Document 240246
IV.
1
LEAD-LAG STUDY
2
Q.
WHAT IS A LEAD-LAG STUDY?
3
A.
A lead-lag study uses historical data and actual payment requirements to
4
measure the differences in the time frames between (1) the time services
5
are rendered until the revenues for those services are received; and (2)
6
the time that the costs associated with items used in providing those
7
services, such as labor and materials, are incurred until they are paid for
8
by the utility.
9
days, which are then multiplied by the average daily operating expenses
10
11
to produce the working capital required for operations.
Q.
WHAT STANDARDS DID YOU APPLY IN DEVELOPING YOUR LEADLAG STUDY?
12
13
The differences between these periods are expressed in
A.
I prepared my lead-lag study consistent with the requirements set forth in
14
Commission Substantive Rule 25.231(c)(2)(B)(iii). My lead-lag study is
15
based on the most accurate, Company-specific data available at the time
16
the study was conducted. I have attached Commission Substantive Rule
17
25.231(c)(2)(B)(iii) as-Exhibit JJJ-5 to my testimony.
18
Q.
19
20
PLEASE DESCRIBE THE GENERAL APPROACH YOU USED TO
CONDUCT THE LEAD-LAG STUDY FOR CTT.
A.
The lead-lag study for CTT reflects costs associated with the test year of
21
July 1, 2011 through June 30, 2012 ("Test Year"). I had discussions with
22
personnel at LS Power Development, LLC ("LS Power") (an indirect owner
23
of the Company) knowledgeable about billing, collections, factoring,
24
payroll, employee benefits, accounts payable, affiliate transactions, payroll
25
taxes, sales taxes, property taxes, state franchise taxes, local gross
26
receipts taxes, public utility commission taxes, income taxes, and bank
27
balances in non-interest-bearing accounts.
28
requested and received data regarding the Company's payments,
29
payment patterns, and payment requirements that I used to develop the
30
lead-lag study. This information is reflected in my work papers.
PUC Docket No. 40604
Based on these interviews, I
Joyce - Direct
Cross Texas Transmission
15,
Initial Rate Case
400
1
Q,
LEAD-LAG STUDY?
2
3
ONCE YOU OBTAINED THE DATA, HOW DID YOU DEVELOP THE
A.
The lead-lag study for CTT reflects anticipated payment patterns
4
associated with the Test Year in this rate application.
5
accurately measure investor-supplied capital, I developed the lead-lag
6
study using the following parameters:
1.
7
In order to
I used a cash method and did not consider non-cash items in
8
performing the lead-lag study;
2.
9
I
performed the lead-lag study in accordance with
10
Commission Substantive Rule 25.231(c)(2)(B)(iii).
11
example, to determine the lead days for expenses, I used
12
the later of the invoice due date or the payment clear date;
13
and
I specifically excluded the amortization of those expenses
3.
14
For
15
that the Company classifies as "prepaid expenses" for
16
ratemaking purposes from the revenue requirements used to
17
calculate CTT's CWC requirements.
18
Q
"LAG" AS USED IN THE LEAD-LAG STUDY.
19
20
PLEASE DESCRIBE THE APPLICATION OF THE TERMS "LEAD" AND
A.
21
For purposes of this testimony and the lead-lag study, I have used the
following definitions of the terms "revenue lag" and "expense lead":
1.
22
Revenue lag - the number of days of lag time between
23
providing electric transmission service to the Company's
24
customers and the subsequent receipt of payments for
25
service; and
2.
26
Expense lead - the number of days of lead time between the
27
service period of goods or services used by the Company to
28
provide electric transmission service and the payments to
29
vendors for those goods and services.
30
31
Q.
HOW DID YOU DEVELOP THE LEAD AND LAG DAYS IN YOUR LEADLAG STUDY?
PUC Docket No. 40604
"6-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
401
1
A.
I developed the revenue lag days from the anticipated billing and payment
2
patterns of the Company's customers. Similarly, I developed the expense
3
lead days for each of the various categories of system expenses by
4
measuring the period of time from when the costs will be incurred until
5
payments are made for such costs.
6
Q.
7
8
HAVE YOU SUBMITTED EXHIBITS THAT REFLECT ACCURATE
MEASUREMENTS OF THESE INVESTOR PROVIDED FUNDS?
A.
Yes.
Exhibit JJJ-2 contains the results of the lead-lag study as those
9
results apply to electric transmission services that will be provided by CTT.
10
As shown in that exhibit, I multiplied the net difference between the
11
computed Revenue Lag days and the computed Expense Lead days by
12
CTT's average daily revenue requirements in order to produce the net
13
CWC required.
14
15
A.
Q.
16
17
Revenue Lag
HOW DID YOU DEVELOP THE REVENUE LAG IN THE LEAD-LAG
STUDY?
A.
Revenue Lag consists of four components: (1) the service lag measured
18
from the middle of the period for which service is billed; (2) the billing lag
19
that reflects the time required to process and record bills; (3) the collection
20
lag that identifies the time delay between the recording of bills and the
21
receipt of the billed revenues; and (4) the delay in the bank's clearance of
22
deposited check payments The total number of days produced by the four
23
components represents the amount of time between providing
24
transmission service to customers and the receipt of the related revenues
25
for such service.
26
The first of these four components, the service period, measures
27
the time span over which services are provided. The critical feature of this
28
measure is that it establishes the common point from which the timing
29
difference between cost incurrence and revenue recovery is measured.
30
For example, assume that a cost is incurred, recorded, and is paid 15
31
days after the end of the service period.
PUC Docket No. 40604
-7-
Further assume that the
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
402
1
revenues for the related services are recovered 20 days after the end of
2
the service period. In these circumstances, the net recovery lag is 5 days
3
regardless of the point in time used as the starting point. These assumed
4
conditions illustrate that the cost incurrence and cost recovery periods
5
must be measured from a common point. That point may be at the
6
beginning of the period, at the end of the period, or at some point in
7
between.
8
relies on the mid-point of the service period, which assumes that service
9
will be provided evenly over the service period.
This Commission has consistently adopted an approach that
Consistent with the
10
Commission's precedent, I used the mid-point of the service period in my
11
analysis.
