EX-99.D5 7 c22015_ex99-d5.txt TESTIMONY Exhibit 99.D5 BEFORE THE LOUISIANA PUBLIC SERVICE COMMISSION LPSC DOCKET NOS. U-21453, U-20925, U-22092 (SUBDOCKET C) SOUTHWESTERN ELECTRIC POWER COMPANY'S BUSINESS SEPARATION PLAN DIRECT TESTIMONY OF JOHN O. AARON FOR SOUTHWESTERN ELECTRIC POWER COMPANY SEPTEMBER 2001 DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 1 TESTIMONY INDEX SUBJECT PAGE I. INTRODUCTION........................................................3 II. PURPOSE OF TESTIMONY................................................5 III. OVERALL BUSINESS SEPARATION ACCOUNTING..............................5 A. Books, Records and Asset Transfers..............................6 B. Corporate Support Services.....................................11 IV. TRANSACTION AND TRANSITION COSTS INCLUDING THE PHYSICAL WORKFORCE SEPARATION COSTS.........................................12 V. CONCLUSION.........................................................13 DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 2 1 BEFORE THE 2 LOUISIANA PUBLIC SERVICE COMMISSION 3 LPSC DOCKET NOS. U-21453, 4 U-20925, U-22092 (SUBDOCKET C) 5 6 SOUTHWESTERN ELECTRIC POWER COMPANY'S 7 BUSINESS SEPARATION PLAN 8 9 DIRECT TESTIMONY OF 10 JOHN O. AARON 11 12 FOR 13 SOUTHWESTERN ELECTRIC POWER COMPANY 14 15 SEPTEMBER 2001 16 17 I. INTRODUCTION 18 Q. PLEASE STATE YOUR NAME, POSITION AND BUSINESS ADDRESS. 19 A. My name is John O. Aaron and I am employed as a Regulatory Accounting Consultant 20 by American Electric Power Service Corporation (AEPSC), a subsidiary of American 21 Electric Power Company, Inc. (AEP). My business address is Williams Tower II, 2 22 W. Second St., Tulsa, Oklahoma, 74103-3102.
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 3 1 Q. WHAT ARE YOUR PRINCIPAL AREAS OF RESPONSIBILITY? 2 I am responsible for the preparation and coordination of accounting-related schedules 3 and other accounting information for regulatory filings made by the four domestic 4 electric operating companies of the western portion of AEP: Central Power and Light 5 Company (CPL), Southwestern Electric Power Company (SWEPCO), Public Service 6 Company of Oklahoma (PSO) and West Texas Utilities Company (WTU). 7 Q. PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND 8 PROFESSIONAL BACKGROUND. 9 A. I received a Bachelor of Science in Accounting from Louisiana State University in 10 Shreveport in May 1980. I am a Certified Public Accountant (CPA) in the State of 11 Oklahoma and a member of the American Institute of CPAs and the Oklahoma Society 12 of CPAs. Upon graduation from college, I was employed as an Internal Auditor for a 13 multi-state wholesale appliance and electrical supplier in Shreveport, Louisiana. In 14 May 1984, I accepted employment with SWEPCO as an accountant in the Property 15 Accounting Department. From 1985 through 1995, I held various positions in the 16 Accounting, Internal Auditing and Rate Departments, including Supervisor of 17 Regulatory Accounting Support and Supervisor of Wholesale Marketing Support. My 18 responsibilities at SWEPCO included preparing property accounting closing reports 19 and journal entries, conducting financial audits, and providing accounting support for 20 regulatory filings made in SWEPCO's retail jurisdictions and at the Federal Energy 21 Regulatory Commission (FERC). In April 1995, I assumed the position of Regulatory 22 Accounting Consultant at Central and South West Services, Inc. (CSWS) the service
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 4 1 company for the former Central and South West Corporation (CSW). As of January 2 1, 2001, AEPSC became the successor to CSWS. 3 Q. HAVE YOU PREVIOUSLY SPONSORED TESTIMONY BEFORE THIS OR 4 OTHER COMMISSIONS? 5 A. Yes. I have sponsored written testimony on behalf of WTU and CPL before the 6 Public Utility Commission of Texas but not before the Louisiana Public Service 7 Commission (LPSC). 8 9 II. PURPOSE OF TESTIMONY 10 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS FILING? 11 A. The purpose of my testimony is to address accounting implications associated with 12 SWEPCO's business separation plan resulting from the restructuring of the electric 13 industry in SWEPCO's Texas service territory. 14 Q. IS THIS TESTIMONY TRUE AND CORRECT TO THE BEST OF YOUR 15 KNOWLEDGE AND BELIEF? 16 A. Yes. 17 18 III. OVERALL BUSINESS SEPARATION ACCOUNTING 19 Q. BRIEFLY DESCRIBE THE PROPOSED BUSINESS SEPARATION PLAN FOR 20 SWEPCO. 21 A. As discussed in the direct testimony of Mr. J. Craig Baker, SWEPCO's assets will be 22 split between SWEPCO and the SWEPCO Texas Energy Delivery Company
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 5 1 (SWEPCO Texas EDC). The SWEPCO Texas EDC will be comprised of SWEPCO's 2 transmission and distribution assets physically located in Texas and any related general 3 plant. SWEPCO will continue to own all of SWEPCO's other assets, including all 4 generation assets, the transmission assets and distribution assets physically located in 5 Arkansas and Louisiana, and any related general plant assets. 6 7 A. BOOKS. RECORDS AND ASSET TRANSFERS 8 Q. HOW WILL THE TRANSFERS OF ASSETS AND LIABILITIES BETWEEN THE 9 LEGAL ENTITIES BE VALUED? 10 A. The transfers of assets and liabilities to accomplish the structural separation will be 11 valued at net book value. Net book value is defined as original cost less accumulated 12 depreciation. This is in compliance with the rules of the Securities and Exchange 13 Commission (SEC) as they pertain to holding companies registered under the Public 14 Utility Holding Company Act of 1935 (PUHCA), and is consistent with Texas 15 restructuring legislation and rules. 16 Q. HOW WILL THE ASSET SEPARATIONS OR TRANSFERS BE CONDUCTED? 17 A. Asset ownership will be detem1ined on the basis of the predominant use of the asset 18 and its physical location. FERC Account 101, Electric Plant in Service, contains most 19 of the assets to be separated. In general, generation assets recorded in FERC plant 20 accounts 310-346 will be functionally separated into generation and will stay on 21 SWEPCO's books.
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 6 1 Transmission assets recorded in FERC plant accounts 350-359 and physically 2 located in Texas will be transferred to the SWEPCO Texas EDC. Transmission assets 3 recorded in FERC plant accounts 350-359 and physically located in Arkansas and 4 Louisiana will stay with SWEPCO. In addition, all generator step-up transformers and 5 related breaker equipment, regardless of physical location, will be transferred to the 6 generation function and remain on SWEPCO's books. 7 Distribution assets recorded in FERC plant accounts 360-373 and physically 8 located in Texas will be transferred to the SWEPCO Texas EDC. Distribution assets 9 recorded in FERC plant accounts 360-373 and physically located in Arkansas and 10 Louisiana will stay with SWEPCO. This follows the current treatment of distribution 11 costs that are maintained on a situs basis. 12 General plant assets recorded in FERC plant accounts 389-399 that can be 13 identified to a specific function (e.g., generation, transmission, distribution) will be 14 assigned to that function. The general plant assets that cannot be directly assigned will 15 be allocated based on functional gross plant balances. The SWEPCO Texas EDC 16 amount will be detern1ined based on the ratio of Texas transmission and distribution 17 situs plant balances to total transmission and distribution assets. 18 Q. HOW WILL SWEPCO IDENTIFY THE ASSETS TO BE TRANSFERRED? 19 A. For transmission and distribution assets, SWEPCO's books and records specify the 20 state in which the plant in service asset is located. Appropriate personnel are currently 21 reviewing the general plant assets to determine the assignment of the general plant 22 assets to be transferred to the SWEPCO Texas EDC.
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 7 1 Q. HAS AN ESTIMATE OF THE SEPARATE SWEPCO AND SWEPCO TEXAS 2 EDC BALANCE SHEETS BEEN MADE? 3 A. Yes. Please refer to the July 24,2001 FERC filing in Docket No. ECO1-130-000 for a 4 balance sheet providing the estimated amounts for SWEPCO and the SWEPCO Texas 5 EDC at December 31, 2000. This balance sheet provides a reasonable estimate of the 6 expected assets, liabilities and capitalization for the separate SWEPCO entities. The 7 actual balances at the time of separation will be different and the methods used to 8 separate the assets more detailed and precise. 9 Q. WHEN WILL THE ASSETS AND LIABILITIES BE TRANSFERRED? 10 A. The asset and liability transfer will be effective January 1, 2002. 11 Q. ARE THERE ANY ASSETS WHICH WILL BE TRANSFERRED THAT HAVE A 12 ZERO BOOK VALUE BUT ARE STILL USEFUL? 13 A. No, for the most part. SWEPCO depreciates assets utilizing "mass asset" accounting. 14 In this type of accounting, assets with similar characteristics are grouped and 15 depreciation is recorded as a group instead of being recorded on an asset-by-asset 16 basis. In mass asset accounting, depreciation rates are adjusted to reflect the average 17 service life of the group as a whole. When an individual asset is no longer useful, that 18 asset is retired and removed from the group. Capitalized computer software is one 19 exception to the mass asset accounting method. For these types of assets, SWEPCO 20 identifies individual computer software systems and amortizes each software system 21 individually. Thus, at December 31, 2001, there is the possibility that a particular 22 system still in use will have a net book value of zero.
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 8 1 Q. WILL SEPARATE BOOKS AND RECORDS BE MAINTAINED FOR SWEPCO AND 2 THE SWEPCO TEXAS EDC? 3 A. Yes. Separate books and records will be maintained. 4 Q. FOR RATE PROCEEDINGS BEFORE THE LPSC, WHERE WILL THE 5 FINANCIAL DATA UTILIZED TO DEVELOP TOTAL COSTS FOR SERVICES 6 PROVIDED TO SWEPCO'S REGULATED LOUISIANA CUSTOMERS RESIDE? 7 A. The financial data will reside both on SWEPCO's and the SWEPCO Texas EDC's 8 books and records. The SWEPCO Texas EDC's books and records will be used to 9 provide asset and cost data associated with assets that are used to provide electric 10 service to SWEPCO's regulated Louisiana customers. For example, the transmission 11 facilities physically located in Texas are utilized to transmit power from the SWEPCO 12 power plants physically located in Texas to SWEPCO's regulated Louisiana 13 customers. Because the financial data associated with the transmission facilities 14 physically located in Texas resides on SWEPCO Texas EDC's books and records, 15 SWEPCO Texas EDC's books and records must be used to develop total transmission 16 costs for SWEPCO's regulated Louisiana customers. For total SWEPCO 17 transmission cost determination, the appropriate financial data from these two 18 companies will be combined. Ms. Hargus provides an example of this concept as it 19 relates to cost of capital in her testimony. 20 Q. WILL THE CREATION OF THE SWEPCO TEXAS EDC RESULT IN 21 ADDITIONAL DATA BEING AVAILABLE TO DEVELOP PROPER 22 LOUISIANA RETAIL COSTS?
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 9 1 A. Yes, it will. Previously, SWEPCO did not track separately Texas T&D cost data such 2 as operation and maintenance (O & M) expense. With the creation of the SWEPCO 3 Texas EDC, more accurate Texas T&D cost data will be available (e.g., Texas specific 4 distribution O & M and Texas specific transmission and distribution ad valorem taxes). 5 With this data, a more precise allocation of costs to SWEPCO's Louisiana retail 6 customers can be made. Because this more precise data was not available for 7 ratemaking purposes in the past, SWEPCO does not know if Louisiana retail costs will 8 increase or decrease. No matter which direction the costs go, the Louisiana retail 9 customer cost allocation will be more accurate. Mr. Chris Potter discusses the proper 10 allocation of the financial data to SWEPCO's Louisiana retail customers. 11 Q. DOES SWEPCO ANTICIPATE THERE WILL BE ANY MATERIAL EFFECT ON 12 LOUISIANA'S RETAIL CUSTOMERS AS A RESULT OF THE TRANSFER OF 13 ASSETS TO THE SWEPCO TEXAS EDC? 14 A. No, it does not. The assets to be transferred to the SWEPCO Texas EDC will be 15 accomplished at book value, which is consistent with the methodology used to set 16 rates. Therefore, no material effect is expected from the transfer. To the extent 17 additional more precise information, such as O & M, is available with the creation of 18 the SWEPCO Texas EDC, such information will be used, but is not expected to 19 significantly change Louisiana customers' costs. For information concerning the 20 implications of the cost of capital for these transfers, please see Ms. Hargus' 21 testimony. 22
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 10 1 B. Corporate Support Services ----------------------------- 2 Q. PLEASE DISCUSS HOW THE CORPORATE SUPPORT SERVICES PROVIDED 3 BY THE AMERICAN ELECTRIC POWER SERVICE CORPORATION (AEPSC) 4 WILL BE SHARED AMONG THE BUSINESS UNITS. 5 A. AEP will continue to make use of corporate support services provided by AEPSC to 6 retain the efficiencies of central management that promote cost savings. Such services 7 will be provided by AEPSC to a larger number of AEP companies. 8 Q. HOW WILL COSTS RELATED TO SHARED SERVICES BE ACCOUNTED 9 FOR? 10 A. Costs related to services provided by corporate and shared services support will be 11 accounted for utilizing a work order type system as required by the SEC. 12 Expenditures for shared and support services will be accumulated in the work order 13 type system and ultimately billed to the AEP subsidiaries, including AEP's 14 non-regulated companies that benefit from the service. Accounting within each 15 activity or project will be in accordance with the FERC system of accounts. This 16 facilitates a clearer understanding of the specific service provided and simplifies the 17 recording of these charges on the benefiting companies' books. 18 Q. HOW ARE THESE EXPENDITURES ALLOCATED TO THE BENEFITING 19 COMPANIES? 20 A. Costs will be directly assigned to a specific company to the maximum extent possible. 21 When costs cannot be directly billed, appropriate SEC approved allocation factors will 22 be used. A volume-driven formula is used in cases where the cost driver is volume-
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 11 1 based and the data is available. If a volume-based formula is not available, the most 2 representative factor will be used based on cost-causative criteria that are indicators of 3 the amount of activity within the companies that gives rise to the costs that are to be 4 allocated. Being based on the activity that gives rise to the costs, the factors assure 5 that costs are allocated on the basis of specific company cost-causative criteria, which 6 appropriately reflects the service recipients' activity level and use of equipment or 7 assets. 8 It is expected that the existing or similar allocation factors will be used to 9 allocate shared support services after the business separation. Although many of the 10 allocation factors will be the same as those used today, it is possible that additional 11 allocation factors may be required as a result of the business separations. AEPSC will 12 seek approval of any new allocation factors from the SEC. 13 14 IV. TRANSITION COSTS INCLUDING 15 THE PHYSICAL WORKFORCE SEPARATION COSTS 16 Q. WILL SWEPCO INCUR TRANSITION COSTS ASSOCIATED WITH THE 17 RESTRUCTURING OF THE ELECTRIC INDUSTRY IN TEXAS? 18 A. Yes. SWEPCO will place in service additional assets (such as load profiling system 19 and transmission metering at power plants) and will incur additional O & M related to 20 the restructuring of the electric industry in Texas. 21 Q. HOW DOES SWEPCO PROPOSE TO HANDLE THESE TRANSITION COSTS 22 WITH REGARD TO SWEPCO'S LOUISIANA RETAIL CUSTOMERS?
