INDEX TO THE DIRECT TESTIMONY
OF JEFFREY S. AGEE, WITNESS FOR
TXU ELECTRIC COMPANY
I. POSITION AND QUALIFICATIONS 2
II. PURPOSE AND OVERVIEW OF TESTIMONY 3
III. TAXES OTHER THAN INCOME TAXES – COST OF SERVICE 5
A. Payroll-Related Taxes 5
B. Revenue-Related Taxes 8
C. State Franchise Taxes 14
IV. FEDERAL INCOME TAXES – COST OF SERVICE 18
A. Income Tax Normalization Principles 18
B. Description of FIT Calculation and Components 26
C. Assignment of Test Year components of FIT by function 32
1. TXU Electric 33
2. TXU SESCO 37
D. Forecast Test Year FIT Calculation By Function 39
E. Affiliate-Related FIT Issues 44
V. ACCUMULATED DEFERRED FEDERAL
INCOME TAXES – RATE BASE 49
VI. TAX-RELATED REGULATORY ASSETS 55
VII. CONCLUSION…………………………………………………………………61
VIII. AFFIDAVIT……………………………………………………………………..62
IX. EXHIBITS
EXHIBIT JSA-RR-1 Filing Package Sponsored by J.S. Agee 63
EXHIBIT JSA-RR-2 Service Affiliate Income Tax Accounting
Example 65
Agee – Direct – TXU Electric
- 1 - Revenue Requirements
Unbundled Cost of Service
DIRECT TESTIMONY OF JEFFREY S. AGEE
I. POSITION AND QUALIFICATIONS
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Jeffrey S. Agee. My business address is 1601 Bryan Street, Dallas, Texas 75201.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am employed by TXU Business Services Company (“TXU Business Services”). I am the Tax Accounting Manager.
Q. WHAT ARE YOUR RESPONSIBILITIES AS TAX ACCOUNTING MANAGER?
A. I have responsibility for managing the overall tax accounting function for the Dallas-based TXU System Companies, including TXU Electric Company (“TXU Electric”) and TXU SESCO Company (“TXU SESCO”) (referred to jointly as “Companies”).
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND BUSINESS EXPERIENCE.
A. I am a 1987 graduate of Abilene Christian University, where I received a Bachelor of Business Administration degree in accounting. Following my graduation, I was employed by Weaver and Tidwell, CPAs (“Weaver and Tidwell”) of Fort Worth, where I participated in the financial audits of various companies in such industries as construction, petroleum, and manufacturing. I left Weaver and Tidwell in July 1989 and began my career with TXU Business Services, formerly Texas Utilities Services Inc., where I held various accounting positions until March 1996, when I assumed my current position. I am a Certified Public Accountant, licensed in the State of Texas since 1989.
Q. ARE YOU A MEMBER OF ANY PROFESSIONAL ORGANIZATIONS?
A. Yes, I am a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants.
Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE PUBLIC UTILITY COMMISSION OF TEXAS (“COMMISSION”).?
A. I have testified in Docket No. 21527, Application of TXU Electric Company for Financing Order to Securitize Regulatory Assets and Other Qualified Costs. In addition, I have previously filed testimony in TXU SESCO’s four most recent House Bill 11 proceedings, Docket Nos. 16702, 18403, 20128, and 21746. However, those proceedings have not required hearings.
II. PURPOSE AND OVERVIEW OF TESTIMONY
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to:
§ Support the amount of payroll, revenue-related and franchise taxes assigned to the various unbundled functions of TXU Electric and TXU SESCO for the historic test year ended September 30, 1999 (“historic test year”);
§ Determine the amount of payroll, revenue-related and franchise taxes attributable to the various unbundled transmission and distribution functions of the combined TXU Electric and TXU SESCO operations (the “Combined Companies”) for the forecast test year ended December 31, 2002 (“forecast test year”);
§ Support the Federal Income Tax (“FIT”) expense calculation and its assignment to the various unbundled functions of TXU Electric and TXU SESCO for the historic test year;
§ Provide the FIT expense calculation for the unbundled transmission and distribution functions of the Combined Companies’ operations for the forecast test year;
§ Present information related to Affiliate FIT issues;
§ Present the amount of Accumulated Deferred Federal Income Taxes (“ADIT”) for the historic test year, by the unbundled functions for the Companies;
§ Determine the amount of ADIT included in rate base for the transmission and distribution functions of the Combined Companies’ for the forecast test year;
§ Present the amount of tax-related regulatory assets attributable to the Companies’ unbundled functions for the historic test year; and
§ Present the amount of tax-related regulatory assets for the Combined Companies attributable to the unbundled transmission and distribution functions for the forecast test year.
See my Exhibit JSA-RR-1 for a list of schedules that I sponsor.
Q. WHAT ARE THE UNBUNDLED FUNCTIONS YOU REFER TO?
A. The following are the nine unbundled functions defined by the UCOS-Rate Filing Package (“UCOS-RFP”) instructions:
· Generation (“GEN”)
· Transmission (“TRN”)
· Distribution (“DIST”)
· Transmission and Distribution Utility Metering System Services (“MET”)
· T&D Utility Billing System Services (“TD-BILL”)
· Additional Billing Services (“A-BILL”)
· T&D Utility Customer Services (“TDCS”)
· Competitive Energy Services (“CES”)
· Other (“OTH”).
