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267828 WH17E - CITV CLERK ��'�� PINK - FINANCE ITY OF SAINT PAITL Council CANARV - DEPARTMENT t � BLUE - MAVOR. � Flle NO. � C i Resolution Presented By Referred To � Committee: Date Out of Committee By Date RESOLVED, that the appointment by the Mayor of Marylyn. Deneen, 831 Nebraska Avenue Weat, to the Civil Service Commission to serve for a six—year term expiring June 13, 1g82, is hereby approved. COUNC[LMEN Yeas Nays i_ Requested by Department of: _� � in Favor Hunt Levine _�__.Against BY Roedler Sylvester Tedesco SEP 9 197� For A oved by City Attorney Adopted by incil: Date � • Cert� �ed Passe Coun � S etary ., v Appr v by Mayor. Dat F'P��_ Approve Mayor for Submis i C By BY usH�u SEP 1 8 t97� „ - __ _ _ _ � , �.�� ,r�=;: CZTY OF SAINT PAUL � � € � �,�`7�.._-� ;��, ' LE t �”:j OFFICE OF THE GITY C4IINCIL ; ��, l�:- .,1 �ti� _.,..� ;-�' Dd t e ; Sept. 7, 1976 `'�=='-:._:� COf� f'� IT'TEE RE P OR�' TO : Soint Paul Ci�Py Councit , F R 0 N� � C o m m i t t e e o n Rur.,ES aNn PoLicY � Robert Sylvester � chairman, makes the following report an C.F. [] Ordinance ❑ Resolution � Ofiher T t T L E : Please place on Council agenda the recommendation of the Rules and Policy Committee for approval of Mrs. Marylyn�Deneen and Dr. George Berry to - positions on the Civi1 Service Commission. Action taken on a motion by Mr. Tedesco at the meeting held September 7, 1976 was unanimous to approve the . recommendation. CITY HALL SEVENTH FLOOR SAI�TT PAUL, b;tIN;VESOTA 55102 �`_,s�.�;'� . .. . r ► f�� MARYLYN DENEEN 831 lttest Nebraska Avenue Saint Paul , Minnesota 55117 Member of the League of Women Voters for 23 years . Active � in Citizens League which serves metropolitan area. Recipient of the Faye Lyksett Award in May of 1976, the League 's Annual Award. Active in the Minnesota Environmental Control Citizens Association (MECCA) . Served on the Saint Paul School Umbrella Committee. Active with Saint Paul Open School and the United Way. Aug. ' 76 EaD;' .� ' � .- , � z � i ��r � ,�R �,r � ,� ��,�, �' � .. . . i �,�� . Q5a ti� � - ,; . . 1� i .��, G ' � t . c�; a b `�; , , � �', , , � .. , c r' � ,"� �� . } ., � 1(' �1 T �! . +'x� i ! "t: �� . - .1 � . . .. J �r' ' � ro !-�. '� r ♦ 3 5 7� x � . . . .✓ ,. .' � , _. � F � . - � . �'.. :�_ ` �� -�.6 � � P ; �',� ��s ''�;.. _a' ... . ;f � .. ,� � �;�, ^"`b "�"' �.� �� , , �`' . .,'r i�,�� ,a.-' i , '� '��° i r .� 'jr : . �! ' . 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C � �� h � . . : . �: . ' � � .' .\� � t�t �i � �.z� �� L � i. ;r. x �Arr"� �'� � , � ' � �' �� { � � ,� ��r� - . , , . .. .:� , } y,h ��, .�.-.�. .�. �� . � t� ,/:` � �� t, \ � �/�� i: �; �� . •.� ,, .� ,i, ,, . , ; �.� � �� . � ' CITY OF SAINT PAUL :`� , � ., . : � OFFICE OF THE CITY ATTORNEY July 2, 1976 HARRIET LANSING Patrick Roedler, Chairman Energy, Utility and Environment Committee 713 City Hall St. Paul, Minnesota 55102 Re: Application of Northern States Power Company for Increase in its Ste.am Utility Rates Dear Mr. Roedler: On January 9, 1976 the Northern States Power Company petitioned the Council of the City of St. Paul under � . section 7 of its steam utility ordinance, number 15742 for an increase in steam rates. In the petition it ' requested a revenue increase of approximately � $730,000.00 per year based on 1976 projected sales. It stated such increase would result in a rate of return on its investment of approximately 8.5/. Upon your request, I have undertaken a study of the application and the facts connected with it. T am submitting my recommended Findings and Conclusions which are drawn to allow a recommended increase to the Company of $415, 002.00 over the revenue ob- tained by the Company in 1975. This amounts to a 6.2% return on its investment. On February 9, 1976 interim rates were adop�ed by the Company which would allow it additional revenue of $396,000.00 on an annual basis. The rates called for an increase of 22/ over 1975 revenues and my recommendation amounts to 23/ over 1975 revenues. Attached to the recomntendation and Opinion and in- corporated therein are the Exhib its, number 1 through 10 which are enumerated on the next page. �- Very tr 1.s�.-yours, ..._---� THOMAS . ST�,x�.vs City Hall, Saint Paul, Minnesota 55102 Assistan City Attorney 612 298-5121 TJS:vb ...�.,�.:_:_.. ..-�. ..�.w . .� ...��._�:.:_,: _. . .... .....u,.._,_.�... .. _. .. .. .. .. ., . ----. - _ , �_..... . .____ _ ,.._ ... , _ ___ _ --— ._ r • � . . � � Exh ib its Exhibit 1. Copy City Information Request, March 2, 1976. Exhibit 2. Copy NSP Answer, March 24, 1976. Exhibit 3. Copy NSP Answer, April 8, 1976 Exhib it 4. Copy City Information Request, April 16, 1976 Exhibit 5. Copy City Information Request, May 4, 1976 Exhibit 6. Copy NSP Answer, May 14, 1976 Exhi.bit 7. Copy NSP Answer, May 24,. 