Resolution No. 7608I
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RESOLUTION NO. 7608
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
VERNON ESTABLISHING THE TRANSMISSION REVENUE
REQUIREMENTS ASSOCIATED WITH VERNON'S HIGH VOLTAGE
(OVER 200 KV) TRANSMISSION FACILITIES AND
ENTITLEMENTS (ALL LOCATED OUTSIDE THE CITY) FOR THE
PURPOSE OF BECOMING A PARTICIPATING TRANSMISSION
OWNER WITH THE CALIFORNIA INDEPENDENT SYSTEM
OPERATOR
WHEREAS, the California state legislature adopted AB 1890
which created the California Independent System Operator ("ISO") and
required ISO to file a Transmission Access Charge ("TAC") tariff with
the Federal Energy Regulatory Commission ("FERC") to establish TACs for
high voltage transmission service within the State of California; and
WHEREAS, the FERC, on May 31, 2000, accepted ISO's proposed
TAC tariff for filing, made provisions of the tariff subject to refund,
and ordered ISO to make a compliance filing in accordance with its
Jorder; and
WHEREAS, Vernon, in accordance with said tariff, provided its
notice of intent to become a Participating Transmission Owner ("PTO")
on June 30, 2000; and
WHEREAS, pursuant to said tariff, Vernon intends to turn over
the operation and control of Vernon's transmission entitlements to ISO
in return for ISO reimbursing Vernon its Transmission Revenue
Requirement relating to such transmission entitlements; and
WHEREAS, Albert E. Clark, an experienced FERC consultant with
the firm of Fred Saffer and Associates, Inc. has submitted testimony
before the City Council of the City of Vernon recommending the
establishment of a Transmission Revenue Requirement; and
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WHEREAS, a Notice of Public Hearing was posted on August 15,
2000,.notifying all interested parties that a hearing to consider
evidence to establish Vernon's Transmission Revenue Requirement was
scheduled for August 22, 2000, at approximately 5 p.m.; and
WHEREAS, on August 22, 2000, the City of Vernon held a public
hearing which was continued to August 29, 2000, which provided a
reasonable opportunity for persons to comment on the establishment of
IVernon's Transmission Revenue Requirement; and.
WHEREAS, the City Council has heard and considered all
evidence, both written and oral, presented in consideration of the
establishment of Vernon's Transmission Revenue Requirement.
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE
CITY OF VERNON AS FOLLOWS:
SECTION 1: The City Council of the City of Vernon hereby
finds and determines that the recitals contained hereinabove are true
land correct.
SECTION 2: The City Council of the City of Vernon further
finds that all persons have had the opportunity to be heard or to file
written comments to the proposed establishment of Vernon's Transmission
Revenue Requirement, and after due consideration of the evidence
submitted at the public hearing determines that there are compelling
reasons to justify the establishment of Vernon's Transmission Revenue
Requirement.
SECTION 3: The City Council of the City of Vernon hereby
establishes the Transmission Revenue Requirement described in the
testimony presented by Mr. Albert E. Clark, a copy of which is attachedl'
hereto as Exhibit "A" and made a part hereof.
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SECTION 4: The City Clerk of the City of Vernon shall
certify to the passage of this resolution, and thereupon and thereafter
the same shall be in full force and effect.
APPROVED AND ADOPTED this 29th day of August, 2000.
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EONIS C. MALB G, May r
ATTEST:
BRUCE V. MALKENHORST, City Clerk
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STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
I, BRUCE V. MALKENHORST, City Clerk of the City of Vernon, do
hereby certify that the foregoing Resolution, being Resolution No.
7608, was duly adopted by the City Council of the City of Vernon at an
adjourned regular meeting of the City Council duly held on Tuesday,
August 29, 2000, and thereafter was duly signed by the Mayor of the
City of Vernon.
v
BRUCE V. MALKENHORST, City Clerk
(SEAL)
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EXHIBIT A
t i /
EXHIBIT V - 1
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
CITY OF VERNON, CALIFORNIA ) DOCKET NO. EL00-
Direct Testimony of
Albert E. Clark
on behalf of
the City of Vernon, California
August 2000
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Q.
PLEASE STATE YOUR NAME, OCCUPATION AND BUSINESS ADDRESS.
3
A.
My name is Albert E. Clark. I am an Executive Consultant
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with the firm of Fred Saffer & Associates, Inc. - Financial,
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Engineering & Management Consultants. My business address
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is 2111 East Michigan Street, Suite 219, Orlando, FL 32806.
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Q.
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND.
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A.
I received a Bachelor of Science degree in mathematics and
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secondary education in 1966 from Towson State University,
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Baltimore, Maryland. In 1975 I received a Certificate in
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Data Processing, Summa Cum Laude, from Anne Arundel
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Community College, Arnold, Maryland, where I also completed
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selected courses in accounting. I have studied at Rollins
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College, Winter Park, Florida, where I took graduate level
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courses in management with a concentration in accounting. I
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also hold a Master of Accounting degree from the George
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Washington University, Washington, D.C.
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Q.
PLEASE DESCRIBE YOUR PROFESSIONAL EXPERIENCE IN THE FIELD OF
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PUBLIC UTILITY REGULATION?
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A.
From 1972 through 1986 I worked for several consulting firms
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in the Washington, D.C. area and in Orlando, Florida.
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During those engagements I participated in numerous rate
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proceedings before Federal and state regulatory agencies. I
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proceeded from assisting senior consultants in the
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preparation of analyses related to fully allocated cost of
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service and rate design studies to providing expert
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testimony and analyses to clients in contested wholesale and
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retail rate cases. These cases involved, cost allocation,
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rate design and revenue requirements analyses.
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In 1986 I participated in formation of another
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consulting firm where I was a Principal and a Vice President
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until I resigned in mid-1997. At that firm my primary
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efforts were in the areas of cost of service and revenue
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requirements studies in wholesale and retail rate
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proceedings before Federal and State regulatory agencies. I
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also assisted various clients - principally wholesale
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municipalities and cooperatives -- with negotiations for
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power supply and transmission services. In 1997 I formed
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Clark Utility Consulting, Inc. and performed similar types
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of services for clients as I had previously done. In
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January 2000 I joined the firm of Fred Saffer & Associates
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in Orlando, Florida.
