20030506Spanos Direct.pdf

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UTILITIES CO;.'IMISSION
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INSTITUTE REVISED
DEPRECIATION RATES FOR ELECTRICPLANT IN SERVICE
CASE NO. IPC-O3-
IDAHO POWER COMPANY
DIRECT TESTIMONY
JOHN J. SPANOS
Please state your name and business address.
My name is John J. Spanos.My business
address is 207 Senate Avenue, Camp Hill , pennsylvania.
Are you associated with any firm?
I am associated with the firm ofYes.
Gannett Fleming, Inc. - Valuation and Rate Division.
How long have you been associated with
Gannett Fleming, Inc.
I have been associated with the firm since
college graduation in June, 1986.
What is your position with the firm?
I am a Vice President of the Valuation and
Rate Division.
What is your educational background?
I have Bachelor of Science degrees in
Industrial Management and Mathematics from Carnegie-Mellon
University and a Master of Business Administration from York
College.
Do you belong to any professional societies?
I am a member of the Society ofYes.
Depreciation Professionals and the American Gas
Association/Edison Electric Insti tute Industry Accounting
Committee.
Do you hold any special certification as a
depreciation expert?
SPANOS, Di
Idaho Power Company
The Society of DepreciationYes.
Professionals has established national standards for
The Society administers andepreciation professionals.
examination to become certified in this field.I passed the
certification exam in September 1997.
Please outline your experience in the field
of depreciation.
In June , 1986, I was employed by Gannett
Fleming, Inc. as a Depreciation Analyst.During the period
from June, 1986 through December, 1995, I helped prepare
numerous depreciation and original cost studies for utility
companies in various industries.I helped perform
depreciation studies for the following telephone companies:
Uni ted Telephone of Pennsylvania, Uni ted Telephone of New
Jersey and Anchorage Telephone Utility.I helped perform
depreciation studies for the following companies in the
railroad industry: Union Pacific Railroad, Burlington
Northern Railroad and Wisconsin Central Transportation
Corporation.
I helped perform depreciation studies for the
following organizations in the electric industry: Chugach
Electric Association, The Cincinnati Gas and Electric
Company (CG&E), The Union Light, Heat and Power Company
(ULH&P), Northwest Territories Power Corporation and the
Ci ty of Calgary - Electric System.
SPANOS, Di
Idaho Power Company
I helped perform depreciation studies for the
following pipeline companies: TransCanada Pipelines Limited
Trans Mountain Pipe Line Company Ltd., Interprovincial Pipe
Line Inc., Nova Gas Transmission Limited and Lakehead
Pipeline Company.
I helped perform depreciation studies for the
following gas companies: columbia Gas of Pennsylvania,
columbia Gas of Maryland, The Peoples Natural Gas Company,
T. W. Phillips Gas & Oil Company, CG&E, ULH&P, Lawrenceburg
Gas Company and Penn Fuel Gas, Inc.
I helped perform depreciation studies for the
following water companies: Indiana-American Water Company,
Consumers Pennsylvania Water Company and The York Water
Company; and depreciation and original cost studies for
Philadelphia Suburban Water Company and Pennsylvania-
American Water Company.
In each of the above studies, I assembled and
analyzed historical and simulated data, performed field
revlews, developed preliminary estimates of service life and
net salvage, calculated annual depreciation, and prepared
reports for submission to state public utility commissions
or federal regulatory agencies.I performed these studies
under the general direction of William M. Stout, P.
In January, 1996, I was assigned to the
position of Supervisor of Depreciation Studies.In July,
SPANOS, Di
Idaho Power Company
1999, I was promoted to the position of Manager,
Depreciation and Valuation Studies.In December, 2000, I
was promoted to my present position as Vice-President of the
Valuation and Rate Division of Gannett Fleming, Inc. and I
became responsible for conducting all depreciation,
valuation and original cost studies, including the
preparation of final exhibits and responses to data requests
for submission to the appropriate regulatory bodies.
Since January, 1996, I have conducted
depreciation studies similar to those previously listed
including assignments for Hampton Water Works Company, Omaha
Public Power District, Enbridge Pipe Line Company, Inc.,
Columbia Gas of Virginia, Inc., Columbia Gas of Kentucky,
Inc., Virginia Natural Gas Company, National Fuel Gas
Distribution Corporation - New York and Pennsylvania
Divisions, The City of Bethlehem - Bureau of Water, The City
of Coatesville Authority, The City of Lancaster - Bureau of
Water, Peoples Energy Corporation, Public Service Company of
Colorado, Reliant Energy - HLP , Massachusetts-American Water
Company, St. Louis County Water Company, Alliant Energy -
Interstate Power and Light Co., Alliant Energy - Interstate
Power Company, Cinergy Corporation - PSI Energy, Citizens
Gas & Coke Utility, Dominion Hope Gas, Dominion Transmission
Inc., Dominion Virginia Power, Duquesne Light Company,
Enbridge Consumers Gas Company, Missouri-American Water
SPANOS, Di
Idaho Power Company
Company, Northampton, Bucks County Municipal Authority,
Centennial Pipeline Company, Northwest Territories Power
Corporation, NUl Corporation - Virginia Gas Distribution
Company, Elizabethtown Gas Company, PPL Gas Division, South
Carolina Electric and Gas Company, Chugach Electric
Association and B. C. Gas Utility, Ltd.My additional
duties include determining final life and salvage estimates,
conducting field reviews and presenting recommended
depreciation rates to management for their consideration.