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 12 1 A. SWEPCO proposes to identify transition costs in its accounting records and not 2 charge any of these costs to its Louisiana retail customers unless and until such time 3 such assets and costs are utilized in the provision of electric service to Louisiana retail 4 customers. New assets will be identified with a special code that will designate them 5 as restructuring assets. O & M costs will also be identified with a special code that 6 will also designate these costs as restructuring costs. The restructuring assets and 7 O & M data will thus be separated from the jurisdictional allocations so that these 8 costs will not be charged to Louisiana retail customers. At some time in the future, 9 should the Louisiana retail customers benefit from these assets, they will be assigned a 10 portion of the costs. Additional information about cost allocation can be found in the 11 direct testimony of Mr. Chris Potter. 12 13 V. CONCLUSION ------------- 14 Q. PLEASE BRIEFLY SUMMARIZE YOUR TESTIMONY. 15 A. SWEPCO's assets and liabilities required by the Texas restructuring initiative will be 16 transferred between entities at net book value. Separate books and records for the 17 separate legal entities will be maintained. For transmission rate making purposes, the 18 books and records of SWEPCO and the SWEPCO Texas EDC will be utilized to 19 develop total SWEPCO costs. Other costs such as distribution will be charged 20 separately to both entities. Corporate support service costs will be directly assigned to 21 the company benefiting from the service or allocated to the company benefiting from 22 the service on a cost-causative allocation basis. The transition costs associated with
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 13 1 the restructuring in Texas will be identified and not charged to SWEPCO's Louisiana 2 retail customers until such time as those assets or costs are utilized 3 to provide service to SWEPCO's Louisiana retail customers. 4 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 5 A. Yes, it does.
DOCKET NOS. U-21453, U-20925, JOHN O. AARON U-22092 (SUBDOCKET C) DIRECT TESTIMONY 14 BEFORE THE LOUISIANA PUBLIC SERVICE COMMISSION LPSC DOCKET NOS. U-21453, U-20925, U-22092 (SUBDOCKET C) SOUTHWESTERN ELECTRIC POWER COMPANY'S BUSINESS SEPARATION PLAN DIRECT TESTIMONY OF J. CRAIG BAKER FOR SOUTHWESTERN ELECTRIC POWER COMPANY AUGUST 2001 DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 1 TESTIMONY INDEX SUBJECT PAGE ------- ---- I. INTRODUCTION .......................................................3 II. PURPOSE OF FILING AND TESTIMONY ....................................4 III. REQUEST FOR APPROVAL OF REQUIRED TRANSFERS AS PART OF THE, SEPARATION PLAN .............................................7 IV. PROPOSED BUSINESS SEPARATION PLAN ..................................8 V. STATUS OF STATE RESTRUCTURING IN SWEPCO'S SERVICE TERRITORY .......................................................13 VI. FERC RTO ISSUES IN RESTRUCTURING ..................................18 VII. SWEPCO BSP EFFECT ON COST STRUCTURE . .............................21 VIII. FERC FILINGS CONCERNING SWEPCO'S BSP ..............................24 IX. OTHER REGULATORY APPROVALS ........................................31 X. CONCLUSION ........................................................32 EXHIBITS -------- EXHIBIT JCB- I Organizational Charts EXHIBIT JCB-2 AEP WEST Comparison of 4 Company versus 2 Company Agreements DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 2 1 BEFORE THE 2 LOUISIANA PUBLIC SERVICE COMMISSION 3 LPSC DOCKET NOS. U-21453, 4 U-20925, U-22092 (SUBDOCKET C) 5 6 SOUTHWESTERN ELECTRIC POWER COMPANY'S 7 BUSINESS SEPARATION PLAN 8 9 DIRECT TESTIMONY OF 10 J. CRAIG BAKER 11 12 FOR 13 SOUTHWESTERN ELECTRIC POWER COMPANY 14 15 AUGUST 2001 16 17 1. INTRODUCTION --------------- 18 Q. PLEASE STATE YOUR NAME AND POSITION. 19 A. My name is J. Craig Baker, Senior Vice President-Regulation and Public Policy, 20 American Electric Power Service Corporation (AEPSC), 1 Riverside Plaza, 21 Columbus, Ohio 43215.
DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 3 1 Q. BRIEFLY DESCRIBE YOUR EDUCATIONAL AND PROFESSIONAL 2 QUALIFICATIONS AND YOUR BUSINESS EXPERIENCE. 3 A. I received a Bachelor's Degree in Business Administration from Walsh College in 4 1970 and a Masters Degree in Business Administration in Finance from Akron 5 University in 1980. I joined the American Electric Power (AEP) System in 1968 and 6 through 1979 held various positions in the Computer Applications Division. I 7 transferred to the System Operation Division in 1979 and held positions of 8 Administrative Assistant and Assistant Manager. In 1985, I took the position of Staff 9 Analyst in the Controller's Department and, in 1987, I became Manager-Power 10 Marketing the System Power Markets Department. In 1991, I became Director, 11 Interconnection Agreements and Marketing. I became Vice President-Power 12 Marketing for AEPSC and Senior Vice President of Energy Marketing for AEP 13 Energy Services, Inc. in November 1996 and August 1997, respectively. On July 1, 14 1998, I became Vice President of Transmission Policy for AEPSC. In June 2000, I 15 became Senior Vice President of Public Policy for AEPSC. 16 17 II. PURPOSE OF FILING AND TESTIMONY ----------------------------------- 18 Q. WHAT IS THE PURPOSE OF THIS FILING? 19 A. The purpose of this filing is to comply with the information request of the Louisiana 20 Public Service Commission (LPSC or Commission) in Docket Nos, U-21453, 21 U-20925, and U-22092 (Subdocket C) requiring Southwestern Electric Power 22 Company (SWEPCO or Company) to identify the changes in its corporate structure,
DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 4 1 and their potential impact on Louisiana retail ratepayers, resulting from SWEPCO's 2 restructuring activities in Texas and anticipated restructuring activities in Arkansas. 3 The filing requests LPSC approval of the of the transfer by SWEPCO of transmission 4 and distribution (T&D) and related general plant (GP) assets located in Texas to a 5 separate Energy Delivery Company (EDC), in order to comply with Texas 6 restructuring statutes. I believe that approval of the requested transfers consistent 7 with the SWEPCO Business Separation Plan (BSP) will constitute all LPSC actions 8 required as a prerequisite to the structural unbundling of SWEPCO as required by the 9 Public Utility Commission of Texas (PUCT) restructuring initiative. 10 Q. HAS SWEPCO PREVIOUSLY PRESENTED INFORMATION REGARDING ITS 11 PROPOSED CORPORATE RESTRUCTURING? 12 A. Yes. On May 25, 2001, SWEPCO made a preliminary filing with the LPSC 13 addressing the SWEPCO BSP. This filing was supplemented on June 29, 2001 14 with drafts of changes to existing AEP agreements and new AEP agreements necessary to 15 implement corporate restructuring. On July 26, 2001, the LPSC was also provided 16 copies of the Application of American Electric Power Service Corporation for 17 Authorization to Transfer Jurisdictional Assets (Docket No. EC0 1 - 130-000) and the 18 Application of American Electric Power Company, Inc. for Approval of Rate 19 Schedules Related to Corporate Restructuring (Docket No. ER01-2668-000) filed 20 before the Federal Energy Regulatory Commission (FERC) on July 24, 2001 21 (collectively, the "FERC filings"). The FERC filings contain the latest versions of 22 the agreements necessary to implement the SWEPCO BSP. On August 6, SWEPCO
DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 5 1 provided the LPSC "redlined" versions of the agreements comparing the agreements 2 filed at FERC with those previously filed at the LPSC. This filing (along with the 3 related agreements filed at FERC) replaces in their entirety the previous SWEPCO 4 BSP filings of May 25, 2001 and June 29, 2001. 5 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? 6 A. The purpose of my testimony is to provide an overview of the SWEPCO BSP and 7 discuss the following matters: 8 1. SWEPCO's plan for transferring its Texas T&D and related GP assets 9 to a new EDC and the associated ratemaking issues; 10 2. The restructuring requirements thus far adopted in Texas and the 11 impact those requirements will have on SWEPCO's BSP; 12 3. The status of the proceedings in Texas and Arkansas related to the 13 SWEPCO BSP; 14 4. A detailed summary of the transactions that are anticipated as a result 15 of the Texas business separation plan and a description of the Restated 16 and Amended AEP-West Operating Agreement (AEP West Operating 17 Agreement), Restated and Amended System Integration Agreement 18 (AEP SIA), Unit Power Sales Agreement between SWEPCO and 19 Power Marketing Affiliate (SWEPCO UPSA), and the Second Unit 20 Power Sales Agreement between Power Marketing Affiliate (PMA) 21 and SWEPCO (Second UPSA); and, 22 5. The cost implications of SWEPCO's restructuring activities in Texas 23 for SWEPCO and for Louisiana.
DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 6 1 III. REQUEST FOR APPROVAL OF REQUIRED ------------------------------------- 2 TRANSFERS AS PART OF THE SEPARATION PLAN ---------------------------------------- 3 Q. SHOULD THE LPSC APPROVE SWEPCO'S PROPOSED PLAN TO TRANSFER 4 ITS TRANSMISSION AND DISTRIBUTION ASSETS INTO A SEPARATE 5 COMPANY? 6 A. Yes. SWEPCO's BSP permits SWEPCO to comply with completely divergent state 7 laws and policies regarding restructuring in Texas, Arkansas, and Louisiana with no 8 disruption of and no material adverse effect on its ability to provide continuing 9 bundled retail utility service to Louisiana retail customers. The BSP will permit 10 compliance with the applicable statutes in each state with regulatory authority over 11 SWEPCO, thereby avoiding lengthy litigation which would result if state laws 12 required conflicting actions. The BSP, as structured, will not materially affect the 13 cost structure or rates of the SWEPCO Louisiana retail customers. By only 14 separating the Texas T&D and related GP assets of SWEPCO, the physical assets that 15 are utilized to serve Louisiana customers will be essentially unchanged. SWEPCO 16 remains committed to achieving the reliability and service quality standards which are 17 in effect in Louisiana with the same assets that are in place today. The BSP is in the 18 public interest of Louisiana customers, since it provides a path for resolution of 19 jurisdictional conflicts with a minimum of future litigation.
DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 7 1 IV. PROPOSED BUSINESS SEPARATION PLAN ------------------------------------- 2 Q. PLEASE DESCRIBE THE PROPOSED SWEPCO BSP. 3 A. In accordance with the legislative requirements discussed previously, the SWEPCO 4 T&D and related GP assets that are physically located in Texas will be transferred to 5 a separate wholly-owned subsidiary of AEP, the SWEPCO TEXAS EDC. In 6 addition, the SWEPCO generation assets and employees currently utilized to provide 7 generation services will remain the assets and employees of SWEPCO. The provision 8 of generation services and wholesale electricity sales currently supplied by SWEPCO 9 will be under the direction, management, and control of a separate wholly-owned 10 subsidiary of AEP, the Regulated Holdco, with the coordination, planning, operation 11 and maintenance responsibilities of its power supply resources delegated to AEPSC 12 pursuant to the AEP West Operating Agreement, continuing the practice currently in 13 effect. The T&D assets physically located in Arkansas and Louisiana and employees 14 currently utilized to provide service in Arkansas and Louisiana will remain assets and 15 employees of SWEPCO. However, SWEPCO and the SWEPCO TEXAS EDC 16 intend to turn over operational control of their FERC jurisdictional transmission 17 facilities to a regional transmission organization (RTO). AEP has also established a 18 retail energy provider (Mutual Energy SWEPCO, LP or "SWEPCO REP") under the 19 Texas REP Holdco discussed below that will provide retail electric services in Texas 20 as required by the restructuring rules of that state. 21 The proposed SWEPCO BSP is being carried out as part of AEP's overall corporate 22 restructuring to respond to the movement toward further competition in the
DOCKET NOS. U-21453, U-20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 8 1 electric power industry and to comply with the restructuring statutes in Texas and 2 Ohio. 3 Q. PLEASE DISCUSS THE OVERALL AEF RESTRUCTURING. 4 A. EXHIBIT JCB-1 provides the planned and current corporate structures for SWEPCO 5 and AEP resulting from the restructuring activities in Texas as described in the July 6 24 FERC filing. To accomplish its overall corporate restructuring (including 7 SWEPCO's BSP) AEP has established or will establish several intermediate holding 8 companies that will be used to reorganize its businesses in the following manner. 9 AEP will hold all of the common stock of three relevant first-tier subsidiaries: 10 (1) Regulated Holdco, which will be the holding company for AEP's regulated 11 businesses, including vertically integrated electric utilities in states the continue to 12 regulate electric utilities in the traditional manner (including SWEPCO) and 13 transmission and distribution (energy delivery) companies that result from the 14 corporate separation of Central Power and Light Company (CPL), West Texas 15 Utilities Company (WTU), SWEPCO, Ohio Power Company (OPCo) and Columbus 16 Southern Power Company (CSP); (2) AEP Texas REP Holdco, a first-tier AEP 17 subsidiary that will be the holding company for AEP's competitive retail energy 18 marketing businesses in Texas; and (3) AEP Enterprises, Inc., which, among other things, 19 will be the holding company for AEP's unregulated or lightly regulated 20 foreign and domestic power generation and marketing businesses, including the 21 power generation companies that will result from the corporate separation of CPL, 22 WTU, OPCo, and CSP to comply with Texas and Ohio electric utility restructuring
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 9 1 laws. AEP Enterprises has established or will establish a second-tier holding 2 company, AEP Wholesale Holding Company, Inc. (Wholesale Holdco), that will 3 control the common stock of a third-tier holding company, AEP Domestic Generation 4 Holding Company, Inc. (Domestic Genco), that will hold the common stock of the 5 power generating companies that result from the corporate separation of CPL, WTU, 6 OPCo and CSP. AEP Texas REP Holdco, Inc., AEP Enterprises, Inc., AEP 7 Wholesale Holdco, Inc., AEP Domestic Generation Holding Company, Inc. and the 8 other corporate names used for affiliates of the existing AEP operating companies are 9 all placeholder names, which are being used for descriptive convenience pending 10 implementation of AEP's business reorganization plans. 11 Q. PLEASE DISCUSS THE FORMATION OF THE SWEPCO TEXAS EDC. 12 A. To comply with the Texas electric restructuring statute (Senate Bill 7), by January 1, 13 2002, SWEPCO will transfer title to its T&D and related GP assets, including 14 interconnection agreements with neighboring utility systems, located in Texas and 15 related business operations to a newly formed wholly owned subsidiary, SWEPCO 16 TEXAS EDC, in exchange for 100% of the capital stock of such subsidiary and then 17 contribute or dividend the shares of SWEPCO TEXAS EDC to SWEPCO's parent, 18 Regulated Holdco. Regulated Holdco will continue to hold all of the common stock 19 of SWEPCO. SWEPCO will retain title to its T&D assets located in Louisiana and 20 Arkansas and all of its generating plants. 21 Q. WHY WILL SWEPCO CONTINUE TO RETAIN TITLE TO ITS GENERATING 22 ASSETS?
