20180117Kobliha Supplemental Direct.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.PAC-E-17-07
OF ROCKY MOUNTAIN POWER FOR A )CERTIFICATE OF PUBLIC )SUPPLEMENTAL DIRECT TESTIMONY
CONVENIENCE AND NECESSITY AND )OF NIKKI L.KOBLIHA
BINDING RATEMAKING TREATMENT )FOR NEW WIND AND TRANSMISSION )FACILITIES )
ROCKY MOUNTAIN POWER
CASE NO.PAC-E-17-07
January 2018
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l Q.Please state your name,business address,and present position with PacifiCorp.
2 A.My name is Nikki L.Kobliha and my business address is 825 NE Multnomah Street,
3 Suite 2000,Portland,Oregon 97232.My present position is Vice President,Chief
4 Financial Officer and Treasurer for PacifiCorp.I am testifying on behalf of Rocky
5 Mountain Power ("Company"),a division of PacifiCorp.
6 QUALIFICATIONS
7 Q.Briefly describe your educational and professional background.
8 A.I received a Bachelor of Business Administration with a concentration in Accounting
9 from the University of Portland in 1994.I became a certified public accountant in 1996.
10 I joined the Company in 1997 and have taken on roles of increasing responsibility
11 before being appointed Chief Financial Officer in 2015.
12 Q.What are your responsibilities as Vice President,Chief Financial Officer and
13 Treasurer?
14 A.I am responsible for all aspects of the Company's finance,accounting,income tax,
15 internal audit,Securities and Exchange Commission reporting,treasury,credit risk
16 management,pension,and other investment management activities.
17 PURPOSE AND SUMMARY OF TESTIMONY
18 Q.What is the purpose of your supplemental direct testimonyin this proceeding?
19 A.In my testimony,I support the Company's Application for Certificates of Public
20 Convenience and Necessity and Binding Ratemaking before the Idaho Public Utilities
21 Commission ("Commission")for construction of new wind resources ("Wind
22 Projects")and for construction of the Aeolus-to-Bridger/Anticline line and network
23 upgrades ("Transmission Projects")(collectively,the "Combined Projects").I outline
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l relevant provisions in the federal income tax reform enacted in December 2017.I
2 confirm that there are no changes to current federal income tax law on production tax
3 credits ("PTCs")which provide significant value to the Combined Projects.
4 Q.Please summarize your testimony.
5 A.In December 2017,the U.S.Congress passed,and the President signed,H.R 1 ("Tax
6 Act"),which included significant federal income tax reforms.The passage of the Tax
7 Act resolved any risk that federal tax reform posed to the Combined Projects.The Tax
8 Act sets a new corporate income tax rate,now incorporated in the Company's updated
9 economic analysis presented by Company witness Mr.Rick T.Link.It also confirms
10 the continued availability of PTCs for the Combined Projects,from which much of
ll their economic benefit is derived.The enactment of the Tax Act therefore resolves the
12 concerns on this issue since the impacts are now known and incorporated in theO.13 economic analysis.
14 SUPPLEMENTAL DIRECT TESTIMONY
15 Q.When was the Tax Act enacted?
16 A.The Tax Act was signed into law by the President on December 22,2017.
17 Q.When does the Tax Act become effective?
18 A.The Tax Act generallybecomes effective for years beginning after December 31,2017.
19 Q.Does the Tax Act reduce the Company's federal income tax rate?
20 A.Yes,the Tax Act reduces the Company's federal income tax rate from 35 percent to
21 21 percent.
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l Q.Is there a difference between the Company's federal statutoryincome tax rate and
2 effective tax rate under the Tax Act?
3 A.No.
4 Q.Does the reduction in the corporate tax rate directly affect the value of PTCs?
5 A.No.The reduction in the corporate income tax rate does not directly impact the value
6 of the PTCs.It does,however,impact the tax gross-up value of the PTCs to customers.
7 Q.Does the Tax Act change any aspect of federal income tax law related to PTCs?
8 A.No.There were no modifications to the federal income tax code or any Internal
9 Revenue Service ("IRS")guidance relating to the PTCs.
10 Q.Please describe how a PTC is generated.
11 A.The Internal Revenue Code ("IRC")provides that a wind facility will generate a PTC
l2 equal to an inflation-adjusted 1.5 cents per kilowatt hour of electricity that is produced
13 and sold to a third-party for a period of 10 years beginning on the date the facility is
14 placed in service for income tax purposes.'The current inflation-adjusted PTC rate for
15 electricity generated in 2017 is 2.4 cents per kilowatt hour.2
16 Q.Under current income tax law,the PTC is being phased out.Please explain the
17 phase-out process.
18 A.The Protecting Americans from Tax Hikes Act of 20l5 ("PATH Act")was signed into
19 law on December 18,2015,and retroactively extended and phased out the PTC for
20 wind facilities that began construction before January 1,2020.For a wind facility that
21 began construction before January 1,2017,the credit generated by the wind facility is
22 a full 100 percent ofthe PTC.For a wind facility that begins construction in 2017,the
O I IRC section 45(a).
2 IRS Notice 2017-33.
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l credit is reduced by 20 percent (i.e.,the facility receives 80 percent of the full PTC).
2 For a wind facility that begins construction in 2018,the credit is reduced by 40 percent
3 (i.e.,the facility receives 60 percent of the full PTC).For a wind facility that begins
4 construction in 2019,the credit is reduced by 60 percent (i.e.,the facility receives 40
5 percent of the full PTC).3 No PTC is available for a wind facility that begins
6 construction after December 31,20l9.
