20180911Kobliha Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF ROCI(Y MOUNTAIN POWER FOR
AUTHORIZATION TO CHANGE
DERECIATION RATES APPLICABLE TO
ELECTRIC PROPERTY
ROCI(Y MOUNTAIN POWER
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CASE NO. PAC.E.18.O8
DIRECT TESTIMONY
OF NIKKI L. KOBLIHA
CASE NO. PAC.E-18-08
SEPTEMBER 11,2018
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Please state your name, business address, and present position with PacifiCorp
dtbla Rocky Mountain Power (the "Company'o).
My name is Nikki L. Kobliha. My business address is 825 NE Multnomah Street, Suite
1900, Portland, Oregon,97232. My present position is Mce President, Chief Financial
Officer and Treasurer for PacifiCorp.
QUALTFICATIONS
Briefly describe your education and professional experience.
I received a Bachelor ol Business Administration with a concentration in Accounting
from the University of Portland in 1994. I became a Certified Public Accountant in
1996. I joined the Company in 1997 and have taken on roles of increasing responsibility
before being appointed Chief Financial Officer in2015.I am responsible for all aspects
of the Company's finance, accounting, income tax, internal audit, Securities and
Exchange Commission reporting, treasury credit risk management, pension and other
investment management activities.
PURPOSE OF TESTIMONY
What is the purpose of your testimony?
My testimony:
. Summarizes the Company's proposal for new depreciation rates and their effect on
annual depreciation expense. The proposed depreciation rates are based on
projected December 31,2020 plant balances. The proposed depreciation rates are
contained in the "Depreciation Study - Calculated Annual Depreciation Accruals
Related to Electric Plant as of December 31, 2017" (the "Depreciation Study"),
which was performed on behalf of the Company by Mr. John J. Spanos of Gannett
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Fleming Valuation and Rate Consultants, LLC. The Depreciation Study is provided
as Exhibit No. 2 to Mr. Spanos's testimony.
. Provides a description of the development of the Depreciation Study and explains
why the depreciation rates resulting from the Depreciation Study are accurate and
reasonable.
. Identifies and discusses the main issues considered during the preparation of the
Depreciation Study. The disposition of these issues was reflected in the data
provided to Mr. Spanos and, in turn, this data formed the basis for the Depreciation
Study and the recommended changes in depreciation rates.
. Introduces the other Company witnesses who will testify in this proceeding and
provides a brief description of their respective subject matter.
. Summarizes the Company's recommendations to the Idaho Public Utilities
Commi ssion ("Commi ssi on").
RESULTS OF THT' DEPRECIATION STUDY
Please explain the depreciation rates for which the Company is seeking
Commission approval of in this proceeding.
The Company seeks Commission approval of the depreciation rates contained in the
Depreciation Study based on December 31, 2020 projected balances as shown in the
Appendix of the Depreciation Study provided in Exhibit No. 2 on page 1393 and as
summarized in Mr. Spanos's testimony.
Please explain how the depreciation rates were developed.
The Company instructed Mr. Spanos to use December 31,2017 historical data as the
basis for his depreciation life study analysis, which he then used to develop
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depreciation rates based on projected December 31, 2020 balances. This process is
further described in Mr. Spanos's testimony. Projecting balances through December 3 1,
2020 aligns with the January I,2021 proposed effective date wherein all anticipated
plant additions have been considered when developing the depreciation rates. The
reasons for using a January 1,2021 effective date are further described in Mr. Steven
R. McDougal' s testimony.
What is the effect on annual depreciation expense if the depreciation rates
recommended by Mr. Spanos are adopted?
The Depreciation Study proposes a system-wide increase of 0.8 percent to the current
composite depreciation rate of 2.74 percent for the Company's electric utility plant,
resulting in a new composite depreciation rate of 3.54 percent as shown in
Mr. McDougal's Exhibit No. 3. Applying the recommended depreciation rates to the
projected December 31., 2020 depreciable plant balances increases total-Company
annual depreciation expense by approximately $228.1 million, compared with the level
of annual depreciation expense developed by application of the currently authorized
depreciation rates to the same plant balances.