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Q.
WHAT TYPES OF CLIENTS HAVE YOU SERVED DURING YOUR REGULATORY
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CONSULTING CAREER?
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A.
During the course of my regulatory consulting career, I have
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been retained by state regulatory commissions, state
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consumer protection agencies, Federal agencies,
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municipalities, industrial corporations, trade associations,
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electric cooperatives and municipally owned electric
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distribution systems.
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Q.
HAVE YOU TESTIFIED PREVIOUSLY IN PUBLIC UTILITY RATE
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PROCEEDINGS?
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A.
Yes, I have provided expert testimony on over 100 occasions
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in 16 jurisdictions in more than 70 separate proceedings. I
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have testified before this commission in matters related to
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full and partial requirements electric service to wholesale
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customers of investor owned utilities, open access
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transmission of investor owned electric systems and revenue
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requirements for interstate gas pipeline companies.
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Q.
ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS PROCEEDING?
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A.
I am testifying on behalf of the City of Vernon, California
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("Vernon" or the "city").
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Q.
WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS CASE?
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A.
This testimony and associated exhibits form a part of, and
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provide support for, Vernon's petition' for a declaratory
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order, pursuant to the California Independent System
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Operator's ("Cal ISO") FERC Electric Tariff, to establish
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Vernon's Transmission Revenue Requirement ("TRR") for
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purposes of the Cal ISO Transmission Access Charge ("TAC").
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The TRR is part. of the TAC charged to the Cal ISO's
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customers and used for purposes of payments to Vernon by the
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Cal ISO for the use of Vernon's transmission facilities as
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of the date that Vernon turns over operational control of
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those facilities to the Cal ISO and thereby becomes a
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Participating Transmission Owner ("PTO"). In this testimony
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I set out the calculation of Vernon's TRR, and address
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various principles that were utilized in that calculation.
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I also describe some of the background of Vernon's
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transmission facilities relevant to the calculation of the
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TRR.
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My testimony and exhibits have been adopted by the
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Vernon City Council as Vernon's TRR. Vernon's City Council
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is its official ratesetting body.
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1 Q. WHAT ARE SOME OF THE REQUIREMENTS FOR VERNON TO BECOME A
2 PTO?
3 A. Under Sections 4.1 and 4.2 of Appendix F of the Cal ISO FERC
4 Electric Tariff, an entity wishing to become a PTO must
5 submit to the Cal ISO a Notice of Intent by either July 1 or
6 January 1 in order to become a PTO on the following January
7 1 or July 1 respectively. Vernon submitted its notice on
8 June 30, 2000 to become a PTO on January 1, 2001. Under the
9 pro forma Transmission Control Agreement Among The
10 Independent System Operator and Transmission Owners ("TCA")
11 that is a part of the Cal ISO FERC Electric Tariff, an
12 entity seeking to become a PTO must next submit to the Cal
13 ISO, and serve on certain other parties, an application
14 containing certain information as set out in the TCA.
15 Vernon submitted its application on August 1, 2000. That
16 Application describes Vernon's transmission facilities and
17 provides various information about them. A portion of that
18 Application is attached as Exhibit V - 3. The attached
19 portion describes the transmission facilities that Vernon
20 owns and will turn over the operational control to the Cal
21 ISO and includes maps that show the particular facilities.
22 That application is subject to a 60 day review period.
23 A TRR must be established for a new PTO so that the ISO
24 TAC can be adjusted to be effective when the entity becomes
25 a PTO and the ISO takes over operational control of the
26 facilities. The TRR also is the basis on which the PTO
27 receives payments from the ISO, which are essentially
28 portions of the TAC's collected by the ISO. The Cal ISO
29 FERC Electric Tariff, as it is presently effective, subject
30 to change in FERC Docket No. ER00-2019, provides that a new
31 PTO may submit its TRR for approval to the Cal ISO, or
32 directly to the Commission for approval. No specific
33 procedures are set out for submitting the TRR to the
34 Commission. Vernon submits its TRR to the Commission in the
35 form of a petition for a declaratory order.
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1 Vernon understands that the Cal ISO will make filings
2 under the Federal Power Act for approval of its assuming
3 operational control of Vernon's transmission entitlements
4 and for a revised TAC that includes the TRR of Vernon and
5 the other PTO's. Vernon's priority is to become a PTO on
6 January 1, 2001. Vernon intends to cooperate with the Cal
7 ISO as to procedures to effectuate that goal.
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9 Q. WHAT ARE THE COMMISSION'S PROCEDURAL OPTIONS WITH RESPECT TO
10 RULING ON VERNON'S PETITION FOR DECLARATORY ORDER?
11 A. In my opinion, the Commission should promptly rule that.
12 Vernon's TRR is proper under the Cal ISO Tariff based upon
13 the facts presented in Vernon's petition. If, however, the
14 Commission cannot or will not make that ruling immediately,
15 the Commission should order that the Vernon TRR should go
16 into effect on January 1, 2001 concurrent with the turnover
17 of operational control of the Vernon transmission facilities
18 to the Cal ISO, subject to refund, if the Commission later
19 determines that the Vernon TRR is improper. Vernon is
20 willing to agree to such a ruling so that Vernon can become
21 a PTO on January 1, 2001. The Cal ISO Tariff contemplates
22 that arrangements be in place for a new PTO to join six
23 months after filing its Notice of Intent. It would be
24 improper to force a potential PTO, against its wishes, to
25 delay joining the ISO until its TRR was finally determined.
26. That is not to say that a potential PTO that wished to have
27 its TRR finally determined before it joined the ISO should
28 not have the right to await such a final determination
29 before it began participating in the ISO. But a potential
30 PTO should not be required to wait, if it is willing, to
31 begin participation in the ISO with its TRR subject to
32 refund.
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_34 Q. WHAT STANDARDS SHOULD APPLY TO THE COMMISSION'S
35 DETERMINATION THAT VERNON'S TRR IS APPROPRIATE UNDER THE CAL
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1 ISO TARIFF?
