance Excenscc

2 (h) Wage _Increare Indering

Adjusba.cnt to reflect restoration ofindexing due to revisions cauned byCommission adjustr.cnts to labor base.

Adjustmant.1 to laborbase (Si,57G X G8.361) $1,077

Wage increase factor 13.37sCommission Adjustment $ 145 $ (145)

(i) Inflation Indexing

Adjustment to reflect restoratjen ofindexing duc to revisionc causnd byCon.ission adjustnents to inflationbase.

Adjustments to inflationbase ($1,576 X 31.64%) $ 499Inflation factor 17.5%Commission Adjustment 86 (86)

(j) Wage Increase - " Proper Period"

Recalculation of elimination of twoextra months Wage Increase cc..ipoundingresulting from Commiscion adjustrc.ents.

Per ALJ $ 234Per Co:rnission 313

Commincion Adjustment (79) 79

(k) Inflation increasa " Proper Period"

Recalculation of clinination of twoextra conths Inflation Increasecompounding resulting from Cor;r.issionadjustmente.

Per ALJ $ 265Per Commission 319

Commission Adjustment (54) 54

Total Operation and Maintenance Adjustments $ 3,184 $ 3,184


-w .

-

1945 202.

C. 27374 APTuriix AScisi in 2

LOMG .T';L7J;D LIGM'.'1NG CO:OMY Pac: LExplanatio:4 o f co..n.ist,lo.4 Ja.J us tments

To Electric Operating IncomeFor the 12 Months Ending Juna 30, 1980

(000)(Cont'd)

Effect On Effect C.Operating :-ecrati:

Adjurtment Explanation Expence Incone _Depreciatien Er.nonae

3(a) Conmission revision of ALJ'n change inOcpreciation ratea en Street Light.ing Plantto ten-year life and 25% salvage.

Comraiss3cn Adjustn ent$ 245 S (2 /. :

(b) Allowanco for Depreciation Expenso relatedto placing Sharcham Switchyard in nato Base(per Exhibit 212) . 132, D--

Total Depreciation Adjustments 3 377 5 (-,

Taxec Other Than Incm Trees

. 4 (a) Adjuut: ant to uplato Property Taxes tolater.t 1:nown tax bills.

Per ALJ $4,977Per Co. letter 3/29/79 3,199

~

Commission Adjustment $ 1,778 $ (1,77:

(b) Adjustment to reduce P.cVenue Taxos relatedto Adjuntuent 1(b) above.

(S2,219 X 4.02%) (89) .. r. i

Total Taxes Cther Than Incomo Tax Adjuttments $ 1,609 $ (1,6SJ

Federal Incono Taxes

5 Per Appendix A, Schedule 3, Page 1. $ (3,467) E 3,.iG-.-

eoD


1945 203

C. 27374 Appcndix ASchedule 2

LONG _IS.L.JD_LIGHTI !G CO"_PAtiY Page 6Explanation or Cc=mir.3:cn Adjustments

To Electric Rate BaseFor the 12 Months Ending Junc 30, 1980

(000)(Cont'd)

Effect OnAdjustment Explanation Rate B2se

Not Plant

6(a) Roverse ALJ adjustment related to ShorthamSwitchyard in Rate Case (per Exh. 112). $ 4,113

(b) Modification of Rate Base allowance fordeferred Storm Damago expenses.

Chango in reserve $ 500Loss one-half of first year'schange in acortization 84Cormission Adjustment (416)

(c) Adjustment to Depreciation Reserve toreflect changes in Depreciation expense(Adjustment 3) .

Commission Adjustment ($377 X 1/2) (188)

Total Adjustment to Not Plant$_ 3,5M

tforkino Capital

7 Adjustment to reflect changes resulting fromCommission adjustments.

Compinbion Adjustment ($3,134 +.$167 X 1/7) $ 479

Construction Work in Proaress

8 Disallevance of Shoreham CNIP from RateBase. $(200,fCi

D' h

B k3U Sl

o B)B o


1945j?ci4

Ap;cndir ;C. 27374 S che.' el : ;

LO?:G ISLt.':D LiqFT.TNG CCMP;.'"/ Page 7Explanation ni Cen*.ilss:.cn Adjuctments

To Electric Rete BaseFcr the 12 Months Ending June 30, 1980

(000)(Cont'd)

Effect C7Adjustncnt Explanation Rate Ensp_

Deferred Federal Incc..e Taxon

9 Change in Average Accuraulated Doferred Taxesdue to Corxnicsjon adju.Stnents to currentDef erred ' faxes (befare rate increasc).

Current Daferredpor ALJ $ 16,709

Current Deferredper Com:nission 18,446*

Additional Def6rred Taxes S 1,737Rato Bass offect (1/2) $ (3 f M

:

Deferred Invcsrrent Tax Credits10 Chi 7e in Averaso Accenulnted Deferred

Invectr. ant Tax Crcdits duc to Commicsionadjucta.cnts (before rate increase).

Current Deferredend StockholderIfC por ALJ $ 2,817 <

Current Coferredand StockholderITC par Commission -0-

Reduction $ (2,817)Rato Baco offect (1/2) $ 1,409

h9

D hSe sh 5

*Por Appendix A, Schedule 3, Page 4.