Adoption of the proposed depreciation rates increases depreciation expense by
approximately $14.1 million annually on an Idaho basis, based on projected December
31, 2020 plant balances. In addition, the Company has assumed the current excess
reserve amortizations will no longer be necessary, as further described in
Mr. McDougal's testimony. Eliminating this excess reserve amortization increases
Idaho's jurisdictional depreciation expense by $3.2 million. The calculation of the
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Idaho jurisdictional amount under the 2017 Protocol allocation methodology is
described in Mr. McDougal's testimony.
DEPRECIATION STUDY BACKGROUND
Please explain the concept of depreciation.
There are many definitions of depreciation. The following definition was offered by
the American Institute of Certified Public Accountants in its Accounting Research
Bulletin #43:
Depreciation accounting is a system of accounting which aims to
distribute the cost or other basic value of tangible capital assets, less
salvage (if any), over the estimated useful life of the unit (which may
be a group of assets) in a systematic and rational manner. It is a process
of allocation, not of valuation.
The actual payment for an electric utility plant asset occurs in the period in
which it is acquired through purchase or construction. Depreciation accounting spreads
this cost over the useful life of the asset. The fundamental reason for recording
depreciation is to accurately measure a utility's operating costs. Capital investments in
the buildings, plant, and equipment necessary to provide electric service are essentially
a prepaid expense, and annual depreciation allocates that prepaid expense applicable to
each successive accounting period over the service life of the asset. Annual depreciation
is important and essential in informing investors and others of a company's periodic
income. If it is omitted or distorted, a company's periodic income statement is distorted
and would not meet required accounting and reporting standards.
Why is depreciation especially important to an electric utility?
An electric utility's business is capital intensive; that is, it requires a continuous
investment in generation, transmission, and distribution equipment with long lives to
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I provide electric service to customers. The annual depreciation of this equipment is a
major component of expense to the utility. Regulated electric rates are set to allow the
utility the opportunity to fully recover its operating costs, earn a fair return on its
investment, and equitably distribute the cost of the assets to customers using the
facilities. If depreciation rates are established at an unreasonably low or high level for
ratemaking purposes, the utility will not recover its operating costs in the appropriate
period, which will shift either costs or benefits from current customers to future
customers.
Why was it necessary for the Company to conduct the Depreciation Study?
It is sound accounting practice to periodically update depreciation rates to recognize
additions to investment in plant assets and to reflect changes in asset characteristics,
technology, salvage, removal costs, life span estimates, and other factors that impact
depreciation rate calculations. The Company conducts depreciation studies as it deems
appropriate or as mandated by the Commission. The Company's last depreciation study
was conducted approximately five years ago. The Company's current depreciation rates
in Idaho were effective on January 1,2014, based on a 2013 depreciation study. The
Commission order approving the stipulation on depreciation rates in Case No. PAC-E-
13-02 required the Company to file a new depreciation study by November 18, 2018.
Was the Depreciation Study prepared under your direction?
Yes. As Vice President, Chief Financial Officer and Treasureq I am responsible for the
Company's corporate accounting departments and for ensuring compliance with
Company accounting policies and procedures. This includes periodic review and study
of depreciation rates.
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Do you believe that the estimated plant depreciable lives and depreciation rates
developed in the Depreciation Study result in a fair level of depreciation expense
for customers to reimburse the Company for its investment in electric utility plant
and equipment?
Yes, I believe that the Depreciation Study is well supported by the underlying
engineering and accounting data, and that the resulting depreciation rates produce an
annual depreciation expense that is fair and reasonable for both financial reporting and
ratemaking purposes.
What is the basis for your conclusions about the Depreciation Study?
A good depreciation study is the product of sound analytical procedures applied to
accurate, reliable accounting and engineering data. I have reviewed Mr. Spanos's work
in preparing the Depreciation Study and concur with his methodologies and application
of analytical procedures as described in his testimony. With respect to data inputs, the
estimated thermal generation plant economic lives used in the study are those provided
by the Company as explained in Mr. Chad A. Teply's testimony. The estimated wind
and hydro plant economic lives used in the study are those provided by the Company
as explained in Mr. Timothy J. Hemstreet's testimony. Depreciable life estimates for
other types of plant and equipment are based on Mr. Spanos's actuarial analysis of the
data and reviewed for reasonableness by the Company. The accounting data has also
been carefully and consistently prepared. I recommend approval of the rates contained
in the Depreciation Study.