7 Q.When does "construction"begin for a wind facility?
8 A.IRS Notice 2013-29 provides a taxpayer with two methods to establish that
9 construction of a wind facility has begun.First,the taxpayer can begin physical work
10 of a significant nature.Physical work can include both on-site and off-site work,either
11 performed by the taxpayer or by another person subject to a binding contract.
12 Second,a taxpayer can pay or incur five percent or more of the eventual total
13 cost of the qualified wind facility."This is known as the five-percent safe harbor.The
14 Company is using the five-percent safe-harbor method to qualify for 100 percent of the
15 PTC for the benchmark resource selected in the final shortlist.In addition to the
16 requirement that the wind facility begin construction before January 1,2017,to qualify
17 for 100 percent of the PTC,the wind facility must also satisfy the continuity-of-
18 construction requirement
19 Q.Please explain the continuity-of-constructionrequirement.
20 A.The wind facility must be under continuous construction from the time physical
21 construction begins until the wind facility is placed in service."Whether a taxpayer
3 IRC section 42(b)(5).
4 IRS Notice 2013-29 Section 5.01.
5 IRS Notice 2016-31 Section 4.
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l satisfies the continuity-of-construction requirement is determined based on the relevant
2 facts and circumstances surrounding the timing of the physical work to be performed
3 on the wind facility.6 The IRS has issued limited guidance on what facts and
4 circumstances might be considered to meet this requirement.For example,the IRS has
5 provided a list of non-exclusive "excusable"disruptions and delays deemed to be
6 beyond the control of the taxpayer and therefore acceptable reasons that would support
7 the taxpayer's contention that it has maintained a continuous program of construction.
8 These acceptable delays include weather-caused delays,permit delays outside of the
9 control of the taxpayer,and supply shortages,among others.'
10 The IRS has,however,also created a continuity-of-construction safe harbor (the
ll "calendar safe harbor")."If a taxpayer places a facility in service by end of a calendar
12 year that is not more than four calendar years after the calendar year during which
13 construction of the wind facility began,the facility will satisfy the continuity-of-
14 construction requirement by virtue of the calendar safe harbor.Accordingly,if
15 construction of a wind facility began in December 2016,the facility will meet the
16 continuity-of-construction requirement as long as the facility is placed in service by
17 December 31,2020.
18 The Company plans to have the Wind Projects placed in service by December
19 31,2020,and therefore,the Company will qualify for 100 percent of the PTCs under
20 the four-year calendar safe harbor.
6 IRS Notice 2016-31 Section 4.02(1).
7 IRS Notice 2016-31 Section 4.06(2).
O 6 IRS Notice 2016-31;IRS Notice 2017-4.
IRS Notice 2016-31 Section 3.
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l Q.If the Transmission Projects are not completed by December 31,2020,can the
2 Wind Projects still qualify for the PTCs?
3 A.Yes.As discussed by Company witness Mr.Rick A.Vail in his rebuttal testimony,the
4 Wind Projects would still qualify if the Transmission Projects have facilitated
5 synchronization to the transmission grid and commissioning of individual wind
6 turbines in accordance with IRS guidance.In Private Letter Ruling ("PLR")20033403,
7 the IRS ruled that a wind turbine has been placed in service for the purposes of PTC
8 qualification if:(1)the turbine has all necessary operating permits and licenses;(2)the
9 turbine has been synchronized to the power grid;(3)the critical tests for the
10 components of the wind turbine have been completed;(4)the wind turbine has been
ll placed in the control of the taxpayer by the contractor;(5)the taxpayer has sold
12 electricity that has been produced by the wind turbine;and (6)the wind turbine is
13 putting power onto the grid on a regular basis.This IRS guidance applies even if the
14 wind project is not producing transmission-level electricity due to a delay in a
15 transmission project and has not been deemed to be under commercial operation by a
16 regulatory commission.A PLR may not be relied on as precedent by other taxpayers;
17 however,it is indicative of the IRS position on certain matters.
18 Q.Are there any other provisions of the Tax Act that affect the Combined Projects?
19 A.Yes.There are two other impacts associated with the reduction in the corporate income
20 tax rate.A reduction to the corporate income tax rate reduces the tax gross-up,lowering
21 the Company's overall rate of return on the Combined Projects.The lower tax rate also
22 reduces the accumulated deferred income tax liability related to the use of
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l Modified Accelerated Cost Recovery System ("MACRS")accelerated depreciation for
2 the five-yeartax life ofthe Wind Projects,which will increase the net rate-base balance.
3 Bonus depreciation rules have also changed.Under prior income tax law,wind
4 projects placed in service in 20l9 by the Company would have received 30-percent
5 bonus depreciation.Wind projects placed in service in 2020 would have received no
6 bonus depreciation.The new tax reform legislation generally provides that regulated
7 utilities such as the Company will not be allowed to use bonus depreciation on projects
8 placed in service after September 27,2017.The Wind Projects,however,remain
9 subject to the five-year MACRS accelerated depreciation.The impacts ofthe reduction
10 in the corporate income tax rate and the elimination of bonus deprecation for regulated
11 utilities has been fully reflected in the updated economic analysis prepared by Mr.Link.
12 Q.Does the reduction in the Company's federal income tax rate make the CombinedO13Projectsuneconomic?
14 A.No,as demonstrated in Mr.Link's updated economic analysis of the Combined
15 Projects.
16 Q.At this point,do you foresee any future tax reform legislation that will materially
17 impact the economics of the Combined Projects?
18 A.No.
19 Q.Does this conclude your supplemental direct testimony?
20 A.Yes.
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