1976 � Exhib it 8. Allocated Administrative and General Expenses Exhibit 9. Portion of Uniform System of Accounts pertinent to Administrative and General Expenses Exhib it 10. Interest Rates on Certifica�es of Deposits, Commercial State Bank Exhibit 11. First National Bank of Saint Paul, Money Market Quotes Exhibit 12. Copy Letter of City Administrator, dated April 5, 1976 Exhibit 13. Custorners as of September 1, 1975 �. L � • RECOMMENDED FINDINGS OF FACTS AND CONCLUSIONS OF LAW f` Upon the answers to the Information Requests, and other responsible data attached, Thomas J. Stearns makes the following : `FINDINGS OF FACT 1: That the Saint Paul Steam Plant is a wholly owned steam :�r' operation of the Northern States Power Company_ which conducts - its steam business within the City of Saint Paul by virtue � of a franchise issued to it by the City Council. � _ 2 . That such franchise, in effect during 1975, allowed for the adjustment of steam rates by petition pursuant to Section 7 thereof. 3. That on January 9, 1976, the Northern States Power Company did petition the Council of the City of Saint paul to prescribe new and reasonable rates which would increase its � revenue about $730,000 per year based on 1976 projected ' o-- sales proc7ucing a rate of return of approximately 8. 5/ on a � projected net rate base of $3, 540,205. l. , - . � , • 4. That the franchise further prescribed in Section 16 thereof: "The Company' s obligation to provide service � shall be limited to serving steam at existing premises receiving such service and reasonable expansions thereo�, provided that such service can be rendered with steam production facilities presently operated by the Company. Other premises located on steam mains may be served pursuant to rules and regulations of the Company which protect serv�.ce to existing premises and reasonalsle expansions thereof." 5. That the pertinent rules and regulations of Northern States � Power Company in effect during 1975 did provide in connection : with the expansion of steam services within the City of Saint Paul as tollows : "The Company will, at it5 own expense, extend, enlarge, or change its distribution..,or other facilities for supplying steam service when the anticipated revenue from the sale of additional service to result therefrom is such as to justify the expenditure. When the expenditure is not so justifiec7, the extension, enlargement, or change of facilities may nevertheless be made by (1) payment by customer to Company of the portion of the capital expenditure not justified by the annual revenue ,<<(with or without provision for refund of all or part of such payment) , or (2) a guarantee by customer to pay annually to Company a specified minimum charge or service connection charge, or (3) a combination of both methods. " � 2 . 6. That the Saint Paul steam operation employs 16 employees and services a total of 131 customers at the peak of the heating season. 7. That the year of 1975 is a proper test year for a rate regulation determination. 8. That the Operating Revenue of $1,772, 722 for 1975 is the proper amount of operating revenue for rate setting purposes. , 9. That the January filing by the Northern States Power Company included one month in 1975 (December) of estimated revenue and expenses which have been adjusted now to make total actual revenue $1, 772 , 722 and operating expenses $1, 924, 845, with the individual adjustments in actual revenue and expenses as shown on Attachment A, page 1. 10. That the administrative and general expenses of $141,662 include allocated expenses using an allocation factor based � on average of 1974 plant investment and 1974 revenues with respect to the total plant (.0030) and with resnect to the Saint Paul Division ( .0125) . 3. ll. That, in view of the size of the steam operation, the proper allocation factor for such costs should be based on company or division customers, or 131 divided by 1,214, 364, equalling .000108 for the Company and .0004 for the Division; the cost of the allocated adminis- trative and general expenses thereby considered as a proper operating expense for rate setting purposes should be $13,919.13 allocated administrative and general expenses. 12. That, in addition to allocated administrative and � general expenses, there are certain administrative ,. and general expenses directly charged to the steam utility operation from other departments of the , Northern States Power Company of $66, 358.87 plus $15,000.00 regulatory expense, making the total administrative and general _expenses for rate setting purposes $95,278.00. 13. That net plant in service should have deducted from it contributions in aid of construction which total in 1975 r. an amount of $8,450, leaving net operating investment , . 4. � . . at $3, 517, 864.00. 14. That a proper rate of return on the net operating in- vestment of the steam plant is 6.2/, in consideration of the lack of expansion and the requirement that customers provide the capital for extension of its lines or, through purchasing steam, the funds for such extension. 