operating costs. Reducing Central Hudson's estimate of increased annual revenue requirement (Soe p. 9 of Mr. Walker's statement) by subtracting the amount attributable to increased fuel costs, the likelihood of which we have questioned, produces a figure of about $5.5 million. The conversion should therefore require an average rate increase of at least 5 percent for Central Hudson's customers. For Niagara Mohawk, it appears additional annual revenue requirements would amount to $8.8 million (after subtracting the company's estimated $15.3 million increase in fuel costs), requiring a minimum rate increase on the order of 2 percent. You must assess, the capital investments that these companies estimate the proposed conversions would require -- $25.5 million by Central Hudson, and about $27 million by Niagara Mohawk in the light of their current weakened financial condition and their other investment obligations over the next several years. Both companies make this point in their statements to you. An additional capital requirement of $25.5 million over the next two years would severely strain Central Hudson's financial position. The $25.5 million figure represents about 8 percent of this company's existing capitalization. Central Hudson currently covers its interest obligations 2.7 times; a $25.5 million mortgage debt issuance at 10 percent interest would reduce its pro forma pre-tax coverage, based on actual earnings for the year ending March 31, 1975 to 2.1 times. This is barely above the minimum 2 times coverage required by its first mortgage bond indenture. The company would obviously be risking its AA Moody's bond rating, and its customers would bear the increased interest costs associated with a derating. Although we have not had time to do a full analyses, I believe this impact on customers would be in considerable degree additiva to the required 5 percent rate increase I estimated earlier to permit the company to raise the added capital in ways that would not produce a deterioration in its interest coverage, given the market's current evaluation of its equity, we would have to give it a substantially higher return on equity, and therefore substantially more than the 5 percent rate increase. Incidentally, the company's bond rating is especially important in view of its planned financing of $148 million of construction to meet future demand for power in its territory by 1980. Niagara Mohawk's ability to finance $27 million on reasonable terms over the next two years to comply with a conversion order is also questionable in view of its recent experience. I am painfully aware of this since our Commission had to consider the company's financial situation when granting it a very large rate increase recently. Effective September 11, 1974, we allowed Niagara Mohawk to increase electric rates by $36 million on an annual basis (which was exactly what it asked for). A month later, despite the rate increase, the company was unable to market either preferred stock or thirty year bonds. It had to settle for $125 million of seven year bonds at an interest cost of 12.82 percent. Later in the year, its interest coverage declined to 1.93 times and the price of its common stock was so close to par value below which point sales are legally prohibited that common stock sales were out of the question. It had to postpone a planned $100 million bond issue and a $60 million preferred stock issue until 1975. On February 26, 1975, we granted an additional $43,650,000 rate increase. The company's financial position did not improve substantially afterwards. The market price of its stock was about 60 percent of its book value. In March, it had to reduce the planned $100 million bond issue to $50 million, and the planned $60 million preferred stock issue to $40 million. The rates on the sales of these issues were high 10.2 percent and 10.6 percent respectively. Under these circumstances, any additions to this company's capital investment requirements that are not absolutely necessary to assure reliable service to its customers would obviously be foolish. I realize that these various cost burdens and financing difficulties could in theory be handled with sufficient rate increases. Indeed, if you were uncharitable, you might observe that the companies would not be in their present precarious position with respect to raising new capital if we had been more generous in our rato awards. I call to your attention, however, that wo gave Central Hudson every cent it asked for in its last rate request, that, as I have already observed, we gave 55-305 75 pt. 3 22 Niagara Mohawk almost all it requested and that had we given it all the difference in its present financial situation would be negligible; that Central Hudson's rates, because of the company's heavý:reliance on oil-fired generation, are among the highest in the country, and that the economy is still in a state of grinding stagflation. III Moreover, there is a matter of principle involved here. I suggest that it is wrong, as a matter of national policy, to require the customers of Niagara Mohawk and Central Hudson to carry the entire burdens of the rate increases and capital investments associated with the proposed conversions. Both of the plants in question originally burned coal and were converted to oil at least in part because that was the most efficient way to reduce pollution and comply with the new environmental laws. Now, for reasons of national security, it is highly desirable that these plants should be switched back to coal. The burden of carrying out and paying for a policy whose purpose is to reduce the nation's dependence on oil should fall upon everyone, not just the customers of those companies whose plants have been chosen for conversion. To the extent that converting oil-fired plants to coal reduces the country's dependence on foreign oil, everyone benefits: in terms of improvement in our balance of payments position, in terms of trade in all commodities between the United States and the rest of the world, enhanced national security, and possibly decreases in our aggregate energy costs. The Congress apparently recognized this fact when it passed the Energy Supply and Environmental Coordination Act of 1974. The primary purpose of the Act (Section 1(b)) is "to provide for a means to assist in meeting the essential needs of the United States for fuels...." Unfortunately, the Congress did not provide a means for sharing the costs in a manner consistent with the distribution of the benefits. I suggest that this inequity must be removed if the conversion program is to be fair and acceptable to consumers in the territories of Central Hudson, Niagara Mohawk, and all other utility territories throughout the country that have plants which will be converted. The Federal government should make available the capital necessary to effect the conversions, funded either out of general tax revenues, or by taxes on consumers of energy throughout the country. One can argue that the latter people will benefit to the greatest degree from this program and should bear all of its costs; it would be just as proper, however, to fund the program from general tax revenues, since all consumers will benefit from the improvements in balance of payments and national security that the conversion program would foster. In either event, the transfer of the cost burden of the program from the few to the many will substantially reduce its impact on individual consumers and the financial burdens on the individual utility companies affected. I urge that before issuing any orders to convert these power plants to coal, you bring these considerations to the Congress. The current formulation of the program is unfair to the customers of Central Hudson and Niagara Mohawk. They should not be forced to bear a disproportionately large share of the costs of a program whose purpose is to benefit the entire country. Sincerely, Alfred E. Kahn Mr. Frank Zarb, Administrator Washington, D. C. |