12
The second component is the time consumed in the billing process,
13
or the billing lag. In CTT's billing process, this period is the difference
14
from the end of the billing period to the date the invoice is electronically
15
transmitted to the Distribution Service Providers ("DSPs").
16
Substantive Rule 25.202(a) provides that "[w]ithin a reasonable time after
17
the first day of each month, transmission service providers (TSPs) shall
18
issue invoices for the prior month's transmission service." The Company
19
anticipates that its billing process will require one business day to process
20
and mail the paper invoices. Based on the Company's expectation, I have
21
used a 1.50-day billing lag in order to reflect that in some instances the
22
next business day is more than one actual day due to weekends and
23
holidays.
Commission
24
The third component, the collection lag, reflects the time between
25
billing for the services rendered and the receipt from customers of the
26
revenues billed. The collection lag days are based on the actual expected
27
collection lag under Commission Substantive Rule 25.202(a)(1), which
28
states, "An invoice for transmission service shall be paid so that the TSP
29
will receive the funds by the 35th calendar day after the date of issuance
30
of the invoice, unless the TSP and the transmission service customer
PUC Docket No. 40604
-8-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
403
1
agree on another mutually acceptable deadline." Consistent with this rule,
2
I have used a 35-day collection lag.
3
The fourth component of the revenue recovery lag, the cash
4
receipts float, represents the time between the receipt of funds from
5
customers until the funds clear the banks and are available to the
6
Company. The cash receipts float is based on the anticipated float under
7
Commission Substantive Rule §25.202(a)(1), which states, "All payments
8
shall be made in immediately available funds payable to the TSP, or by
9
wire transfer to a bank named by the service provider or by other mutually
10
acceptable terms."
11
CTT's cash receipts float is zero days.
12
I totaled each of these revenue lag components to arrive at total
13
revenue lag days.
B.
14
15
Q.
16
17
Since all payments from the DSPs are electronic,
Expense Lead - Operation and Maintenance Expenses
PLEASE EXPLAIN THE OPERATION AND MAINTENANCE ("O&M")
EXPENSE LEAD DAYS.
A.
In determining the lead days for this group of expenses, I separated total
18
system expenses into four groups - regular payroll costs, annual incentive
19
payroll costs, other non-affiliate O&M costs (e.g., materials, services, etc.),
20
and affiliate transactions between CTT and LSP Western Transmission
21
Holdings, LLC. I measured the lead days for each of these groups
22
independently.
23
24
1.
Q.
25
26
Regular Payroll
HOW DID YOU DETERMINE THE LEAD DAYS FOR THE PAYROLL
COSTS?
A.
I based the lead days for payroll on LS Power's wage payment process.
27
The Company does not currently have its own employees, but there are
28
employees dedicated to the Company that are currently employed by LS
29
Power. Those employees will ultimately be employed by the Company,
30
and the wage payment processes currently used by LS Power will be the
31
same processes used by the Company when it employs those employees
PUC Docket No. 40604
-9-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
404
1
directly.
2
during the Test Year serve as a proxy for the Company's wage payment
3
processes.
4
Power to determine the lead days for Company payroll costs.
5
employs semi-monthly pay periods and outsources its payroll processing
6
to Automatic Data Processing, Inc. ("ADP").
7
last day of each pay period, except when the payday falls on a weekend
8
or, holiday.
9
business day. I computed the lead days for payroll costs by determining
10
the average days of service being reimbursed and adding the days
11
between the end of each service period and the payment by LS Power to
12
ADP. This calculation produces the number of total days between the
13
middle of the period for which employees' costs were recorded and the
14
disbursement of the payments.
15
Q.
A.
Q.
Employees are paid on the
In such cases, the payday is moved up to the preceding
DID YOU MAKE ANY ADJUSTMENTS TO THE PAYROLL LEAD DAYS
Yes. I adjusted the payroll lead days to incorporate the effects of vacation
WHAT IS THE BASIS FOR YOUR VACATION ADJUSTMENT TO
PAYROLL LEAD DAYS?
20
21
LS Power
pay using a 7.5% vacation factor.
18
19
Therefore, I reviewed the wage payment processes of LS
IN YOUR LEAD-LAG STUDY?
16
17
As a result, the wage payment processes used by LS Power
A.
CTT does not currently have any employees, so a vacation pattern has
22
not yet been established. In order to address this fact, I based the
23
vacation adjustment on comparable data from recent utility rates cases.
24
The cases that I reviewed are detailed in my work papers. As my work
25
papers show, vacation patterns are generally consistent among utilities,
26
and thus provide a reasonable basis on which to make a vacation
27
adjustment to CTT's payroll lead days.
28
Q.
29
30
31
WHAT EFFECT DOES YOUR DECISION TO INCLUDE A VACATION
ADJUSTMENT HAVE ON THE WORKING CAPITAL ANALYSIS?
A.
While the Commission's Rule does not require a vacation adjustment to
payroll lead days, my decision to include a vacation adjustment to payroll
PUC Docket No. 40604
_10-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
405
1
lead days represents a conservative approach that benefits customers by
2
reducing CTT's working capital requirement.
3
4
Q.
PLEASE EXPLAIN YOUR CALCULATION OF LEAD DAYS FOR CTT'S
ANNUAL INCENTIVE PAYROLL.
5
6
Annual Incentive Payroll
2.
A.
As I discussed above, the Company does not currently have its own
7
employees, but there are certain employees dedicated to the Company
8
that are currently employed by LS Power. Those employees will ultimately
9
be employed by the Company, and the incentive payment processes used
10
by LS Power will be the same processes used by the Company when it
11
employs those employees directly.
12
processes used by LS Power during the Test Year serve as a proxy for
13
the Company's incentive payment processes. Therefore, I reviewed the
14
incentive payment processes of LS Power to determine the associated
15
lead days for the Company.
As a result, the incentive payment
16
LS Power has an annual incentive program. LS Power's annual
17
incentive payments were transmitted to ADP on December 29, 2011 and
18
paid to employees on December 30, 2011. These incentives were based
19
on calendar year 2011 performance. I based the lead days on the days
20
between the midpoint of the 2011 service period and the date the
21
incentives were funded.
3.