1945 205 OAmendment 35 - January 1980

.<, .

\ed

C. 27374 Inic FSrxio v.teTTlen (wnurCcevutation et .%Jetal Ie cs.mo WM - I cr Cusumieniori A.geeredia A3

1.1. ct ri c In g e t te*-e.t SCI *Jale 3for the 12 .%,nt's ?.ndtn1 June 10,1933 g.,9, g

(nw'}

As AJjusteJAs I.JJ.istoJ Ccec 1sr tos As A4]vstcJ Cornission For Commt stonAA t.f g it wnts tiy twem!*:sfort stato increase R.e t e Increase

(1) (2) (J) (4) (' )s

Total Operating Incoone }Fda'' 5 I_{3,312) $l'Jt.613 y24dO1 S i ts I,}94,Other Income - A M 64.8M3 0) 29.204 'J J , fst'C 9 2.tt' 4JTrust Intervet Charges ('2,100) (2) ( 10.)). (23,000) (2),600)Other Interest Charges 19734) (3) J1,Q) (9 3 dG I) _{9.),5(.8)3

Euistot.n! _{s M N1) 2 8.( tas t 2 3 ,0 72) _ 23,d79)(Incos,4 Isuforo income Taxes 11*>,201 t r., 's il 1 1 ". , *ys 24,7b1 1 *=', l l 'a

N.!uct tbn-T.o ra'.1 e it emsAllcatance for runda used Du. ring Construction Jt , t.no ?<: . 2r54 '31,004 91. f434

AJJ-Dack of S tes e int Tax-DediectibleAccrual for Ittj ttries ani.8 DJ%3ges lle*Scrve - - *

Accroal for Dail tasLts huscrvo - - -

As.caual for Storm Darage bcserve 1,601 (4) (167) 1,434 1,434sortlev.cntal Provision 1,468 1,4CS 1,46teAmoatization of thirtga<;o PccordinJ Taxes 275 275 271l'AC Casats - 84 furred (2,271) (2,274) (?,27()

r,ut,t o t a l I,070 flgt e33 9sa) 7DeJ xt Alditional Tau Deductions I

T4x tet'reciation an Excsse of Dook Depreciation 15,506 (5) 1,0C6 16,672 16,672 -7Eu,miss Cesarr).ed to Reserves j

Injuries aset tsmagce - - -

Stow. am,nes - = =

' 'C31 ! t,.l.ti. - = =

Co it of Aseving Hstired Property 1,005 1.995 1,0J5 CConta (t.aaged to Constructions C

.syro11 Tames 1,161 1,151 1,161 -

Q I s"alon;s 2,013 2.013 2,013 !:. les Tawng 2.546 2,546 J,545 -yrest Presir.aty Taxes J.6,731 16,731 16,7J1 Q7C, t n.. ma t h at.J 84rvelotment comte $17 517 5 '. 7 C

Pe ert y Tus s - Lien Date 3,272 3,272 3,272N 2413 r Milo 52 - Cne.mtruction Charges 1,267 1,261 1,2b7 ~

Q l'est ") Vacations AJjustaent 714, (6) (141) ','s ) *.y t, bSu'.t.,ta f J 1g>l2 96 4%,U57 4 '. . m. JTaz.shte Is cuno (tesse) p_1.MQ [it i,'M1) S '3.311) y23 /u'. $34Q

ro teral fucore Tax et 4% $ 4.912 $ (G,132) $ (1,520) *11,399 $ e,st7 Pteas s : Investw.et Yan Credit JM4j) 4.045 - (12.232) (IJ,2tJ)reAral Tesma T.sm - Current 14 7 (2 J31) ( 1, '.M) (u2J) ( 2,353nD.iferred re bral Is.coew Tax - Current 1 G , ,'GS (7) 1,737 I fl.4 ' 6 lb,4 %.

fa.forrsJ ted.rr.1 Inc m o Taz - t.svrtization (1,653) (k,651) (1,fe ))aisteated Invustment T.ix credit 1.5CS (0) (1.5C0) - 5,744 5,714:,tuimal.kr Iown.at wesit Tax Credit _l , ? !!s (')) jl y2) - 3,214 1,2;11,2

PNt l'wica al Ir:c<.ru T.auss (Albactiwnt 5) L19,7f1 }, ( 3. 467) * 15,271 (10) En l'A S ??,423g


C. 27374 0 D 0 b'Appendi:: A

~{- u Schedulo 3

LO!!G ISLAND LIGHTI !C CO:'PAMY Page.2Explanation of Cor.:aission Acjustments

To Electric Department Federal Income TaxesFor the 12 Months Ending Junc 30, 1980

(000)

Effect OnTaxable

Adjustment Explanation Incone

Other Incom> - AFC

1(a) Reversal of ALJ reduction of AFC rel'atedto additional Shoreham in Rate Base.($200,000 X 7.63t). $ 15,260

(b) Additional AFC cn revised Shorehamconstruction expenditures allowed byCommission. ($4 3,000 X 7. 63%) . 3,281