2 A. First, it is appropriate to address what is not appropriate
3 in a standard to determine the TRR. At issue in FERC Docket
4 No. ER00-2019 are such things as overall "caps" and
5 transition periods. Those matters are not at issue with
6 respect to Vernon's TRR. Here, Vernon's TRR should be
7 determined apart from such concerns. The Cal ISO Tariff as
8 it is presently in effect, or as it may be modified through
9 the ER00-2019 proceeding, will be applied to take care of
10 any such concerns and, therefore, these concerns should not
11 have any impact on the determination of Vernon's TRR.
12 As far as standards that should be applied, the
13 Commission stated in the May 31, 2000 suspension order in
14 Docket No. ER00-2019 that the Commission's review authority
15 in this area "is a complex and evolving question." The
16 Commission specifically references the fact that in Order
17 No. 2000-A the Commission specifically "confirmed that we
18 did not.intend `to broaden the applicability of Section 205
19 to non-public utilities.— The Commission also notes that in
20 Central Hudson Gas & Electric Corporation, 86 FERC ¶ 61,062
21 (1999) ("Central Hudson"), it determined that "we cannot
22 review [municipality] rates under the Section 205 just and
23 reasonable standard, but will apply the comparability
24 standard we use when evaluating non -jurisdictional, so-
25 called `NJ' transmission tariffs to assure that the tariff
26, rate is comparable to the rate LIPA charges itself and
27 others."
28 Vernon's presentation in this petition for review is
29 intended to meet any standard the Commission might apply, up
30 to and including the Federal Power Act just and reasonable
31 standard that the Commission stated that it could not apply
32 in Central Hudson and would not extend to non-public
33 utilities such as Vernon in Order No. 2000-A. Because
34 Vernon is a governmental entity that is not subject to the
35 Federal Power Act, the Commission should grant Vernon's TRR
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1 determination significant deference as a policy matter.
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4 Q. DOES THE VERNON TRR MEET THE COMPARABILITY STANDARD APPLIED
5 TO "NON -JURISDICTIONAL, SO-CALLED `NJ' TRANSMISSION TARIFFS-
6 APPLIED BY THE COMMISSION IN CENTRAL HUDSON?
7 A. Yes. NJ transmission tariffs are filed by.otherwise non-
8 jurisdictional transmission providers pursuant to Order No.
9 888, which requires that such entities submit transmission
10 tariffs under certain circumstances, such as when the non-
11 jurisdictional entity is obtaining service under Order No.
12 888 open access transmission service. Order No. 888
13 provides essentially that the transmission rate should be no
14 higher than the rate charged by the non -jurisdictional
15 entity to transmission customers outside of the Order No.
16 888 open access context. Where the non -jurisdictional
17 entity does not provide any transmission service to others,
18 the standard provides that the NJ rate should be no higher
19 than the rate charged by the entity to itself.
20 The analogy between determining the transmission rate
21 applicable to service to be provided under an NJ filing and
22 the issue of a municipality's TRR when it turns operational
23 control of its high voltage transmission entitlements to the
24 ISO is not a perfect one. An NJ rate is the rate that will
25 be charged to certain entities other than the transmission
26. owner. Here, the TRR, is a component of rates to be applied
27 absolutely evenly to all customers of the Cal ISO. There is
28 no issue of discrimination in the rate to be charged ISO
29 customers.
30 When it turns such entitlements over to the Cal ISO, it
31 is the Cal ISO that will provide the transmission service.
32 Indeed, Vernon will no longer have entitlements over which
33 to provide any transmission service. Vernon will obtain
34 transmission service over the lines it owns through the ISO
35 at the same rate and in the same manner as do others.
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1 Nevertheless, the Vernon TRR discussed herein is
2 equivalent/comparable to what Vernon charges and will charge
3 itself and its bundled customers, and, thus, meets the NJ
4 comparability test.
5
6 Q. HAVE YOU DETERMINED VERNON'S TRR FOR PURPOSES OF VERNON'S
7 BECOMING A PTO?
8 A. Yes. I have applied conventional ratemaking concepts
9 regarding cost of service to develop the Vernon TRR. I will
10 discuss each component in turn in the testimony below. In
11 summary,, however, I first determined the expenses applicable
12 to the transmission lines. These expenses include operation
13 and maintenance expenses, including a share of Vernon's
14 administrative and general expenses; property taxes that
15 Vernon pays for the facilities located outside of its
16 service territory; and depreciation expenses. Finally,
17 because Vernon has a substantial investment in the
18 transmission facilities, that investment, in the nature of a
19 rate base, had to be determined and an appropriate rate of
20 return applied in order to develop a complete TRR. I have
21 used an historical test period consisting of Vernon's fiscal
22 year 1999.
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24 Q. PLEASE EXPLAIN THE DERIVATION OF VERNON'S OPERATION AND
25 MAINTENANCE EXPENSES.
26. A. The California Oregon Transmission Project ("COTP"), the
27 Mead-Adelanto Project ("MAP") and the Mead -Phoenix Project
28 ("MPP") are operated by third parties under operation
29 agreements. Vernon owns facilities which are portions of
30 each of these projects. As shown in Exhibit V - 2, the
31 charges under these agreements are reflected in Vernon's TRR
32 as operation and maintenance expenses. Other operation and
33 maintenance expenses include Vernon's costs for the
34 transmission service that it receives from Southern
35 California Edison Company ("SCE") and the Los Angeles
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Department of Water and Power ("LADWP") under existing
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transmission contracts that continue to remain in effect.
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My understanding is that the entitlements under these
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contracts will also be vested in the Cal ISO. Service under
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a portion one of these contracts was discontinued in 1999
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and the cost of this contract has been excluded from the
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TRR. Other operation expenses also include an allowance for
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regulatory expenses and an allocated portion of Vernon's
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administrative expenses.
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Q.
HOW WERE THE ADMINISTRATIVE AND GENERAL EXPENSES DERIVED?
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A.
As shown in Exhibit V - 2, Vernon's internal administrative
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and general expenses were allocated between the other
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functions and transmission function based upon an internal
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labor ratio. The portion that is functionalized as
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transmission is included in the TRR.