15. That the rate of return of 6.2% applied to the net opera- ting investment of $3, 517, 864.00 provides a fair and reasonable return to be $218, 108.00 or an additional � amount of net revenue of $323,847.00 over the revenue actually received in 1975. 16. That the increas.e in revenue to provide a fair and reasonable return to the net operating investment will occasion an increase in the Federal and S�ate Income taxes of $57, 956.00. 17. That, in addition to the $57, 956.00 of income taxes, the � annual franchise fee of 8.7/ levied by the City on such �. additional revenue of $381, 803� is $33, 199.00, making the ' total increase to which the Company is entitled $415,002 .00. - 5. 18. That such allowable increase of $415,002 .00 amounts to a further increase over the interim rates now in effect to an extent of $19, 002 on an annual basis or an average of $145.05 per customer per year. 19. That such increase amaunts to 23/0 over the revenue actually received in 1975, and 'rates for 1976 and thereafter shall be designed to allow for such additional revenue based on the test year of 1975. 20. That the Company shall commence the collection of the additional rates upon the effective date of the ordinance approving of the same. CONCLUSIONS OF LAW I II 1. That the year 1975 is the appropriate test year in this proceeding. II 2. That the net operating investment of the utility plant � used and useful in conducting its steam operations in �- � �;, Saint Paul on December 31, 1975, as calculated on the , �� , , 6. �, I basis of historical cost depreciated method, was not less than $3, 517,864.00. 3. That the net operating income (loss) of the Company from its steam operation in the City of 5aint Paul in 1975 was - $105.739. 4. That an increase in revenues of $415,002 over the revenues of $1, 772, 722 received from the steam service, or 23� above the revenues of the test year of 1975, is a fair and reasonable amount of increase for the steam operation. 5. That such increase will provide a 6.2/ rate of return on the net operating investment of $3, 517,864.00 as of year- end 197 5. � ' 6. That such a return of 6.2/ is fair and reasonable, con- sidering the static nature of the investment and the source of expansion capital. 7. That the increase hereby recommended shall be made as the � , effective date of the ordinance changing the rates. 7. On the basis of the foregoing Findings of Fact and Conclusions of Law, the undersigned Rate Expert recommends that the City Council grant an increase in rates to provide a 23/ increase in test year revenues from the steam opera- tion of the Northern States Power Company in the City of Saint Paul, and Company shall design rate schedules to be included in the amendment of its franchise to provide such a return. Dated: July 2, T976 � __._�_ . THOMAS EARNS Utilitie ate Expert 647 City Hall and Court House Saint Paul, Minnesota 55102 612 298-5121 ; �� i � 8. OPINION On January 9, 1976 the Northern States Power Company filed an application for the increase of its rates for the steam opera- tion within the City of Saint Paul. It requestecl additional revenue of $730,000 per year based upon projected sales in 1976. It stated that such an increase would produce a rate of return of approximately 8.5/ on a projected net rate base of $3, 540, 205.00. This would amount to a 36% 'increase over anticipated 1976 revenue � from the customers in the City of Saint Paul. However, if taken with respect to actual revenue in 1975, it would approximate 41/ over what was actually received from its customers. Past filings within the City show that Northern States Power Company has made requests with respect to the historical test years from 1966 to date of 41% in 1966, 30% in 1973, 40/ in 1974, and 41% in 1976. Such filings were based upon a stated rate of return of .48/ in 1966, 2 .08/ in 1973, 5% in 1974, and 8.5/ in 1976. . Although the latest request is calculated with respect to a � projected test year, in all its prior rate determinations, the , City of Saint Paul has deemed a historical test year to be 9. • proper. The reason for that determination has been that factual rather than speculative data can be provided through such a method, and with the minimal expansion of the investment and changes in costs, attrition can be controlled by the selection of a year-end approach to rate regulation. On February 9, 1976 the City Council of the City of Saint Paul allowed the Company interim rates calculated by the Company at a rate of return of 4.2/ on its investment under the filing . On an annual basis, they accounted for $396,000 of additional revenue, or an increase of 22/ over 1975 revenues. Because of the complicated cost calculations by the Company, it is appropriate that the burden of proof with respect to its � application, for rate increases be placed upon it. Such burden applies not only to the total amount of increase but also to the various costs which the Company contends were incurred by the steam operation. The burden of groof concept is in line with prevalent legal authority. See: 73 CJS Public Utilities s26, p. 1048: "Increase in rates. In accordance with the rules hereinbefore stated, the burden of proving the reasonableness of a proposed increase in rates is on the utility, � 10. .