Have you submitted testimony to any state
utility commission on the subject of utility plant
depreciation?
I have submitted testimony to theYes.
Pennsylvania Public Utility Commission, the Massachusetts
Department of Telecommunications and Energy, the Public
Utili ties Commission of Ohio, the Public Utili ty Board of
New Jersey, Indiana Public Utili ties Commission, and the
Commonweal th of Kentucky Public Service Commission.
Have you had any additional education
relating to utility plant depreciation?
I have completed the following coursesYes.
conducted by Depreciation Programs, Inc.
: "
Techniques of
Life Analysis,
" "
Techniques of Salvage and Depreciation
Analysis,
" "
Forecasting Life and Salvage,
" "
Modeling and
Life Analysis Using Simulation " and "Managing a Depreciation
SPANOS, Di
Idaho Power Company
I have also completed the "Introduction to PublicStudy. "
Utili ty Accounting " program conducted by the American Gas
Association.
What is the purpose of your testimony in this
proceeding?
I am sponsoring the depreciation study
performed on behalf of Idaho Power Company.
Please define the concept of depreciation.
Depreciation refers to the loss in service
value not restored by current maintenance, incurred in
connection with the consumption or prospective retirement of
utili ty plant in the course of service from causes, which
can be reasonably anticipated or contemplated, against which
the Company is not protected by insurance.Among the causes
to be given consideration are wear and tear, decay, action
of the elements, inadequacy, obsolescence, changes in the
art, changes in demand and the requirements of public
authorities.
Was the depreciation study prepared under
your direction and control?
Yes.
What depreciation procedure did you initially
recommend to the Company?
I recommended the use of the Equal Life Group
Procedure as this procedure best matches the recovery rate
SPANOS, Di
Idaho Power Company
of capital investment wi th the asset service value.
Did Idaho Power request that you prepare an
alternative to the preferred procedure?
Yes, The Company requested I prepare a
depreciation study based on the use of the Average Service
Life Procedure.
Do you continue to believe that the ELG is
the more appropriate method to be used in the Company
depreciation study?
The Equal Life Group Procedure is theYes.
superior method for determining depreciation accrual rates.
In the Equal Life Group procedure, also known as the unit
summation procedure, the property group is subdivided
according to service life.That is, each equal life group
includes that portion of the property which experiences the
life of that specific group.The relative size of each
equal life group is determined from the property s life
The calculated depreciation for thedispersion curve.
property group is the summation of the calculated
depreciation based on the service life of each equal life
unit.
This procedure eliminates the need to base
annual depreciation expense on average lives, inasmuch as
each group has a single life.The full cost of short-lived
items is accrued during their lives, leaving no deferral of
SPANOS, Di
Idaho Power Company
accruals required to be added to the annual cost associated
The depreciation expense for thewi th long-lived items.
property group is the summation of the depreciation expense
based on the service life of each equal life group.
Is Exhibit 1 a true and accurate copy of the
depreciation study performed by you on behalf of Idaho Power
Company using the average service life procedure?
Yes.
Does Exhibi t 1 accurately portray the results
of your depreciation study using the average service life
procedure as of December 31, 2001?
Yes.
In conducting the depreciation study, did you
follow generally accepted practices in the field of
depreciation valuation?
Yes.
Please describe the contents of Exhibit
I recommend changes to the depreciation rates
currently in use as follows:
Recommended %Existinq %Function
07%00%Steam Production Plant
Hydraulic production Plant 1. 99%22%
Other production Plant 77%84%
Transmission plant 18%34%
26%66%Distribution plant
SPANOS, Di
Idaho Power Company
52%11.24%General Plant
The Exhibit is presented in three parts.
Part I, Introduction, presents the scope and basis for the
Part II, Methods Used in Study,depreciation study.
includes descriptions of the basis of the study, the
estimation of survivor curves and net salvage and the
calculation of annual and accrued depreciation.Part III,
Resul ts of Study, presents a description of the results,
summaries of the depreciation calculations, graphs and
tables that relate to the service life and net salvage
analyses, and the detailed depreciation calculations.