22
23
Q.
A.
Q
HOW DID YOU IDENTIFY THE MID-POINT OF THE SERVICE PERIOD
FOR OTHER NON-AFFILIATE O&M COSTS?
28
29
I based the measure of lead days for the expenses in this group of Other
O&M Costs on a sample of these expenses for the Test Year.
26
27
HOW DID YOU DETERMINE THE LEAD DAYS FOR THE REMAINING
NON-AFFILIATE EXPENSES IN THE O&M EXPENSE GROUP?
24
25
Other Non-Affiliate O&M Costs
A.
Consistent with the ruling of the Commission in Application of AEP Texas
30
Central Company for Authority to Change Rates, Docket No. 33309, the
31
lead-lag study estimates the midpoint of the service period independently
PUC Docket No. 40604
-11 -
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
406
1
for each invoice rather than assuming that the invoice date is the midpoint
2
of the service period for all invoices. I carefully examined each of the
3
sample items to determine the service period and the invoice due date.
4
Consistent with the requirements of the Commission, the effects of the
5
amortization of prepaid expenses were removed.
6
7
4.
Q.
8
9
Affiliate Transactions
HOW DID YOU DERIVE THE LEAD DAYS ASSOCIATED WITH
AFFILIATE TRANSACTIONS?
A.
To determine the average lead days for affiliate transactions, the study
10
utilizes the contractual payment requirements and resultant pattern. The
11
executed affiliate agreement that governs these transactions is included in
12
my workpapers.
C.
13
Expense Lead - Federal Income Tax Expense, Depreciation
Expense and Return
14
15
Q.
INCOME TAXES?
16
17
WHAT ARE THE LEAD DAYS ASSIGNED TO CURRENT FEDERAL
A.
I calculated the lead days for current federal income taxes by measuring
18
the days between the mid-point of an annual calendar year service period
19
(as the tax is incurred throughout the year) and the actual pro forma
20
payment dates of the Company for the rate period. Payment of at least
21
100% of the estimated tax for the year must be made in quarterly
22
payments on April 15th, June 15t", September 15th, and December 15th. If
23
any date falls on Saturday, Sunday, or a legal holiday, the installment is
24
due on the next regular business day. The Commission has accepted this
25
method in every case in which I have been involved.
26
Q.
DOES YOUR LEAD-LAG STUDY INCLUDE NON-CASH ITEMS, SUCH
27
AS DEPRECIATION, DEFERRED INCOME TAX EXPENSES, AND
28
RETURN?
29
A.
No.
Commission Rule § 25.231(c)(2)(B)(iii)(-a-) provides, "The lead-lag
30
study will use the cash method; all non-cash items, including but not
31
limited to depreciation, amortization, deferred taxes, prepaid items, and
PUC Docket No. 40604
-12-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
407
I
return (including interest on long-term debt and dividends on preferred
2
stock), will not be considered."
3
above items were not considered in my lead-lag study.
D.
4
5
Q.
6
7
Consistent with this requirement, the
Expense Lead and Lag - Taxes Other than Income Taxes
WHAT TAXES ARE INCLUDED IN TAXES OTHER THAN INCOME
TAXES?
A.
This group of taxes consists of: ( 1) payroll-related taxes (FICA, Federal
8
Unemployment, and State Unemployment); (2) state franchise taxes; and
9
(3) ad valorem taxes.
10
Q.
11
12
HOW DID YOU MEASURE THE LEAD OR LAG DAYS FOR PAYROLL-
RELATED TAXES?
A.
I calculated the payment leads or lags for the various payroll taxes from
13
the midpoints of the applicable work periods to the payment dates of the
14
taxes to ADP.
15
Q.
16
17
WHAT IS THE BASIS FOR YOUR CALCULATION OF THE LAG DAYS
FOR STATE FRANCHISE TAXES?
A.
My calculation is based on the state franchise tax statute applied to the
18
calculation of the lead-lag days. To determine the average lead days for
19
state franchise taxes,
20
requirements and resultant pattern. This requires that the study recognize
21
that the Company will pay state franchise taxes in May in order to conduct
22
business in the State of Texas from January 1 through December 31 for
23
that same year. This calculation is consistent with the calculation of the
24
lead-lag days for all of the other expenses and revenues included in the
25
lead-lag study.
26
Q.
the study
utilizes the statutory payment
IS YOUR CALCULATION OF THE LAG DAYS FOR THE STATE
27
FRANCHISE TAX CONSISTENT WITH THE MOST RECENT RULING
28
BY THIS COMMISSION?
29
A.
Yes, it is consistent with the Commission's Order on Rehearing (Finding of
30
Fact No. 50.) issued on June 23, 2011, in Docket No. 38339, Application
31
of CenterPoint Energy Houston Electric for Authority to Change Rates.
PUC Docket No. 40604
-13-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
408
1
Q.
TAXES?
2
3
HOW DID YOU MEASURE THE LEAD DAYS FOR AD VALOREM
A.
I calculated the payment lead for ad valorem taxes from the midpoint of
4
the period for which the tax was assessed to the due date. CTT intends to
5
pay its ad valorem taxes by the due date in order to avoid the substantial
6
penalties for late payments.
7
within the utility industry and is reasonable.
8
V.
This is consistent with the general practice
SUMMARY AND CONCLUSION
9
Q
WHAT ARE THE RESULTS OF THE LEAD-LAG STUDY?
10
A.
The CWC requirement for CTT is negative $959,327, as shown on Exhibit
11
JJJ-2.
12
Myers and Bruce H. Fairchild for inclusion in CTT's rate base.
I have provided this amount to Company witnesses Joseph L.
13
Q.
ARE THE RESULTS OF THE LEAD-LAG STUDY REASONABLE?
14
A.
Yes. The lead-lag study is consistent with Commission Substantive Rule
15
25.231 and relevant Commission precedent.
16
requirements resulting from that lead-lag study reflect an accurate,
17
unbiased and rational calculation for determining the reasonable level of
18
CWC to include in CTT's rate base. The CWC requirements resulting
19
from the lead-lag study are reflective of actual or anticipated Company
20
practices, and are fair and reasonable.
The calculations of CWC
21
Q.
DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
22
A.
Yes.
PUC Docket No. 40604
-14-
Joyce - Direct
Cross Texas Transmission
Initial Rate Case
409
STATE OF TEXAS
COUNTY OF DALLAS
BEFORE ME, the undersigned authority, on this day personally appeared Jay
Joyce; who, having been placed under oath by me, did depose as follows;
My name is Jay Joyce. I am of legal age and a residertt of the State of Texas. 711e
fb,ragoing direct testimony and thae attached exhibits offered by rue are true and correct;
and the opinions stated therein are aectuate>, true and carmct.
4ay
SUBSCRIBED AND SWORN TO BEFORE ME by the said Jay Joyce this 14"'
day of August, 2012.
Not y
te of Texas
sMSYtOUGM
+^;
Mr cc^Npk138rcn ^
410
EXHIBIT JJJ-1
Page 1 of 5
JAY JOYCE - REPRESENTATIVE UTILITY PROJECTS
Line
Jurisdiction
Texas Natural
Resource
Conservation
Commission
1
2
(TNRCC)
Texas Public Utility
Commission PUC
Docket
7796-M &
Company
Description
Wholesale Revenue
Requirements, Cost of Service,
City of Kilgore,
Texas
1989
and Rate Design
Texas-New
Mexico Power
Company
1989
Revenue Requirements
Revenue requirements
7831-M
8928
Year
Southwestern
Bell Telephone
3
Texas PUC
8585
Company
Texas-New
Mexico Power
1989
4
Texas PUC
9491
Company
1990
prudence
TrinityWater
Reserve, Inc. d/b/a
Devers Canal
System
1990
Rate base, return, rate
design
1991
Revenue requirements,
prudence
1991
Franchise Compliance
1991
Cost of Service, Rate Design
5
TNRCC
8388-M
Revenue requirements,
Texas-New
6
Texas PUC
7
N/A
8
Oklahoma Corp.
Comm.
10200
Mexico Power
Company
TCI Cablevision
N/A
PUD 001346
of Texas, Inc.
ArkansasOklahoma Gas
Company
United Irrigation
District of Hidalgo
9
TNRCC
8293-M
Coun
Texas
Revenue requirements, cost
1991
of service
1992
Deferred Accounting
Texas-New
10
Texas PUC
10034
Mexico Power
Company
Denton County
Electric
11
Texas PUC
9892
Cooperative
Revenue Requirements,
1992
settlement negotiations
1992
Federal Income Taxes
Southern Union
12
N/A
13
TNRCC
14
TNRCC
15
N/A
6
TNRCC
17
N/A
Gas Company
8338-A
Culleoka Water
Wholesale Revenue
Supply
Corporation
City of
Lewisville, Texas
City of Paris,
Requirements, Cost of Service,
and Rate Design *
Revenue requirements, cost
of service *
Revenue requirements, cost
N/A
Texas
N/A
Knollwood, Texas
Rodcett Special
Utility District/City
of Midlothian,
Texas
1992
1993
1993
of service
Wholesale Revenue
Requirements, Cost of Service,
1994
and Rate Design
1994
Water Supply Feasibility
Analysis
City of
Ql^
EXPERGY
411
EXHIBIT JJJ-1
Page 2 of 5
JAY JOYCE - REPRESENTATIVE UTILITY PROJECTS
Line
Docitat
Jurisdiction
Cmmnanv
Voar
Dasr_rintinn
1994
Revenue Requirements,
Restructuring Costs "
Houston
18
Texas PUC
12065
19
Texas PUC
12900
20
TNRCC
N/A
21
N/A
N/A
Lighting & Power
Company
Texas-New
Mexico Power
Company
Lakeside
Utilities, Inc.
City of North
Richland Hills,
1994
Texas
1994
of service
1995
Merger analysis
1995
Merger candidate evaluation
1995
Merger analysis
1994
Revenue requirements, rate
case expenses *
Revenue requirements, cost
of service "
Revenue requirements, cost
Detroit
Edison/MCN
22
N/A
N/A
Corporation
Illinois Power
23
N/A
N/A
company
Northern States
24
N/A
Washington
N!A
Utilities &
Natural Gas/Puget
Transportation
25
Commission
Power/Wisconsin
Electric Company
Washington
Sound Power &
UE-960195
26
N/A
N/A
27
N/A
N/A
Light
General Public
Utilities
San Diego
G&E/Southem
California Gas
Company
Southwest
Public Service
Merger analysis, testimony in
1995
support of merger
1996
Merger candidate evaluation
1996
Merger analysis
1996
Testimony in support of
merger
1996
Testimony in support of
merger
1996
Testimony in support of
merger
Company/Public
Service Company
of Colorado
Southwest
Public Service
Company/Public
Service Company
of Colorado
Southwest
Public Service
Company/Public
Service Company
of Colorado
Western
28
Texas PUC
29
New Mexico Public
Regulation
Commission PRC
30
Colorado Public
Service
Commission
31
N/A
N/A
Resources/Kansas
City Power & Light
1996
32
N/A
N/A
Fort Worth
Water Department
1996
Mercer analysis
Wholesale water revenue
requirements, cost of service,
rate design
N/A
Nashville Metro
Water Services
TXU Electric
1996
Wastewater Cost of Service
and Rate Design
1997
Cash Working Capital (CWC)
1997
Stranded cost quantification
33
N/A
34
Texas PUC
35
N/A
14980
2678
95A-513EG
18490
N/A
Company
Tucson Electric
Power
IZ&
EJfPiw•RGY
412
EXHIBIT JJJ-1
Page 3 of 5
JAY JOYCE - REPRESENTATIVE UTILITY PROJECTS
Line
36
Jurisdiction
N/A
Docket
N/A
Comnanv
Cobb County
Water System
Year
Descriotion
1997