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 10 1 A. SWEPCO will continue to retain title to its generating assets because it provides 2 bundled retail electric service in Louisiana, which to date has not adopted a retail 3 Competition policy or legislation, and in Arkansas, where SWEPCO is not obliged 4 to separate ownership of its generating assets from its transmission and distribution 5 assets. SWEPCO also will retain its existing wholesale electric sales contracts, but 6 will sell to AEP's PMA proportionate rights to capacity in each SWEPCO generating 7 unit and certain capacity purchase agreements equal to the ratio of the sum of the 8 demands of the SWEPCO-Texas retail native load and the SWEPCO wholesale 9 contract native load at the time of the four Year 2000 coincident monthly summer 10 (June through September) SWEPCO peak demands to the sum of the same four 11 coincident peak demands of the total SWEPCO native load. As discussed later in this 12 testimony, such capacity and associated energy will be made available to PMA under 13 the SWEPCO UPSA. To enable SWEPCO to continue to supply its wholesale 14 requirements customers, PMA will sell back to SWEPCO under the Second UPSA 15 the capacity and associated energy needed for that purpose. 16 Q. PLEASE DISCUSS THE NEW SWEPCO REP ORGANIZATION, 17 A. As discussed earlier, AEP established the SWEPCO REP as a subsidiary with the 18 primary purpose of providing retail electric service to end-use customers in Texas, including 19 the procurement of generation services and competitive customer services 20 components. SWEPCO may also assign to the affiliated SWEPCO REP the 21 responsibility to provide the standard service package offering in Arkansas once retail 22 competition begins in that state. The SWEPCO REP will acquire wholesale energy supply and necessary transmission and distribution services to meet the needs of the
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 11 1 remaining Texas retail customers. The SWEPCO REP anticipates acquiring energy 2 supplies from one or more of the following: its affiliate power generation company, 3 non-affiliate power generation companies, and power marketers. 4 Q. PLEASE DISCUSS THE TRANSFERS OF SWEPCO ASSETS AND LIABILITIES 5 ANTICIPATED UNDER THE SWEPCO BSP. 6 A. The only change in ownership of existing SWEPCO assets pertains to T&D assets 7 located in Texas and related general plant assets. The transfers of assets and 8 liabilities related to the transmission and distribution utility located in Texas will be 9 valued at net book value. Further, to functionally separate all of SWEPCO's assets 10 into generation, transmission, distribution, and customer services functions, assets 11 will be valued at net book value. Net book value is defined as original cost less 12 accumulated depreciation. This treatment complies with the rules of the Securities 13 and Exchange Commission (SEC) for holding companies registered under the Public 14 Utility Holding Company Act of 1935, such as AEP. Mr. John Aaron will be filing 15 testimony in this proceeding and will discuss the transfer of assets in more detail in 16 that testimony. 17 Q. WILL THERE BE A MATERIAL EFFECT ON LOUISIANA'S RETAIL 18 RATEPAYERS AS A RESULT OF THESE TRANSFERS? 19 A. No. As will be discussed in more detail by Ms. Wendy Hargus (who will also be 20 filing testimony in this proceeding), the SWEPCO Texas assets that are transferred to 21 the SWEPCO TEXAS EDC will be financed by the SWEPCO TEXAS EDC or 22 Regulated Holdco and will not be subject to any existing SWEPCO indentures or
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 12 1 other form of lien or pledge. Because the transfer of the SWEPCO Texas assets can 2 be accomplished without violating the terms of SWEPCO's indentures or the terms of 3 other securities contracts, SWEPCO's capital costs are not expected to change 4 significantly. 5 6 V. STATUS OF STATE RESTRUCTURING 7 IN SWEPCO'S SERVICE TERRITORY 8 Q. WHAT IS THE STATE OF RETAIL COMPETITION POLICY IN LOUISIANA, 9 ARKANSAS, AND TEXAS? 10 A. The LPSC is currently evaluating the merits of a transition to retail competition. No 11 final decision has been reached regarding whether a transition to competition is 12 appropriate; therefore, SWEPCO remains obligated to provide bundled utility service, 13 at tariffed rates, to retail customers in Louisiana. 14 In Arkansas, legislation has been passed which requires SWEPCO to provide 15 retail customer choice no sooner than October 1, 2003, and no later than October 1, 16 2005. The statute requires SWEPCO to functionally separate its generation and 17 energy delivery functions, but does not require any structural separation of assets. 18 The requirements of this legislation could be met with organizational changes, and no 19 structural changes. 20 In Texas, the restructuring statute (Senate Bill 7 or SB7) requires SWEPCO to 21 offer retail customer choice on January 1, 2002 to Texas retail customers. The statute 22 also contains language that requires SWEPCO to undertake some form of structural
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 13 1 separation of assets. As discussed later in this testimony, on August 3, 2001, the 2 PUCT Staff petitioned the PUCT to determine whether market institutions and 3 participants are ready for retail competition to begin within SWEPCO's Texas 4 jurisdiction, which is located in the Southwest Power Pool (SPP). 5 Because these policy directions are all different, considerable time and effort 6 was required to develop SWEPCO's BSP. Discussions with the affected state 7 regulatory commissions proved extremely valuable in developing a plan that best 8 meets the needs of each state, 9 Q. HAS THE SWEPCO BSP BEEN APPROVED BY EITHER Of THE 10 REGULATORY AGENCIES IN TEXAS AND ARKANSAS? 11 A. Yes. The proposed Texas business separation plan was subject to a settlement 12 agreement between AEP and the various intervenors in that case. The settlement was 13 approved by the PUCT on July 7, 2000. In Arkansas, SWEPCO filed a business 14 separation plan pursuant to the Arkansas Public Service Commission (APSC) 15 Affiliate Rules. That plan (APSC Docket No. 00-249-U) is pending before the APSC 16 at this time. 17 Q. PLEASE DISCUSS THE ARKANSAS RESTRUCTURING REQUIREMENTS 18 THAT IMPACT SWEPCO. 19 A. The State of Arkansas originally ordered retail customer choice to be implemented on 20 January 1, 2002. However, that date has been delayed at least until October 1, 2003, 21 with the possibility of further delays until October 1, 2005, based on APSC 22 determinations as to market readiness and quantifiable benefits to customers.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 14 1 Arkansas restructuring statutes require utilities to functionally separate the energy 2 delivery and generation businesses, but do not require separation of the energy 3 delivery, generation, and retail businesses into separate companies. In Arkansas, Ark. 4 Code Ann. ss. 23-19-205 (b) and (c) require that: 5 (b) Each electric utility shall functionally unbundle its business 6 activities from one another as follows: 7 (1) Generation facilities, operations, services, and rates; 8 (2) Transmission facilities, operations, services, and rates; 9 and 10 (3) Distribution and customer services facilities, operations, 11 services, and rates. 12 (c) An electric utility shall accomplish this functional separation 13 through creation of separate divisions or departments, 14 nonaffiliated companies, separate affiliated companies owned 15 by a common holding company, or through a sale of assets to a 16 third party. 17 In addition, APSC Affiliate Rule 3.01.A. provides that "[a]t a minimum, each electric 18 utility shall functionally unbundle its business activities as required by Ark. Code 19 Ann. ss. ss. 23-19-205 (b) and (c)." 20 Q. WHICH PROVISION OF THE TEXAS RESTRUCTURING STATUTE 21 REQUIRES SOME CHANGE IN THE STRUCTURE OF SWEPCO? 22 A. SB7 requires that any company that owns generation in the state may not own 23 transmission and distribution plant located in the state. Specifically, Section 24 39.051 (b) of the Texas Public Utility Regulatory Act (PURA) states: 25 (b) "Not later than January 1, 2002, each electric utility shall separate its business 26 activities from one another into the following units: 27 (1) a power generation company; 28 (2) a retail electric provider; and 29 (3) a transmission and distribution utility."
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 15 14 Q. DO LOUISIANA RETAIL CUSTOMERS RECEIVE SERVICE FROM SWEPCO 15 GENERATORS THAT ARE LOCATED IN TEXAS? 16 A. Yes. SWEPCO Louisiana customers receive service from SWEPCO generation 17 assets that are located in Louisiana, Arkansas, and Texas. The generation assets are 18 dispatched in a least-cost manner, along with resources from affiliated companies and 19 the outside market, in order to achieve lowest reasonable cost for customers. 20 Q. DOES SWEPCO's PLAN MEET THE STRUCTURAL SEPARATION 21 REQUIREMENTS OF THE TEXAS STATUTE WITH MINIMAL STRUCTURAL 22 CHANGE TO THE ASSETS UTILIZED TO SERVE LOUISIANA CUSTOMERS? 23 A. Yes. Since only the Texas T&D and related GP assets of SWEPCO are to be 24 separated, the SWEPCO assigned capacity under the UPSA will come from the same 25 SWEPCO generation asset mix and will be available to meet the needs of Louisiana 26 customers. As discussed later in this testimony, the SWEPCO UPSA assigns rights to 27 the capacity in SWEPCO's generating units between SWEPCO's regulated operations
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 16 1 and PMA unregulated operations. However, SWEPCO will continue to own, operate, 2 and maintain its power plants and its assigned capacity will continue to be dispatched 3 by AEPSC, which has performed this function since the merger of Central and South 4 West Corporation (CSW) with AEP. Further, although ownership of SWEPCO's 5 Texas transmission assets will change, use of those assets for Louisiana jurisdictional 6 customers will not change. 7 Currently, SWEPCO takes transmission service under the AEP Open Access 8 Transmission Tariff (AEP OATT) under a pricing zone which includes all AEP 9 transmission assets in the SPP and Electric Reliability Council of Texas (ERCOT). 10 Due to the changes required by Texas legislation and their effects on the AEP West 11 Operating Agreement, AEP anticipates filing changes to die AEP OATT that provide 12 for separate pricing zones for the SPP and ERCOT regions to be effective on January 13 1, 2002. Even though the SWEPCO transmission assets currently being utilized to 14 provide transmission service will not be changed, it is anticipated that SWEPCO's 15 future transmission costs will reflect the average cost of the AEP SPP transmission 16 system rather than the average costs of the AEP SPP and ERCOT transmission 17 systems. Louisiana customers will still be served by the same mix of SWEPCO 18 generation, transmission, and distribution assets that are utilized today. Most 19 importantly, the rate commitments currently in effect for SWEPCO limit the ability of 20 SWEPCO to request non-fuel rate changes for a significant period of time.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 17 1 VI. FERC RTO ISSUES IN RESTRUCTURING 2 Q. PLEASE DISCUSS THE FERC'S REJECTION OF THE SPP RTO. 3 A. On April 27, 2001, as supplemented on May 29, 2001, SWEPCO, WTU (for its 4 Northern Region, which is located in the SPP), and Public Service Company of 5 Oklahoma (PSO) (collectively, the AEP SPP Operating Companies) filed an 6 application with FERC to transfer operational control of their transmission facilities 7 located in the SPP to the SPP RTO. By order issued July 12, 2001 (Docket Nos. 8 RT01-34-000, et al.), FERC rejected the application as premature because it found 9 that the proposed SPP RTO did not meet the scope and configuration requirements of 10 Order No. 2000. The AEP SPP Operating Companies are currently participating in 11 the mediation (involving several entities for the purpose of forming a RTO in the 12 southeastern United States) being conducted under FERC auspices, and support the 13 participation of the SPP transmission owners in a large RTO that will meet the scope 14 requirements of Order No. 2000. 15 Q. HOW DOES THE FERC'S REJECTION Of THE SPP RTO AFFECT SWEPCO'S 16 PATH TO COMPETITION IN TEXAS? 17 A. On August 3, 2001, the PUCT Staff petitioned the PUCT to determine whether 18 market institutions and participants are ready for retail competition to begin within 19 SWEPCO's Texas jurisdiction, which is located in the SPP. There are two sets of 20 contingencies related to retail restructuring under the Texas PURA. 21 First, if the PUCT has not certified the "power region" in which SWEPCO is 22 located as a "qualifying power region" (QPR) at the time that retail customer choice
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 18 1 begins, the SWEPCO REP will have a continuing Obligation to serve certain large 2 customers (1 MW or more) at rates that are no higher than the rates that, on a bundled 3 basis, were in effect on January 1, 1999, subject to certain adjustments provided for in 4 Section 39.202(m) of PURA. At this time, the PUCT has not yet certified 5 SWEPCO's power region as a "qualifying power region" under the Texas statute. 6 Second, if the PUCT determines that a power region is unable to offer fair 7 competition and reliable service to all retail customer classes on January 1, 2002, the 8 PUCT is to delay customer choice for the power region, in which case SWEPCO 9 would continue to have a public utility obligation to serve Texas retail customers at 10 cost-based rates. The PUCT Staff's August 3 petition also requests the PUCT to 11 suspend further activity on SWEPCO's required capacity auction until the PUCT 12 issues a final order in that proceeding. The Staff requests that the PUCT issue that 13 final order before November 1, 2001. 14 Q. WILL THIS DETERMINATION AFFECT SWEPCO's PROPOSED BUSINESS 15 SEPARATION? 16 A. No, it should not. On August 23, the PUCT voted not to delay SWEPCO's required 17 capacity auction in Texas at this time. Further, the PUCT directed its staff to develop 18 a list of required milestones necessary to achieve retail competition by January 1, 19 2002. The PUCT also stated that the absolute last resort should be a decision to delay 20 competition. As such, the LPSC's approval of the required T&D transfers should 21 proceed.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 19 1 Q. DOES THE REJECTION Of THE SPP RTO AFFECT THE STATUS OF THE 2 SWEPCO BSP FILING IN ARKANSAS? 3 A. No. On August 8, 2000, SWEPCO filed its business separation plan in Arkansas to 4 accomplish the required functional unbundling in APSC Docket No. 00-249-U. At 5 the present time, there have been no interventions and no APSC action. However, in 6 Arkansas Docket No. 00-010-U, the Show Cause Order relating to SWEPCO's 7 request to transfer operational control of certain SWEPCO transmission facilities to 8 the SPP RTO, due to FERC's rejection of the SPP RTO and the mandated mediation, 9 the APSC has suspended all activities in the docket, until such time as the direction of 10 a southeastern RTO is more clear. 11 Ark. Code Ann. ss. 23-19-107(a) requires the APSC to periodically report to the 12 Arkansas General Assembly on the progress of the development of competition in 13 electric markets and the impact, if any, of competition and industry restructuring on 14 retail customers in Arkansas. The APSC is to make the second such report before 15 January 15, 2002. The APSC, through Docket No. 00-190-U, will gather information 16 from electric utilities and the APSC General Staff to be used in its report to the 17 General Assembly. The issues pertaining to the FERC's SPP RTO order and its 18 effect on Arkansas' market readiness will be addressed in this docket. Initial filings 19 in this docket are due September 4, 2001.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 20 1 VII. SWEPCO BSP EFFECT ON COST STRUCTURE 2 Q. WHAT RATE COMMITMENTS HAS SWEPCO MADE THAT WILL PROTECT 3 LOUISIANA CUSTOMERS? 4 A. In the settlement related to the AEP-CSW merger, SWEPCO agreed to not seek an 5 increase in non-fuel rates prior to January 1, 2005, subject to certain force majeure 6 conditions and riders for the impact of purchased power costs. These restrictions will 7 significantly impact the ability of SWEPCO to request recovery of any additional cost 8 increases, and will provide customers a predictable path for SWEPCO future rates. 9 Q. WILL THE COST STRUCTURE OF SWEPCO LOUISIANA CUSTOMERS 10 CHANGE MATERIALLY AS A RESULT OF THE TEXAS T&D SEPARATION? 11 A. No. The cost structure for SWEPCO Louisiana retail customers is not expected to 12 change materially. In addition, SWEPCO witnesses Ms. Wendy Hargus, Mr. Chris 13 Potter and Mr. John Aaron will file testimony discussing the changes in more detail. 14 Q. WHAT CHANGES ARE EXPECTED IN THE COST STRUCTURE OF THE 15 PRODUCTION FUNCTION? 16 A. The changes in the costs of SWEPCO's production function should not be material, 17 because SWEPCO will continue to own the same production assets that it owns 18 today. The output of SWEPCO's generating capacity that is currently used to serve 19 existing wholesale and Texas retail customers will be sold to PMA pursuant to the 20 UPSA and sold back in part to SWEPCO under the SECOND UPSA. As will be 21 discussed by Mr. Potter in his testimony, the sale of the generation on this basis is 22 essentially equivalent to the jurisdictional allocation (4 Coincident Peak method) used