� . where the existing rate is one fixed by public authority . . . ° In accord: 64 Am Jur 2d Public Utilities s127, pp 653-654. The Rule is repeated in City of Fort Smith vs Southwestern Bell Tel. Co. , Ark , 247 SW 2d 474, 485: " (16, 17) When a utility seeks an increase of existing rates, the burden is, of course on the utility not only to offer all evidence to justify such in- crease, but also to comply with all • reasonable requests of the Commission for . full disclosures. ° . The reason for placing the burden of proof upon a party requesting a change in rates is explained in Dessommes vs Dessommes, Tex CA , 505 SW 2d 673 where the court recognized that the party in particular control of the in- formation to support its request is required to sustain the - proof of the facts which it has available (SW 2d 679) : . "The burden of proof is not necessarily determined by which party happens to be in the position of plaintiff. It may rest on broad considerations of fairness, con- venience and policy . . . One of the recognized rinciples in determining the burden is to place it on the party having peculiar knowledge of the facts to be rp oved . . . " (Underlining added) � 11. I RATE BASE � In its filing of January 9, 1976 Northern States Power Company , provided information regarding net operating investment as of year-end 1975 and average year 1976. I recommend using year- end 1975 for plant in service with an adjustment made for con- tributions in aid of construction. This places the amount of plant or net investment at $3, 517, 864.00. The explanation . of the calculation of plant in service is found on Attachment A (Page 3 of 3) hereto. . II TEST YEAR When a Company files ori the basis of a projected year (the average year 1976) a11 the costs and computation of revenues are estimates. On the other hand, a fiTing on the grounds of actual data (the year-end 1975) can be related directly to actual computations. The value of this method of calculation has been expressed by Chief Justice Robert J. Sheran and Leonard Lindquist in prior hearings. With actual data, there � � is no speculation involved, and adjustments can be made for any extraordinary occurrences during the year's experience. The 12. ', problem with estimated data for a full year is demonstrated in this case with what the Company described as 1975 historical data. When corrected, the revenue in the filing was $862.00 off, and operating expenses $31,685.00 off, because the original information included one month (December, 1975) of estimated calculations. (See: Attachment A, page 1 of 3) If the Company cannot estimate accurately for one month, it is difficult to see how it can do so for a full year. Under the circumstances, I am continuing to recommend a 1975 test year as a proper one. III OPERATING F.XPENSES The Company views the operating costs of the steam plant in three different ways. First, there is a calculation based upon actual cost of operation at the plant itself. Second, there is a calculation based upon allocated portions of . common expenses, and third, there is a calculation based upon costs charged to the plant by other departments of the Company. a The calculation of direct charges appears in the production . costs, the distribution costs, and in administrative and 13. general costs. The Company advised me that time sheets were kept and cost data was maintained on computers. The labor cost totalled $66, 326.00 in the production area, consisting of the compensation of certain employees, who were physically transferred frorn the Highbridge Plant to the steam plant and others devoting their time to specific tasks for the plant. In the distribution area, the plant had one crew for maintenance of the steam mains. When further work was re- quired, crews from the natural gas department were assigned to the steam operation, and their costs were, once more, � treated as direct charges to it. For administrative and general costs, the Company inc.luded - amounts from not only direct charges but also allocated charges of common (gas and electric) costs. As corrected, they came to $141,662 . In calculating the allocated costs, the Company used an allocation factor based on average 1974 steam plant investment and 1974 steam revenues, as compared with total C�mpany plant investment and total revenues. The Con�pany' s method resulted in an allocation factor of .0030 with respect P to total plant costs, and .0125 with respect to common St. ; _ 14. Paul Division costs. I used a different factor for allocatea costs. Following the procedure the City has adopted in past rate determinations, I developed factors based on comparative customers rather than the plant investments and total revenues. This method gave me an allocation factor of .000108 for Company