Sewer Development Fee
Analysis
Fern Bluff
Municipal Utility
37
N/A
N/A
District
Wastewater Contract
1997
Lower Colorado
38
N/A
N/A
39
N/A
N/A
40
N/A
N/A
River Authority
Nashville
Thermal Transfer
Corporation
1997
Negotiations
1997
Financial Advisory Services
Pflugerville
Water and Wastewater
Water and
Revenue Requirements, Cost of
Wastewater Utility
1997
N/A
Service, Rate Design
Wholesale water revenue
requirements, cost of service, rate
Travis County
Municipal Utility
41
Negotiations
Wastewater Contract
N/A
District No.4
1997
design
Southwest
Power Pool
Houston Public
1998
Tariff policies and procedures
42
N/A
N/A
43
N/A
N/A
Utilities
1998
Management Audit
N/A
Trinity River
Authority
1998
Management Audit
1999
CWC
1999
CWC
44
TNRCC
TXU Electric
45
Texas PUC
22350
46
Texas PUC
22350
47
N/A
N/A
Company
TXU SESCO
Company
Mt. Carmel
Public Utilities
1999
Waco Water
48
49
TNRCC
Texas Railroad
Commission (RRC)
97-0049-UCR
8976
and Wastewater
utility
Lone Star
Pipeline Company
Valuation
Wholesale water revenue
1999
requirements, cost of service, rate
design
2000
CWC
2000
CWC
2001
CWC
2002
CWC
2002
Contractual pricing, bankruptcy
2003
CWC •
2003
CWC
2004
CWC
TXU Gas
50
Texas RRC
51
Georgia PSC
52
New Jersey BPU
United States
Bankruptcy Court
for the Northern
53
District of Georgia
54
Texas RRC
55
Texas PUC
56
North Carolina UC
57
PUC of Ohio
9145
14311-U
GR02040245
Distribution Dallas Distribution
System
Atlanta Gas
Light Company
Elizabethtown
Gas Company
02-10835
through 02-
10837
9400
28840
E-22, Sub 412
04-571-GA-
AIR and 04794-GA-AAM
NewPower
TXU Gas
Company
American
Electric Power Texas Central
Company
Dominion
Virginia Electric
Power
Vectren Energy
Delivery of Ohio
2004
CWC
4EXPERGY
413
EXHIBIT JJJ-1
Page 4 of 5
JAY JOYCE - REPRESENTATIVE UTILITY PROJECTS
Line
58
59
Jurisdiction
Texas Commission
on Environmental
Quality (TCEQ)
62
TCEQ
US District Court
for the Northern
District of California
Superior Court of
Fulton County,
Georgia
Texas PUC
63
Texas RRC
60
61
Docket
Comoanv
Year
Descriotion
Chisholm Trail SUD
2005
Aqua Texas
2005
Cost of Service, Rate sign *
Valuation, Cost Allocation,
Revenue Requirements
TXU Energy Services
2006
Wholesale Gas Supply Pricing
Dispute *
2000-CV20379
City of Atlanta Water
Utility
2006
Water Rates *
32093
CenterPoint Energy
Atmos Energy - MidTex
2006
CWC*
2006
CWC *
2006
CWC *
2006
CWC *
2006
CWC
2007
Working Capital
Water Cost of Service, Rate
Design
2004-0979UCR
2004-1120UCR, at. at.
C01-20289
RMW
9670
American Electric
64
Texas PUC
33309
65
Texas PUC
33310
Oklahoma Corp.
PUD-
66
Comm.
200600285
67
Arkansas PSC
68
TCEQ
060161-U
2006-1919UCR
69
Texas PUC
70
71
TCEQ
Texas PUC
Power - Texas
Central Company
American Electric
Power - Texas North
Company
Public Service
Company of
Oklahoma
34040
CenterPoint Energy
Arkansas Gas
Oak Shores Water
System
TXU Electric Delivery
Company
2008-0804-
Kendall County Utility
UCR
35717
2007
2007
CWC
Water & Wastewater Cost of
Company
2008
Service & Rate Design *
Oncor Electric
Delivery Company
2008
CWC
2008
CWC *
2009
CWC
CenterPoint Energy
Entex Gas - Texas
72
Texas RRC
73
New Mexico Public
Regulation
Commission
74
Texas RRC
9872
09-00171-UT
9902
Coast Division
El Paso Electric
company
CenterPoint Energy
Entex Gas - Houston
Division
2009
2008-1856-
75
TCEQ
Virginia State
76
Corporation Comm.
77
Texas PUC
78
Texas PUC
UCR
PUE-2009-
CWC '
Water & Wastewater Cost of
City of Pecos City
Appalachian Power
Company
2009
Service & Rate Design *
2009
CWC *
37364
SWEPCo
2009
CWC *
37690
El Paso Electric
2009
CWC *
2010
CWC *
2010
CWC *
0030
Appalachian Power
79
West Vi inia PSC
80
Texas PUC
10-099-E-42T
38339
Company & Wheeling
Power Company
CenterPoint Energy
Houston Electric
Q^
EXPERGY
414
EXHIBIT JJJ-1
Page 5 of 5
JAY JOYCE - REPRESENTATIVE UTILITY PROJECTS
Line
Jurisdiction
Docket
Comoanv
Year
Descriotion
2010
CWC *
2010
CWC *
2010
CWC'
2010
CWC
2011
CWC *
2011
2011
CWC
CWC •
2012
CWC *
CenterPoint Energy
9985, 9986,
81
Texas RRC
9987
Entex Gas -
Beaumont Division
CenterPoint Energy
10006, 10007,
82
Texas RRC
10018
83
Texas RRC
84
Oklahoma Corp.
Comm.
PUD201000050
Virginia State
PUE-2011-
85
Corporation Comm.
New Mexico Public
10038
00037
Entex Gas - Texas
Coast Division
CenterPoint Energy
Entex Gas - South
Texas Division
Public Service
Company of
Oklahoma
Appalachian Power
Company
86
87
Regulation
Commission
Texas PUC
88
Texas PUC
40020
89
Texas RRC
10182
Texas Division
2012
CWC *
90
Texas PUC
40443
SWEPCo
2012
CWC *
11-00042-UT
39896
New Mexico Gas
Company
Entergy Texas, Inc.