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 21 1 in SWEPCO's last Louisiana retail rate case to allocate production costs among 2 SWEPCO's jurisdictions. Therefore, there should not be a material change in 3 production costs allocated to the Louisiana jurisdiction as a result of the UPSA. 4 As shown in the FERC filing, the changes related to the AEP West Operating 5 Agreement and the AEP SIA result in cost impacts that are DE MINIMIS for 6 SWEPCO's native load customers. An except from Attachment 12 from the July 24, 7 2001 FERC filing in Docket No. ER01-2668-000, which provides a comparison of 8 the AEP West Operating Companies moving from the existing four-company to a 9 two-company operating agreement, is included as EXHIBIT JCB-2. It should be 10 noted that the UPSA, SECOND UPSA, AEP SIA and AEP West Operating 11 Agreement replace the versions that were filed on June 29, 2001 with the LPSC. 12 Q. WHAT CHANGES ARE EXPECTED IN THE COST STRUCTURE OF THE 13 TRANSMISSION FUNCTION AS A RESULT OF THE TRANSFER OF THE 14 TEXAS TRANSMISSION ASSETS? 15 A. The changes in the costs of transmission service to SWEPCO Louisiana customers 16 should not be material, since they will be served from the same SWEPCO 17 transmission assets that serve those customers today. The Louisiana retail customers 18 will be charged rates based upon taking transmission service under a tariff that 19 reflects all transmission assets currently owned by SWEPCO, as well as the 20 transmission assets owned by other AEP subsidiaries in the SPP. The transmission 21 asset base of AEP in SPP will not change due to the transfer of SWEPCO's Texas 22 assets,
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 22 1 After the transfer of Texas T&D assets from SWEPCO to the SWEPCO 2 TEXAS EDC, the SPP transmission system will still be operated as an integrated 3 system. In other words, even though the SWEPCO TEXAS EDC will own the 4 transmission assets physically located in Texas, SWEPCO will still require use of the 5 entire SPP transmission system (including those Texas assets) to serve customers in 6 Louisiana. 7 Q. WHAT CHANGES ARE EXPECTED IN THE COST STRUCTURE OF THE 8 DISTRIBUTION FUNCTION? 9 A. The changes in the costs of distribution service to SWEPCO Louisiana customers 10 should not be material, because the Louisiana distribution assets will continue to be 11 owned by SWEPCO, and will continue to be assigned to Louisiana customers. There 12 may be some minor allocation factor differences for O&M and common costs, which 13 will be addressed in the testimony of Mr. Potter. However, these differences are not 14 expected to produce any material cost changes. 15 Q. WHAT COST CHANGES ARE EXPECTED IN THE COST LEVELS FOR 16 ADMINISTRATIVE AND GENERAL MANAGEMENT EXPENSE? 17 A. The changes in the costs of administrative and general management expense for 18 SWEPCO Louisiana customers should not be material. SWEPCO is already managed 19 as part of a multi-state holding company system. The addition of more companies to 20 the eleven utilities already utilized for assignment of administrative costs should not 21 cause any material additional costs to be incurred. Mr. Aaron will address these 22 issues in more detail.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 23 1 Q. WHAT COST CHANCES ARE EXPECTED IN THE COST OF CAPITAL FOR 2 SWEPCO? 3 A. No material changes are expected to the capital costs of SWEPCO, because 4 SWEPCO's debt to be retired as a result of the removal of Texas T&D and related 5 GP assets is a relatively small part of SWEPCO's total outstanding debt. The capital 6 structure policy of SWEPCO is not expected to change materially as a result of the 7 separation of the Texas transmission and distribution assets. The effects of separation 8 on the cost of debt will be discussed in the testimony of Ms. Hargus. 9 Q. IN SUMMARY, DOES THIS PLAN CREATE ANY MATERIAL CHANGES IN 10 THE COST STRUCTURE OR ASSET MIX OF SWEPCO? 11 A. No. After separation of the Texas transmission and distribution assets, SWEPCO 12 Louisiana customers will still receive utility service from the same workforce using 13 the same physical assets and capital structure policy. Because the plan minimizes the 14 structural changes required to comply with Texas law, it produces a minimum of 15 possible cost changes for SWEPCO. Since compliance with Texas statutes will 16 minimize the potential for further litigation for SWEPCO, the plan is in the public 17 interest, and should be approved. 18 19 VIII. FERC FILINGS CONCERNING SWEPCO'S BSP 20 Q. PLEASE GENERALLY DESCRIBE AEP'S RECENT FERC FILINGS. 21 A. On July 24, 2001, AEP filed its Application of American Electric Power Service 22 Corporation for Authorization to Transfer Jurisdictional Assets (Docket: No. EC01-
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 24 1 130-000) and Application of American Electric Power Company, Inc. for Approval of 2 Rate Schedules Related to Corporate Restucturing (Docket No. ER01-2668-000) at 3 the FERC. The applications request the approval of asset transfers and rate schedule 4 changes related to AEP's corporate restructuring that are required for AEP to comply 5 with the restructuring laws of Ohio and Texas and to foster the development of 6 competitive electric markets consistent with such state laws. In addition to 7 authorization to transfer SWEPCO's Texas T&D assets to the SWEPCO TEXAS 8 EDC, AEP seeks approval of the following agreements related to the SWEPCO BSP 9 AEP West Operating Agreement, AEP SIA, UPSA and the SECOND UPSA. 10 Q. PLEASE DESCRIBE THE CHANGES TO THE AEP WEST OPERATING 11 AGREEMENT. 12 A. The primary change in the Restated and Amended Operating Agreement for the AEP 13 West Operating Companies is the withdrawal of those companies that are undergoing 14 restructuring and corporate separation of their generation functions - WTU, CPL, and 15 the portion of SWEPCO's generation attributable to its Texas retail load. The Texas 16 companies will no longer have native load obligations. If they were to continue to 17 participate in the arrangement, the other participants would have first call on all of 18 their generation, defeating the purposes of deregulation in Texas and imposing 19 excessive burdens on Texas consumers. To The extent that the most economic 20 deregulated generation is burdened with obligations under the Operating Agreement, 21 the intent of the Texas restructuring legislation may be frustrated. Finally, the call on 22 Texas generation under the existing Operating Agreement would impede and distort
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 25 1 the efforts of the deregulated companies to recover stranded costs, as permitted by the 2 Texas restructuring legislation. 3 The Restated and Amended Operating Agreement makes several other 4 substantive changes going forward. First, the provisions for joint planning of future 5 generation capacity and provisions for capacity sharing among the participating 6 companies are being modified so that the planning function recognizes and takes 7 account of possible restructuring in any of the three remaining jurisdictions 8 (Louisiana, Oklahoma and Arkansas). Oklahoma, served by PSO, has enacted 9 legislation to plan for deregulation but has so far not implemented any plan. 10 Arkansas has enacted deregulation but has deferred the effective date. Louisiana 11 continues to consider a transition to competition plan that would permit retail access 12 for certain large customers as soon as January 1, 2003. Planning of future capacity 13 additions must take account of the likelihood that deregulation will proceed - or 14 not - on a state-by-state basis, and not system-wide. 15 Second, energy purchases from other members continue to be priced at the 16 midpoint between the seller's incremental cost and the purchaser's decremental cost. 17 These provisions, which are in the existing AEP West Operating Agreement, 18 correctly reflect the economic costs of the options available to a member, while 19 permitting the use of the most economic energy by the member companies. 20 Third, the hourly net margins for off-system energy sales will continue to be 21 shared in proportion to each member's generation for sales, but that generation will
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 26 1 now include economy sales. Economy purchases from other members will continue 2 to be subtracted from the allocation, with the result not less than zero. 3 AEP's cost studies show that PSO and SWEPCO can effectively operate a 4 "two-company system," incorporating the changes described above as well as the 5 changes in the SIA described below, without material adverse economic impact on 6 their native load customers. The overall effects on SWEPCO for years 2002-2004 are 7 DE MINIMIS. An except from Attachment 12 from the July 24, 2001 FERC filing in 8 Docket No. ER01-2668-000, which provides a comparison of the AEP West 9 Operating Companies moving from the existing four-company to a two-company 10 operating agreement, is included as EXHIBIT JCB-2. There are small cost reductions 11 for PSO; SWEPCO shows a small cost increase in the initial years, moving to a small 12 decrease by 2004. 13 Q. PLEASE DESCRIBE THE CHANGES TO THE AEP SIA. 14 A. The primary change in the Restated and Amended AEP SIA is the withdrawal of the 15 deregulated companies - OPCo, CSP, CPL, and WTU. For the same reasons 16 discussed previously, it no longer is appropriate in the inter-zone arrangements for the 17 deregulated companies to integrate and coordinate their power supply resources with 18 the regulated Operating Companies. The deregulated generation companies and the 19 remaining Operating Companies have disparate goals; having them continue to 20 coordinate and integrate their power supplies would cause inappropriate cost-shifting 21 and impede competition.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 27 1 The other principal change in the Restated and Amended AEP SIA is that non- 2 physical trading and marketing will not be part of the coordinated activities of the 3 parties. The AEP SIA, however, will continue to provide for centralization of off- 4 system purchases and off-system sales. This is consistent with AEP's overall 5 objective of charging the regulated merchant organization with minimizing the cost of 6 power through off-system sales and purchases. 7 In addition, the Restated and Amended AEP SIA provides that off-system 8 sales margins will be shared in proportion to owned generating capacity in the two 9 zones. This change will eliminate the historic threshold for the sharing of benefits 10 between the West and East Zones. In light of the departure of the Ohio and Texas 11 Operating Companies from the AEP SIA (as well as from their respective system 12 agreements), elimination of the previous threshold provides a better mechanism for 13 the sharing of benefits between the AEP East and West Zones. 14 Q. PLEASE DESCRIBE THE SWEPCO UPSA. 15 A. In order to comply with the Texas requirement to separate the generation function 16 from transmission and distribution functions, SWEPCO proposes to enter into a 17 SWEPCO UPSA with PMA and AEPSC. Effective January 1, 2002, SWEPCO will 18 separate its existing generation capacity into SWEPCO-assigned capacity 19 (representing that portion of SWEPCO's generation attributable to the continued 20 regulated requirements of Louisiana and Arkansas retail customers) and PMA- 21 assigned capacity (representing that portion of SWEPCO's generation attributable to 22 its current Texas retail native load and its wholesale requirements load). Under Texas
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 28 1 law, the former capacity must be operated in the wholesale market on a deregulated 2 basis and may not be sold directly to Texas retail customers. The assignment of 3 capacity to PMA will be based on the ratio of the sum of the demands of the 4 SWEPCO-Texas retail native load and the SWEPCO wholesale contract native load 5 at the time of the four Year 2000 coincident monthly summer (June through 6 September) SWEPCO peak demands to the sum of the same four coincident peak 7 demands of the total SWEPCO native load. 8 This approach proportionally assigns rights to the capacity in SWEPCO's 9 generating units between SWEPCO's deregulated and regulated operations and 10 thereby facilitates the onset of competition in Texas and at the same time reasonably 11 maintains the status quo for the states that have not enacted restructuring statutes. 12 SWEPCO will continue to own, operate, and maintain its power plants and its 13 assigned capacity will continue to be dispatched by AEPSC, which has performed this 14 function since the merger of CSW with AEP. 15 Q. PLEASE DESCRIBE THE SECOND UPSA. 16 A. The SECOND UPSA (among PMA, SWEPCO, and AEPSC) provides SWEPCO 17 with access to a proportionate share of the assigned capacity received by PMA under 18 the SWEPCO UPSA so that SWEPCO can continue supplying its existing wholesale 19 contract customers for the remaining terms of their respective contracts. The 20 proportion of PMA's assigned capacity to be assigned to SWEPCO under the 21 SECOND UPSA will be based on the ratio of the sum of the four coincident peak 22 demands of native load for each wholesale contract to the sum of the same four
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 29 1 coincident peaks demands of the total SWEPCO native load. Because SWEPCO's 2 wholesale contracts expire or may terminate at different times, the proportion of 3 PMA's assigned capacity that is assigned to SWEPCO under the SECOND UPSA 4 will change as each wholesale contract expires or is terminated. A portion of the 5 monthly costs that SWEPCO charges to PMA will be netted out based on the share of 6 capacity that is assigned to SWEPCO during that month and the energy dispatched 7 from SWEPCO out of the capacity assigned under the SECOND UPSA. 8 Q. PREVIOUSLY, YOU ADDRESSED TWO SETS OF REGULATORY 9 CONTINGENCIES RELATED TO RETAIL RESTRUCTURING IN SWEPCO'S 10 TEXAS SERVICE TERRITORY. DO THE UPSAS ADDRESS THOSE 11 CONTINGENCIES? 12 A. Yes. To address the contingencies discussed previously, the SECOND UPSA 13 provides that PMA will assign back to SWEPCO a proportionate share of the 14 assigned capacity it receives under the SWEPCO UPSA so that SWEPCO can furnish 15 part of the resources needed for the SWEPCO REP to fulfill the obligations imposed 16 under Section 39.202(m) of PURA, or if the PUCT delays retail customer choice in 17 SWEPCO's territory, that PMA will assign back to SWEPCO a proportionate share of 18 the assigned capacity it receives under the SWEPCO UPSA so that SWEPCO can 19 continue to furnish regulated electric service. As in the case of the wholesale 20 contracts, to the extent that the statutory obligations are reduced or eliminated, the 21 assignment back from PMA to SWEPCO will decrease by a corresponding 22 percentage.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 30 1 IX. OTHER REGULATORY APPROVALS 2 Q. IS THIS FILING THE ONLY FILING BEFORE ANY REGULATORY 3 AUTHORITY WHICH WOULD BE REQUIRED TO IMPLEMENT THE SWEPCO 4 BSP? 5 A. No. Implementation of the SWEPCO BSP requires a number of regulatory filings 6 before several other jurisdictions which have the authority to approve or disapprove 7 the necessary structural changes and/or transfers of assets. 8 At the SEC, an application for approval to create the new entities, retire 9 securities and issue new refinancing securities, transfer assets into the new entities, 10 and for certain affiliate transactions has been filed. The SEC has jurisdiction over 11 these transactions pursuant to the Public Utility Holding Company Act of 1935. 12 As discussed previously, applications were filed at FERC on July 24, 2001 for 13 approval of (1) the transfer of the T&D facilities to the energy delivery subsidiaries, 14 (2) transfer of generation assets to newly created legal entities owned by the Domestic 15 Genco, (4) UPSA and Second UPSA, and (5) modifications to the AEP West 16 Operating Agreement and AEP SIA to recognize the changing relationships between 17 deregulated generation business units and regulated generation divisions of utilities. 18 Approvals of the following will also be filed at the FERC: (1) revised open 19 access transmission tariff reflecting the new energy delivery subsidiaries and the 20 anticipated zonal pricing for the SPP and ERCOT transmission systems, (2) network 21 transmission agreements and network operating agreements for the Domestic Genco 22 and/or its generation subsidiaries to take transmission service from the transmission
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 31 1 subsidiaries, (3) service agreements between the SWEPCO REP and the energy 2 delivery and/or generation subsidiaries, (4) interconnection agreements between the 3 generation entities and the energy delivery subsidiaries, and (5) modifications to the 4 CSW Transmission Coordination Agreement and AEP System Transmission 5 Integration Agreement to delegate to the energy delivery company the responsibility 6 and authority to act as the transmission provider as agent for and on behalf of the 7 transmission subsidiaries. 8 9 X. CONCLUSION 10 Q. WILL THE PROPOSED SWEPCO BSP ADVERSELY AFFECT THE CURRENT 11 PROVISION OF BUNDLED SERVICE FOR THE RETAIL RATEPAYERS OF 12 LOUISIANA? 13 A. No. Because SWEPCO's current operations in Louisiana will remain substantially 14 unchanged, retail ratepayers in Louisiana will continue to enjoy the same level of 15 service and low rates that SWEPCO has provided in the past. 16 Q. PLEASE SUMMARIZE THE RELIEF REQUESTED BY THE COMPANY IN 17 THIS FILING. 18 A. SWEPCO is requesting the Commission to approve the proposed asset transfers 19 necessary to fulfill the requirements of the industry restructuring in Texas as 20 described in the SWEPCO BSP. Because the SWEPCO Texas transmission assets are 21 utilized to provide utility service to Louisiana retail customers and are partially
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 32 1 included in their rate base, approval from the LPSC will be required before the 2 requested assets can be transferred out of SWEPCO. 3 Q. PLEASE SUMMARIZE YOUR TESTIMONY. 4 A. The SWEPCO BSP separates the wires, generation, and retail businesses in order to 5 achieve compliance with the restructuring activities in Texas. It is anticipated that the 6 Louisiana retail rates will not be materially affected by the restructuring activities in 7 Texas. In addition, operations in Louisiana will not be affected by the restructuring 8 activities in Texas. 9 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 10 A. Yes, it does.
