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<br />LACK OF SYSTEMATIC AND LOGICAL <br />METHOD OF RECOVERING CAPITAL <br />COSTS AND APPROPRIATE O&M AND INTEREST <br /> <br />Aside from the exceptions noted in this report on the methodology of <br /> <br />preparing the PRS, we have other questions about the viability of the <br /> <br />PRS as a means of determining current power revenue requirements and <br /> <br />demonstrating payout against a schedule. <br /> <br />The law establishes sound business practices as one of the criteria <br /> <br />for establishment of power rates. Our report of January 31, 1978, <br /> <br />on "Review of the Central Valley Project" explores in some detail our <br /> <br />questions on this matter and why we believe that sound business prac- <br /> <br />tices have not been given adequate attention (partially' because of <br /> <br />PRS philosphies of the past). While the specific situations of the <br /> <br />Central Valley Project (CVP) are not comparable to Pick-Sloan, the <br /> <br />thrust of the CVP report relating to development of a systematic and <br /> <br />logical method of recovering' capital costs, O&M, and interest applies <br /> <br />to any project the magnitude of CVP or Pick-Sloan. We noted in the <br /> <br />CVP report that the PRS does not include a disciplined method of <br /> <br />incorporating annual recovery of capital costs in the power rate base; <br /> <br />i.e., the capital investment in power facilities is depreciated annually <br /> <br />in the accounts, but that depreciation is not included as an annual cost <br /> <br />in the PRS. Also,. irrigation assistance is not amortized annually in <br /> <br />the accounts nor reflected as an annual cost in the PRS. <br /> <br />We think that financial management geared to the current PRS is totally <br /> <br />inadequate for multibillion dollar investments such as those in Pick-Sloan. <br /> <br />28 <br /> <br />