TO SUPPLEMENT THESE DEPARTMENTS?
2
A. Yes. Sharyland Utilities utilizes Outside Services to supplement these 3
departments as well as other departments within Sharyland Utilities. A&G costs 4
for Outside Services include financial, audit, legal, and regulatory.
5
Q. ARE THE A&G EXPENSES INCLUDED IN SHARYLAND UTILITIES’
6
RATE FILING ASSOCIATED WITH THESE DEPARTMENTS AND 7
OUTSIDE SERVICES AND INCLUDED IN SHARYLAND UTILITIES’
8
RATE FILING REASONABLE AND NECESSARY?
9
A. Yes. As a regulated entity, Sharyland Utilities is required to comply with various 10
laws and regulations established by the Legislature and the Commission, as well 11
as other entities. Because Sharyland Utilities maintains a lean in-house staff, it 12
relies on outside consultants and counsel to assist in these functions. The level of 13
requested expenses is commensurate with the level of activities required to 14
operate the business.
15
XIII. SUPPORT FOR OTHER RFP ELEMENTS 16
Deferred Costs A.
17
Q. PLEASE DESCRIBE SHARYLAND UTILITIES’ DEFERRED COSTS.
18
A. As mentioned above, Sharyland Utilities began its operations as a greenfield 19
utility that was formed to serve a new master planned community under 20
development between the cities of McAllen and Mission. Because there was 21
limited electrical infrastructure in place, Sharyland Utilities was required to 22
construct a new electrical system in order to serve a few initial customers at the 23
inception of service. Due to the small size of the customer base during this 24
development phase, Sharyland Utilities could not recover the full cost of serving 25
its initial customers without charging rates which would have effectively 26
prevented growth of the community. For this reason, in its first rate case in 27
Docket No. 21591, Sharyland Utilities requested and the Commission approved a 28
deferral mechanism under which Sharyland Utilities was allowed to defer the 29
unrecovered portion of its costs necessary to serve its customers until a later date 1
when Sharyland Utilities’ customer base had increased and the unrecovered costs 2
could be spread among a larger customer base. At that time, Sharyland Utilities 3
would be allowed an opportunity to seek recovery of its deferred costs. The 4
deferral mechanism was approved again in 2001 in the Company’s unbundled 5
cost of service (“UCOS”) proceeding in Docket No. 24338 and extended in 2003 6
in Docket No. 27566, when the initial term of the deferral approved in Docket No.
7
29591 ended. Sharyland Utilities agreed to stop recording deferred costs on its 8
books at the end of December 2007 in a settlement approved by the Commission 9
in Docket No. 35542. Thus, the deferred cost account was frozen as of December 10
31, 2007.
11
Q. WHAT IS THE TOTAL AMOUNT OF SHARYLAND UTILITIES’
12
DEFERRED COSTS?
13
A. The total amount of Sharyland Utilities’ deferred cost account as of December 31, 14
2007, is $39,460,869. As Mr. White explains, this amount is maintained as a 15
regulatory asset on Sharyland Utilities’ books.
16
Q. IS SHARYLAND UTILITIES SEEKING RECOVERY OF ITS DEFERRED 17
COST ACCOUNT IN THIS PROCEEDING?
18
A. Yes.
19
Q. PLEASE EXPLAIN WHY SHARYLAND UTILITIES IS SEEKING TO 20
RECOVER THE DEFERRAL AMOUNT AT THIS TIME.
21
A. In its initial order approving the deferral mechanism in Docket No. 21591, the 22
Commission found that “[i]t would be unreasonable to deny SU the opportunity to 23
seek recovery of costs deferred during its initial years of operation.”29 Those 24
costs were incurred by Sharyland Utilities in order to meet its obligation as a 25
regulated utility to provide safe and reliable service to its customers, and 26
Sharyland Utilities is entitled like any other utility to an opportunity to recover its 27
29 Application of Sharyland Utilities, L.P. for Authority to Established Initial Rates and Tariff, Docket No. 21591, Order at FoF 30, (Jul. 25, 2000).
costs. This is Sharyland Utilities’ first rate proceeding since its UCOS case in 1
Docket No. 24338. During that time, Sharyland Utilities has grown to the point 2
that it has a sufficiently large customer base to absorb the deferred costs. Thus, 3
this case is the appropriate proceeding for Sharyland Utilities to seek recovery of 4
the costs that it incurred during the period 2000 through 2007.