DOCKET NOS. U-21453, U -20925, J. CRAIG BAKER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 33 SOUTHWESTERN ELECTRIC POWER COMPANY Exhibit WGH-1 WEIGHTED COST OF CAPITAL Page 1 of 5 December 31, 2000 BEFORE ASSET TRANSFER
--------------------------------------------------------------------------------------------------------------------------------- (A) (B) (C) (D) (E) (F) -------------------------------------------------------------------------------------------------------------------------- Percent of Cost of Weighted Page Amount Total Capital Average Line Description Reference Per Books Capitalization Rate Cost of Capital --------------------------------------------------------------------------------------------------------------------------------- 1 Long-Term Debt WGH-1, p. 4 $722,437,699 51.54% 7.93% 4.09% 2 Preferred Stock WGH-1, p. 2 $2,697,319 0.19% 12.83% 0.02% 3 Common Stock Equity na $676,655,920 48.27% 11.10% 5.36% -------------------- -------------------- -------------------- 4 $1,401,790,938 100.00% 9.47% ==================== ==================== ==================== ---------------------------------------------------------------------------------------------------------------------------------
SOUTHWESTERN ELECTRIC POWER COMPANY Exhibit WGH-1 WEIGHTED COST OF PREFERRED STOCK Page 2 of 5 December 31, 2000 -------------------------------------------------------------------------------- (A) (B) (C) (D) (E) (F) -------------------------------------------------------------------------------- Mandatory Premium Series Dividend Redemption Par Value or Date Rate (Y/N) at Issuance (Discount) -------------------------------------------------------------------------------- NOT SUBJECT TO MANDATORY REDEMPTION 5.00% 2/12/40 5.00% N $7,500,000 4.65% 6/19/49 4.65% N $2,500,000 8,250 4.28% 6/9/55 4.28% N $6,000,000 24,300 ---------------- Sub-Totals $16,000,000 SUBJECT TO MANDATORY REDEMPTION 6.95% 4/1/87 6.95% 4/1/18 $40,000,000 $0 ---------------- Sub-Totals $40,000,000 -------------------------------------------------------------------------------- TOTAL $56,000,000 -------------------------------------------------------------------------------- LOSS ON REDEEMED STOCK A. Annual Requirement = Preferred Stock Balance x Weighted Cost of Preferred Stock B. Adjusted Annual Requirement = Annual Requirement + Amortization of Loss on Redeemed Stock (S. Kerry monthly amortization schedule less gain on reacquired preferred stock (monthly a/c 1860.1213-.1220)) C. Adjusted Preferred Stock Balance = Preferred Stock Balance - Unamortized Loss on Redeemed Stock D. Adjusted Cost of Preferred Stock = Adjusted Annual Requirement / Adjusted Preferred Stock Balance -------------------------------------------------------------------------------- NOTES * Redeemed subsequent to the end of the test-year. See Adjustment 1. --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------- (G) (H) (I) (J) (S, p.2) (K) (L) (M) ---------------------------------------------------------------------------------------------------------------------------- Under- Gain Net Book Value Issue Writing (Loss) on Net Proceeds Including as % Weighted Fees and Redeemed Proceeds as % Scheduled Total Cost of Average Issuance Exp. Stock at Issuance of Par Redemptions Book Value Money Cost ---------------------------------------------------------------------------------------------------------------------------- 7,500,000 100.00% $3,771,500 80.17% 5.000% 4.008% 2,508,250 100.33% $191,330 4.07% 4.635% 0.188% 6,024,300 100.41% $741,591 15.76% 4.263% 0.672% --------------- Sub-Totals $4,704,421 $342,315 $0 39,657,685 99.14% $0 0.00% 7.018% 0.000% --------------- Sub-Totals $0 ---------------------------------------------------------------------------------------------------------------------------- TOTAL $4,704,421 100.00% 4.869% ---------------------------------------------------------------------------------------------------------------------------- Preferred Stock Balance $4,704,421 x Weighted Cost of Preferred 4.87% --------------- = Annual Requirement $229,055 Annual Requirement $229,055 + Amortization of Loss/(Gain) on Redeemed Stock $117,132 --------------- = Adjusted Annual Requirement $346,187 Preferred Stock Balance $4,704,421 - Unamortized Loss/(Gain) on Redeemed Stock $2,007,102 --------------- = Adjusted Preferred Stock Balance $2,697,319 Adjusted Annual Requirement $346,187 / Adjusted Preferred Stock Balance $2,697,319 --------------- = Adjusted Cost of Preferred 12.830% --------------- -------------------------------------------------------------------------------- Note 1. Previously redeemed preferred. Series 6.95% Amortization schedule provided by S.Kerry $84,227 Series 8.16% " " " $685,376 Series 8.84% " " " $501,551 Series 9.72% " " " $1,593,507 Series 4.28% Gain on reacq'd Pref St - a/c1860.1214 ($1,189,073) Series 4.65% Gain on reacq'd Pref St - a/c1860.1216 ($433,769) Series 5.00% Gain on reacq'd Pref St - a/c 1860.1218 ($625,402) Series6.95% Gain(loss) on reacq'd Pref St - a/c 1860.1220 $1,390,685 --------------- $2,007,102 --------------------------------------------------------------------------------
Exhibit WGH-1 Page 3 of 5
-------------------------------------------------------------------------------------------------------------------------- (A,p.1) (N) (O) (P) (Q) (R) (S) -------------------------------------------------------------------------------------------------------------------------- Par Value Book Value Excluding Unamortized Unamortized Unamortized Including Par Value Scheduled Premium or Issuance Gain (Loss) on Scheduled Series Outstanding Redemptions (Discount) Expense Redeemed Stock Redemptions -------------------------------------------------------------------------------------------------------------------------- NOT SUBJECT TO MANDATORY REDEMPTION 5.00% $3,771,500 $3,771,500 $3,771,500 4.65% $190,700 $190,700 630 $191,330 4.28% $738,600 $738,600 $2,991 $0 $0 $741,591 ------------------------------ -------------------- Sub-Totals $4,700,800 $4,700,800 $4,704,421 SUBJECT TO MANDATORY REDEMPTION 6.95% $0 $0 $0 $0 ------------------------------ Sub-Totals $0 $0 $0 -------------------------------------------------------------------------------------------------------------------------- TOTAL $4,700,800 $4,700,800 BALANCE OF PREFERRED STOCK $4,704,421 -------------------------------------------------------------------------------------------------------------------------- NOTES (O) Scheduled redemptions to be excluded reflect those amounts to be redeemed prior to the anticipated effective date for the rates being requested. (P), (Q), and (R) Consistent with the Federal Energy Regulatory Commission's Uniform System of Accounts Order 390, SWEPCO records its preferred stock issuances net of any issuance expenses, premiums, or discounts. Gains or losses on preferred stock redemptions are not amortized. The entire gain or loss is immediately recognized as an adjustment to retained earnings. For rate making purposes these are recovered through amortization in rates. (Q) Unamortized balance of underwriter fees should also be provided here. (S) = (N) + (P) - (Q) + (R) --------------------------------------------------------------------------------------------------------------------------
SOUTHWESTERN ELECTRIC POWER COMPANY Exhibit WGH-1 WEIGHTED COST OF DEBT Page 4 of 5 December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------ (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (T, p.2) ------------------------------------------------------------------------------------------------------------------------------------ Under- Gain Writing (Loss) Net Book Value Sinking Principal Premium Fees and on Reac- Net Proceeds Including Series Issuance Maturity Interest Fund Amount or Issuance quired Proceeds as % Scheduled Date Date Rate (Y/N) at Issuance (Discount) Exp. Debt at Issuance of Par Maturities ------------------------------------------------------------------------------------------------------------------------------------ FIRST MORTGAGE BONDS A 11/1/76 11/1/06 6.200% N 7,100,000 (118,925) 177,704 0 6,803,371 95.82% 5,738,896 B 11/1/76 11/1/06 6.200% N 1,000,000 (16,750) 25,028 0 958,222 95.82% 991,827 V 6/1/92 6/1/04 7.750% N 40,000,000 (270,000) 152,214 0 39,577,786 98.94% 39,874,716 W 9/1/92 9/1/99 6.125% N 40,000,000 (474,800) 34,619 0 39,490,581 98.73% 0 X 9/1/92 9/1/07 7.000% N 90,000,000 (1,688,400) 77,893 0 88,233,707 98.04% 89,177,023 Y 2/1/93 2/1/03 6.625% N 55,000,000 (573,650) 493,115 0 53,933,235 98.06% 54,863,939 Z 7/1/93 7/1/23 7.250% N 45,000,000 (506,702) 498,787 0 43,994,511 97.77% 44,245,042 AA 10/1/93 4/1/00 5.250% N 45,000,000 (110,250) 308,273 0 44,581,477 99.07% 0 BB 10/1/93 10/1/25 6.875% N 80,000,000 (565,600) 748,041 0 78,686,359 98.36% 78,907,196 ------------ -------------- Sub-Totals 403,100,000 Sub-Totals 313,798,639 TRUST PREFERRED SECURITIES 7.875% 4/30/97 4/30/37 7.875% N 110,000,000 3,768,900 0 106,231,100 96.57% 106,576,385 SENIOR UNSECURED FLOATING RATE NOTES 3/1/00 3/1/02 6.970% N 150,000,000 0 640,237 0 149,359,763 99.57% 149,577,392 POLLUTION CONTROL BONDS 1978A 1/1/78 1/1/08 6.000% 16,200,000 (194,400) 314,650 0 15,690,950 96.86% 13,414,233 1991A 5/3/91 8/1/11 8.200% 17,125,000 0 417,265 0 16,707,735 97.56% 16,906,907 1991B 7/17/91 11/1/04 6.900% 12,290,000 0 363,824 0 11,926,176 97.04% 12,159,381 1992 11/24/92 1/1/19 7.600% 53,500,000 0 1,014,193 0 52,485,807 98.10% 52,797,903 1996 7/11/96 4/1/18 6.100% 81,700,000 (408,500) 1,945,305 0 79,346,195 97.12% 79,833,189 ------------ -------------- Sub-Totals 180,815,000 Sub-Totals 175,111,613 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $693,915,000 TOTAL $745,064,029 ------------------------------------------------------------------------------------------------------------------------------------ LOSS ON REACQUIRED DEBT NOT ASSOCIATED WITH A SPECIFIC REFUNDING ISSUE A. Annual Requirement = Debt Balance x Weighted Cost of Debt Debt Balance $745,064,029 x Weighted Cost of Debt 7.30% ------------- Annual Requirement $54,389,674 B. Adjusted Annual Requirement = Annual Requirement (see Adjustment 2A) + Amortization of Loss on Reacquired Debt Annual Requirement $54,389,674 ((a/c 189;257;1810.7307;2260.7307)X12) + Amortization of Loss on Reacquired Debt 2,900,340 ------------- = Adjusted Annual Requirement $57,290,014 C. Adjusted Balance = Debt Balance - Unamortized Loss on Reacquired Debt Debt Balance $745,064,029 (a/c 189;257;1810.7307;2260.7307) - Unamortized Loss on Reacquired Debt 22,626,330 ------------- = Adjusted Debt Balance $722,437,699 D. Adjusted Cost of Debt = Adjusted Annual Requirement (see Adjustment 2B) / Adjusted Debt Balance (see Adjustment 2C) = Adjusted Annual Requirement $57,290,014 / Adjusted Debt Balance $722,437,699 ------------- = Adjusted Cost of Debt 7.930% ------------- ------------------------------------------------------------------------------------------------------------------------------------
----------------------------- (L) (M) (N) ----------------------------- Issue as % Weighted of Total Cost of Average Book Value Debt Cost ----------------------------- 0.770% 6.519% 0.050% 0.133% 6.519% 0.010% 5.352% 7.888% 0.420% 0.000% 6.353% 0.000% 11.969% 7.216% 0.860% 7.364% 6.897% 0.510% 5.938% 7.437% 0.440% 0.000% 5.422% 0.000% 10.591% 7.004% 0.740% 14.304% 8.167% 1.170% 20.076% 7.203% 1.450% 1.800% 6.233% 0.110% 2.269% 8.451% 0.190% 1.632% 7.249% 0.120% 7.086% 7.770% 0.550% 10.715% 6.345% 0.680% ----------------------------- 100.000% 7.300% ----------------------------- SOUTHWESTERN ELECTRIC POWER COMPANY Exhibit WGH-1 WEIGHTED COST OF DEBT Page 5 of 5 December 31, 2000
------------------------------------------------------------------------------------------------------- (O) (P) (Q) (R) (S) (T) ------------------------------------------------------------------------------------------------------- Principal 226 181 189/257 Book Value Principal Excluding Unamortized Unamortized Unamortized Including Amount Scheduled Premium or Fees and Gain (Loss) on Scheduled Series Outstanding Maturities (Discount) Expenses Reacquired Debt Maturities ------------------------------------------------------------------------------------------------------- FIRST MORTGAGE BONDS A 5,795,000 5,650,000 (22,422) 33,682 0 5,738,896 B 1,000,000 1,000,000 (3,300) 4,873 0 991,827 V 40,000,000 40,000,000 0 125,284 0 39,874,716 W 0 0 0 0 0 0 X 90,000,000 90,000,000 (453,403) 369,574 0 89,177,023 Y 55,000,000 55,000,000 (21,894) 114,167 0 54,863,939 Z 45,000,000 45,000,000 (379,980) 374,978 0 44,245,042 AA 0 0 0 0 0 BB 80,000,000 80,000,000 (437,449) 655,355 0 78,907,196 0 ------------ ------------- ----------- ---------- ---- ------------- Sub-Totals $316,795,000 $316,650,000 ($1,318,448) $1,677,913 $0 $313,798,639 7.875% 110,000,000 110,000,000 3,423,615 106,576,385 150,000,000 150,000,000 422,608 149,577,392 POLLUTION CONTROL REVENUE BONDS 1978A 13,520,000 13,070,000 (40,417) 65,350 0 13,414,233 1991A 17,125,000 17,125,000 0 218,093 0 16,906,907 1991B 12,290,000 12,290,000 0 130,619 0 12,159,381 1992 53,500,000 53,500,000 0 702,097 0 52,797,903 1996 81,700,000 81,700,000 (323,982) 1,542,829 0 79,833,189 ------------ ------------- ----------- ---------- ---- ------------- Sub-Totals $178,135,000 $177,685,000 ($364,399) $2,658,988 $0 $175,111,613 ------------------------------------------------------------------------------------------------------ TOTALS $754,930,000 $754,335,000 ($1,682,847) $8,183,124 $0 $745,064,029 ------------------------------------------------------------------------------------------------------
SOUTHWESTERN ELECTRIC POWER COMPANY Exhibit WGH-2 WEIGHTED COST OF CAPITAL Page 1 of 3 December 31, 2000 AFTER ASSET TRANSFER -------------------------------------------------------------------------------- (A) (B) (C) (D) ------------------------------------------------------------------------- Estimated Page Amount Asset Line Description Reference Per Books Transfer -------------------------------------------------------------------------------- 1 Long-Term Debt WGH-2, p. 2 $722,437,699 ($150,000,000) 2 Preferred Stock WGH-1, p. 2 $2,697,319 $0 3 Common Stock Equity na $676,655,920 ($180,000,000) ------------------ 4 $1,401,790,938 ================== 5 Short-Term Debt ($127,590,000) ----------------- 6 ($457,590,000) ================= -------------------------------------------------------------------------------- ------------------------------------------------------------------------ (E) (F) (G) (H) ------------------------------------------------------------------------ Percent of Cost of Weighted Adjusted Total Capital Average Amount Capitalization Rate Cost of Capital ------------------------------------------------------------------------ $572,860,307 53.43% 8.13% 4.34% $2,697,319 0.25% 12.83% 0.03% $496,655,920 46.32% 11.10% 5.14% --------------------------------------- ------------------ $1,072,213,546 100.00% 9.52% ======================================= ================== ------------------------------------------------------------------------ (1) The retirement of $150M of Senior Unsecured Floating Rate Note results in a $149.6M reduction to Long-Term Debt due to unamortized discount and issuance expense balances. SOUTHWESTERN ELECTRIC POWER COMPANY Exhibit WGH-2 WEIGHTED COST OF DEBT Page 2 of 3 December 31, 2000