Lone Star
Transmission
CenterPoint Energy
Entex Gas BeaumonttEast
* Indicates projects where Mr. Joyce was a testifying expert witness
7
4&
EXPERGY
415
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EXHIBIT JJJ-4
Page 1 of 1
PUC DOCKET NO. 40604
CROSS TEXAS TRANSMISSION, LLC
RATE FILING PACKAGE SCHEDULES
SPONSORED BY JAY JOYCE
Section / Schedule Number
Title of Schedule
Other Witness Sponsor(s)
Cash Working Capital
Fairchild
SECTION II: TEST YEAR DATA
Schedule B: Rate Base
Schedule II-B-9
SECTION III: ERCOT
WHOLESALE TRANSMISSION
COST OF SERVICE
Schedule III-B-9
Cash Working Capital
440
Exhibit JJJ-5
Page 1 of 1
Substantive Rule 525.231(c)(2)(B)(iii)
(iii) A reasonable allowance for cash working capital. The following shall apply in
determining the amount to be included in invested capital for cash working
capital:
(I) Cash working capital for electric utilities shall in no event be greater than
one-eighth of total annual operations and maintenance expense, excluding
amounts charged to operations and maintenance expense for materials,
supplies, fuel, and prepayments.
(11) For electric cooperatives, river authorities, and investor-owned electric
utilities that purchase 100% of their power requirements, one-eighth of
operations and maintenance expense excluding amounts charged to
operations and maintenance expense for materials, supplies, fuel, and
prepayments will be considered a reasonable allowance for cash working
capital.
(III) Operations and maintenance expense does not include depreciation, other
taxes, or federal income taxes, for purposes of subclauses (1), (II), and (V)
of this clause.
(IV) For all investor-owned electric utilities a reasonable allowance for cash
working capital, including a request of zero, will be determined by the use
of a lead-lag study. A lead-lag study will be performed in accordance with
the following criteria:
(-a-) The lead-lag study will use the cash method; all non-cash items,
including but not limited to depreciation, amortization, deferred
taxes, prepaid items, and return (including interest on long-term
debt and dividends on preferred stock), will not be considered.
(-b-) Any reasonable sampling method that is shown to be unbiased may
be used in performing the lead-lag study.
(-c-) The check clear date, or the invoice due date, whichever is later,
will be used in calculating the lead-lag days used in the study. In
those cases where multiple due dates and payment terms are offered
by vendors, the invoice due date is the date corresponding to the
terms accepted by the electric utility.
(-d-) All funds received by the electric utility except electronic transfers
shall be considered available for use no later than the business day
following the receipt of the funds in any repository of the electric
utility (e.g. lockbox, post office box, branch office). All funds
received by electronic transfer will be considered available the day
of receipt.
(-e-) For electric utilities the balance of cash and working funds included
in the working cash allowance calculation shall consist of the
average daily bank balance of all non-interest bearing demand
deposits and working cash funds.
(-f-)
The lead on federal income tax expense shall be calculated by
measurement of the interval between the mid-point of the annual
service period and the actual payment date of the electric utility.
(-g-) If the cash working capital calculation results in a negative amount,
the negative amount shall be included in rate base.
(V) If cash working capital is required to be determined by the use of a lead-lag
study under the previous subclause and either the electric utility does not
file a lead lag study or the electric utility's lead-lag study is determined to be
so flawed as to be unreliable, in the absence of persuasive evidence that
suggests a different amount of cash working capital, an amount of cash
working capital equal to negative one-eighth of operations and maintenance
expense including fuel and purchased power will be presumed to be the
reasonable level of cash working capital.
441
INDEX TO THE DIRECT TESTIMONY
OF SUZANNE PEPE ROBBINS, WITNESS FOR
CROSS TEXAS TRANSMISSION. LLC
I.
INTRODUCTION, POSITION, AND QUALIFICATIONS ............................ 2
II.
PURPOSE OF DIRECT TESTIMONY ....................................................... 3
III.
FEDERAL INCOME TAX ........................................................................... 4
A. Basis for Calculation ............................................................................. 4
B. Consolidated Tax Savings .................................................................... 9
IV.
OTHER TAXES ....................................................................................... 10
A. Ad Valorem Taxes .............................................................................. 10
B. State Franchise/Texas Gross Margin Tax .......................................... 11
C. Payroll Taxes ..................................................................................... 12
V.
TAX ACCOUNTING SERVICES .............................................................. 13
VI.
CONCLUSION ......................................................................................... 14
VI.
AFFIDAVIT
VII.
EXHIBITS
Exhibit SPR-1 - Schedule Sponsorship List
PUC Docket No. 40604
-1 -
Robbins - Direct
Cross Texas Transmission
Initial Rate Case
442
1
DIRECT TESTIMONY OF SUZANNE PEPE ROBBINS
2
3
I.
Q.
4
5
INTRODUCTION, POSITION, AND QUALIFICATIONS
PLEASE STATE YOUR NAME, BUSINESS ADDRESS, AND CURRENT
EMPLOYMENT POSITION.
A.
My name is Suzanne Pepe Robbins. My business address is 1700
6
Broadway, 35th Floor, New York, New York 10019. I am currently Vice
7
President and Tax Counsel for LS Power Development, LLC ("LS Power"),
8
an indirect owner of Cross Texas Transmission, LLC ("Cross Texas" or
9
"Company").
10
Q.
11
12
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND
PROFESSIONAL QUALIFICATIONS.
A.
I initially attended the undergraduate program at New York University in
13
the University Scholar (Business) program and subsequently transferred
14
to the University of Southern California, School of Administration, from
15
where I graduated in 1988 with a Bachelors of Science degree in Finance
16
(Beta Gamma Sigma). I then attended New York University School of
17
Law from where I obtained a Juris Doctor in 1991 and an LL.M. in
18
Taxation in 1992. After graduating law school, I joined the international
19
law firm of Paul, Hastings, Janofsky, & Walker LLP, where I practiced tax
20
and corporate law for 13 years, advising clients on a variety of
21
transactions, including direct asset transactions, mergers and acquisitions,
22
and partnership and lease transactions. My practice primarily focused on
23
project finance for energy industry clients.