5
Q. PLEASE DESCRIBE SHARYLAND UTILITIES’ DEFERRAL 6
MECHANISM AS APPROVED BY THE COMMISSION.
7
A. Under the mechanism, Sharyland Utilities calculated the deferral amount each 8
year based on a formula approved by the Commission and recorded that amount 9
on its books. The formula, which is attached to my testimony as Exhibit RGG-7, 10
determined the annual deferral amount as the difference between the revenues 11
received during the year and an annual cost amount based upon a standard 12
revenue requirement determination using the allowed rate of return. Sharyland 13
Utilities filed an annual deferral calculation report with the Commission showing 14
the amount of costs recorded and deferred during the preceding calendar year on 15
May 1 of each year, beginning on May 1, 2001 (for the previous calendar year).
16
After the deferral mechanism was extended in Docket No. 27556 in 2003, 17
Sharyland Utilities began filing its deferral reports on a semi-annual basis and 18
continued doing so until the final report was filed for calendar year 2007. Under 19
the order issued in Docket No. 21591, Sharyland Utilities was allowed to seek 20
recovery of its deferred costs in a subsequent rate proceeding, subject to showing 21
that the costs were reasonable and prudently incurred. Mr. Caskey addresses the 22
reasonableness and prudence of the deferred costs in his testimony.
23
Q. HOW DOES SHARYLAND UTILITIES PROPOSE TO RECOVER ITS 24
DEFERRED COSTS IN THIS PROCEEDING?
25
A. We are proposing to recover a portion of the deferred costs through riders 26
applicable to our retail delivery rates and wholesale transmission rate adopted in 27
this proceeding as described below.
28
Q. WHAT IS THE BASIS FOR SEEKING RECOVERY OF DEFERRED 1
COSTS THROUGH RETAIL DELIVERY RATES APPLICABLE TO 2
CUSTOMERS IN THE FORMER CAP ROCK DIVISIONS?
3
A. As I stated above, Sharyland Utilities operates its system as a single integrated 4
utility, notwithstanding the geographical separation of the various divisions. All 5
customers benefit from the costs incurred to establish Sharyland Utilities as an 6
efficient, well-managed utility that provides service throughout the state. For 7
example, as Mr. Caskey points out, the systems and expertise that was developed 8
initially for the McAllen division have benefitted the four Sharyland divisions and 9
will assist Sharyland in implementing retail competition in those divisions. The 10
Sharyland divisions are also benefitting from improved reliability and safety that 11
has occurred since Sharyland acquired control of Cap Rock in 2010 and the 12
substantial capital investments the Company has made to upgrade the system’s 13
infrastructure.
14
Although the deferred costs were incurred prior to the date on which 15
Sharyland Utilities acquired control of Cap Rock, limiting recovery of those costs 16
just to a particular subgroup of customers such as the Sharyland-McAllen division 17
is inconsistent with the Commission’s longstanding policy in favor of system-18
wide rates. System-wide rates ensure parity among all customers regardless of 19
when particular costs were incurred and avoid balkanization by attempting to 20
assign specific costs to specific groups of customers. In Cap Rock’s last rate case 21
in Docket No. 28813, the Commission approved system-wide rates for all four of 22
Cap Rock’s divisions, even though one division (then the McCulloch division, 23
which is today called the Brady division) had operated under separate rates since 24
it had been acquired by Cap Rock in 1999.30 Since Sharyland Utilities now 25
operates as a single integrated utility, Sharyland Utilities should recover the costs 26
in its deferred cost account from all of its retail customers, regardless of whether 27
they were customers of Sharyland Utilities when the costs were incurred.
28
30 Docket No. 28813 (Nov. 10, 2005).
Q. DOES THIS SAME PRINCIPLE APPLY TO COSTS THAT WERE 1
INCURRED PRIMARILY WITH RESPECT TO THE FORMER CAP 2
ROCK CUSTOMERS?
3
A. Yes, to be consistent, I believe that the system-wide rates principle should apply 4
across the board. For example, Sharyland Utilities is proposing a rider in this 5
proceeding to allow it to recover the costs associated with the transition to 6
competition of the four Sharyland divisions, which I will discuss below. Even 7
though these transition costs were not specifically incurred for the benefit of the 8
Sharyland-McAllen division customers, who have had retail competition since 9
2002, I believe that a portion of the costs should be allocated to the Sharyland-10
McAllen division customers under the system-wide rates principle.