The table on pages III-4 through 111-
(Exhibit 1, pages 51 through 58) presents the estimated
survivor curve, the net salvage percent, the original cost
as of December 31, 2001, the book reserve and the calculated
annual depreciation accrual and rate for each account or
The section beginning on page 1II-subaccount.
(Exhibit 1, page 59)presents the results of the retirement
rate and simulated plant balance analyses prepared as the
historical bases for the service life estimates.The
section beginning on page I11-101 (Exhibit 1, page 148)
presents the results of the salvage analysis.The section
beginning on page II1-161 (Exhibit 1, page 208) presents the
depreciation calculations related to surviving original cost
as of December 31, 2001.
SPANOS, Di
Idaho Power Company
Have you prepared a summary of your detailed
recommendations that are described in Exhibit 1?
Yes, pages III-4 through III-11 (Exhibit
pages 51 through 58) set forth the annual depreciation
accrual rates as of December 31, 2001.
Please explain how you performed your
depreciation study.
I used the straight line remaining life
method of depreciation, wi th the average service Ii fe
The annual depreciation is based on a method ofprocedure.
depreciation accounting that seeks to distribute the
unrecovered cost of fixed capital assets over the average
remaining life of the property within a group rather than
recovering the unrecovered costs over the estimated
remaining useful life of each unit, or group of assets.
For General Plant Accounts 391.1, 391.
393.394.395.397.397.397.397.4 and 398, I
used the straight line remaining life method of
The account numbers identified throughout myamortization.
testimony represent those in effect as of December 31, 2001.
The annual amortization is based on amortization accounting
that distributes the unrecovered cost of fixed capital
assets over the remaining amortization period selected for
each account and vintage.
How did you determine the recommended annual
SPANOS, Di
Idaho Power Company
depreciation accrual rates?
I did this in two phases. In the first phase,
I estimated the service life and net salvage characteristics
for each depreciable group, that is, each plant account or
subaccount identified as having similar characteristics.
the second phase, I calculated the composite remaining lives
and annual depreciation accrual rates based on the service
life and net salvage estimates determined in the first
phase.
please describe the first phase of the
depreciation study, in which you estimated the service life
and net salvage characteristics for each depreciable group.
The service life and net salvage study
consisted of compiling historical data from records related
to Idaho Power s plant; analyzing these data to obtain
historical trends of survivor characteristics; obtaining
supplementary information from management and operating
personnel concerning practices and plans as they relate to
plant operations; and interpreting the above data and the
estimates used by other electric utilities to form judgments
of average service life and net salvage characteristics.
What historical data did you analyze for the
purpose of estimating service life characteristics?
I analyzed the Company s accounting entries
that record plant transactions during the period 1946
SPANOS, Di
Idaho Power Company
through 2001.The transactions included additions,
retirements, transfers, sales and the related balances.The
Company records included surviving dollar value by year
installed for each plant account as of December 31, 2001.
What method did you use to analyze this
service life data?
I used the retirement rate method.This is
the most appropriate method when retirement data covering a
long period of time is available , because this method
determines the average rates of retirement actually
experienced by the Company during the period of time covered
by the depreciation study.
Please describe how you used the retirement
rate method to analyze Idaho Power s service life data.
I applied the retirement rate analysis to
each different group of property in the study.For each
property group, I used the retirement rate data to form a
life table which , when plotted, shows an original survivor
curve for that property group.Each original survivor curve
represents the average survivor pattern experienced by the
several vintage groups during the experience band studied.
The survivor patterns do not necessarily describe the life
characteristics of the property group; therefore,
interpretation of the original survivor curves is required
in order to use them as valid considerations in estimating
SPANOS, Di
Idaho Power Company
The Iowa type survl vor curves were used toservice life.
perform these interpretations.
What is an "Iowa-type Survivor Curve " and how
did you use such curves to estimate the service life
characteristics for each property group?
Iowa type curves are a widely-used group of
survivor curves that contain the range of survivor
characteristics usually experienced by utilities and other
industrial companies. The Iowa curves were developed at the
Iowa State College Engineering Experiment Station through an
extensive process of observing and classifying the ages at
which various types of property used by utili ties and other
industrial companies had been retired.
Iowa type curves are used to smooth and
extrapolate original survivor curves determined by the
The Iowa curves and truncated Iowaretirement rate method.
curves were used in this study to describe the forecasted
rates of retirement based on the observed rates of
retirement and the outlook for future retirements.
The estimated survivor curve designations for
each depreciable property group indicate the average service
life, the family wi thin the Iowa system to which the
property group belongs, and the relative height of the mode.
For example, the Iowa 35-R2 indicates an average service
life of thirty-five years; a right-moded, or R, type curve
SPANOS, Di
Idaho Power Company
(the mode occurs after average life for right-moded curves) ;
and a moderate height, 2, for the mode (possible modes for R
type curves range from 1 to 5) .