Q. PLEASE SUMMARIZE YOUR DIRECT TESTIMONY AND THE CONCLUSIONS YOU HAVE REACHED.
A. My direct testimony presents the appropriate determination and assignment of the following taxes and tax-related items for TXU Electric and TXU SESCO for the historic test year and for the forecast test year for the Combined Companies by unbundled function:
· Payroll-related taxes;
· Revenue-related taxes;
· State franchise taxes;
· FIT included in cost of service;
· ADIT included in rate base;
· Tax-related regulatory assets; and
· Affiliate-related FIT issues.
III. TAXES OTHER THAN INCOME TAXES – COST OF SERVICE
A. Payroll-Related Taxes
Q. PLEASE DESCRIBE THE VARIOUS PAYROLL-RELATED TAXES THAT TXU ELECTRIC AND TXU SESCO PAY.
A. TXU Electric and TXU SESCO, like most employers, are required by federal and state law to pay Social Security and Medicare taxes (“FICA”), Federal Unemployment Taxes (“FUTA”) and State Unemployment Taxes (“SUTA”). TXU Electric’s and TXU SESCO’s payroll tax expense by type of payroll tax for the historic test year is presented on their respective Schedules II-E-2.
Q. PLEASE EXPLAIN HOW THE COMPANIES’ FICA TAX EXPENSES ARE DETERMINED.
A. For the historic test year period, the Social Security tax rate of 6.2% was levied against the first $68,400 of each employee’s earnings for the period October through December 1998 and the first $72,600 of each employee’s earnings for the period January through September 1999. The Medicare tax rate of 1.45% was levied against every dollar of each employee’s earnings for the entire historic test year.
Q. PLEASE EXPLAIN HOW THE COMPANIES’ ANNUAL FEDERAL UNEMPLOYMENT TAX EXPENSES ARE DETERMINED.
A. For the historic test year period, the federal unemployment tax rate of .8% was levied against the first $7,000 of each employee’s earnings.
Q. PLEASE EXPLAIN HOW THE COMPANIES’ ANNUAL STATE UNEMPLOYMENT EXPENSES ARE DETERMINED.
A. For the historic test year period, the appropriate state unemployment tax rate was levied against the first $9,000 of each employees’ earnings.
Q. HAVE YOU ASSIGNED THE APPROPRIATE AMOUNT OF EACH PAYROLL-RELATED TAX TO THE UNBUNDLED FUNCTIONS OF TXU ELECTRIC AND TXU SESCO FOR THE HISTORIC TEST YEAR?
A. Yes, I have.
Q. PLEASE EXPLAIN, BY TYPE OF PAYROLL-RELATED TAX, HOW YOU DETERMINED THE APPROPRIATE ASSIGNMENT OF PAYROLL- RELATED TAX TO EACH UNBUNDLED FUNCTION FOR THE HISTORIC TEST YEAR.
A. As shown on the Companies’ respective workpapers WP/II-E-2/6, I have assigned the Companies’ historic test year levels of payroll taxes to each unbundled function based on the pro-rata assignment of Operations and Maintenance (“O&M”) labor expense to each function. Mr. R. Keith Pruett provided me with the O&M labor expense by unbundled function.
Q. HAVE YOU DETERMINED THE APPROPRIATE AMOUNT OF PAYROLL TAXES FOR THE FORECAST TEST YEAR FOR EACH UNBUNDLED FUNCTION FOR THE COMBINED COMPANIES?
A. Yes, I have. The results of my payroll tax determinations are presented on Schedules III-E-2(T) and III-E-2(D).
Q. PLEASE EXPLAIN HOW YOU DETERMINED THE APPROPRIATE AMOUNT OF PAYROLL TAXES THAT YOU HAVE ASSIGNED TO EACH FUNCTION FOR THE FORECAST TEST YEAR ON SCHEDULES III-E-2(T) and III-E-3(D).
A. As shown on workpaper WP/III-E-2/2, page 1, I have developed payroll tax expense factors to apply to forecast O&M labor dollars to determine payroll tax expense for the forecast test year. I developed the effective payroll tax expense factors for each type of payroll tax by dividing the historic test year level of payroll tax expense by the historic test year level of O&M payroll dollars. I then applied such factors to the forecast test year level O&M labor dollars for the unbundled transmission and distribution functions for the Combined Companies to determine the appropriate level of payroll tax expense for the forecast test year. Mr. Rick Hays and Ms. Becky Armstrong provided me with the level of forecast test year O&M labor for the transmission and distribution functions.
Q. HAVE YOU DETERMINED THE APPROPRIATE AMOUNT OF PAYROLL-RELATED TAXES FOR INCLUSION IN THE TRANSMISSION FUNCTION FOR THE HISTORIC AND FORECAST TEST YEARS?