(c) Revision of AFC to allow use of the FERCmethod to compute Arc rate. 10,663

Adjustracnt to Other Incone - AFC S 29,204 S _ 0_

Trent Interort Chargos

2 Recalculat30n of Trunt Interest to updateinterest rate to 10.5% estimate ofprime. rate.

Commission Adjustment (.5% over ALJ rate) $ (900)

Other Interont Charoes

3 Revision of interest deduction to changeLong-Term Debt cost rate.

CostAmount Rate Interest

Long Tern Debt $1,275,375 7.81% S100,372Customer

747Deposits 8,300 9.00_$101,119

Electric portion at 92.33% $ 93,363Interest Per ALJ 89,734

Commission Adjustment S(3,629)

OAmendment 35 - January 1980

1945 207,p,

C. 27374 Appendi:: ASchedule 3

LONG 1SI.AND LICHTI:iG COMPA!!Y Page 3Explanatian of Com.nission /.d3uctnents

To Electric Department Federal Incomo Ta::esFor the 12 Months Ending June 30, 1980

(000)(Cont'd)

Effect onTaxable

Ad3ustaent Explan~ation Income

Accrual for Storm Denage P.eserve

4 Adjuctment to revice add-back ofStorm L mage accrual to level allowedby Com:r.ission.

Accrual per ALJ $ 1,601Accrual per Commission 1,434

Commission Adjustment S (167)

tax Depreciction in Execes of Book Deureciation

5 Additional ta:: depraciation related tochange in book deprcciation rates(per Adj. 3). $(1,096)

Earncd Vacttion Ar}justr.ent

6 Revirion of. Earned vacation deductionto three year averago inflated forWage Increase.

Per ALJ $ 941Per Commincion 760

Commission Adjust =cnc $ 181Electric portion at 78% $ 141

'.B

%9 \:)o

D Sh b

1945 208-

-


C. 27374 Appendix ;Schedule 3

LONG I_S,IAN'] LTC ~?T7NG CO.'iP AM_'{ Page 4Explanation of Cortiss,len Aa;ustuents

To Electric Ceparcr.ent Federal Incer.e TaxesFor the 12 Months Ending June 30, 1980

(000)(Cont'd)

_

Effect OnInco: .c

Adjustment _ Exclanstien Taxes

7 Pocalculation of Leferred Taxes - Currentunder the APB ill t:cched.

48% Deferral 46% Dcferral1979-00 Avera;c 7.c N-e,;ut ad

Assen OcpreciationPange $ 6,223 $ 5,969

Cost of Eccorel 527 505Mortgage Taxes 310 297Puol ccst Adjtstrent (922) (884)Gac Cost Adju::t=3ut 269 257

Dofezred Tu::cs S 6,411 $ 6,144

i 46% kxCr1gLnnting TizingDifferences $13,356 g

Tax at 4Gt S 6,144 ..

Additional I"C at 70% linit $(4,301) 9uResulting Deferred Tax $ 1,0_4 3

_

Deferred Ta:: Co.eutation

Total Electric At Gas AtDeferrals E6.87% 13.13%

APS #11 Itcr.s $ 1,8(3 $ 1,601 $242Shorcha:a AFCNet of Tax 16,845* 16,945 -

18,098 513,4*6 $242

*AFC Met of Tax Revision~ Deferred Per ALJ $13,122

Co sission reversal of Ch*IP in Rate Base 3,771

Ceferral at 1.87% 16,393

Percentage Eeduction to 1.78% FERC Fate (.0481) %Reduction (813)Net 16,080

Plus: Deferral related to additionalShorehan c:qcnditures 535,000 X 1/2 =

j}f} }i $J3,000 X 1.73% 765Revised Deferral S16,545_''

Doferred Taxes Per ALJ (Electric Portion) S16,709Deferred Taxes Per Co. mission (Electric Portion)lE,446

Co:nraission Adjustncnt $1,737

Amendment 35 - January 1980.

C. 27374 Appendix 1.Schedule 3

IONC ISLTND LIGH"_iNO CO:*2A:iY Page 5Explanatio., of Commission Acjustments

To Electric Dopartment Federal Incono TaxesFor the 12 Months Ending June 30, 1980

(000)(Cont'd)

Effect OnIncome

Adjustment Explanation Taxes

Deferred Investment Tax Credit,s

8 Elintination of Dcferred ITC becauseof negative current income taxbefore rate increase. $ (1,539)

Stockholder Investmant Tax Credits

9 Elimination of Stockholder ITC becauseof negative current incomo ta.s: beforerate increase. $ (1, 2],S )

0g

1945 210

Amendment 35 - January

.

.

Cs. 27374 Accer. dix ASc'odule 3 |hh27375Page 6

LC!iG ISLA! D LIG!!TI:2G CO"PI.21YExplanttion of Cor=nssion Adjustncnto

E-10 and G-5 to Electric and GasIncomc Taxes After Rate Increase

For the 12 Months Ending June 30, 1980(000)

Total Electric Ga r,

(1) Federal Incomo Ta:: @ 46% $ 20,601 $ 9,879 $ 10,722

(2) ITO utilization @ 70% 14,421 12,232 2,139e

(3) Federal Income Tax - Current 6,180_ (2,353) 8,3_33_

(4) Flo:-through 7,364 6,488 876

(5) Lces: Stockholder portion - 50% 3,682 3,244 438

(6) Deferred ITC $ 7,057 S 5,7/,4** $ 1,313

OD**D *D'TK*.b.oo a ,

* Maximum allocable based on generated credits.