11
Q. IS SHARYLAND UTILITIES PROPOSING IN THIS CASE TO 12
ESTABLISH NEW UNBUNDLED RETAIL DELIVERY RATES FOR THE 13
SHARYLAND-MCALLEN DIVISION?
14
A. No, that would be inconsistent with the Commission’s order approving the 15
settlement agreement in Docket No. 39592. However, we are proposing to 16
allocate a portion of the deferred costs to our retail customers in the Sharyland-17
McAllen division even though rates will not be set for Sharyland-McAllen 18
customers in this proceeding. Thus, Sharyland Utilities will have to seek recovery 19
of any costs that are allocated to the Sharyland-McAllen customers in a future rate 20
proceeding.
21
Q. PLEASE EXPLAIN SHARYLAND UTILITIES’ PROPOSAL TO 22
RECOVER A PORTION OF THE DEFERRED COSTS THROUGH ITS 23
WHOLESALE TRANSMISSION RATE.
24
A. The deferral mechanism approved by the Commission did not distinguish between 25
transmission and distribution costs. As I explain above, the deferral formula 26
calculated the annual deferral amount as the difference between the revenues 27
received during the year and an annual cost amount based upon a standard 28
revenue requirement determination. All of Sharyland Utilities’ revenues and 29
expenses, including those that were transmission related, were reflected in the 30
deferral calculation. As the Commission found, the deferral mechanism was 31
necessary to allow Sharyland Utilities to begin its operations as a start-up utility, 1
and that required the construction of both transmission and distribution assets.
2
Although the initial operations were related to serving customers in Sharyland 3
Plantation, Sharyland Utilities has since become a major transmission service 4
provider in ERCOT, and has developed and constructed a number of major 5
transmission projects in Texas that will improve reliability and provide access to 6
lower-priced supplies of energy to all ERCOT consumers, such as the projects 7
that I described earlier in my testimony. Without the deferral mechanism, this 8
would not have been possible. Spreading the deferred costs among all customers 9
who have benefited, including ERCOT consumers who benefit from the ERCOT 10
transmission grid, minimizes the impact of recovery of the deferred costs on any 11
single group of customers and is a practical way to allow Sharyland Utilities to 12
recover start-up costs that it is entitled to recover pursuant to the Commission’s 13
order in Docket No. 21591 without unduly burdening Sharyland Utilities’ retail 14
customers.
15
Q. HOW DOES SHARYLAND UTILITIES PROPOSE TO ALLOCATE THE 16
DEFERRED COSTS BETWEEN RETAIL AND WHOLESALE 17
TRANSMISSION CUSTOMERS?
18
A. There are different methodologies that could be utilized. We believe that the most 19
logical method of allocation is based on the net plant balances as of the end of the 20
Test Year as adjusted by the net plant additions that are to be included through the 21
Interim Transmission Cost of Service (“TCOS”) filing that is currently pending 22
before the Commission in Docket No. 41438. We also propose to amortize the 23
total amount of the deferred cost account over a period of eight years through 24
riders to our retail delivery rates and our wholesale transmission service rate, the 25
same period of time that the deferred cost mechanism was in effect. As I 26
previously mentioned, Sharyland Utilities would have to seek recovery of the 27
portion of the costs allocated to the Sharyland-McAllen division customers in a 28
future rate proceeding. Mr. Lain explains the design and operation of the 29
proposed riders in his testimony.
30
Q. PLEASE EXPLAIN WHY SHARYLAND UTILITIES PROPOSES TO 1
ALLOCATE THESE COSTS BASED ON THE PLANT IN SERVICE 2
AMOUNTS AS UPDATED THROUGH THE INTERIM TCOS FILING 3
THAT IS CURRENTLY PENDING BEFORE THE COMMISSION.
4
A. Sharyland Utilities’ transmission net plant balance as of the end of the Test Year 5
is $68,642,891. Through the Interim TCOS filing currently pending in Docket 6
No. 41438, Sharyland Utilities proposes to establish a new Interim TCOS rate 7
based on a transmission net plant balance of $220,249,148, as of March 31, 2013.