-------------------------------------------------------------------------------------------------- (A) (B) (C) (D) (E) (F) (G) (H) -------------------------------------------------------------------------------------------------- Under- Sinking Principal Premium Writing Series Issuance Maturity Interest Fund Amount or Fees and Date Date Rate (Y/N) at Issuance (Discount) Issuance Exp. -------------------------------------------------------------------------------------------------- FIRST MORTGAGE BONDS A 11/1/76 11/1/06 6.200% N 7,100,000 (118,925) 177,704 B 11/1/76 11/1/06 6.200% N 1,000,000 (16,750) 25,028 V 6/1/92 6/1/04 7.750% N 40,000,000 (270,000) 152,214 W 9/1/92 9/1/99 6.125% N 40,000,000 (474,800) 34,619 X 9/1/92 9/1/07 7.000% N 90,000,000 (1,688,400) 77,893 Y 2/1/93 2/1/03 6.625% N 55,000,000 (573,650) 493,115 Z 7/1/93 7/1/23 7.250% N 45,000,000 (506,702) 498,787 AA 10/1/93 4/1/00 5.250% N 45,000,000 (110,250) 308,273 BB 10/1/93 10/1/25 6.875% N 80,000,000 (565,600) 748,041 ---------------- Sub-Totals 403,100,000 TRUST PREFERRED SECURITIES 7.875% 4/30/97 4/30/37 7.875% N 110,000,000 3,768,900 SENIOR UNSECURED FLOATING RATE NOTES 3/1/00 Retired 6.970% N POLLUTION CONTROL BONDS 1978A 1/1/78 1/1/08 6.000% 16,200,000 (194,400) 314,650 1991A 5/3/91 8/1/11 8.200% 17,125,000 0 417,265 1991B 7/17/91 11/1/04 6.900% 12,290,000 0 363,824 1992 11/24/92 1/1/19 7.600% 53,500,000 0 1,014,193 1996 7/11/96 4/1/18 6.100% 81,700,000 (408,500) 1,945,305 ---------------- Sub-Totals 180,815,000 -------------------------------------------------------------------------------------------------- TOTAL $693,915,000 -------------------------------------------------------------------------------------------------- LOSS ON REACQUIRED DEBT NOT ASSOCIATED WITH A SPECIFIC REFUNDING ISSUE A. Annual Requirement = Debt Balance x Weighted Cost of Debt B. Adjusted Annual Requirement = Annual Requirement (see Adjustment 2A) + Amortization of Loss on Reacquired Debt ((a/c 189;257;1810.7307;2260.7307)X12) C. Adjusted Balance = Debt Balance - Unamortized Loss on Reacquired Debt (a/c 189;257;1810.7307;2260.7307) D. Adjusted Cost of Debt = Adjusted Annual Requirement (see Adjustment 2B) / Adjusted Debt Balance (see Adjustment 2C) --------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------- (I) (J) (K) (T, p.2) (L) (M) (N) ----------------------------------------------------------------------------------------- Gain Book Value (Loss) on Net Net Including Issue as % Weighted Reacquired Proceeds Proceeds Scheduled of Total Cost of Average Debt at Issuance as % of Par Maturities Book Value Debt Cost ----------------------------------------------------------------------------------------- 0 6,803,371 95.82% 5,738,896 0.964% 6.519% 0.060% 0 958,222 95.82% 991,827 0.167% 6.519% 0.010% 0 39,577,786 98.94% 39,874,716 6.696% 7.888% 0.530% 0 39,490,581 98.73% 0 0.000% 6.353% 0.000% 0 88,233,707 98.04% 89,177,023 14.975% 7.216% 1.080% 0 53,933,235 98.06% 54,863,939 9.213% 6.897% 0.640% 0 43,994,511 97.77% 44,245,042 7.430% 7.437% 0.550% 0 44,581,477 99.07% 0 0.000% 5.422% 0.000% 0 78,686,359 98.36% 78,907,196 13.251% 7.004% 0.930% ---------------- Sub-Totals 313,798,639 0 106,231,100 96.57% 106,576,385 17.897% 8.167% 1.460% 0 15,690,950 96.86% 13,414,233 2.253% 6.233% 0.140% 0 16,707,735 97.56% 16,906,907 2.839% 8.451% 0.240% 0 11,926,176 97.04% 12,159,381 2.042% 7.249% 0.150% 0 52,485,807 98.10% 52,797,903 8.866% 7.770% 0.690% 0 79,346,195 97.12% 79,833,189 13.406% 6.345% 0.850% ---------------- Sub-Totals 175,111,613 ----------------------------------------------------------------------------------------- TOTAL $595,486,637 100.000% 7.330% ----------------------------------------------------------------------------------------- Debt Balance $595,486,637 x Weighted Cost of Debt 7.33% ---------------- Annual Requirement $43,649,170 Annual Requirement $43,649,170 + Amortization of Loss on Required Debt 2,900,340 ---------------- = Adjusted Annual Requirement $46,549,510 Debt Balance $595,486,637 - Unamortized Loss on Reacquired Debt 22,626,330 ---------------- = Adjusted Debt Balance $572,860,307 = Adjusted Annual Requirement $46,549,510 / Adjusted Debt Balance $572,860,307 ---------------- = Adjusted Cost of Debt 8.130% ---------------- -----------------------------------------------------------------------------------------
Exhibit WGH-2 Page 3 of 3 ------------------------------------------------------------------------------ (O) (P) (Q) ------------------------------------------------------------------------------ 226 Principal Principal Unamortized Amount Excluding Scheduled Premium or Series Outstanding Maturities (Discount) ------------------------------------------------------------------------------ FIRST MORTGAGE BONDS A 5,795,000 5,650,000 (22,422) B 1,000,000 1,000,000 (3,300) V 40,000,000 40,000,000 0 W 0 0 0 X 90,000,000 90,000,000 (453,403) Y 55,000,000 55,000,000 (21,894) Z 45,000,000 45,000,000 (379,980) AA 0 0 BB 80,000,000 80,000,000 (437,449) 0 ---------------------- --------------------- ------------------ Sub-Totals $316,795,000 $316,650,000 ($1,318,448) 7.875% 110,000,000 110,000,000 POLLUTION CONTROL REVENUE BONDS 1978A 13,520,000 13,070,000 (40,417) 1991A 17,125,000 17,125,000 0 1991B 12,290,000 12,290,000 0 1992 53,500,000 53,500,000 0 1996 81,700,000 81,700,000 (323,982) ---------------------- --------------------- ------------------ Sub-Totals $178,135,000 $177,685,000 ($364,399) ------------------------------------------------------------------------------ TOTALS $604,930,000 $604,335,000 ($1,682,847) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------ (R) (S) (T) ------------------------------------------------------------------------ 181 189/257 Book Value Unamortized Unamortized Including Fees and Gain (Loss) on Scheduled Expenses Reacquired Debt Maturities ------------------------------------------------------------------------ 33,682 0 5,738,896 4,873 0 991,827 125,284 0 39,874,716 0 0 0 369,574 0 89,177,023 114,167 0 54,863,939 374,978 0 44,245,042 0 0 0 655,355 0 78,907,196 --------------------- --------------------- --------------------- $1,677,913 $0 $313,798,639 3,423,615 106,576,385 65,350 0 13,414,233 218,093 0 16,906,907 130,619 0 12,159,381 702,097 0 52,797,903 1,542,829 0 79,833,189 --------------------- --------------------- --------------------- $2,658,988 $0 $175,111,613 ------------------------------------------------------------------------ $7,760,516 $0 $595,486,637 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Exhibit WGH-3 Page 1 of 1 SOUTHWESTERN ELECTRIC POWER COMPANY BLENDED COST OF CAPITAL FOR COMBINED SWEPCO AND SWEPCO TEXAS EDC AFTER ASSET TRANSFER AS OF DECEMBER 31, 2000
(A) (B) (C) BEFORE ASSET TRANSFER --------------------------------------------- Cost of Amount % Capital --------------------------------------------- (000's) --------------------------------------------------------------------------------------------- SWEPCO INTEGRATED UTILITY Common Stock Equity 676,656 48.27% 11.10% Preferred Stock 2,697 0.19% 12.83% Long-term Debt 722,438 51.54% 7.93% ------------------------------------------------ Total 1,401,791 100.00% =============================== Short-term Debt WACC 9.47% =========== --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- SWEPCO Texas EDC Common Stock Equity Preferred Stock Long-term Debt Total WACC --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- BLENDED SWEPCO AFTER ASSET TRANSFER Common Stock Equity Preferred Stock Long-term Debt Total BLENDED WACC --------------------------------------------------------------------------------------------- (D) (E) (F) (G) AFTER ASSET TRANSFER ------------------------------------------------- Capital Cost of Reductions Amount % Capital -------------- ------------------------------------------------- (000's) (000's) ------------------------------------------------------------------------- (180,000) 496,656 46.32% 11.10% 2,697 0.25% 12.83% (150,000) 572,861 53.43% 8.13% ---------------- ----------------------------------------------- (330,000) 1,072,214 100.00% ============================== (127,590) ---------------- (457,590) ================ 9.52% ============= ------------------------------------------------------------------------- ------------------------------------------------------------------------- 183,036 40.00% 11.25% - 0.00% 0.00% 274,554 60.00% 8.12% ----------------------------------------------- 457,590 100.00% ============================== 9.37% ============= ------------------------------------------------------------------------- ------------------------------------------------------------------------- 679,692 44.43% 11.14% 2,697 0.18% 12.83% 847,415 55.39% 8.13% ----------------------------------------------- 1,529,804 100.00% ============================== 9.47% ============= -------------------------------------------------------------------------
BEFORE THE LOUISIANA PUBLIC SERVICE COMMISSION LPSC DOCKET NOS. U-21453, U-20925, U-22092 (SUBDOCKET C) SOUTHWESTERN ELECTRIC POWER COMPANY'S BUSINESS SEPARATION PLAN DIRECT TESTIMONY OF WENDY G. HARGUS FOR SOUTHWESTERN ELECTRIC POWER COMPANY SEPTEMBER 2001 DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 1 TESTIMONY INDEX SUBJECT PAGE I. INTRODUCTION...............................................................3 II. PURPOSE OF TESTIMONY......................................................6 III. CAPITAL STRUCTURE AND COST OF CAPITAL....................................6 IV. OTHER FINANCIAL ISSUES...................................................14 EXHIBITS EXHIBIT WGH-1 SWEPCO Weighted Cost of Capital at December 31, 2000 EXHIBIT WGH-2 SWEPCO Pro Forma Weighted Cost of Capital EXHIBIT WGH-3 Blended Cost of Capital for Combined SWEPCO and SWEPCO Texas EDC after Asset Transfer DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 2 1 BEFORE THE 2 LOUISIANA PUBLIC SERVICE COMMISSION 3 LPSC DOCKET NOS. U-21453, 4 U-20925, U-22092 (SUBDOCKET C) 5 6 SOUTHWESTERN ELECTRIC POWER COMPANY'S 7 BUSINESS SEPARATION PLAN 8 9 DIRECT TESTIMONY OF 10 WENDY G. HARGUS 11 12 FOR 13 SOUTHWESTERN ELECTRIC POWER COMPANY 14 15 SEPTEMBER 2001 16 17 I. INTRODUCTION 18 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 19 A. My name is Wendy G. Hargus. My business address is 1616 Woodall Rodgers 20 Freeway, Dallas, Texas 75202. 21 BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? 22 I am employed by American Electric Power Service Corporation (AEPSC), a 23 subsidiary of American Electric Power Company, Inc. (AEP) as Assistant Treasurer
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 3 1 and Vice President, Treasury Operations of AEP and its subsidiaries including 2 Southwestern Electric Power Company (SWEPCO or Company). Prior to the merger 3 with AEP, I was Treasurer of Central and South West Corporation (CSW) and its 4 subsidiaries. 5 Q. PLEASE DESCRIBE YOUR RESPONSIBILITIES IN YOUR PRESENT 6 POSITION WITH THE COMPANY. 7 A. As AEP's Assistant Treasurer, I am responsible for treasury operations including 8 short-term funding and cash management. In addition, I will continue to be involved 9 in the completion of the required structural and functional unbundling 10 of the former CSW subsidiaries. 11 Q. PLEASE GIVE A BRIEF STATEMENT OF YOUR PROFESSIONAL AND 12 EDUCATIONAL QUALIFICATIONS. 13 A. I have a Bachelor of Business Administration degree with a concentration in 14 Accounting from McMurry University and a Master of Science degree with a 15 concentration in Accounting from Texas Tech University. 16 I have worked for the AEP and CSW for 21 years in a variety of positions in 17 the finance and accounting areas. I began at West Texas Utilities Company (WTU) 18 with responsibility for financial planning and analysis. While at WTU I also held the 19 positions of Assistant to the Treasurer with additional responsibilities of testimony 20 preparation for rate filing applications and issuance of long-term debt and preferred 21 stock, and Assistant to the Controller with responsibility for all financial reporting, 22 planning and analysis for the company.
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 4 1 In 1986, I transferred to Central and South West Services, Inc. (CSWS) in the 2 Financial Accounting area and was responsible for preparing consolidated financial 3 statements for CSW and benefit plan accounting. I have also held positions as 4 Strategic Planning Analyst, Director of Investor Relations, Director of Strategic 5 Planning and Controller for CSW. Until June 2000, I was Treasurer for CSW and its 6 subsidiaries. As a result of the merger with AEP, I am Assistant Treasurer for AEP 7 and its subsidiaries, including SWEPCO. 8 I am a Certified Public Accountant licensed to practice in the State of Texas 9 and a member of the American Institute of Certified Public Accountants, the Texas 10 Society of Certified Public Accountants, the American Women's Society of Certified 11 Public Accountants, the Association for Financial Professionals and the Financial 12 Executives Institute. 13 Q. HAVE YOU PREVIOUSLY FILED TESTIMONY? 14 A. Yes. I have filed testimony in the following cases in Texas: Docket Nos. 22352, 15 22353 and 22354, the unbundled cost of service filings for the three AEP operating 16 companies in Texas; and Docket No. 21953, the business separation plan in Texas. I 17 also testified in Docket No. 21528, CPL's stranded cost securitization filing and in 18 Docket No. 12700, the CSW/El Paso Electric merger. 19 Q. DO YOU HAVE ANY EXHIBITS TO YOUR TESTIMONY THAT YOU 20 SPONSOR IN THIS FILING? 21 A. Yes. I sponsor the following exhibits: 22 EXHIBIT WGH-1 SWEPCO Weighted Cost of Capital at December 31, 2000
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 5 1 EXHIBIT WGH-2 SWEPCO Pro Forma Weighted Cost of Capital 2 EXHIBIT WGH-3 Blended Cost of Capital for Combined SWEPCO and 3 SWEPCO Texas EDC after Asset Transfer 4 Q. ARE THE TESTIMONY AND THE RELATED EXHIBITS TRUE AND 5 CORRECT TO THE BEST OF YOUR KNOWLEDGE AND BELIEF? 6 A. Yes, they are. 7 8 II. PURPOSE OF TESTIMONY 9 Q. PLEASE DESCRIBE THE PURPOSE OF YOUR TESTIMONY. 10 A. The purpose of my testimony is to describe the financial aspects of SWEPCO's 11 proposed business separation plan. I will discuss the impact of SWEPCO's proposed business 12 separation plan on SWEPCO's capital structure and cost of capital. In addition, 13 I will discuss the treatment of SWEPCO's existing securities. 14 15 III. CAPITAL STRUCTURE AND COST OF CAPITAL 16 Q. PLEASE DESCRIBE THE EXISTING CAPITAL STRUCTURE AND BOND 17 RATINGS OF SWEPCO.