administrative and general common costs . For Division administrative and general common costs, it was .0004. I support my method over the original company method, because � T believe that, in administrative and general costs, the emphasis should be on the relative strain the small steam business places upon the total administration burden of running the company. As defined in the Federal Power Commission' s Uniform System of Accounts, these costs include the following (Section 6, Subd. 920, pp 101-96 to 101-100) _ Administrative and General Salaries , Office 5upplies and Expenses Administrative Expenses Transferred - Credit Outside Services IInployed Property Insurance Injuries and Damages � , IInployee Pensions and Benefits Franchise Requirements 15. � ' . j � � � . � � . Regulatory Commission Expenses Duplicate Charges - Credit Miscellaneous general (Management) Expenses Rents - Maintenance of General Plant Using my factors, the part of the above costs that were cornmon and had to be allocated came to $13, 919.13. With the part that was direct, the total of all these costs equalled $95, 381.I.3 instead of the $141,662 the Company adopted. � IV THE RATE OF RETURN A rate of return on the net utility investment rate base is frequently relatecl to the corporate capital structure of the Company. Ordinarily, the capital structure is composed of three forms of costs ; those of long term bonds, preferred stock, and common stock. The bonds and preferred stock have a fixed annual cost. The common stock has no guaranteed income, but is controlled in regulated industries by the underlyi.ng � precepts expounded by the Minnesota Supreme Court in Re Northwestern Bell Telephone Company, Minn , 216 NW 2d 16. 841, 846, 4 PUR 4th 47, 50: "The process by which rates are fixed is, first, to determine the value of the . company' s property represented by the equity of its stockholders; second, to establish a fair rate of return which will provide earnings to investors comparable to those realized in other businesses which are attended by simi- • lar risks, will allow the company to� : attract new cagital as required, and will maintain the company' s financial _ integrity; and, third, to compute corporate taxes, depreciation reserves, , and other expenses of operating the company. The rates charged sub- scribers are thereupon authorized in an amount which will equal the sum of � the return to investors and the company' s operating expenses. ° An annual cost of capital is determined by taking the senior capital interest or dividend rate and multiplying it by the percentage amount that such capital represents of the total capital issued by the Company. Common equity, representing a form of risk capital, t�ren earns the typ� of return that fulfills the dictates of the rate setting process described by the Minnesota Supreme Court in the Northwestern Bell Telephone case above. The Company requested a rate of return Q_ on the rate base comparable to that obtained from the Minneso�a Public Service Commission for its electrical operation. This T�7. was 8.5/. I received no other reason for such a high rate of return. The steam operation is a whol2y owned operation of the Northern States Power Company. There was no way to compare it with other wholly owned operations. There was no capital structure indigenous to it. In view of the fact that there is no risk to the Company in this small operation ancl no commitment by the Company to provide service to all the customers in St. Paul who request it, I do not think that the risks and uncertainties � are properly comparable to those of the electrical operation. : At the same time, I observed that 6/ - 6.5/ seems to be the amount of interest that certificates of deposits receive from the 1oca1 banks and the amount that treasury notes and bonds bear. See: Exhib its 10 and 11 attached. Accordingly, z recommend the allowance of a 6.2/ rate of return for the Company. In view of the fact that no customers can require an extension of the system to provide steam in his area, I do not believe the Company has borne the burden of proving it should have a higher rate of return at this time. � _ � , lg. V CONCLUSION The recommended findings of fact and conclusions of law that are attached propose a 1975 test year, an adjustment in allocated administrative and general expenses, and a deduction from the rate base of $8,450.00 for contributions in aid of construction. With such adjustments and a 6.2/ rate of return, it appears that additional revenue of $415,002 over the revenue of 1975 is in order. That increase assumes the same number of customers as there were in September of 1975 (Exhibit 13) . and includes a calculated Federal and State Income Tax as well as a franchise fee of 8.7/ upon the actual revenues received. The interim rates, which took effect on February 9, 1976, were calculated on a projected income and return to the in- vestment for the year 1976. 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