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Q.
HOW WERE THE REGULATORY EXPENSES DETERMINED?
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A.
The estimated regulatory expense is $350,000. I based the
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estimate on the actual transmission related regulatory costs
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that Vernon incurred in its fiscal years for 1998 and 1999
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and on discussions that I had with Vernon's utility
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personnel and counsel. The actual costs were $246,442 and
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$597,361 respectively. Vernon does not believe that the
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actual fiscal 1999 cost of $597,361 is a reasonable estimate
26.
on a forward looking basis. The average for the two years
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is $421,902. It was decided to use $350,000 for the
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purposes of the TRR.
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30
Q.
PLEASE EXPLAIN THE TREATMENT OF TAXES IN THE TRR.
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A.
Vernon is not exempt from the payment of its share of the
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property taxes on those owned transmission facilities
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located outside of the city. As part of the operating
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agreements for those projects, Vernon pays its share of
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those taxes. These taxes are included in the TRR. Vernon
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is not subject to state or Federal income taxes and,
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therefore, there is no allowance for income taxes in the
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TRR. Labor related taxes that Vernon pays are included in
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the operation and maintenance expenses.
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Q.
PLEASE EXPLAIN HOW DEPRECIATION EXPENSE WAS CALCULATED.
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A.
The annual depreciation expense is based on a depreciation
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rate of 3.20 of gross plant which I understand to be the
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same rate that SCE uses for its transmission plant. The
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accumulated depreciation for depreciation reflects the same
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3.2% accrual rate which I understand reflects a 42 year
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service life with a negative 330-. net salvage rate.
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15
Q.
HOW WAS THE RATE BASE DERIVED?
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A.
Vernon's transmission investment was derived from the
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records of each of the transmission projects. The gross
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plant amounts reflect Vernon's initial investment and
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Vernon's share of the capitalized additions each year. The
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accumulated provision for depreciation is deducted from the
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gross plant to arrive at a net plant amount included in the
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rate base.
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I have included a cash working capital requirement in
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the rate base that is based on the FERC 45-day method of
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calculation. That is, the cash working capital requirement
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is equal to one -eighth (45/360) of operation and maintenance
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expenses.
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The rate base also includes the unamortized balance of
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the unrecovered transmission costs that Vernon incurred from
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the time these transmission projects were placed into
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service.
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Q.
WOULD YOU DESCRIBE THE RECOVERY OF DEFERRED COSTS IN YOUR
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COST OF SERVICE ANALYSIS?
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A.
Virtually all utility facilities are built larger than the
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immediate needs of the utility customers. This is so
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because economies of scale, and the need for reserves, are
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usually such that it is much more economical to build a
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facility now that will accommodate expected needs in the
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future.
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In the case of Vernon's transmission facilities, this
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effect of building facilities larger than initially needed
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was something that Vernon could not avoid. Since Vernon is
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relatively small as a utility, it did not have the ability
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to construct major electric transmission projects on its
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own. Therefore, Vernon was largely dependent on the timing
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of the transmission expansion activities by others. For
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example, when the COTP was being planned and built Vernon's
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share of the total project ultimately exceeded .its needs.
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Vernon reasoned, however, that it would need that
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transmission capacity in the future and that it would be
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economical in the long term to pay for the facilities at
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that time for later use. A vital part of Vernon's reasoning
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at the time was the prospect of replacing high cost power
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supply with lower cost power supply originating outside of
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California. The ability to move that power into Vernon's
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service area was critical to Vernon's long term power supply
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and cost outlook. Vernon's intent was to allocate the costs
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of the transmission investment to match the benefits to be
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derived from the transmission investment.
26.
Additionally, Vernon made an effort to mitigate its
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costs by offering capacity on these facilities to other
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utilities. Although such efforts were not entirely
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successful, all use on these facilities has been credited to
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the historical costs of the facilities -- even if the
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revenues received did not recover the full costs of the
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facilities.
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The intent was that some of the costs would be carried
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forward, and paid when the facilities were needed and used
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in the future. Thus, Exhibit V - 2 shows for each year a
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1 cost of service (reduced by depreciation expense) that is
2 carried forward and amortized to future periods when the
3 facilities will be used as a part of the ISO. This approach
4 provides a matching between the utilization of the
5 facilities and the cost recovery. This approach also helps
6 keep Vernon whole in the recovery of its costs related to
7 these projects.
8
9 Q. WOULD YOU PLEASE EXPLAIN THE CALCULATION OF THE UNAMORTIZED
10 DEFERRED COSTS?
11 A. For each year the cost of the unused capacity in each
12 project is determined. The costs include operation and
13 maintenance expenses, property taxes and a return
14 requirement based on net plant in service each year, but
15 does not include depreciation expense. The annual
16 depreciation expense is excluded in this calculation because
17 the TRR already reflects depreciation expense on Vernon's
18 total investment in these projects.
19 A carrying charge is applied to the total unrecovered
20 cost for each year to reflect the time value of the deferred
21 recovery by Vernon. The carrying charge is set each year at
22 the annual rate that Vernon could have earned if the money
23 had been invested in the State of California Local Agency
24 Investment Fund in an attempt to duplicate the lost
25 opportunity costs that Vernon incurred since these costs
26. were not recovered in rates at the time the costs were being
27 incurred. That is, Vernon would have had the opportunity to
28 invest these amounts in interest bearing accounts if they
29 had been recovered at the time. The carrying charge,
30 however, does not reflect the return on rate base since
31 Vernon would not have reinvested these funds in additional
32 transmission facilities or other high risk ventures.
33 Finally, I am proposing to include an average balance
34 of the unamortized balance over the amortization period.
35 This is consistent with proposals I have made in other cases
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1 for amounts that are fully measurable at the beginning of
2 the amortization period and have a definite amortization
3 period. The total unamortized balance that is included in
4 the rate base is $10,363,990.
5
6
Q.
HOW IS THE UNAMORTIZED BALANCE BEING AMORTIZED THROUGH THE
7
TRR?
8
A.