** Maximum flow-through allcwable $10,300Actual flow-through - linc 4 7,364Difference - Option 3 - Electric - deferred ~ 1,936

Total Electric deferred - line 6 5,744

Electric deferred - Option 1 5 2,808

Sumdary of ITC Total Electric Gas

Option .3 - flow-through $ 7,364 S' 6,488 $ 876Option 3 - deferred 2,936 2,936 -

Option 1 - deferred 4,121 2,308 1,313$ 14,421 $ 12,232 S 2,119

O~~


1945 211

C. 27375 Appendix 3Schedule 1

LONC ISLAND LIGHTI!!G CO"P7sNYCommission Revenue Ecquirement

Gas Department(000)

Revenue Requircrr.unt per Schedulo 2, Page 1 $ 15,SEO

Less: Revenue Taxes 4.02% $ G66Advertising 0.075% 12Uncollectibloc 0.594% 98 (7761

__

Oporating Incomo 15,"804~

Less: Federal Income Taxes 7,271,

Balance Availabic for Return 0,532

Adjusted Balanco Available at Present Rates 15,974

Total Available for Return $ 24,507

Adjusted Rate Base per Schedule 2, Page 1 S238,7 {Rate of Return 10.26%

h'0g

1945 212

.iaendment 35.- January 1980'

..

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. _

C. 2/375 Appa u: aSchadule 2

LONG ISLAND LIGHTI!!G CO!'PANY Page 2Explanation of Conmission Ac]ustrents

To Gas Operating IncomeFor the 12 Months Ending June 30, 1980

(000)

Effect OnOperating

Adjustment Explanation Incore-

Operatino Revenues

1(a) Adjustment to increase revenues to reflectchange in S.C. S temperature setting. $ 549

(b) Decrease in revenues to reflect reductionof meter tampering revenues to companyrevised level.

Increase Per ALJ $ 5Increase Per Commission 2

Commission Adjustment (3 ) $ 546

Effect OnOperatingExcense

Ooeratien and Maintenance Expenses

2 (a) Transmission and Distribution Expenses

(1) Elimination of nor:aalizing adjustmentto servicing customer equipmentexpense. $ 277 $ (277)

(2) Elimination of adjustment to normalizeroutine operations expense. 120 (120)

(b) Customer Accounts Expense

Commission allowance for increase in CustomarRelations expenses.

Per ALJ $ 297Per Commission (1/2 X S518) * 309

Commission Adjustment 12 (12)(c) Advertising and Public Affairs Expense

Adjustment to ALJ disallowance.

Per Commission ($248 X 10%) (25) 25

* See Appendix A, Schedule 2, Page 3. -

{D _3.$hD*' D

.S -I 7gm u


19aS 714

A 0 N0 " ]D s

sen 6; .S. 3

C. 27375 Appendix BSchedule 2

LONG ISL?ND LIC'!T7'!G CO:'?tl!Y Page 3Explanc. tion o r C=nssion Ady.:staants

To Gas Operating InccmeFor the 12 Months Ending June 30, 1980.

(000)(Cont'd)

Effect On Effect CnOperating Operatinj

Adjustment Explanation Expense Incore_

Operation and M?.intenanco E::pensos

2(d) Labor Productivity

Reversal of company's productivityadjustment. $ 577 $ (577)

(e) Wace Increase Indexing

Adjustment to reflect restoration ofindexing due to revisions caused byComT.ission adjustments to labor base.

Changa in labor base (S409 X 76.77%) $ 314Wage increase factor 13.31

Commission adjustn.cnt 42 (42)

(f) Inflation Inde::ina_

Adjustment to reflect restoration of indexingdue to revisiona caused by Commissionadjustments to infla' ion base.

Chr.nge in ir.flation base ($409 X23.23%) $ 95Inflat' ion factor 17.5%Ccamission adjustment 16 (1G)

(g) Wage Increase - " Proper Period"

Recalculation of climination of two extramonths wage increase compounding resultingfrom Commission adjustments.

Per ALJ $ 147Per Commission 171Conmission Adjustment (24) 24

(h) Inflation Increase "Procer Period"

Recniculation of climination of two extramonths inflation increase compounding 1945 215resulting from Commission adjustments.

Per ALJ S 127Per Commission 140Commission Adjustment (13) 13

Total Operation and Maintenance Adjustment $ 982 $ (982)


.

:. 27375 Appcndix aSchedule 2

IR:G TSLAND LIG:4TJf!G CO !PA!!Y Pt.cc 4Explanac. ton of Co=6: ssion Ad]ustnents

To Gas Operating IncomeFor the 12 Months Ending June 30, 1980

(000)(Cont'd)

Effect On Effect OnOperating Cperating

idjustment Explanation Expense Incone

taxes Other Then Incon.e Taxes,

3(a) Adjustment to update Property Taxes tolatest known tax bills.

