Playing ga with By Laurie Telfair Canyon Now you see it, now you don’t. Whether you see Southwestern Public Service Company’s profitable fuel subsidiary depends on whether you read the Panhandle-based electric company’s annual report or its request for a $21.9 million rate increase from the Texas Public Utility Commission. Judging by the most recent SPS report to stockholders, the company’s executives are fit to bust with pride over the performance of their subsidiary TUCO, Inc. Here’s what they’re telling investors: “TUCO, INC., our wholly-owned fuel subsidiary, contributed significantly to the consolidated earnings picture, producing net income equivalent to 20 cents per share on Southwestern’s average shares outstanding, up seven cents per share from about 13 cents reported in 1976.” But SPS officials left TUCO out of account entirely when they asked the PUC in May for permission to jack up the price of electricity for the company’s Panhandle customers \(65 cities, including Amarillo and Canyon, and surroundsolidated earnings picture” looked in testimony submitted to the commission by SPS secretary-treasurer Adrian Sebastian: “The operating income of TUCO 14 SEPTEMBER 8, 1978 has been eliminated because it is a nonutility subsidiary and thus must not be included both from a jurisdictional standpoint and in an attempt to obtain a clear view of whether or not the Company’s revenues derived from its utility operations have covered its ongoing total costs of service during recent years.” Which is to say: even though TUCO is an integral part of its parent’s business of supplying electricity to consumers, selling 90 percent of its fuel to SPS, TUCO’s income doesn’t count when it comes to deciding how much profit SPS can justifiably extract from its customers. This sort of hocus-pocus used to be a standard feature of dealings between privately owned utility monopolies and local governments trying to regulate them, but the advent of the Public Utility Commission in 1975 was supposed to change all that. City councils across the state happily washed their hands of the rate-setting business, expecting the PUC to be more of a match for the companies’ legal and financial experts. However, the commission’s initial response to the SPS rationale for ignoring TUCO’s earnings in computing a fair rate of return has put that expectation in doubt. Birdnests on the ground The PUC staff, returning what is to date its most favorable report for a utility, agreed that TUCO’s substantial earn ings ought to be disregarded in fixing new rates for the parent company. That assessment didn’t sit well with 26 of the Panhandle communities that get their electric bills, replete with fuel cost adjustments, from SPS, and they hired several rate consultants and an Austin attorney who is a veteran of the wars against utilities to argue the case for treating the fuel subsidiary as part of SPS. What’s at issue is more than just the size of the rate hike this particular utility will receive. “Nonutility” subsidiaries are proliferating in Texas, according to Jack Hopper, an Austin economist and utility watchdog who testified for SPS’s customer cities in July hearings before a PUC examiner. Texas Utilities, the biggest utility company in the state, has one. So does Houston Lighting & Power. Through these subsidiaries, Texas utility monopolies are turning themselves into energy conglomerates with the potential for higher profits, unregulated by the PUC, that will attract investors. And TUCO is a classic example. Since it was formed in 1974, TUCO has been a big moneymaker for its parent company. Wayne Brown, “a Pampa accountant serving as a consultant to the cities in the rate case, reports that TUCO started with a limited amount of plant and equipment, amounting to an investment by SPS of approximately $1 million. Since then, he says, the whollyowned subsidiary has earned $8 million in net income \(after deducting federal inEconomist Hopper calls these earnings “excessive and unreasonable,” backing up his claim with figures showing that TUCO’s rate of return on investment for 1977 was 51.7 percent, and that the rate of return SPS earned on its original investment in the subsidiary was an “even more spectacular” 412 percent. Though the reported earnings of the parent company itself don’t reach these proportions, SPS is no slouch either. The median rate of return for SPS from 1968 to 1977 was 16.8 percent, compared to 11.2 percent for independent electric utilities nationwide. And last year, by Hopper’s calculation, the rate for SPS was 21.7 percent. Accounting consultant Brown spells out the meaning of these numbers for SPS ratepayers. TUCO is a “bonus corporation,” he says; that means that “by complete control maintained by the company, a substantial amount of earnings is transferred to the subsidiary and is not considered or included in the test year revenues in a rate application. The result is that the shareholders of the utility corporation enjoy the added ‘bonus’ of the subsidiary earnings on top of the required earnings of the parent corn
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