I am proposing a thirty-five year amortization period. The
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thirty-five year period was chosen for two reasons. First,
10
the facilities themselves are being depreciated, over a
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forty-two year life (using SCE's depreciation rate) and we
12
are approximately seven years into that life for the
13
earliest project. Therefore, it seems appropriate to extend
14
the amortization period over the maximum possible number of
15
years which would be the perceived remaining life of thirty-
16
five years. Second, the longer the amortization period, the
17
lower the impact on the TRR.
18
19
Q.
THE FINAL ELEMENT OF THE TRR IS THE RETURN REQUIREMENT WHICH
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IS MEASURED AS A RATE OF RETURN MULTIPLIED BY THE RATE BASE.
21
WOULD YOU EXPLAIN HOW YOU DETERMINED THE RATE OF RETURN THAT
22
YOU APPLIED TO THE RATE BASE?
23
A.
In a typical rate case the rate of return is measured, on a
24
weighted basis, as the cost of equity (both preferred and
25
common, if applicable) and the cost of debt. Vernon has no
26.
outstanding debt, therefore, the rate of return does not
27
include a weighted component for interest expense. There is
28
no direct method to measure Vernon's cost of equity since,
29
unlike an investor owned utility that goes to the equity
30
markets from time to time, there is no equity capital
31
attraction test that is applicable directly to Vernon. I
32
have used the cost of equity that has been granted to SCE
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both by the California commission and the FERC which is
34
currently 11.601.
35
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1 Q. WHY DID VERNON NOT USE BONDS TO FINANCE ALL OF OR A PORTION
2 OF ITS TRANSMISSION FACILITIES?
3 A. I have been informed by Vernon that conventional tax-exempt
4 bonds would not have been feasible to use to finance
5 Vernon's participation in the transmission projects. This
6 was so for several reasons. Vernon was in the position of
7 being able to assess the costs of the bonds, the risks
8 associated with the issuance of the bonds, as well as the
9 potential impacts on the future use of the facilities and
10 then to decide whether or not to go to the bond market.
11 First of all, as is evident from the concerns of other
12 municipalities that did float tax-exempt bonds to finance
13 their portions of the projects, there were (and continue to
14 be) considerable uncertainties with respect to what services
15 could be provided to third parties without jeopardizing the
16 tax-exempt status of the bonds. It is my understanding
17 that, currently, municipals that have tax-exempt bonds
18 outstanding may be prohibited from turning over operational
19 control of their transmission facilities without violating
20 the bond covenants. Vernon does not face this problem
21 because it opted not to use bond financing.
22 Secondly, the facilities are long transmission lines
23 located far outside of Vernon's service territory, and even
24 outside of the state of California. Vernon opted to size
25 its portions of these projects so that Vernon could take
26. virtually its entire load from out of the Southern
27 California area. Vernon was convinced at that time that its
28 least expensive power supply options for its customers would
29 not be from its traditional supplier, SCE, but would be from
30 areas far removed from Vernon. Having been stymied in
31 obtaining transmission access from SCE and other investor
32 owned utilities because of their claims that they needed
33 their transmission capacity for their own transactions,
34 Vernon believed that its best course was to invest in
35 significant transmission resources. Vernon reasoned that
14
1 even if it turned out that it did not need the transmission
2 capacity to serve its own customers immediately, the
3 capacity would be a valuable asset; one easily used by
4 others for a fair compensation.
5
6 Q. IF THE RESTRUCTURING OF THE ELECTRIC INDUSTRY HAD NOT TAKEN
7 PLACE, WOULD VERNON'S ANALYSIS OF THE INVESTMENT IN THESE
8 TRANSMISSION PROJECTS HAVE BEEN ACCURATE?
9 A. It is not possible to determine that with precision because
10 the restructuring (that was not in any way foreseen when
11 Vernon was making the analysis) did, in fact occur. I do
12 believe, however, that Vernon's evaluation of its future
13 power supply costs, its need for transmission capacity and
14 the potential need for future transmission capacity of
15 others, would have made these investments productive ones
16 for Vernon.
17 Restructuring in California forced SCE and other
18 entities to open up transmission access to all entities and
19 made the only practical way of providing transmission
20 service through the ISO. The investor owned utilities'
21 ("IOU") high voltage transmission service is now provided
22 through the ISO. Moreover, the establishment of the ISO
23 and the Power Exchange further levelized the cost of power
24, purchased by the IOU's in the state. Currently,
25 transmission ownership is no longer as crucial to the
26 individual entity seeking access to low cost, remote power
27 supply because of access to the ISO. Transmission
28 facilities and entitlements are now more valuable to all of
29 California under the operational control of the Cal ISO than
30 they would be under the operational control of Vernon or any
31 similarly situated entity.
32 Without restructuring, Vernon would have had
33 significant amounts of transmission access to low cost power
34 that it could use itself to lower its retail customers'
35 rates, or could have sold to others at an unregulated rate.
15
1 Restructuring has limited Vernon's abilities to do either of
2 these things. In short, Vernon can no longer use these
3 transmission facilities and entitlements as intended.
4 However, collectively California is short on
5 transmission capacity. Having additional capacity under the
6 Cal ISO's operational control will be immensely beneficial
7 to California as a whole.
8
9 Q. WHY DID YOU CHOOSE TO USE SCE'S ALLOWED COST OF EQUITY FOR
10 VERNON'S TRR?
11 A. I chose it because Vernon's transmission facilities should
12 be placed in the ISO at least at the same relative risk as
13 those of SCE. SCE's most recent allowed returns on equity
14 at both the California commission and at the FERC are 11.60.
15 Vernon provides service in the same geographical area as
16 SCE'. There should not be a distinction between the
17 incentive offered to SCE in the form of a return equity and
18 the incentive offered to entities such as Vernon to invest
19 in transmission facilities.
20 Indeed, Vernon's risks may exceed those of SCE. These
21 facilities are located outside the City's compact service
22 territory. These extend for long distances in California
23 and even beyond. The mere fact that a larger portion, on a
24 percentage basis, of these facilities extend to states
25 beyond California, states that may not provide the same
-26. environment, puts Vernon at more risk.