8
Given this large increase in the transmission net plant balance, I believe that it is 9
reasonable to include this amount when allocating the proportional shares of the 10
deferred costs because it is more representative of the circumstances that will 11
exist at the time that the rates go into effect than are the plant balances as of the 12
end of the Test Year.
13
Proposed Riders B.
14
Q. IS SHARYLAND UTILITIES REQUESTING THAT THE COMMISSION 15
APPROVE ANY RIDERS IN THIS PROCEEDING?
16
A. Yes. First, as described above, Sharyland Utilities is proposing riders to its retail 17
delivery rates as well as its wholesale transmission rate to allow it to recover its 18
deferred costs (“Rider DCRC”). Second, we are proposing two rate case expense 19
riders (“Rider RCEs”), one applicable to our retail delivery tariff and the other 20
applicable to our wholesale transmission tariff, to recover the reasonable and 21
necessary rate case expenses associated with this proceeding and any other related 22
proceedings. Third, we have proposed a transition to retail competition expense 23
rider (“Rider TTCC”) to recover certain costs incurred as a result of Commission 24
orders to move the Stanton and Colorado City divisions from SPP into ERCOT 25
and for costs incurred in implementing retail competition in the former Cap Rock 26
divisions. Fourth, we are requesting that the Commission approve a power cost 27
recovery factor reconciliation rider (“Rider PCRFR”) consistent with P.U.C.
28
SUBST. R. 25.238(k) so that we can reconcile any outstanding wholesale power 29
costs incurred before the transition to retail competition.
30
Q. ARE YOU PERSONALLY ADDRESSING THE MECHANICS OF THE 1
PROPOSED RIDERS?
2
A. No, I am only providing an overview of the riders and their purposes. Mr. Daniel 3
and Mr. Lain will address the specific mechanisms that Sharyland Utilities 4
proposes to implement the riders.
5
1. Rider Deferred Cost Recovery Charge (DCRC) 6
Q. PLEASE DESCRIBE RIDER DCRC.
7
A. Rider DCRC is the mechanism that we propose to utilize to recover Sharyland 8
Utilities’ deferred costs regulatory asset through our retail rates described in my 9
testimony above. I explained the reasons for the rider in my testimony above.
10
Mr. Daniel and Mr. Lain will discuss the mechanics of the rider in their 11
testimony.
12
2. Rider Rate Case Expenses (RCE) 13
Q. PLEASE GENERALLY DESCRIBE RIDER RCE AND THE POLICY 14
REASONS FOR INCLUDING THIS RIDER.
15
A. Sharyland Utilities has estimated that it will incur $6.5 million in rate case 16
expenses for participating in this proceeding, including $650,000 in estimated rate 17
case expenses for the Cities. Pursuant to PURA § 36.062(b)(2), Sharyland 18
Utilities is entitled to recover its reasonable costs for participating in this 19
proceeding. In order to recover its reasonable expenses, and to ensure that 20
Sharyland Utilities does not recover more than the Commission deems 21
appropriate, we have proposed to recover this amount through Rider RCEs rather 22
than through base rates. If both Rider RCEs are approved, it would allow 23
Sharyland Utilities to recover its reasonable rate case expenses through both its 24
retail delivery rates and its wholesale transmission rate over a 36-month period.
25
Q. PLEASE DESCRIBE HOW SHARYLAND UTILITIES PROPOSES TO 1
ALLOCATE THE COMMISSION-APPROVED RATE CASE EXPENSES 2
BETWEEN ITS RETAIL AND WHOLESALE RATES.
3
A. Consistent with the allocation methodology that I describe above regarding 4
allocation of the deferred costs, Sharyland Utilities proposes to allocate rate case 5
expenses based upon the net plant in service balances as provided in this RFP and 6
as adjusted for the inclusion of the transmission plant balances that are the subject 7
of the Interim TCOS filing that is currently pending before the Commission in 8
Docket No. 41438. Mr. Lain discusses the Riders RCE in his direct testimony.
9
3. Rider Transition to Competition Charge (TTCC) 10
Q. COULD YOU ALSO BRIEFLY EXPLAIN SHARYLAND UTILITIES’
11
PROPOSAL FOR RIDER TTCC?