24
In 2005, I joined GE Energy Financial Services ("GE") as Vice
25
President of Tax Planning and Tax Counsel. In that role, I worked closely
26
with GE's energy businesses, and provided technical and legal advice to
27
the business teams regarding how to structure transactions involving
28
many different kinds of energy assets and investment vehicles. While at
29
GE, I worked closely with the business analysts to prepare the tax
30
components of complex financial models. I joined LS Power in May of
31
2009, and I advise on complex financial transactions that range from asset
PUC Docket No. 40604
Robbins - Direct
Cross Texas Transmission
-2Initial Rate Case
443
1
or portfolio acquisitions to the development of energy assets, including
2
transmission and renewable assets.
3
Additionally, I have co-authored a chapter in a leveraged leasing
4
treatise' and have spoken at several tax conferences on a variety of
5
topics. I am licensed to practice law in New York and Connecticut, and I
6
am currently a member of the New York State Bar Association, Tax
7
Section.
8
Q.
POSITION. •
9
10
PLEASE DESCRIBE YOUR RESPONSIBILITIES IN YOUR CURRENT
A.
As Vice President and Tax Counsel, I am primarily responsible for
11
advising on the Federal Income Tax ("FIT") consequences of energy
12
sector investments by LS Power and its affiliates, including Cross Texas. I
13
work with the business teams to properiy structure investments, and with
14
the accounting and tax compliance teams to ensure that the tax
15
consequences of those investments are properly reported. My Cross
16
Texas-related responsibilities have involved reviewing contracts and other
17
project-related documents from an FIT perspective. I am also working
18
with our tax compliance group to account for income and expenses
19
incurred by Cross Texas for FIT purposes, both during construction and
20
once commercial operation commences.
21
Q.
22
23
HAVE YOU EVER TESTIFIED BEFORE THE PUBLIC UTILITY
COMMISSION OF TEXAS ("COMMISSION°)?
A.
No.
24
II.
PURPOSE OF DIRECT TESTIMONY
25
Q.
WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY?
26
A.
The purpose of my direct testimony is as follows:
27
28
•
present and support the Company's FIT expense calculation and the
reasonableness and necessity of that expense;
' David Burton et al., Leasing Outside the United States: Pickle, Loss Trapping, Subpart
F and Foreign Tax Credits, in EQUIPMENT LEASING - LevEw ►GED LEASING 25-1 ( Ian Shrank &
Arnold G. Gough, Jr., eds., 5th ed. 2012).
PUC Docket No. 40604
-3-
Robbins - Direct
Cross Texas Transmission
Initial Rate Case
444
1
•
present and support the legal and tax status of Cross Texas and
2
explain why the consolidated tax savings adjustment ("CTSA")
3
provisions of the Public Utility Regulatory Act ("PURA") do not apply to
4
the Company's tax expense;
5
•
present and support the amount of ad valorem taxes, payroll taxes,
6
and Texas gross margin taxes included in the Company's expense for
7
taxes other than FIT, and the reasonableness and necessity of those
8
expenses; and
9
10
•
present an overview of the affiliate-provided tax accounting services
utilized by Cross Texas.
11
I co-sponsor Schedules II-E-3 through II-E-3.26 of the Investor
12
Owned Utility Transmission & Distribution Cost of Service Rate Filing
13
Package ("RFP") and the associated workpapers ("WPs") related to FIT,
14
as well as Schedule II-E-2 and the associated WPs related to taxes other
15
than FIT.
16
sponsoring.
My Exhibit SPR-1 lists each of the schedules that I am co-
17
My direct testimony, the attached exhibit, and the portions of the
18
schedules (including the associated workpapers) I co-sponsor were
19
prepared by me or under my direction, supervision, or control, and are true
20
and correct. My direct testimony will address each topic in the order that I
21
have described them.
22
III.
23
24
A. Basis for Calculation
Q.
25
26
FEDERAL INCOME TAX
PLEASE PROVIDE AN OVERVIEW OF HOW CROSS TEXAS IS
ORGANIZED FROM A TAX PERSPECTIVE.
A.
Cross Texas is a Delaware limited liability company classified as a
27
partnership for federal, state, and local income tax purposes.
28
Schedule V-K-3 of the RFP for an organizational chart.
29
30
Q.
See
WHAT IS THE BASIS OF THE FIT EXPENSE INCLUDED IN THE
REQUESTED COST OF SERVICE?
PUC Docket No. 40604
-4-
Robbins - Direct
Cross Texas Transmission
Initial Rate Case
445
I
A.
Because Cross Texas has not yet commenced commercial operations, it
2
had no operating revenues or FIT expense during the test period July 1,
3
2011 through June 30, 2012 ("Test Year"). Once facilities are placed in
4
service and Cross Texas begins charging rates, it will begin charging
5
rates,
6
Accordingly, a known and measurable change is made to include FIT
7
expense in the Company's revenue requirements which is calculated on a
8
normalized
9
25.231(b)(1)(D).
receiving revenue, and FIT expense will begin to accrue.
basis
pursuant
to
Commission
Substantive
Rule
10
Q
CAN YOU PLEASE EXPLAIN THE TERM "NORMALIZATION"?
11
A
Normalization means calculating the FIT expense included in the cost of
12
service by reference to "book" or ratemaking numbers, not based on how
13
items are reflected on an FIT return. This ensures that the utility passes
14
along to ratepayers the tax benefits derived from expenses (calculated on
15
a book basis) that ratepayers fund in the cost of service as ratepayers
16
fund those expenses. Under normalization, FIT expense included in the
17
cost of service is equal to the statutory FIT rate (currently 35%) times the
18
regulated book income before taxes and adjustments for certain items, as
19
discussed below.
20
Q.
21
22
HOW HAS THE FIT EXPENSE IN CROSS TEXAS' COST OF SERVICE
BEEN CALCULATED?
A.
In addition to ensuring compliance with PURA's FIT provisions, which I
23
discuss further below, the Company's FIT expense has been calculated
24
utilizing the "return"
25
instructions and schedules.
26
Company's total return by function, which consists of a return on equity
27
and a debt return (interest). Because the interest component of the return
28
is tax-deductible, it is subtracted from the total return to produce the equity
29
return.
method required by the Commission's RFP
The return method begins with the
30
Next, permanent differences between book and tax income, which I
31
describe further below, are deducted or added to the equity return. The
PUC Docket No. 40604
Robbins - Direct
Cross Texas Transmission
15,
Initial Rate Case
446
I
computed equity return, plus or minus these "permanent" items, produces
2
the taxable component of the return which is then multiplied by a tax factor
3
(based on the current statutory corporate income tax rate of 35%) to
4
determine FIT expense.