27 Additionally, these facilities are not wholly owned by
28 Vernon. Vernon has only a small percentage of the
29 facilities (7.5497°s of the COTP, 6.2501 of.the MAP and even a
30 smaller portion of the various segments of the MPP - see
31 Exhibit V - 3). The facilities operate under a joint
32 ownership committee that is controlled by others.
33 Vernon's own load is also vastly different from
34 virtually every other municipal or investor owned utility.
35 Vernon's load is virtually all industrial. This makes
16
1
Vernon's load subject to more volatility than a utility that
2
has a residential and commercial base to serve. Industrial
3
customers can shift large loads to other jurisdictions or
4
simply shut down depending on external and internal economic
5
conditions. As an example, Vernon's peak load was
6
historically in the area of 250 MW, but declined to
7
approximately 170 MW (a decline of approximately 32%)
8
because of the loss of industrial customers. The peak load
9
is currently back up to approximately 196 MW. Only a
10
relatively small, but almost totally industrial load would
11
place such volatility and risk on a utility system.
12
For these reason, Vernon uses SCE's allowed return on
13
equity in the return calculation. Since Vernon has no
14
outstanding debt, the 11.6% is the rate of return used. AS
15
noted earlier, there is allowance in the TRR for income
16
taxes as would be the case for an IOU. Therefore this rate
17
of return is not increased for any income tax allowance.
18
19
Q.
WHAT IS VERNON'S TRANSMISSION REVENUE REQUIREMENT AT THIS
20
TIME?
21
A.
Based on the historical test year consisting of Vernon's
22
fiscal year 1999, adjusted as notedreviously in this
9c)
23
Tb i?� , O c� y r
testimony, Vernon's TRR is on annual basis. The
24
calculation is shown in Exhibit V - 1, page 1 of 8.
25
26
Q.
DOES THIS COMPLETE YOU TESTIMONY AT THIS TIME?
27
A.
Yes, it does.
17
City of Vernon, California
Total Cost of Service
Fiscal 1999
Line
Docket No. EL00-
Exhibit V - 2
Page 1 of 8
No. Description Amount
(a) (b)
1 Gross plant
2 Accumulated depreciation
3 Net plant in service
4 Cash working capital
5 Unrecovered transmission cost
6 Total Rate Base
7 Return requirement at 11.6%
8 Annual depreciation expense [1 ]
9 Amortization of unrecovered transmission cost [2]
10 O&M expense (owned projects) [3]
11 Transmission service[4]
12 A&G expense[5]
13 Property tax[3]
14 Regulatory expense[6]
15 TOTAL COST OF SERVICE
$69,499,223
-10,495,663
59,003,560
116,727
10,363,990
$69,484,278
$8,060,176
2,223,975
296,110
445,821
1,431,162
137,997
134,948
350,000
$13,080,189
[1] Annual depreciation expense using a 3.2% depreciation rate.
[2] Amortization based on a thirty five remaining life.
[3] Amount paid to operators per agreements.
[4] Amount paid less Midway -Vincent.
[5] Vernon A&G allocated on labor ratio.
[6] Estimated annual expense.
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Docket No. EL00-
Exhibit V - 2
Page 3 of 8
City of Vernon, California
Cost of Unused Transmission
1994 through 1999
Percent Total Cost
Unused
1994
Available Used Unused Less Deprec Exp
Cost
1
NOB -Sylmar (COTP)
1,116 252 77.42% $5,168,693
$4,001,569
2
West Wing -Mead
3
Mead Substation
4
Mead -Marketplace
5
Marketplace-Adelanto
6
TOTAL
$5,168,693
$4,001,569
Percent Total Cost Unused
1995
Available Used Unused Less Deprec Exp Cost
1
NOB -Sylmar (COTP)
1,116 478 57.17% $4,846,782 $2,770,830
2
West Wing -Mead
3
Mead Substation
4
Mead -Marketplace
5
Marketplace-Adelanto
6
TOTAL
$2,770,830
Percent
Total Cost
Unused
1996
Available
Used
Unused
Less Deprec Exp
Cost
1
NOB -Sylmar (COTP)
1,116
438
60.75%
$5,090,530
$3,092,634
2
West Wing -Mead
252
93
63.10%
1,739
1,097
3
Mead Substation
423
0
100.00%
2,908
2,908
4
Mead -Marketplace
675
93
86.22%
3,150
2,716
5
Marketplace-Adelanto
675
289
57.19%
12,364
7,070
6
TOTAL
$5,110,691
$3,106,425
Percent
Total
Unused
1997
Available
Used
Unused
Cost
Cost
1
NOB -Sylmar (COTP)
1,116
605
45.79%
$4,540,394
$2,078,980
2
West Wing -Mead
336
129
61.61%
779,126
479,997
3
Mead Substation
564
142
74.82%
96,685
72,342
4
Mead -Marketplace
900
271
69.89%
302,629
211,504
5
Marketplace-Adelanto
900
876
2.67%
2,255,784
60,154
6
TOTAL
$7,974,619
$2,902,978
Percent
Total
Unused
1998
Available
Used
Unused
Cost
Cost
1
NOB -Sylmar (COTP)
1,116
674
39.61%
$4,603,117
$1,823,098
2
West Wing -Mead
336
184
45.24%
839,246
379,659
3
Mead Substation
564
177
68.62%
102,563
70,376
4
Mead -Marketplace
900
414
54.00%
312,703
168,860
5
Marketplace-Adelanto
900
858
4.67%
2,223,442
103,761
6
TOTAL
$8,081,072
$2,545,753