Per AIJ $ 1,306Per Co. ltr.3/29/79 1,080Commission Adjustment $ 226 $ (226)

(b) Adjustment to reflect Revenue Taxesrelated to Adjustment 1(a)($549 X 4.02%) 22 (22)

Total Taxec Other Than Income Tax Adjustnent $ 248 $ (248)

?cderal Income Taxes

4 Per Appendix D, Schedule 3, Page 1. $ (542) $ 542

D""D "D T Ti fB- l\ ..s h b . _2-

194S 216


:, 27'J75 Appendi:: BSchedule 2

LONG ISI.?!!D LIG'ITI !G CO:tPA!IY Page 5Explanation ci Cornission Ad3ustments

To Gas Rate Danefor the 12 F.onths Ending June 30, 1900

(000)(Cont'd)

Effect OnAdjustment Explanation Rate Barr

prhing Capital

5 Adjustr.cnt to reflect changes resultingfrom Cornissicn adjustnonts.

Commission Adjustment ($982 X 1/8) $ 122,

Ceferred Investrnnt Tax Credits

6 !!oduction in hvorage Accuraulated DeferredInvestment Tax Credits due to Commissionadjustments.

Change in Deferred ITC per Cornission S 838

Rato Base offcet (1/2) S 419_

O

,

b

DO\S 'b @9

9%S

..

OAr.ndment 35 - January 1980

1945 217

C. 27375

tmc rstrio f.Tra Ttwo c<n nrifCcomputation of Icdotal trvonic Tanen - Per Coresission AI.:vndta a

SeheJule 3Ces Dutartru.*tFnt the 12 mnths I'n. ling Junes ?0,1900 pa,e i

{0N)

As AdjustedAJ AJ)usted reelcston As Adjusted Coeusisalon For Ccenissiong A_f.1 $.e.tme s g g stssion State incr.*ase k.ste incie..se(1) 32) (J) (4) (h)Total Operating Inco**Other Incune - AFC 5 19,464 $ (Cfl4 8 $ 171,7U2 $35,C05 $ 34,53','Ntal Interest Chargos -

--

Subtotal . (7,764,) (1) 8 J 7,75(-) (7.75MIncasmo Cofone Incman Teses _E,M) 0 ySr.) Jt,p411,301 (67C) 11,026 _ 15.8504 J g ]A,6Delut t. N..,e-Ta nable It eseg

A11ouance for tuneds (f;ed During Construction-

*

"_Aehl Dee-k of item s r:ot Tan-th-Jiectil>1n _

Accrual for Injeerles awl C se.agos !<aserve-

--Accrual for I:4d lulits Reserveu

Su;1,1=.=crtal Provision --

-332Amurtization of rar,g=rty tose 332514 312

Amortizatioes of Mortgage Res;ording Taxes 51431 514

CAC Costs Defegr d 31u 7% 31Subtutal 7'.6

1.6 33 ?'.61, te l),

1 t,15

Doduct A l. lit tesnal Tau thst actioneT.ex r 4.semistion in Excess of Book Depreciation 3,261 (2) 541 3,002tom a s Charged to Reserves 3,602

jusli;u an! Desages-

? aJ bel,t s-

- --

of Ime=2vir.g ket tred Property h 280 --s.

"C4 st a Changed to Constructions en 2t'd283

@ P.sysola Temos l' 1754 Pensions 175(g 300 175Salce Tames 300

100 300Prog.usty Tamus - Lien Date 100

243 1COItsrt.ed Vacation Adjusteent 243 243207 (3) (40) 367, 167,

N subtot.=14,'A4 totTausblu Income (Imas) 5 IJ1 5.3"5s c

$ 0. t.H LQ g ._ _$ (1,177) W,5 04, $ 15,00 4 $ 23,P ]3

Federal Jr. cosmo Tar at 46% __

$ J,933 $ (541) $ 3,452 $ 7,270 $ 10,722Imams love .ta.unt.T.as CreJitreJoral incusau Tau - Current J 2_,,109) 037 (3,352) ( a!33 gly1,004 Jy6 2,10J to,4 3 3 u,533Deferred ta Jural Inconnu Tas - Current 242Lanf.orrcJ *ederal Incomo Tas - pmortization 242 242Duferred investsrnt Tau Caedit 4349) (419) (440)1,314 (4) (633) 476 030 1,314St.octbolder Investine:nt Credit ,

41fl 4 IG 4?Swt l'eJort! Incomo Taxes (AJjustment 4) L 3,150 g_ t1421 $ 2,n od (5) {7 27j ggg

_,


C. 27373 Appendix BSchedule 3

LONG ISIJ.: D LIGHOI':0 00"?A !Y Page 2Explanation of Co m.issio.. ..s3vstmentsTo Gas D3partment Federa'. Income Tc::csFor the 12 Months Ending Jcno 30, 1980

(000)

Effect OnTaxable

Adjustment Explanation Income

Total _Interent Characa

1 Rcvision of interest deduction to reflectchange in Long- Term Debt cost rate.

Interest per ALJ $ 7,764Commission Interest 7.67% of totalshown on Appendix A, Schedule 3,Page 2 7,756Comirssion Adjustment S 8

Tax Depreciaticn in Excess of Book Depreciatica

2 Additional ta:< depreciation related tochange in book depreciation rates. S ( 541_)

Earned vecetion Adiustr.enu_

3 Revinion of Earned Vacation deductionto three year average inflated forWage Increase.

Per hLJ S 941Per Comnission 760

~

Commission Adjustment S 181Gas portion at 22% $ 40

0

#"9

1945 219

OAmendment 35 - January 1980

.