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SIGNIFICANT ISSUES
What are the steam generating facilities-related issues the Company considered in
the Depreciation Study?
The Company considered.
. Recognizingthe impact of incremental capital additions;
. Shortening of the terminal lives for several of the Company's coal-fired units;
. Shifting group depreciation from a plant level to a unit level; and
. Changing the method used to determine decommissioning costs for each steam
generating facility.
Explain the impact of capital additions to the Company's steam generating
facilities.
Additions to property, plant and equipment balances, more commonly referred to as
capital additions, are one of the primary drivers creating the increase to depreciation
expense. Because the Company's steam facilities have set terminal lives, incremental
capital additions must be depreciated over a shorter remaining life. Further explanation
of the need for these additions is included in Mr. Teply's testimony.
Is this a new issue for the steam generating facilities?
No. This issue was identified in previous studies where the Company proposed to
include projected capital additions in the development of the depreciation rates to help
mitigate potential future depreciation increases. The Commission's adoption of
depreciation rates arising out of those studies did not allow recognition of any capital
additions occurring after the implementation of those rates.
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Did the Company consider extending the depreciation lives of the steam
generating facilities to mitigate the increase in depreciation expense?
No. There is uncertainty regarding the period in which steam generating facilities will
be allowed to continue to operate due to existing, evolving or emerging environmental
regulations. Gven this, the Company does not recommend extending the depreciation
lives of the steam generating facilities. Instead, the Company recommends retaining 61
years, as previously approved by the Commission, and in certain cases shortening the
depreciable terminal life of steam generating facilities.
For which steam generating facilities is the Company recommending to shorten
the terminal life?
The Company is recommending shortening the terminal lives of the following steam
generation facilities: Cholla Unit 4, Colstrip Plant, Craig Plant and Jim Bridger Unit I
and Unit 2, as further explained and discussed in Mr. Teply's testimony.
Describe the accounting treatment for the retirement of Naughton Unit 3.
As referenced in Exhibit No. 5 of Mr. Teply's testimony, Naughton Unit 3 is projected
toberetiredin2019,priortotheproposedJanuary 1,2021implementationdateofthis
Depreciation Study. Consistent with the composite or group procedure of depreciationr
the Company applies to all facilities, the cost of the retired unit is included in Naughton
Plant' s depreciation reserve.
Explain the change made to the Company's group method of depreciation for
steam generating facilities.
In the depreciation study performed rn 2013 (the "2013 depreciation study"),
t The group depreciation procedure is discussed in Part V of Exhibit No. 2 to Mr. Spanos's testimorry
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depreciation for steam facilities were grouped by Federal Energy Regulatory
Commission ("FERC") account at a plant level, merging all units within one facility
into one common group. For this Depreciation Study, steam facilities are grouped by
FERC account at a unit level. This shift in methodology allows the Company the
flexibility to retire different units in different years.
Please explain the adjustment made to decommissioning costs for steam
generating facilities.
In the 2013 depreciation study, the Company determined the decommissioning costs at
each facility by applying $40 per kW. In this Depreciation Study, the Company has
provided plant-specific estimates of decommissioning costs, as further explained in Mr.
Teply's testimony.
Has the Company changed any of the significant issues considered for
hydroelectric facilities lives in this Depreciation Study?
No. The 2013 depreciation study based hydroelectric plant terminal lives primarily on
FERC hydroelectric plant license termination dates. For this Depreciation Study, the
Company continued to use the FERC hydroelectric plant license termination dates and
has updated those lives where new licenses have been issued or are estimated to be
reissued within the next five years.
Please discuss the other hydroelectric facilities-related issues you considered in
this Depreciation Study.
The 2013 depreciation study included removal cost for hydroelectric facilities where
the Company has entered into negotiations or settlements to remove those facilities, as
well as a decommissioning reserve for minor hydroelectric facilities that may be
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removed in the near future. The Company has updated this Depreciation Study to reflect
the current projection for small plants where the Company has estimated some
probability of their decommissioning in the near future. This reserye is not intended to
cover the decommissioning or removal of any large facility.