Percent
Total
Unused
1999
Available
Used
Unused
Cost
Cost
1
NOB -Sylmar (COTP)
1,116
826
25.99%
$4,656,568
$1,210,040
2
West Wing -Mead
336
314
6.55%
940,690
61,593
3
Mead Substation
564
87
84.57%
121,487
102,747
4
Mead -Marketplace
900
653
27.44%
373,414
102,481
5
Marketplace-Adelanto
900
653
27.44%
2,252,222
618,110
6
TOTAL
$8,344,381
$2,094,971
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Docket No. EI00-
Exhibit V - 2
Page 5 of 8
City of Vernon, California
West -Wing Mead Cost of Service
1994 through 1999
Line
No
Description
1996
1997
1998
1999
(a)
(b)
(c)
(d)
(e)
1
Gross plant at 6/30
$5,644,484
$5,668,336
$5,733,306
$5,749,176
2
Additions in fiscal year
23,852
64,970
15,870
0
3
Gross plant at 6/30
$5,668,336
$5,733,306
$5,749,176
$5,749,176
4
5
Annual depreciation
$0
$179,497
$181,555
$182,057
6
Accumulated depreciation
$0
$179,497
$361,052
$543,109
7
Net plant
$0
$5,553,809
$5,388,124
$5,206,067
8
Return on equity
12.10%
11.60%
11.60%
11.60%
9
Return requirements
$0
$644,242
$625,022
$603,904
10
Annual depreciation
0
179,497
181,555
182,057
11
O&M expense (includes A&G)
1,739
9,151
11,761
13,210
12
Property tax
0
37,335
81,269
78,857
13
Admin & general
0
88,398
121,194
244,719
14
TOTAL COST OF SERVICE
$1,739
$958,623
$1,020,801
$1,122,747
Docket No. EL00-
Exhibit V - 2
Page 6 of 8
City of Vernon, California
Mead Substation Cost of Service
1994 through 1999
Line
No
Description
1996
1997
1998
1999
(a)
(b)
(c)
(d)
(e)
1
Gross plant at 6/30
$627,164
$629,814
$637,033
$638,796
2
Additions in fiscal year
2,650
7,219
1,763
_ 0
3
Gross plant at 6/30
$629,814
$637,033
.$638,796
$638,796
4
5
Annual depreciation
$0
$20,173
$20,229
$20,229
6
Accumulated depreciation
$0
$20,173
$40,401
$60,630
7
Net plant
$629,814
$616,860
$598,395
$578,166
8
Return on equity
12.10%
11.60%
11.60%
11.60%
9
Return requirements
$0
$71,556
$69,414
$67,067
10
Annual depreciation
0
20,173
20,229
20,229
11
O&M expense (includes A&G)
2,908
15,307
19,672
22,096
12
Property tax
0
0
11
5,133
13
Admin & general
0
9,822
13,466
27,191
14
TOTAL COST OF SERVICE
$2,908
$116,858
$122,791
$141,716
Docket No. EL00-
Exhibit V 2
Page 7 of 8
City of Vernon, California
Mead -Marketplace Cost of Service
1994 through 1999
Line
No
Description
1996
1997
1998
1999
(a)
(b)
(c)
(d)
(e)
1
Gross plant at 6/30
$2,203,943
$2,213,255
$2,238,618
$2,244,814
2
Additions in fiscal year
9,312
25,363
6,196
0
3
Gross plant at 6/30
$2,213,255
$2,238,618
$2,244,814
$2,244,814
4
5
Annual depreciation
$0
$70,890
$71,086
$71,086
6
Accumulated depreciation
$0
$70,800
$141,675
$213,061
7
Net plant
$2,213,255
$2,167,728
$2,102,839
$2,031,753
8
Return on equity
12.10%
11.60%
11.60%
11.60%
9
Return requirements
$0
$251,456
$243,929
$235,683
10
Annual depreciation
0
70,890
71,086
71,086
11
O&M expense (includes A&G)
3,150
16,579
21,307
23,932
12
Property tax
0
0
38
18,029
13
Admin & general
0
34,594
47,429
95,770
14
TOTAL COS
$3,150
$373,519
$383,789
$444,500
r ' �
City of Vernon, California
Mead-Adelanto Cost of Service
1994 through 1999
Docket No. EL00-
Exhibit V - 2
Page 8 of 8
Line
No
Description
1996
1997
1998
1999
(a)
(b)
(c)
(d)
(e)
1
Gross plant at 6/30
$18,727,838
$18,727,838
$18,833,938
$18,833,938
2
Additions in fiscal year
0
106,100
. 0
0
3
Gross plant at 6/30
$18,727,838
$18,833,938
$18,833,938
$18,833,938
4
5
Annual depreciation
$0
$593,048
$596,408
$596,408
6
Accumulated depreciation
$0
$593,048
$1,189,456
$1,785,864
7
Net plant
$0
$18,240,890
$17,644,482
$17,048,074
8
Return on equity
12.10%
11.60%
11.60%
11.60%
9
Return requirements
$0
$2,115,943
$2,046,760
$1,977,577
10
Annual depreciation
0
593,048
596,408
596,408
11
O&M expense (includes A&G)
12,364
73,434
84,779
57,876
12
Property tax
0
0
858
32,929
13
Admin & general
0
66,407
91,045
183,840
14
TOTAL COS
$12,364
$2,848,832
$2,819,850
$2,848,630
SUPPORTING
DOCUMENTS
r
4305 Santa Fe Avenue
Vernon, CA 90058
Phone: 323/583-8811 x 368
Fax: 323/583-2956
FaX
To: Channing Strother
From:, Judy Lehr
Fax: (202) 626-6780. Date: August 29, 2000 5:30 p.m.
Phone: Pages: 33 ro�)Joqlo-
Re: Transmission Revenue Requirement CC: N/A
❑ Urgent O For Review O Please Comment ❑ Please Reply ❑ Please Recycle
*Comments:
Attached please find a copy of the signed Resolution No. 7608. A copy will be
mailed to you tomorrow.
s:Yor.�
`CITY COUNC
LEONIS C. MAJRC
Mayor
THOMAS A. YBARRA
Mayor Pro-Tem
WM. "BILL" DAVIS
Councilman
H. "LARRY" GONZALES /
Councilman !ll
W. MICHAEL MCCORMIC
Councilman
BRUCE V. MALKENHORST
City Administrator / City Clerk I / 3
FAX (323) 581-7924
City Council
City of Vernon
Honorable Members:
n.
