SOAH DOCKET NO. 473-00-1020
PUC DOCKET NO. 22355
SUPPLEMENTAL DIRECT TESTIMONY OF
BENJAMIN A. MCKNIGHT III
FOR
RELIANT ENERGY HL&P
UNBUNDLED COST OF SERVICE RATE FILING
PURSUANT TO PURA SEC. 39.201
ECOM UPDATE
AUGUST 28, 2000
TABLE OF CONTENTS
INTRODUCTION...... Page 1
PURPOSE OF TESTIMONY...... Page 1
COMPLIANCE WITH PUCT ORDER NO. 14...... ……………………………….. Page 1
CONCLUSION...... Page 3
Reliant Energy HL&P
Supplemental Direct Testimony of Benjamin A. McKnight III
Page 1 of 3
INTRODUCTION
Q. Would you please state your name, occupation and business address?
A. My name is Benjamin A. McKnight III. I am a partner in the firm of Arthur Andersen LLP. My business address is 33 West Monroe Street, Chicago, Illinois, 60603.
Q. Are you the same Benjamin A. McKnight III that previously submitted direct testimony in this proceeding?
A. Yes.
PURPOSE OF TESTIMONY
Q. What is the purpose of your supplemental direct testimony?
A. My supplemental direct testimony will address Reliant Energy HL&P’s (“HL&P’s”) compliance with the Public Utility Commission of Texas (“PUCT”) finding in Order No. 14 of Docket No. 22344 relating to the treatment of Investment Tax Credits (“ITC”) in the ECOM model.
COMPLIANCE WITH PUCT ORDER NO. 14
Q. Did any of the provisions of PUCT Order No. 14 impact the income tax related ECOM amounts you sponsored in your initial direct testimony filed March 31, 2000?
A. Yes. Issue No. 6 of PUCT Order No. 14 concludes “The Commission finds that ITCs should be included in the ECOM calculation. If however, inclusion of the tax in the model is determined to result in violation of IRS normalization rules, the Commission will re-examine the issue. Should a determination to request a ruling be made, the participation by Commission staff and other interested parties in drafting the request is essential.”
Q. Has HL&P complied with Issue No. 6 of PUCT Order No. 14?
A. Yes. The Updated Staff Case and Staff Alternative Case discussed in Mr. Rice’s supplemental testimony reflects generation related ITC amortization continuing past January 1, 2002 in the amount of $203 million.
Q. Does HL&P agree with PUCT Order No. 14, as it relates to treatment of ITC in the ECOM Model?
A. No. HL&P believes that including ITC amortization related to generation property after January 1, 2002 in ECOM would violate Federal income tax normalization requirements. This is because generation property ceases to be public utility property for income tax purposes beginning January 1, 2002 when generation property is deregulated. The IRS has previously determined in a Private Letter Ruling (“PLR”) 8730013 that “The normalization rules would be violated if the deferred tax reserves and the ADITC’s were left on the utility’s regulatory books of account and flowed through to the ratepayers after the property to which they relate becomes deregulated.” (emphasis added)
Q. Has the PUCT provided HL&P with guidance in how to best address whether a normalization violation exists?
A. Yes. The PUCT stated in Order No. 14 that if it is found that including ITC amortization in the ECOM model results in violation of IRS normalization rules, the PUCT will re-examine the issue. Order No. 14 also required the participation of PUCT staff and other interested parties in the drafting of the request for a PLR.
Q. Has HL&P determined whether a PLR will be requested?
A. Yes. HL&P believes a PLR request is necessary because an ITC normalization violation would result in a recapture of ITC of approximately $272 million which would have to be paid to the Internal Revenue Service. This amount represents HL&P’s estimated total company unamortized ITC as of January 1, 2002. HL&P will follow the PLR protocol established by the Internal Revenue Service, which mandates PUCT involvement in the drafting of the PLR request. Additionally, HL&P will follow the PUCT’s Order 14, which requires the participation of other interested parties in preparing the PLR request.
Q. When do you anticipate the PLR to be finalized?
A. The PLR request must be reviewed and approved by the PUCT and other interested parties in accordance with the IRS and PUCT requirements prior to submission to the IRS. As HL&P has just started the initial draft of the PLR request and finalization of the request will involve extensive review and discussion, the timing of the filing of the PLR request is uncertain. Once filed, the process of receiving a PLR typically takes from six to ten months. Accordingly, it is virtually certain that the IRS will not issue the PLR prior to the start of the HL&P ECOM hearing set to begin on October 4, 2000. Therefore, HL&P anticipates that a re-examination of this issue will be necessary once a determination is made by the IRS.
CONCLUSION
Q. Does this conclude your testimony?
A. Yes.
Reliant Energy HL&P
Supplemental Direct Testimony of Benjamin A. McKnight III