Did you physically observe Idaho Power
plant and equipment in the field as part of your
depreciation study?
I made field reviews of Idaho PowerYes.
property on August 7, and October 14 through 16, 2002, to
observe representative portions of plant.Field reviews are
conducted to become familiar with Company operations and
obtain an understanding of the function of the plant and
information with respect to the reasons for past retirements
and the expected future causes of retirements.This
knowledge as well as information from other discussions with
management was incorporated in the interpretation and
extrapolation of the statistical analyses.
Please describe how you estimated net salvage
percentages.
I estimated the net salvage percentages by
incorporating the historical data for the period 1954
through 2001 and considered estimates for other electric
companies.
please describe the second phase of the
process that you used in the depreciation study in which you
calculated composite remaining lives and annual depreciation
SPANOS, Di
Idaho Power Company
accrual rates.
After I estimated the service life and net
salvage characteristics for each depreciable property group,
I calculated the annual depreciation accrual rates for each
group, using the straight line remaining life method, and
using remaining lives weighted consistent with the average
service life procedure.
Please describe the straight line remaining
life method of depreciation.
The straight line remaining life method of
depreciation allocates the original cost of the property,
less accumulated depreciation, less future net salvage, in
equal amounts to each year of remaining service life.
Please describe the average service life
procedure.
The average service life procedure is a
method for determining the remaining life annual accrual for
under this procedure, the rateeach vintage property group.
of annual depreciation is based on the average service life
of the group, and this rate is applied to the surviving
The average remaining life isbalances of the group s cost.
deri ved from the area under the survivor curve between the
attained age of the vintage and the maximum age. The future
book accruals (original cost less book reserve) are divided
by the average remaining life of the vintage which is
SPANOS, Di
Idaho Power Company
determined by the average service life.
please describe amortization accounting.
In amortization accounting, units of property
are capitalized in the same manner as they are in
depreciation accounting.Amortization accounting is used
for accounts with a large number of units, but small asset
values, therefore, depreciation accounting is difficult for
these assets because periodic inventories are required to
properly reflect plant in service.Consequently,
retirements are recorded when a vintage is fully amortized
rather than as the units are removed from service.That is,
there is no dispersion of retirement.All units are retired
when the age of the vintage reaches the amortization period.
Each plant account or group of assets is assigned a fixed
period which represents an anticipated life which the asset
will render full benefit.For example, in amortization
accounting, assets that have a 10-year amortization period
will be fully recovered after 10 years of service and taken
off the Company books, but not necessarily removed from
In contrast, assets that are taken out of serviceservice.
before 10 years remain on the books until the amortization
period for that vintage has expired.
Amortization accounting is being implemented
to which plant accounts?
Amortization accounting is only appropriate
SPANOS, Di
Idaho Power Company
These accounts arefor certain General Plant accounts.
391.1, 391.2, 393.0, 394.0, 395.0, 397.1, 397.2, 397.
397.4 and 398.0 which represent only two percent of
depreciable plant.
Please use an example to illustrate how the
annual depreciation accrual rate for a particular group of
property is presented in your depreciation study, Exhibit
I will use Account 362 , Station Equipment, as
an example as it is a typical depreciable group.
The retirement rate method was used to
analyze the survivor characteristics of this property group.
Aged plant accounting data was compiled from 1916 through
2001 and analyzed in periods that best represent the overall
14 . service life of this property.The life tables for the
1996-2001 experience band is presented on pages III-
through 1II-69 (Exhibit 1, pages 114 through 116) of the
The life tables display the retirement andreport.
surviving ratios of the aged plant data exposed to
For example, Page III-retirement by age interval.
(Exhibit 1 , page 114) shows $10,548 retired at age 0.5 with
$28,736,129 exposed to retirement.Consequently, the
retirement ratio is .0004 and the surviving ratio is 0.9996.
This life table, or original survivor curve, is plotted
along with the estimated smooth survivor curve, the 50-01 on
page III-66 (Exhibit 1, page 113) .
SPANOS, Di
Idaho Power Company
My calculation of the annual depreciation
related to the original cost at December 31, 2001, of
utility plant is presented on pages III-287 through III-289
(Exhibit 1, pages 334 through 336) .The calculation is
based on the 50-01 survivor curve, 0% negative net salvage,
the attained age, and the allocated book reserve.The
tabulation sets forth the installation year, the original
cost, calculated accrued depreciation, allocated book
reserve, future accruals, remaining life and annual accrual.
These totals are brought forward to the table on page III-
(Exhibit 1, page 57) .
What date does the company propose that the
new depreciation rates become effective.
I have been advised that the Company desires
a December 1, 2003 ~mplementation date.
Does this conclude your testimony?
Yes.
SPANOS, Di
Idaho Power Company