5
Q.
6
7
WHAT ARE ACCUMULATED DEFERRED FEDERAL INCOME TAXES
OR "ADFIT"?
A.
The difference between normalized FIT expense based on income levels
8
and expenses reflected on a utility's books and the amount of current tax
9
liability related to those items actually reflected for tax purposes is known
10
as deferred FIT expense. The cumulative balance of deferred FIT
11
expenses is known as ADFIT. For example, accelerated tax deductions
12
(e.g., depreciation computed using the Modified Accelerated Cost
13
Recovery System ("MACRS")) that are permitted for tax purposes are
14
used to defer the utility's taxes by reducing income taxes due in earlier
15
years at the cost of increased income taxes due in later years.
16
deferred income taxes allow for the creation of a fund from which the utility
17
can pay future taxes.
18
reflects the fund as an ADFIT liability. Thus, this ADFIT liability represents
19
temporary cost-free capital available to the utility, which is effectively an
20
interest-free loan from the government. To reflect the economic benefit of
21
the interest-free loan, the ADFIT liability is deducted from rate base so that
22
ratepayers receive the benefit of the governmental subsidy. It is
23
noteworthy that differences in the treatment of some items for book versus
24
tax purposes work just the opposite of that described above and result in
25
an ADFIT asset. ADFIT assets serve to reduce or offset ADFIT liabilities
26
and may be an addition to rate base.
The
Until the--utility actually pays that tax, the utility
27
Q.
ARE THERE OTHER TYPES OF BOOK VERSUS TAX DIFFERENCES?
28
A.
Yes. The timing differences described above are temporary differences
29
because the same amounts will ultimately be reflected for both book and
30
tax purposes, only at different times (e.g., straight-line book versus
31
MACRS depreciation). Other differences between the book and tax
PUC Docket No. 40604
-6-
Robbins - Direct
Cross Texas Transmission
Initial Rate Case
447
1
treatment of certain items are permanent and will never turn around; that
2
is, the differences exist in perpetuity (e.g., interest accruing on equity
3
associated with accumulated funds used during construction). As a result,
4
whereas temporary timing differences create deferred taxes, permanent
5
differences do not. In turn, temporary differences only change tax
6
expenses from current to deferred (or vice versa) without increasing or
7
decreasing the overall tax expense, while permanent differences change
8
the overall tax liability and are typically considered in calculating FIT
9
expense.
10
Q.
WHAT ADFIT ARE INCLUDED IN THE COMPANY'S RATE BASE?
11
A.
Because all of Cross Texas' investment has been capitalized for both
12
book and tax purposes and Cross Texas has not yet commenced
13
commercial operations, there are no timing differences as of June 30,
14
2012, and no ADFIT. In addition, there will not be any net ADFIT at the
15
time the facilities are placed in service because any ADFIT liability will be
16
offset by a corresponding deferred income tax asset resulting from the net
17
operating loss. Accordingly, no ADFIT were included in Cross Texas' rate
18
base.
19
Q.
ON SCHEDULE I1-E-3.3, CROSS TEXAS NOTES THAT IT HAS
20
CALCULATED THE AMOUNTS REPORTED THERE USING MACRS
21
DEPRECIATION RATES BUT NOT BONUS DEPRECIATION. PLEASE
22
DESCRIBE ACCELERATED TAX DEPRECIATION AND BONUS
23
DEPRECIATION.
24
A.
Since at least 1954, federal tax law has permitted taxpayers to claim
25
depreciation deductions for tax purposes using accelerated calculation
26
methods and short depreciable lives. These accelerated depreciation
27
deductions reduce federal tax liability in the early years of an asset's life.
28
Because a taxpayer cannot depreciate more than the total cost of any
29
given asset, the "extra" depreciation deductions claimed in the early years
30
of an asset's life are entirely offset by reduced depreciation deductions in
31
the later years of that asset's life. (Thus, the book-tax differences from
PUC Docket No. 40604
"7-
Robbins - Direct
Cross Texas Transmission
Initial Rate Case
448
1
accelerated depreciation are temporary differences since they ultimately
2
reverse.) Under current tax law, the most prevalent accelerated method is
3
MACRS.
4
From time to time, Congress enacts laws to spur investment by
5
allowing greater acceleration of the depreciation deductions currently
6
available under the current MACRS system - these increased deductions
7
are generally known as "bonus" depreciation deductions.
8
were enacted that allowed 30%, 50%, and even 100% bonus depreciation
9
deductions in the first year certain assets were placed in service, with
10
regular MACRS depreciation deductions allowed (in the case of 30% and
11
50% bonus depreciation) on the remaining asset cost. The specific laws,
12
when enacted, contained numerous conditions for an asset to qualify for
13
the bonus depreciation including when construction needed to begin and
14
when the assets needed to be placed in service. With respect to certain
15
assets which are considered to have long production periods and which
16
are placed in service for FIT purposes in 2013, a 50% bonus depreciation
17
deduction could be available for certain costs incurred through the year
18
ending December 31, 2012. A taxpayer may make an election to forego
19
bonus depreciation with respect to a class of property. If such an election
20
is made, it would apply to all assets that are in the same class of property
21
for FIT purposes and which are placed in service during that same taxable
22
year.
23
Q.
24
25
Various laws
WHY DID CROSS TEXAS NOT REFLECT THE EFFECTS OF BONUS
DEPRECIATION ON SCHEDULE II-E-3.3?
A.
Under the FIT law, Cross Texas cannot claim tax depreciation deductions
26
with respect to any asset until the asset is placed in service for FIT
27
purposes.
28
assets were still under construction and have not yet been placed in
29
service for FIT purposes, those assets are not currently eligible for FIT
30
depreciation deductions.
31
service for FIT purposes, Cross Texas will determine whether, and to what
Because, as of the end of June 30, 2012, the Company's
Once the Company's assets are placed in
PUC Docket No. 40604
-8,
Robbins - Direct
Cross Texas Transmission
Initial Rate Case
449
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