.

C. 27375 Appendix BSchedulo 3

LO! G ISLI.t:D LIG!!TI?!G [O"JA!!Y Page 3Explanation of Coticission Ac.]ustmentsTo Gas Department Federal Inc me TaxesFor the 12 Months Ending Jure 30, 1930

(000)(Cont'd)

Effect OnIncona

Adjuntnent Explanation _ Taxes

Doferred Investment Tax credits

4 necalculation of Investment Tax creditutilization using the APB #11 r.:ethod(before rate increase).

Reduction of Deferred ITO to lcVelindicated from Conmission adjustments. S (S32)

I33nD

D (\DQh

1945 220


C1.SES 27374 and 27375 APPL DIX C

LO!!G ISLAND LIGHTIt!C CO.'!PA:lY

Amendments to Schednic P.S.C. tio . 7 - Electricity

First Revised Leaf tio. 31CSixtn Revised Leaves llos. 331 and 47Tenth Revised . Leaf tio. 42AFourteen'.h Revised Leaf :;o. 38Sixteenth Revisco Lear.l;o. 42Seventeenth Revised Leaves !!os. 31A cnd 33HEighteenth Revisco Lear :Jo. 43Twenty rirst Revised Leaf tio. 45Twenty-seventh Revised Lcar !!c. 33FTwenty-eighth Reviced Leaf I;o. 33GThirty-second Revised Lcer :;o. 34Thirty-third Revised Leaf !!o. 30Thirty-fourth Revised Leaf flo. 28

Suppplen:ent !!o. 42Supplement lio. 47 q 'g ,

Amendments to Schedule P.S.C. !!o. 4 - Gns gpFourteenth Revised Leaf !!o. 34Sixtecntn Revised Leaf i;c. 30Seventeenth Revised Lear !c. 32111netecnth Revi. sed Laaf :lo. 27 9-Twentieth Revised Leaf !!o. 25Supplement !!o. 25Supplcment flo. 28

.

I945 22iO


D 0 0 3bSTATE OF NLM YCRK I

PUBLIC SERVICE COMMISSION I j\ ;as e, U eu

,

I

CASE 27 374 - LONG ISLMD LIGliTING CO:iPAliY - Electric Rates

EDWARD P. LARKIN, Commissioner, dissenting:

I dissent from the majority's electric revenue

requirement detcrmination on the basis of a fundamental

regulatory precept. The electric rate incrcase authorized

by the majority does not, in my opinion, provide the corpany

with enough internally generated cash to guarantee its

ability to meet its financial and service commitments.

I cannot sanction a rate award that will require a

public service corporation to rely heavily on short-term

horrowings, or elaborate trust financing schemes and sales

of stock at substantially less than book value to meet its

service and finanaial obligations. The interest coverage,

dividend coverage, and AFC ratios inplicit in the majority's

revenuo requirement will make it difficult for LILCo's

management to attract the capital the majority concedes the

company will need to complete the Shorcham project. There

is no margin for error in the majority's revenue requirement

calculation: its sales revenue estimate is optimistic, its

expense allouances are minimal, its tax estimates reflect a

flow-through of almost every conceivable credit and deduction,

and its return allowance is at the extreme low end of the

range of reasonableness.

I have no objection to tough-minded regulation,

but I believe we have an obligation to look beyond the

immediate result to see who will be hurt if our determinations

are vrong. It is naive to think LILCO's stockholders will

be P.ne primary, or even the major, victims if the. majority's

1945 222


c3 c3 n.D D TD

-

IQCASE 27374tfud $ . u~uta'oa

rate award proves insufficient. Experience shows it is

consumers who ultimately pay when rates are kept at artifi-

cially low levels. Consumcrs can be exploited just as

cffcetively by poor service as by high ratcc.1/ In this

case, I see a real possibility that financing delays could

result in slippage of the Shorehan in-service date, an event

that would be most unfortunate for LILCO consumers, for they

will continue to pay the high cost of electricity generated

mostly with oil purchased at OPEC-dictated prices, until

Shoreham comes on line. Thud, consumers face the dochlejeopardy of high fuel adjustment charges and poorcr service.

The tragic part of the majority's decision is that

it is so unnecessary. In LILCO's last electric rate case,

this Commission had the will to approve the cash flcu

allowances the company nceded to provide s^*vice and finance

cons truc tion. It could have done so again here by adopting

hthe cash flow and return rccommendations of the Ctaff and

the Judge. In its rush tc heep this electric rate increase

to the minimum, the majority has found it eressary to allow

LILCO'r, stockholders a higher return than either the Staff

or the Judge recommended. It would havr: been better to

follow Staff and the Judge and provide LILCO with more

cash while reducing its paper profits.