Please discuss the wind generation facilities-related issue in the Depreciation
Study.
The Company will repower many of its wind generation facilities in 2019 and2020.
The estimated balances in the Depreciation Study is projected plant balances as of
December 31,2020, including both the new investment in plant due to the repowering,
as well as the retirement of wind turbine equipment associated with the repowered
assets, with the retirement costs included in the depreciation reserve. The treatment of
retired wind turbine equipment included in the depreciation reserve is consistent with
the composite or group procedure of depreciation the Company applies to all facilities.
With the repowering of the wind generation facilities, the Company is recommending
the terminal lives of wind generation facilities be 30 years from the time of repowering,
as discussed further in Mr. Hemstreet's testimony.
Please discuss natural gas generation facilities-related issue in the Depreciation
Study.
Since the 2013 depreciation study, the Company has continued to experience interim
retirements related to scheduled overhauls on its natural gas facilities. This interim
retirement experience has allowed the Company to provide Mr. Spanos with additional
historical retirement data to aid in his analysis and determination of interim retirement
patterns used in the calculation of the composite remaining lives. Changes to the
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projected future interim retirements have contributed to an increase to depreciation
expense.
Were there any significant changes in the Depreciation Study related to
transmissiono distribution, and general plant assets?
No. The Company provided Mr. Spanos with the historical data for both transmission,
distribution, and general plant assets including removal costs, salvage, and third-party
accommodation payments related to removal costs to use in determining the proposed
depreciation lives and rates. There were no significant changes to the depreciation lives
and rates for these assets, outside of those which would normally result from updating
the study.
Are there any significant changes related to mining facilities in this Study?
Yes, the Utah mine has been removed from the Depreciation Study. Since the 2013
study, the Company's Deer Creek mine was closed and mine reclamation is underway.
INTRODUCTION OF WITNESSES
Who will be testifying on behalf of the Company in support of the Company's
Application?
Four other witnesses will testify on behalf of the Company: Mr. John J. Spanos, Senior
Vice President of Gannett Fleming Valuation and Rate Consultants, LLC, Mr. Steven
R. McDougal, Director of Revenue Requirements, Mr. Chad A. Teply, Senior Vice
President of Strategy and Development, and Mr. Timothy J. Hemstreet, Director of
Renewable Energy Development.
Mr. Spanos presents the Depreciation Study and the depreciation rates for which
the Company is seeking Commission approval. Mr. Spanos describes how the
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Depreciation Study was prepared and discusses the basis for the recommended changes
in depreciation rates.
Mr. McDougal describes the jurisdictional allocation of the Depreciation Study
to Idaho and how the new study complies with and responds to reporting requirements
from the 2013 depreciation study.
Mr. Teply describes the process used by Company's engineers to evaluate the
current approved plant depreciable lives for steam and natural gas generating facilities
and estimates the retirement date for those generating facilities. Mr. Teply demonstrates
that the estimated retirement dates proposed by the Company for generation plants are
reasonable, prudent and are appropriate inputs for Mr. Spanos's depreciation analysis.
Mr. Teply also explains why the amounts the Company proposes to include as terminal
net salvage, or "decommissioning costs," in the calculation of depreciation rates for
generating plants, are reasonable and prudent.
Mr. Hemstreet describes the Company's repowering project for its wind
facilities and the process of determining an appropriate life for the repowered wind
facilities. He also describes the procedure used to estimate the retirement date for the
Company's hydroelectric generating stations. He demonstrates that the estimated
retirement dates proposed by the Company forwind and hydroelectric generation plants
are reasonable, prudent and are appropriate inputs for Mr. Spanos's depreciation
analysis.
SUMMARY OF RECOMMENDATIONS
Please summarize your recommendations to the Commission.
I recommend that the Commission find that the depreciation rates sponsored by Mr.
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Spanos in the Depreciation Study based on projected December 31,2020 plant balances
are fair and reasonable depreciation rates for the Company. I further recommend that
the Commission order the Company to implement these depreciation rates in its
accounts and records effective January 1,2021.
Does this conclude your direct testimony?
Yes.
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