A. Yes, I have. The historic test year amounts of payroll-related taxes for the Transmission function for TXU Electric and TXU SESCO are provided on each company’s respective Schedules IV-E-2. The appropriate level of Transmission payroll-related taxes for the forecast test year is presented on Schedule IV-E(f)-2. I determined the historic test year level of Transmission payroll-related taxes as part of the assignment of payroll tax expense to the unbundled functions for the historic test year as I described previously. The forecast test year level of payroll tax expense for Transmission was determined as part of the forecast test year payroll tax determination I described previously. The supporting workpapers to the Companies’ respective Schedules II-E-2 provide support for the assignment of payroll tax expense to the Transmission function for the historic test year. Also, page 2 of workpaper WP/III-E-2/2 provides support for the determination of the forecast test year level of payroll tax expense for the Transmission function.
Q. PLEASE SUMMARIZE YOUR TESTIMONY REGARDING PAYROLL-RELATED TAXES.
A. The payroll-related taxes of TXU Electric and TXU SESCO for the historic test year are presented on each company’s respective Schedule II-E-2. The payroll-related taxes shown on these schedules have been functionalized in accordance with General Instruction 10 of the UCOS-RFP. Payroll-related taxes for the Combined Companies for the forecast test year are presented on Schedules III-E-2(T) and III-E-2(D). The payroll-related taxes for the forecast test year have been derived by making reasonable adjustments to the historic test year expenses presented on the corresponding historic test year schedules.
B. Revenue-Related Taxes
Q. WHAT REVENUE-RELATED TAXES ARE TXU ELECTRIC AND TXU SESCO RESPONSIBLE FOR?
A. The Companies are currently responsible for paying State Gross Receipts Taxes (“SGRT”), Occupational Street Rental, (which are also known as Local Gross Receipts Taxes (“LGRT”)) and PUC Assessment Fees (“PUC fees”).
Q. PLEASE DESCRIBE HOW THE COMPANIES’ ANNUAL SGRT LIABILITIES ARE DETERMINED.
A. The Companies’ SGRT liability is determined based on taxable receipts. Taxable receipts consist of General Business Revenue, Late Fees, and Net Charge-offs. The liability due is based on taxable receipts from within an incorporated city or town having a population of 1,000 or more. The tax rates are: (1) 0.581 percent of taxable receipts from an incorporated city or town with a population of more than 1,000, but less than 2,500; (2) 1.07 percent of the taxable receipts from an incorporated city or town with a population of 2,500 or more, but less than 10,000; and (3) 1.997 percent of the taxable receipts from an incorporated city or town with a population of 10,000 or more.
Q. PLEASE DESCRIBE HOW THE COMPANIES’ ANNUAL LGRT LIABILITIES HAVE HISTORICALLY BEEN DETERMINED.
A. The Companies’ LGRT liabilities have historically been paid based on a percentage of taxable receipts in accordance with the contracts negotiated with the incorporated cities and towns from which the Companies receive taxable receipts from the retail sale of electricity within the corporate limits of municipalities. The taxable receipts consist of revenue from the sale of electric power and energy. TXU Electric’s taxable receipts are largely taxed at a rate of 4 percent. TXU SESCO’s taxable receipts are taxed at a rate of 3 or 4 percent, depending on the contracts with the municipalities.
Q. PLEASE DESCRIBE HOW THE COMPANIES’ ANNUAL PUC ASSESSMENT FEE LIABILITIES ARE DETERMINED.
A. The Companies’ PUC Fees are based on the gross receipts from rates charged to the ultimate consumer in Texas. The gross receipts are taxed at a rate of one-sixth of one percent.
- WHAT DO THE INSTRUCTIONS FOR THE UCOS-RFP SAY REGARDING REVENUE-RELATED TAXES?
- The UCOS-RFP requires revenue-related taxes to be attributed to the unbundled functions that are responsible for the payment of specific revenue-related taxes under the Utilities Code.
- WHAT UNBUNDLED FUNCTIONS ARE RESPONSIBLE FOR THE PAYMENT OF SPECIFIC REVENUE-RELATED TAXES ACCORDING TO THE UTILITIES CODE?
- Section 16.001 of the Utilities Code assesses the PUC Fee on a public utility’s “gross receipts from rates charged to the ultimate consumers in the state.” Therefore, the retail electric provider is responsible for the payment of the PUC Fee.
Section 33.008 of the Utilities Code allows municipalities to assess the LGRT on a transmission and distribution utility that “provides distribution service within the municipality,” as a charge based on “each kilowatt hour of electricity delivered by the utility to each retail customer whose consuming facility’s point of delivery is located within the municipality’s boundaries.” Therefore, the distribution function is responsible for the payment of the LGRT.
Section 55 of Senate Bill No. 7 amended Section 182.021 of the Texas Tax Code to assess the SGRT on a retail electric provider “that makes local sales within an incorporated city or town in this state.” The Tax Code goes on to read in Section 182.021 “that a person who owns an electric light or electric power or gas plant used for distribution, but who does not make retail sales to the ultimate consumer within an incorporated city or town in this state” is excluded from the definition of a “utility company” in the Tax Code. Therefore, the retail electric provider is responsible for the payment of the SGRT.