For what does the majority risk service degradations,

delay in Shoreham's completion, impairment of capital, and

excess profits? As far as I can see, the only reason is to

give consumers a few more months of relatively low base

rates before the addition of $1 billion of Shoreham investment

to rate base requires an extraordinarily large increasc in base

electric rates. When Long Island consumers find their

household budgets stretched by that increase, there will be

no thanks or remembrance for the majority's decision to

1945 223 (|)1/ Cases 26522 and 26523, Rochester Gas and Electric Corcoration -Rates, 14 NY PSC 1064, 1068 (Chairman dahn, concurrang).


CAEn 27374

reduce the modest electric rate increase reccmacnded by the

Judge here, because the necessary result is that what

promises to be a large increase in the next LILCO electric

rato case will be even larger.

I thereforc dissent from the electric rate increase

authorized by t.he majority. I would have accepted their

dete minations , if r.ach flow allowances from inclusion of

CWIP in rate base or interperiod tax allocations had been

recognized to produce additional revenues in the $60-$75

million range.

u

%\U 1\D 00 o

1945 224


NhY

SThT", CF : D: YCiB (PL*2LIC SEEVICE CO.t!ISSIC:1 9

CASE 27374 - IC G ISUJ:D LIGifTI!;O COP.PMN - Electric Rates

CASE 2732 5 - LONG ISUd:D LIGHT 1::G COMP AtN - Gas Pates

A!CIC F. PIAD, KARE:t S. BUROTEIli,' Commissioners, dissenting:

;5 dissent fro a various portions of the opinion of the

majority.

Before teaching the issues on which we dissent, we believe

it is neccccary to put into perspective the conditions which obtain

in the frar. chide area sierved by the Company and the it.eact that

increased rates will have on business and industry es voll as

residential ratepayers.

The decision of the majority decs not, nor did the

Adlainistrative Law Judge's Recom:r. ended Decision, discuss the public

outcry that occurred at the outset of this case. There were four

public statement her. rings held in Nassau and Suf folk Counties at

its inccption. Some 115 persons spoke at these hearings during

July 1978. In addition no less than 10,000 protests and petitions

were received by the Public Service Cornission from ratepayers

cbjecting to the proposed rate increase. With few exceptions,

1945 2?Speopic at the hearings voiced opposition to the rate increase. -

f. .

They pointed out the difficulty that the ciderly and the poor, who

already face severe financial hardships, will have if rates are

increased. In addition middle class families plagued by high taxes,


-2-

sever cs.sessments, inflation and unemploymnt argued that hardship

will result frca higher utility prices.

In addition to those who wrote to the Corsission or appeared

at public statenent hearings, several witnesses presented by the

Counties of Nacsau and Suffolk testified to the irpact increased

rates would have on rcsidential ratepayers as well as upon industry

and business, thus exacerbating the serious econo:.ic prcblems which

beset Long. Island at this tine.

It is important to note that this rate incretse application

is the fourth rade by the Company ,ince 1974. In 1975 in case 26552

this Corzission granted an increase of SG4.3 million. On 1:ay 22,1976

in Case 2f937 this Cornission granted an increase of $33.2 millien and

on January 9, 1978 thin Cornission gran*ed an inercare of S53.7

million--a total increase in three years of $157.2 million. In

additien, in two of thcse cases, temporary rates were allcwed prior

to the decisien in the permanent rato case and second stage rate

increases totalling :.ver $11 millien were authorized by this Corsission.

Although the Company was granted an increase on January 9,

1978, barely five conths later the Company was once again at our

doorstep with a request for S171,000,000! A review of the Company's

presentation clearly indicates that this request is based on an

overstated budget designed to inflate its rate request.

While it is true that the rate of return earned by the

Company,in 1978 fell below its allowed rate of return of 13.3%,

nevertheless the Company has achieved an average retur a

for the years 1975-78. U D L 4

1945 226


-3-

While there is some continued cash flow problem, this is the

result of a large construction program and AFC accruals. This

problem should be reduccd considerably by the ccmpletion and inclusion

in rate base of the Shoreham plant in 1930.

He conclude, as we did in Case 27370/1/2, Rochester Gas and

Electric Corporation, and in Casos 27361/2, New York State Electric and

Gas Corporation, that the ccenomic conditions in a utility franchise

area should be censidered in arriving at an appropriate ccst of equity

capital and establishing rates so that the impact on censumers is \minimized to the greatest extent possible, while at the same time bgallowing the corpany sufficient funds to provide safe and relichle

service and raise r.ecessary capital in the firuncial market. N

t.'e turn now to those areas in the majority opinien frem

which we dissent.

1. Rate of return. The analysis used by the majority in

determining the rate of return on common equity indicates that a

" bare bones" cost of equity in the 13.25 - 13.75% range is proper.

Because of the impact of these rates on consumers of service as

discussed above this Commission should adopt the lower end of the

range of reasonableness. This would equate to a return of 13.5%

including issuance costs--a fair return on commen equity under the

circu:1 stances that prevail.