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 6 1 A. Shown below are the historical capital structures and current bond ratings for 2 SWEPCO: Year Year Year Ended Ended Ended Average 12/31/00 12/31/99 12/31/98 98 to 00 -------- -------- -------- -------- Common Equity 48.3% 52.3% 50.9% 50.5% Preferred Stock 0.2% 0.3% 0.3% 0.3% Long-Term Debt 51.5% 47.4% 48.8% 49.2% ------ ------ ------ ------ Total 100.0% 100.0% 100.0% 100.0% 3 SENIOR SECURED BOND RATINGS 4 S&P MOODY'S FITCH/D&P 5 A A1 A+ 6 Q. WHAT IS SWEPCO'S CAPITAL STRUCTURE GOAL? 7 A. AEP's goal is to manage the capital structures and financial performance of its utility 8 subsidiaries to maintain strong bond ratings. AEP targets capital structures that help 9 our subsidiaries maintain these ratings, so as to minimize capital costs. 10 Q. WILL ANY OF SWEPCO'S OUTSTANDING DEBT OR PREFERRED STOCK 11 HAVE TO BE RETIRED AS A RESULT OF THE ASSET TRANSFERS 12 NECESSARY TO COMPLY WITH TEXAS RESTRUCTURING 13 REQUIREMENTS? 14 A. Yes. A portion of SWEPCO's existing securities will be retired as part of this 15 transaction. When SWEPCO transfers Texas transmission and distribution (T &D) 16 assets to the SWEPCO Texas Energy Delivery Company (SWEPCO Texas EDC), the 17 SWEPCO Texas EDC will transfer cash equal to the total capitalization of those assets 18 to SWEPCO. That cash will be used to retire a portion of SWEPCO's current debt 19 and common equity, generally in the same proportion as the existing capital structure.
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 7 1 However, SWEPCO's Texas T&D assets make up a small enough portion of 2 SWEPCO's total assets so that they can be transferred without violating any of the 3 restrictive covenants of SWEPCO's securities. In other words, the transfer of assets 4 will not require SWEPCO to retire all of its existing first mortgage bonds and 5 pollution control bonds. 6 Q. WHAT WILL BE THE IMPACT ON SWEPCO'S CAPITAL STRUCTURE AND 7 COST OF CAPITAL AS A RESULT OF STRUCTURAL UNBUNDLING 8 REQUIRED IN TEXAS? 9 A. It is not possible at this time to precisely know the impact on SWEPCO's capital 10 structure and cost of capital. EXHIBITS WGH-l and WGH-2 show the expected 11 minimal impact on the capital structure and weighted average cost of capital (WACC) 12 of SWEPCO as a result of structural unbundling in Texas. As shown in EXHIBIT 13 WGH-2 the transfer of Texas T&D assets from SWEPCO to SWEPCO Texas EDC 14 will result in the retirement of a portion of both the existing debt and equity supporting 15 those assets. SWEPCO plans to retire capital in the most prudent manner so that there 16 will be virtually no change from its then current capital structure mix or cost of capital. 17 Q. WHAT CAPITAL DO YOU EXPECT TO RETIRE AS A RESULT OF THE 18 ASSET TRANSFER? 19 A. SWEPCO currently expects to retire a combination of debt and equity to minimize the 20 impact on capital structure and cost of capital. There are a number of factors to 21 consider when determining which of the multiple debt issues to retire. Overall cost is 22 the primary factor that will be used to determine which securities to retire. Overall
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 8 1 cost includes any one-time transaction costs required to retire securities (such as call 2 premiums or the cost to tender or defease). These one-time costs are sometimes very 3 large and are impacted by the then current debt markets. In order to minimize the 4 cost of restructuring, SWEPCO expects to retire only unsecured debt and short-term 5 debt that can be redeemed without one-time transaction costs (as shown in EXHIBIT 6 WGH-2). 7 Q. HOW DID YOU DETERMINE THAT THERE WOULD BE ONLY MINIMAL 8 IMPACT ON SWEPCO'S CAPITAL STRUCTURE AND WACC? 9 A. I used the existing December 31, 2000 capital structure and WACC to demonstrate 10 the costs both before and after the asset transfers. The table below shows SWEPCO's 11 last approved WACC in Docket No. U-23029-A and the estimated WACC before and 12 after the asset transfer: --------------------------------------------------------------------- WACC Source ---- ------ --------------------------------------------------------------------- Docket No. U-23029-A 9.61% December 29, 1999 Order --------------------------------------------------------------------- Before Asset Transfer 9.47% Exhibit WGH-1 --------------------------------------------------------------------- After Asset Transfer 9.52% Exhibit WGH-2 --------------------------------------------------------------------- 13 The supporting detail and calculations are shown in EXHIBITS WGH-l and WGH-2 14 and demonstrate that there will be minimal impact on SWEPCO's capital structure and 15 WACC. 16 Q. DESCRIBE SWEPCO'S CAPITAL STRUCTURE AND WACC BEFORE THE 17 ASSET TRANSFER. 18 A. EXHIBIT WGH-1 presents the actual capital structure and WACC as of December 19 31, 2000 before the asset transfer. The summary table on page 1 provides the 20 calculation for the actual WACC of 9.47% and pages 2-5 provide the detail for the
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 9 1 actual cost of debt and preferred stock. The cost of equity used for this calculation is 2 the last allowed return on equity approved by the Louisiana Public Service 3 Commission in Docket No. U-23029-A. 4 Q. HOW DID YOU ESTIMATE THE PRO FORMA WACC AFTER ASSETS ARE 5 TRANSFERRED TO THE SWEPCO TEXAS EDC? 6 A. The detailed calculations are presented in EXHIBIT WGH-2. To estimate the pro 7 forma WACC after the asset transfer, I used the estimated total capitalization of 8 $457.6 million (as presented in Attachment H-8 of the July 24, 2001 FERC filing in 9 Docket No. EC01-130-000. This amount is an estimate and is subject to change as 10 the actual amounts to transfer are finalized) as the amount of capital necessary to be 11 retired. The only long-term debt that can currently be retired without one-time 12 transaction costs is the $150 million floating rate note. Accordingly, long-term debt 13 was reduced by $150 million and equity was reduced by $180 million. The remainder 14 was used to pay down short-term debt. 15 These reductions result in minimal change in capital structure and WACC. The 16 capital structure ratios change slightly as a result of these changes with a 48% equity 17 ratio before the asset transfers and 46% after the asset transfers. The cost of debt 18 increases slightly from 7.93% to 8.13% as a result of these changes, but the overall 19 WACC only changes by a very minimal amount as can be seen in the comparison table 20 on the previous page. 21 Q. WHY IS THE WEIGHTED COST OF DEBT PROJECTED TO INCREASE 22 SLIGHTLY WHEN YOU RETIRE THE ESTIMATED AMOUNT OF DEBT?
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 10 1 A. The weighted cost of debt can be impacted by three factors: the interest rate of the 2 debt issue retired; any one-time transaction costs of the debt issue retired; and the 3 smaller remaining balance of debt. First, if the interest rate on the retired debt is lower 4 than the average cost of debt, the new average cost of debt will increase. Likewise, if 5 the interest rate on the retired debt is higher than the average cost of debt, the new 6 average cost of debt will decrease. Second, if there are one-time costs to retire the 7 securities, those costs are included in the unamortized loss on reacquired debt, and the 8 overall cost of debt is also increased. Third, the amortization of the loss on reacquired 9 debt and the unamortized balance become a larger percent of the reduced amount of 10 outstanding debt. 11 As shown in EXHIBIT WGH-2, the weighted cost of debt is projected to 12 increase slightly from 7.93% to 8.12% as a result of the first and third reasons 13 described above - the interest rate on this debt is slightly under the average and the 14 resulting debt balance is smaller. None of the changes described results in a significant 15 change in the cost of debt or WACC as demonstrated in EXHIBIT WGH-2. 16 Q. WILL SWEPCO'S PROJECTED CAPITAL STRUCTURE AND WACC CHANGE 17 OVER TIME? 18 A. Yes. As mentioned above, as debt issues mature, they must be retired or replaced with 19 new securities which may be higher or lower cost depending on the financial markets 20 at the time. Also, any new capital needs must be financed with new securities and any 21 excess cash generated by operations will be used to retire securities and pay dividends. 22 All of these items are part of ongoing operations and will impact the capital structure
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 11 1 and WACC over time. In the past, SWEPCO has done a good job of managing its 2 capital structure and WACC and has taken advantage of good financial markets by 3 refinancing higher cost securities to reduce the overall capital costs. EXHIBIT WGH- 4 2 simply provides an estimate of the WACC at a point in time. In the normal course of 5 business, this cost will change over time as the Company's capitalization and securities 6 outstanding change. 7 Q. IS SWEPCO'S WEIGHTED COST OF PREFERRED STOCK IMPACTED BY 8 THE ASSET TRANSFER? 9 A. No, the weighted cost of preferred stock is not affected by the asset transfer because 10 the amount of preferred stock outstanding does not change. The calculation of the 11 weighted cost of preferred stock is shown in EXHIBIT WGH-1, pages 2 and 3. 12 Q. WHAT WILL BE THE REGULATED WACC FOR THE NEW SWEPCO TEXAS 13 EDC? 14 A. The settlement order in the SWEPCO Texas EDC Unbundled Cost of Service 15 proceeding mandates that the cost of capital be based on a capital structure of 60% 16 debt and 40% equity for Texas regulatory purposes. The allowed return on equity is 17 11.25% and the cost of debt is 8.12%. These requirements result in the following 18 WACC:
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 12 1 2 Capital Weighted 3 Structure Cost Cost --------- ---- ---- 4 Equity 40% 11.25% 4.50% 5 Debt 60% 8.12% 4.87% ---- ----- 6 Total 100% 9.37% ==== ===== 7 Q. HOW DOES THIS COMPARE TO THE WACC FOR THE REMAINING 8 INTEGRATED SWEPCO? 9 A. The regulated WACC for the SWEPCO Texas EDC of 9.37% is lower than the 10 WACC expected for the remaining integrated SWEPCO of 9.52% outlined earlier in 11 this testimony primarily because of the lower percentage of equity in the SWEPCO 12 Texas EDC approved capital structure. There are also slight differences in the cost of 13 debt and the cost of equity that impact the calculated WACC. 14 Q. WILL THE ACTUAL CAPITAL STRUCTURE AND COST OF CAPITAL FOR 15 THE NEW SWEPCO TEXAS EDC BE THE SAME AS THE STRUCTURE 16 APPROVED BY THE PUBLIC UTILITY COMMISSION OF TEXAS (PUCT)? 17 A. Not necessarily. However, when the new company is financed we will attempt to 18 balance the requirements to maintain solid credit quality with the 60% debt ratio 19 required by the PUCT. One of the overall goals for the SWEPCO Texas EDC will be 20 to minimize the cost of capital while maintaining good credit quality. Over time we 21 would expect that SWEPCO Texas EDC's actual financing would be able to reach the 22 capital structure required by the PUCT. In addition, the actual cost of debt will also 23 differ from the approved amount depending on the capital market conditions when we 24 actually issue the new debt. 25 Q. FOR THE PURPOSE OF SETTING TOTAL TRANSMISSION COSTS FOR
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 13 1 SWEPCO'S TRANSMISSION ASSETS, WHAT COST OF CAPITAL SHOULD 2 BE CONSIDERED? 3 A. Mr. Potter's testimony explains that total transmission costs are determined by 4 combining the transmission of SWEPCO and SWEPCO Texas EDC. The cost of 5 capital that will be used is a blended cost of capital for the two companies. The table 6 below and EXHIBIT WGH-3 show the current estimate for the blended cost for the 7 combined capital of the remaining integrated SWEPCO and SWEPCO Texas EDC. 8 As you can see, the blended WACC is equal to the WACC for SWEPCO before the 9 asset transfer. 10 WACC 11 Before Asset Transfer: ---- 12 SWEPCO 9.47% 13 After Asset Transfer: 14 SWEPCO 9.52% 15 SWEPCO Texas EDC 9.37% 16 SWEPCO Total (Blended) 9.47% 17 18 IV. OTHER FINANCIAL ISSUES 19 Q. WILL SWEPCO ALLOCATE DEBT BETWEEN REGULATED AND 20 UNREGULATED ENTITIES? 21 A. No, SWEPCO does not anticipate the need to allocate any of its current outstanding 22 debt or preferred stock to any other affiliated entities. SWEPCO will remain an 23 integrated electric utility in order to continue to meet its obligation to serve in 24 Louisiana. The business separation plan will result in the transfer of Texas T&D assets 25 to the SWEPCO Texas EDC. SWEPCO will retain its generation assets and
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 14 1 substantially all of its outstanding capital. As mentioned above, as a result of the 2 transfer of the Texas T&D assets, the total amount of capital outstanding at SWEPCO 3 is expected to be reduced by retiring specific securities. 4 Q. PLEASE SUMMARIZE YOUR TESTIMONY. 5 A. SWEPCO's proposed business separation plan will not materially impact SWEPCO's 6 Louisiana retail customers. As discussed above, SWEPCO will remain an integrated 7 electric utility serving in Louisiana and will retain most of its outstanding debt and 8 preferred securities. The only capital structure impact will be the transfer of Texas 9 T&D assets to the SWEPCO Texas EDC and the resulting retirement of a portion of 10 SWEPCO's outstanding debt and common equity. 11 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 12 A. Yes, it does.
DOCKET NOS. U-21453, U-20925, WENDY G. HARGUS U-22092 (SUBDOCKET C) DIRECT TESTIMONY 15 BEFORE THE LOUISIANA PUBLIC SERVICE COMMISSION LPSC DOCKET NOS. U-21453, U-20925, U-22092 (SUBDOCKET C) SOUTHWESTERN ELECTRIC POWER COMPANY'S BUSINESS SEPARATION PLAN DIRECT TESTIMONY OF CHRIS POTTER FOR SOUTHWESTERN ELECTRIC POWER COMPANY SEPTEMBER 2001 DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 1 TESTIMONY INDEX SUBJECT PAGE 1. INTRODUCTION .......................................................... 3 II. PURPOSE OF TESTIMONY .................................................. 5 III. COST ALLOCATION ISSUES ................................................ 6 IV. CONCLUSION ............................................................ 14 DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 2 1 BEFORE THE 2 LOUISIANA PUBLIC SERVICE COMMISSION 3 LPSC DOCKET NOS. U-21453, 4 U-20925, U-22092 (SUBDOCKET C) 5 6 SOUTHWESTERN ELECTRIC POWER COMPANY'S 7 BUSINESS SEPARATION PLAN 8 9 DIRECT TESTIMONY OF 10 CHRIS POTTER 11 12 FOR 13 SOUTHWESTERN ELECTRIC POWER COMPANY 14 15 SEPTEMBER 2001 16 17 I. INTRODUCTION 18 Q. WOULD YOU PLEASE STATE YOUR NAME, POSITION, AND BUSINESS 19 ADDRESS? 20 A. My name is Chris Potter. My position is Principal Regulatory Consultant in the 21 Regulated Pricing & Analysis department for American Electric Power Service 22 Corporation (AEPSC), a subsidiary of American Electric Power Company, Inc.
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 3 1 (AEP). My business address is Williams Tower II, Two West Second Street, Tulsa, 2 Oklahoma (74103-3102.) 3 Q. WHAT ARE YOUR PRINCIPAL AREAS OF RESPONSIBILITY AS PRINCIPAL 4 REGULATORY CONSULTANT? 5 A. My responsibilities as Principal Regulatory Consultant are to manage pricing and 6 costing resources for rate cases, regulatory filings and rulemakings, as well as provide 7 pricing and costing services to AEP and its subsidiary electric utility operating 8 companies in the areas of regulatory analysis, cost-of-service studies and rate design. I 9 am also responsible for assisting the AEP electric utility operating subsidiaries in the 10 preparation and coordination of filings before the Louisiana Public Service 11 Commission (LPSC or Commission), the Arkansas Public Service Commission 12 (APSC), the Federal Energy Regulatory Commission (FERC), the Oklahoma 13 Corporation Commission (OCC), and the Public Utility Commission of Texas 14 (PUCT). 15 Q. WHAT IS YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND? 16 A. I received my Bachelor of Business Administration degree from Corpus Christi State 17 University (CCSU). While attending CCSU I was employed by Central Power and 18 Light Company (CPL) as an intern in the Budgeting section of Accounting. In 19 November of 1991 I accepted the position of General Ledger coordinator for CPL. 20 My duties as General Ledger coordinator included monthly closing of CPL's financial 21 books, preparation of external financial statements and implementation of various 22 mainframe systems used in the day to day operations of CPL. In July of 1994 I
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 4 1 transferred to Central and South West Services, Inc. (CSWS), as the Closing 2 Coordinator of CPL and Southwestern Electric Power Company (SWEPCO or 3 Company). In February of 1995 I was promoted to Accounting Consultant for CSWS 4 but maintained the same Closing Coordinator responsibilities. In March of 1995 I 5 transferred to the CSWS Pricing/Costing department as a Pricing/Costing Consultant. 6 In October of 1996 I was promoted to Project Manager in the Pricing/Costing 7 department and in May of 1999 I was promoted to Senior Project Manager. In June 8 of 2000, with the conclusion of the AEP/CSW merger, I accepted my current position 9 as Principal Regulatory Consultant for AEP. 10 Q. HAVE YOU PREVIOUSLY SPONSORED TESTIMONY BEFORE A 11 REGULATORY COMMISSION? 12 A. Yes. I have sponsored testimony before the LPSC, APSC and PUCT for SWEPCO, 13 before the OCC for Public Service Company of Oklahoma (PSO) and, before the 14 PUCT for CPL and West Texas Utilities Company. 15 16 II. PURPOSE OF TESTIMONY 17 Q. BRIEFLY OUTLINE THE PURPOSE OF YOUR TESTIMONY. 18 A. My testimony addresses the potential impact to Louisiana ratepayers resulting from the 19 anticipated restructuring and deregulation in Texas with regard to the traditional cost 20 of service studies and the impact on jurisdictional and retail allocation factors. 21 Q. WILL THE RESTRUCTURING IN TEXAS HAVE A MATERIAL IMPACT ON 22 THE LOUISIANA JURISDICTIONAL COST OF SERVICE STUDY?