(�fI K
I HALL
AVENUE, VERNON, CALIFORNIA 90058
TELEPHONE (323) 583-8811
August 17, 2000
EDUARDO OLIVO
City Attorney
FAX: (562) 927-8722
KEVIN WILSON
Director of Community Services & Water
FAX: (323) 588-2761
KENNETH J. DeDARIO
Director of Municipal Utilities
FAX: (323) 583-1983
DAVE TELFORD
Fire Chief
FAX: (323) 581-1385
BRUCE W. OLSON
Police Chief
FAX: (323) 583-5236
In accordance with AB1890, the California Independent System
Operator (ISO) filed a Transmission Access Charge tariff with
the Federal Energy Regulatory Commission (FERC) on March 31,
2000. The tariff provides a process for a utility to become a
Participating Transmission Owner (PTO) with the ISO.
The City retained the services of Fred Saffer & Associates, Inc.
to assist in preparing and recommending a Transmission Revenue
Requirement (TRR) to be filed with the FERC as part of the
application process to become a PTO.
It is hereby recommended that the TRR be approved
Very truly yours,
Bruce V. Malkenhorst
City Clerk
BVM/gst
NOTICE OF PUBLIC HEARING
PLEASE TAKE NOTICE that on August 22, 2000, at 5:00 p.m., or
as soon thereafter as the matter may be heard, in the Council
Chamber of the City Council of the City of Vernon located at
Vernon City Hall, 4305 Santa Fe Avenue, Vernon, California, the
City Council of the City of Vernon will hold a public hearing to
consider evidence to establish Vernon's Transmission Revenue
Requirements for its high voltage (over 200 kV) transmission
facilities and entitlements (all located outside the City) for
the purpose of becoming a Participating Transmission Owner with
the California Independent System Operator.
Any interested person may attend and may make an oral
presentation to the City Council at the time of the hearing, or
may present written comments prior to the hearing.
If you challenge the approval of the establishment of
Vernon's Transmission Revenue Requirements or any provision
thereof in court, you may be limited to raising only those issues
you or someone else raised at the hearing described in this notice
or in written correspondence delivered to the City of Vernon at,
or prior to, the meeting.
Information may be obtained by contacting the office of the
City Clerk at the above address.
The hearing may be continued or adjourned to a stated time
and place without further notice.
Dated:-
BRUCE V. MALKENHORST, City Clerk
August 17, 2000
TO: Bruce V. Malkenhorst, City Administrator
FROM: Kenneth J. DeDario, Director of Utilities Kj,,*-
SUBJECT: Transmission Revenue Requirement
In accordance with Assembly Bill 1890 (AB 1890) the California Independent System Operator
(ISO) filed a Transmission Access Charge (TAC) tariff with the Federal Energy Regulatory
Commission (FERC) on March 31, 2000. The TAC tariff provides a process for a utility to
become a Participating Transmission Owner (PTO) with the ISO.
On May 31, 2000 FERC accepted the ISO's proposed TAC tariff for filing, subject to refund,
which permits interested utilities the opportunity to become a PTO in accordance with the
provisions of the TAC tariff. Vernon provided its Notice of Intent on June 30, 2000 to the ISO
per the requirements of the proposed TAC tariff for a utility to become a PTO effective January
1, 2001. On July 11, 2000 the Council approved and authorized the filing of an application with
the ISO to become a PTO effective January 1, 2001. Such application requires the determination
of a Transmission Revenue Requirement (TRR) associated with the operation and control of the
transmission entitlements that Vernon intends to provide to the ISO.
Mr. Albert E. Clark, an experienced FERC consultant with the firm of Fred Saffer & Associates,
Inc., was retained to assist Vernon in preparing and recommending a TRR to be filed with the
FERC as part of the application process to become a PTO.
I recommend approval of the TRR recommended by Mr. Clark which is fully explained in the
Attached testimony.
If you have any questions or comments, please contact me. Thank you for your consideration.
KJD:dm
Attachment
August 15, 2000
TO: Bruce V. Malkenhorst, City Administrator
FROM: Kenneth J. DeDario, Director of Utilities
SUBJECT: Transmission Revenue Requirements
Please place the following on the City Council agenda:
A Public Hearing for the consideration of establishing Vernon's Transmission Revenue
Requirements for its high voltage (over 200 kV) transmission facilities and entitlements
(all located outside the City) for the purpose of becoming a Participating Transmission
Owner with the California Independent System Operator.
If you have any questions or comments, please contact me. Thank you for your consideration.
KJD:dm
CITY COUNCIL
LEONIS C. MALBURG
Mayor
THOMAS A. YBARRA
Mayor Pro -Tern
WM. "BILL" DAVIS
Councilman
H. "LARRY" GONZALES
Councilman
W. MICHAEL MCCORMICK
Councilman
BRUCE V. MALKENHORST
City Administrator / City Clerk
FAX (323) 581-7924
CITY HALL
4305 SANTA FE AVENUE, VERNON, CALIFORNIA 90058
TELEPHONE (323) 583-8811
August 30, 2000
EDUARDO OLIVO
City Attorney
FAX: (562) 927-8722
KEVIN WILSON
Director of Community Services & Water
FAX: (323) 588-2761
KENNETH J. DeDARIO
Director of Municipal Utilities
FAX: (323) 583-1983
DAVE TELFORD
Fire Chief
FAX: (323) 581-1385
BRUCE W. OLSON
Police Chief
FAX: (323) 583-5236
Channing D. Strother, Esq.
Squire, Sanders & Dempsey L.L.P.
1201 Pennsylvania Ave., N.W.
P.O. Box 407
Washington, D.C. 20044-0407
Re:I. ` Vernon's Transmission Revenue
C uer6ment
Dear Mr. Strother:
Enclosed herewith is a certified copy of a fully executed
Resolution No. 7608 that was approved by the Vernon City Council
on August 29, 2000.
If you should have any questions, please refer them to David B.
Brearley at Ext. 306.
Very truly yours,
CITY OF VERNON
G�
rla J. Or s
Chief Deputy City Clerk
GJO:j1
Enclosure
cc: Mr. Eduardo Olivo, City Attorney (w/o enclosure)
Mr. David B. Brearley, Special Consultant (w/o enclosure)
Mr. Ken DeDario (w/o enclosure)