2. Meter Tt.rpering Recoveries. We disagree with the

majority in the ravenue estimate adopted with respect to re. venue

protection activitics preposed by the Company. Initially the

1945 227

Amendment 35 - January 1980t

' \'

-4-

Company request was based upon the pre:nise that LILCO was willing to

asstoc that the program would prcduce revenue equal to its cost.

Statf used a test year benefit / cost ratio to project revenues

attributable to the progran and detern.ined that revenues of $1,112,700

over and above the cost of tne program would be a reasonable, even

conservative, estimate. The Company then recomputed its figures and

agreed tnat additicnal revenues of $350,000.00 cculd be imputed on

the basis of 1978 data. Since the 1978 data are derived fron a six

month period shen the progra= was being developed, they do not

properly reflect all the revenues to be cy.pected in the test year.

The Cor.:nicsion .chould instead adopt the revenue figuro as reco =cnded

by the Administrative LU: Judy .

In all other respects we concur with the opinion c,f the

majority.

b

D{{D }D

1945 228

Admendment 35 - January 1980

QUESTION 4.d.

Complete the enclosed form entitled, " Financial Statistics,"for the most recently available period and the calendar years1977, 1976, and 1975.

RESPONSE

See the attached form enti^' ed " Financial Statistics," for thecalendar years 1975 through JLi8.

1945 229

C-21

Admendment 35 - January 1980

DFI MNCIAL STATISTICS D

LONG ISLAND LIGHTING COMPANY Dk

1978 1977 19-6 19 75

(S0001

Earnings available to cer .on equity $111,305- $104,593 $ 26,737 $ 66,95h

Average co=on equity 88h,918 754,6h2 615,192 512,S5;

Rate of return on average co=on equity 12 585 13.865 14.115 13.c65

Times total interest earned before FIT:Gross incone (bo h including and excludins (1) 2.62 2.62 2.62 2.53

AFC) + current and deferred FIT + totalinterest charges + acortication of debt (2) 1 91 1.85 . 92 1 95discount and expense

Times long-term interest earned before FIT:Gross income (both including and excluding (1) 2 74 2 76 2.80 2.87AFC) + current and deferred FIT + lcng-

term interest charces + a ortization of (2) 2.01 1 95 2.05 2.20debt discount and expense

Bond ratings (end of period) (3)Standard and Poor's A-/A A-/A A-/A A-/A-Moody's A/AA A/AA A/AA A/AA

Times interest and preferred dividends earnedafter FIT:

Gross income (both includin6 and excluding (1) 1.86 1,92 1.89 1.82

AFC) total interest chsrges +amo.tization of debt discount and expense (2) 1.32 1.3h 1.37 1.37+ preferred dividends

AFC.(all) (h) $ 69,739 $ 65,801 $ 50,661 $ 36,3h5Net income after preferred dividends 111,305 10h,593 86,757 66,954

5 62 75 62.95 58.45 Sh.35

Market price of coccon $ 17-1/h $ 18-5/8 $ 18-1/h $ 15-7/5Book ue of co=on $ 19 12 $ 18.70 $ 17 93 $ 17 19

!sarket-book rr2tio (end of period)* 90.25 99.6G 101.60 92.-5

Earnings avail. for,coron less AFC +depreciat' ion end amortization, deferredtaxes, and invest, tax cr. adjust.-deferred $107,h70 $ 87.h97 $ 27,750 $ 76,606

co=non dividends 74,759 63,473 51,336 kl,936Ratio of Earnings to Dividends 143.85 137 8% 169 35 152.75

Short-term debt (5)Bank loans -- -- -- --

Co..?.creial paper - -- - -

O* If subsidiary company, use parent's data.

1945 230C-22 Admendment 35 - January 1980

(Continued)

1978 1977 1976 1975

Capitalization (Arount & Percent):Long-term debt (6) $1,175,751 $1,102,003 $1,017,977 $892,L75Preferred stock 390.449 394,436 331,431 304,9DCommon equity 982,942 823.h83 67h,828 551,3h1

Long-term debt h6.1% 47 5% 50 3% 51.c5Preferred stock 15 3% 17 0% 16.h% 17 55Cornon equity 38.6% 35 5% 33.3% 31 55

.

Notes:

(1) Gross income includes all AFC

(2) Gross income excludes all 4:

(3) The ratings are listed for the Company's two mortgages as follows:General and Refunding Bonds /First Mortgage Bonds.

(4) Includes AFC applicable to Trust financings in 1978 of $3.6 million.

(5) No short-term debt was outstanding at any one of the four yearsended December 31, 1975, 1976, 1977, or 1978.

(6) Includes lo ng-term debt (and current =eturities of $25 million at12/31/75) and unamortized pre ium er.d discount on debt, but excluding$30.0 million of Trust Obligations-the Company's pro issory note,due 1982, to Tri-Counties Resources Trust (at 12/31/77 and at 3/31/78).

1945 231

C-23 Admendment 35 - January 1980

ML19262C206.pdf - Nuclear Regulatory Commission

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Transcript of ML19262C206.pdf - Nuclear Regulatory Commission