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 5 1 A. No. The Louisiana Commission has a legitimate concern to ensure compliance with 2 Texas industry restructuring rules and regulations does not materially affect the costs 3 SWEPCO incurs in providing services to the Louisiana jurisdiction. However, the 4 SWEPCO Business Separation Plan (SWEPCO BSP) does not contemplate that 5 SWEPCO's retail customers in Louisiana will be materially affected by the 6 restructuring activities in Texas. The SWEPCO BSP allows the Company to 7 implement restructuring in Texas without materially affecting the costs paid by 8 SWEPCO's other retail jurisdictions. 9 10 III. COST ALLOCATION ISSUES 11 Q. HOW DID SWEPCO ALLOCATE PRODUCTION RELATED COSTS TO THE 12 JURISDICTIONS IN THE LAST LPSC RATE PROCEEDING? 13 A. In SWEPCO's last cost of service study filed in Louisiana (Docket No. U-23029), 14 production demand related costs were allocated to the jurisdictions utilizing the Four 15 Coincident Peak (4CP) methodology. The 4CP methodology was also utilized in the 16 allocation of production costs in SWEPCO's last rate review before the APSC, 17 (Docket No. 98-339-U), as well as in the Unbundled Cost of Service proceeding 18 before the PUCT (Docket No. 22353). 19 Q. HOW DID SWEPCO ALLOCATE NON-PRODUCTION RELATED COSTS TO 20 THE JURISDICTIONS IN THE LAST LPSC RATE PROCEEDING? 21 A. In SWEPCO's last cost of service study filed in Louisiana, transmission demand 22 related costs were allocated to the jurisdictions utilizing the 4CP methodology.
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 6 1 Distribution related investment was directly assigned to the jurisdictions based on the 2 physical location of the assets (situs basis). Customer related costs were allocated on 3 the basis of either year-end number of customers or a weighted year-end number of 4 customers. While many allocation factors are utilized in a cost of service study, these 5 allocation factors allocate the vast majority of costs. 6 Q. WHY DID SWEPCO UTILIZE THESE JURISDICTIONAL ALLOCATION 7 METHODOLOGIES IN THE LAST LOUISIANA COST OF SERVICE STUDY? 8 A. The 4 CP method used for production and transmission demand allocation accurately 9 reflects the system peak demands that are considered in the planning and construction 10 of those facilities. The SWEPCO system load has consistently been characterized by 11 pronounced summer peak demands in the four summer months of June through 12 September. Therefore, it is most appropriate to allocate these costs based upon the 4 13 CP methodology. The situs basis for assigning distribution costs allows facilities 14 located in Louisiana to be directly assigned to the Louisiana jurisdiction, where the 15 facilities are actually located and utilized in the provision of distribution-related 16 services. Likewise, the situs basis ensures that distribution facilities not located in 17 Louisiana are assigned to either Texas or Arkansas and not to the Louisiana retail 18 customers. Customer-related costs vary with the number of customers served and 19 should therefore be allocated based upon the number of customers served. 20 Q. HOW DOES THE PRODUCTION JURISDICTIONAL ALLOCATION 21 METHODOLOGY USED IN THE LAST SWEPCO LOUISIANA COST STUDY 22 CHANGE AS A RESULT OF THE UNBUNDLING INITIATIVES IN TEXAS?
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 7 1 A. While the production allocation methodology does not change, as part of its BSP 2 SWEPCO is proposing a one time allocation of the production related investment and 3 costs (operation and maintenance, depreciation, etc.) between the regulated 4 jurisdictions of Arkansas and Louisiana and the competitive Texas retail and wholesale 5 jurisdictions. 6 Q. PLEASE EXPLAIN SWEPCO's PROPOSED FIXED ALLOCATION OF 7 GENERATION RELATED COSTS. 8 A. As discussed in Sections 4.1.1 and 4.1.2 of the Unit Power Sales Agreement between 9 SWEPCO and the AEP Power Marketing Affiliate (PMA) as filed in FERC Docket 10 No. ER01-2668-000 on July 24, 2001, the capacity assigned to the PMA will be based 11 on the 4CP calculation for the year 2000, the most recent data available. As discussed 12 above the 4CP allocation is consistent with the allocation methodology used in 13 SWEPCO's most recent rate reviews for all three of its retail jurisdictions. Based 14 upon the 2000 4CP data, regulated SWEPCO will be responsible for 45.54% of the 15 non-fuel related generation costs and the PMA will be responsible for the remaining 16 54.46% of those costs. SWEPCO proposes to freeze this allocation percentage for 17 future cost allocation purposes. 18 Q. WHY IS IT APPROPRIATE TO SET THE ALLOCATION OF GENERATION 19 RELATED COSTS AND INVESTMENTS AS A FIXED PERCENTAGE FOR THE 20 TEXAS RETAIL AND WHOLESALE CUSTOMERS? 21 A. By setting the allocation at a fixed percentage of SWEPCO's current generation 22 related assets the Louisiana and Arkansas retail customers will be isolated from the
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 8 1 effect competition may have on the demand for SWEPCO's generation facilities. 2 Establishing the jurisdictional percentage split based on load data prior to retail 3 competition will ensure that the Louisiana and Arkansas retail customers will not be 4 responsible for any more nor any less than their fair share of SWEPCO's generation 5 costs. 6 Q. PLEASE DISCUSS THE COMPANY'S PROPOSAL TO ALLOCATE NON-FUEL 7 PRODUCTION-RELATED COSTS BETWEEN THE ARKANSAS AND 8 LOUISIANA RETAIL JURISDICTIONS AND THE PMA. 9 A. As mentioned previously, the allocation of non-fuel production costs to the Louisiana 10 and Arkansas retail jurisdictions will be set at 45.54%. Likewise, 54.46% of total non- 11 fuel production costs will be assigned to the PMA. Until such time as either Arkansas 12 or Louisiana decides to implement competition, the jurisdictional allocation of 45.54% 13 of SWEPCO's total non-fuel production-related costs between the Arkansas and 14 Louisiana retail jurisdictions will be based on the 4CP methodology utilizing 15 appropriate test year load data. However, when either Arkansas or Louisiana 16 implements competition, SWEPCO will propose the same methodology for 17 determining the fixed percentage split for the assignment of non-fuel 18 production-related costs to the remaining regulated jurisdiction. 19 Q. HOW WILL THE NON-PRODUCTION JURISDICTIONAL ALLOCATION 20 METHODOLOGIES USED IN THE LAST SWEPCO COST STUDY CHANGE AS 21 A RESULT OF THE UNBUNDLING INITIATIVES IN ARKANSAS AND 22 TEXAS?
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 9 1 A. Industry restructuring should have minimal impact on the Company's non-production 2 jurisdictional allocation methodologies. However, there may be instances where 3 specific items can be directly assigned to a particular jurisdiction as a result of 4 restructuring requirements. AEP witness John Aaron discusses the accounting 5 changes resulting from restructuring in his direct testimony. SWEPCO intends to 6 utilize the same or similar allocation methodologies, including those utilized to allocate 7 costs between the retail and wholesale jurisdictions, used in the last LPSC filing unless 8 direct assignment is available or cost causation changes. If the cost causation factors 9 indicate that a change in allocation methodologies is warranted, SWEPCO will fully 10 support any such methodology change, which will be reviewed by the Commission in 11 SWEPCO's next rate filing. If a specific service is no longer provided in the Texas 12 jurisdiction as a result of restructuring, but continues to be provided to regulated 13 customers, the costs associated with that particular service will be directly assigned or 14 allocated to only the regulated jurisdictions. For example, if the SWEPCO Texas 15 Energy Delivery Company (SWEPCO Texas EDC) is no longer responsible for 16 issuing individual customer bills, the Company's expense incurred for postage 17 associated with mailing regulated customers' bills would be allocated only to the 18 remaining regulated jurisdictions. 19 Q. WILL RETAIL CUSTOMERS CHOOSING DIFFERENT SUPPLIERS IN TEXAS 20 DUE TO INDUSTRY RESTRUCTURING MATERIALLY AFFECT THE 21 AMOUNT OF NON-PRODUCTION RELATED COSTS JURISDICTIONALLY 22 ALLOCATED TO THE LOUISIANA RETAIL CUSTOMERS?
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 10 1 A. No. Consistent with prior practice, SWEPCO proposes to continue to use the total 2 loads in the current SWEPCO service territories in the development of its non- 3 production jurisdictional allocation factors, regardless of whether a customer receives 4 energy from SWEPCO or a Retail Energy Provider (REP) in Texas. Loads 5 traditionally included in the development of the non-production jurisdictional 6 allocation factors will still be accounted for in the development of these factors, 7 regardless of whether a customer has a different supplier for their generation needs. 8 Q. WILL THE TRANSMISSION PORTION OF SWEPCO's COST STUDY CHANGE 9 AS A RESULT OF RESTRUCTURING INITIATIVES IN OTHER 10 JURISDICTIONS? 11 A. No. As discussed in the testimony of Mr. Baker, the SWEPCO transmission assets 12 and employees located in Texas will be transferred to the SWEPCO Texas EDC. 13 Also, as discussed in the testimony of Mr. John Aaron, the financial data from the 14 books of the SWEPCO Texas EDC and SWEPCO will be combined to obtain the total 15 transmission costs of the entire SWEPCO system. Combining the transmission 16 investments and costs will result in the calculation of total SWEPCO transmission 17 costs on a basis substantially the same as SWEPCO used in its last proceeding. As a 18 result, the potential for material effects on SWEPCO's jurisdictional allocation of 19 transmission-related costs to the Louisiana retail customers is minimized. 20 Q. WILL THE ASSIGNMENT OF DISTRIBUTION-RELATED INVESTMENT TO 21 THE LOUISIANA JURISDICTION BE AFFECTED AS A RESULT OF 22 RESTRUCTURING EFFORTS IN OTHER JURISDICTIONS?
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 11 1 A. No. As discussed earlier in my testimony, SWEPCO jurisdictionally assigns 2 distribution-related investment to each of the three states in which SWEPCO operates 3 on a situs basis. Restructuring will not change the physical location of the distribution- 4 related investments; and as such, there should be little change in the amount of 5 distribution-related investment allocated to the Louisiana retail jurisdiction. 6 Q. WILL THERE BE AN EFFECT ON THE DISTRIBUTION-RELATED O&M 7 EXPENSES ASSIGNED TO THE LOUISIANA JURISDICTION? 8 A. Yes. Previously, distribution-related O&M costs were allocated to the jurisdictions 9 based on the respective plant accounts assigned to each jurisdiction. Because of 10 restructuring, certain O&M costs will now be directly assigned to the Texas 11 jurisdiction. As a result, the remaining O&M expenses will be allocated to the 12 Arkansas and Louisiana jurisdictions, consistent with past ratemaking treatment, based 13 upon the respective plant in each of the jurisdictions. 14 Q. WILL GENERAL PLANT, ADMINISTRATIVE AND GENERAL COSTS, AND 15 OTHER COMMON COSTS CONTINUE TO BE ALLOCATED BASED UPON 16 THE METHODOLOGIES UTILIZED IN THE LAST LPSC FILING? 17 A. Not necessarily. As a result of the restructuring initiatives, SWEPCO will be required 18 to keep more precise, jurisdictional-specific data to separate the bookkeeping of the 19 SWEPCO Texas EDC from the other SWEPCO jurisdictions. This separate 20 bookkeeping will allow SWEPCO to directly assign many of the costs, including 21 payroll and some O&M expenses to specific jurisdictions. Mr. Aaron discusses this 22 separation of costs in his direct testimony. If direct assignment is not available,
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 12 1 SWEPCO intends to allocate these costs consistent with previously used 2 methodologies unless cost causation principles support a change. If the cost causation 3 factors indicate that a change in allocation methodologies is warranted, SWEPCO will 4 fully support any such methodology change, which will be reviewed by the 5 Commission in SWEPCO's next rate filing. 6 Q. WILL THE ALLOCATION OF COSTS TO THE LOUISIANA RETAIL 7 CUSTOMERS CHANGE AS A RESULT OF RESTRUCTURING ACTIVITIES IN 8 OTHER JURISDICTIONS? 9 A. No. Once the allocation of SWEPCO total company cost has been made to each of 10 the various jurisdictions, the same retail transmission and distribution allocation 11 methodologies used in the last LPSC filing would be used, unless the cost causation of 12 a particular item changes, requiring that a more appropriate allocator be used. If the 13 cost causation factors indicate that a change in allocation methodologies is warranted, 14 SWEPCO will fully support any such methodology change, which will be reviewed by 15 the Commission in SWEPCO's next rate filing. 16 Q. WHAT WILL THE IMPACT BE TO THE LOUISIANA JURISDICTION AS A 17 RESULT OF THE PROPOSED CHANGES OUTLINED ABOVE? 18 A. At this time, the exact dollar amount impact of the proposed changes in jurisdictional 19 allocation methodologies cannot be quantified. However, none of these allocation 20 methodologies changes are expected to have a material impact on the cost SWEPCO's 21 Louisiana retail customers will pay for electricity.
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 13 1 Q. HOW DOES SWEPCO INTEND TO TREAT TRANSITION AND 2 TRANSACTION COSTS RESULTING FROM RESTRUCTURING ACTIVITIES 3 IN OTHER JURISDICTIONS? 4 A. It is the Company's intent to directly assign restructuring costs to the states that are 5 implementing restructuring, thereby adhering to cost causation principles. Since 6 Louisiana has not at this time determined that retail competition is in the public 7 interest, no costs from restructuring activities will be allocated to the Louisiana 8 jurisdiction, unless that cost provides a used and useful service to the Louisiana retail 9 customers. If Louisiana implements competition for generation and other services in 10 the future, SWEPCO will allocate an appropriate amount of transition costs to the 11 Louisiana jurisdiction. 12 13 IV. CONCLUSION 14 Q. WILL THE RATEPAYERS OF LOUISIANA BE MATERIALLY AFFECTED AS 15 A RESULT OF IMPLEMENTING COMPETITION IN OTHER SWEPCO 16 JURISDICTIONS? 17 A. No. By establishing the jurisdictional percentage split on a pre-competition load basis 18 for generation related costs, Louisiana retail customers will be protected from any 19 effect competition might have on the jurisdictional allocation of SWEPCO's 20 generation related costs. It is SWEPCO's intent to allocate Louisiana retail customers 21 non-production related costs, except as discussed in earlier in my testimony, in the
DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY 14 1 same manner as if restructuring was not occurring in Texas. As a result, the effect on 2 SWEPCO's Louisiana customers should be minimal. 3 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 4 A. Yes, it does.
15 DOCKET NOS. U-21453, U-20925, CHRIS POTTER U-22092 (SUBDOCKET C) DIRECT TESTIMONY