12
A. Yes. As a result of the Commission’s orders in Docket Nos. 37990, 39070, and 13
39592, Sharyland Utilities incurred reasonable and necessary costs of 14
approximately $2.9 million to move the Stanton and Colorado City divisions from 15
SPP to ERCOT and to transition all of the former Cap Rock divisions to retail 16
competition. The costs were primarily incurred during 2011 and 2012. Although 17
some of these costs were incurred during the Test Year, those were not recurring 18
costs and thus Sharyland Utilities proposes to recover those costs through a rider 19
in order to prevent over- or under-recovery. Through Rider TTCC, Sharyland 20
Utilities proposes to recover the costs associated with the move to ERCOT and 21
the implementation of retail competition in the four Sharyland divisions.
22
Q. HAS THE COMMISSION EVER APPROVED A RIDER SIMILAR TO 23
RIDER TTCC?
24
A. Yes, the Commission previously approved a similar rider for Southwestern Public 25
Service Company (“SPS”) in Docket No. 2508831 and for Entergy Gulf States, 26
31 Application of Southwestern Public Service Company To Recover Transition to Competition Costs Pursuant to Section 39.409 of PURA, Docket No. 25088, Final Order at 5 (May 30, 2002).
Inc. (“Entergy”) in Docket No. 31544.32 These riders were approved under 1
PURA § 39.409 and PURA § 39.454, respectively.
2
Q. DOES SHARYLAND UTILITIES CONTEND THAT PURA § 39.409 OR 3
PURA § 39.454 APPLIES IN THIS CASE?
4
A. No, Sharyland Utilities does not contend that either PURA § 39.409 or PURA § 5
39.454 apply here. PURA § 39.409, which applies to Entergy, only covers 6
expenses incurred before September 1, 2001, and contemplates that utilities will 7
file to recover costs by December 1, 2001. Similarly, PURA § 39.454, which 8
applies to SPS, only covers expenses incurred before June 18, 2005. As I stated 9
above, PURA §§ 39.102(d) and (e), which are applicable to this proceeding, were 10
specifically added to PURA to address Cap Rock’s transition to retail competition 11
and provide the Commission broad authority to determine the schedule and 12
procedures for the transition in order to obtain the objectives of Chapter 39 of 13
PURA.
14
Q. WHY IS IT APPROPRIATE FOR THE COMMISSION TO ALLOW 15
SHARYLAND UTILITIES TO RECOVER TRANSITION TO 16
COMPETITION COSTS THAT WERE INCURRED OUTSIDE OF THE 17
TEST YEAR?
18
A. Sharyland Utilities will move a portion of its assets from SPP to ERCOT and will 19
be the first investor-owned utility to move to retail competition since the original 20
UCOS proceedings that occurred over a decade ago. Both of these steps are being 21
made for the benefit of, and at the request of, Sharyland Utilities’ customers and 22
pursuant to Commission orders in Docket Nos. 37990, 39070, and 39592. Unlike 23
the procedure that was laid out for all of the incumbent utilities in the original 24
UCOS proceedings, Sharyland Utilities – along with the Commission, the 25
Commission Staff, Sharyland Utilities’ customers, and other interested 26
stakeholders – has had to develop and participate in a process that is unique in 27
order to successfully transition the four Sharyland divisions to retail competition.
28
32 Application of Entergy Gulf States, Inc. for Recovery of Transition to Competition Costs, Docket No. 31544, Final Order at 7 (Jun. 12, 2006).
This process has led to the furtherance of the Legislature’s and Commission’s 1
goal of furthering competition in the State of Texas.
2
This process, however, has required significant expenditures by Sharyland 3
Utilities because of the necessity of multiple regulatory proceedings, as well as 4
costs incurred to accomplish the transition. It is these expenditures that Sharyland 5
Utilities seeks to recover through Rider TTCC, and we believe that it is 6
reasonable to do so because all of these expenses were incurred in furtherance of 7
the Commission’s goal of fostering competition in this state and as required by 8
Commission orders.
9
4. Rider Power Cost Recovery Factor Reconciliation (PCRFR) 10
Q. COULD YOU PLEASE EXPLAIN SHARYLAND UTILITIES’ PROPOSED 11
RIDER PCRFR?
12
A. Sharyland Utilities’ proposed Rider PCRFR is a rider authorizing Sharyland 13
Utilities to engage in a final reconciliation of any power costs incurred before the 14
transition to retail competition, but which could not be reconciled until after the
transition to retail competition, but which could not be reconciled until after the