20180911Spanos Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
rN TrrE MATTER OF THE APPLICATION ) CASE NO. PAC-E-18-08
oF ROCKY MOUNTATN POWERFOR )
AUTHORIZATION TO CHANGE ) DIRECT TESTIMONY
DERECIATION RATES APPLICABLE TO ) OF JOHN J. SPANOS
ELECTRIC PROPERTY )
)
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ROCI(Y MOUNTAIN POWER
CASE NO. PAC-E-18-08
SEPTEMBER 11,2018
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Please state your name and address.
My name is John J. Spanos. My business address is 207 Senate Avenue, Camp Hill,
Pennsylvania l70ll. I am a Senior Vce President at Gannett Fleming Valuation and
Rate Consultants, LLC ("Gannett Fleming").
How long have you been associated with Gannett Fleming?
I have been associated with the firm since college graduation in June 1986.
On whose behalf are you testifying in this case?
I am testifying on behalf of PacifiCorp diblaRocky Mountain Power (the "Company").
QUALIFICATIONS
Please state your qualifications.
Please refer to Exhibit No. 1 for my qualifications.
PURPOSE OF TESTIMONY
What is the purpose of your testimony?
I sponsor and support the depreciation study titled, "Depreciation Study - Calculated
Annual Depreciation Accruals Related to Electric Plant as of December 31, 2017" (the
"Depreciation Study"), performed for the Company, attached as Exhibit No. 2. The
Depreciation Study sets forth the calculated annual depreciation accrual rates by
account as of December 31,2017. Based on the Depreciation Study, I recommend
approval of the depreciation rates using the projected December 31, 2020 plantand
reserve balances. The proposed rates appropriately reflect the rates at which the
Company's assets should be depreciated over their useful lives and are based on the
most commonly used methods and procedures for determining depreciation rates.
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I DEPRECIATION STUDY
Please define the concept of depreciation.
Depreciation refers to the loss in service value that is not restored by current
maintenance, incurred in connection with the consumption or prospective retirement of
utility plant in the course of service from causes which are known to be in current
operation, against which the Company is not protected by insurance. Among the causes
to consider are wear and tear, decay, action of the elements, inadequacy, obsolescence,
changes in the art, changes in demand, and the requirements of public authorities.
Did you prepare the Depreciation Study filed by the Company in this proceeding?
Yes.
Are there guidelines in the preparation of depreciation studies?
Yes. In preparing the Depreciation Study,I followed generally accepted practices in the
field of depreciation valuation.
How do the methods and procedures of this Depreciation Study compare to those
used historically?
The methods and procedures of this study are the same as those used in past studies of
this Company, as well as others before this Commission. Depreciation rates are
determined based on the average service life procedure and the remaining life method.
Please describe the contents of the Depreciation Study.
The Depreciation Study includes nine parts: Part I, Introduction, presents the scope and
basis for the Depreciation Study. Part II, Estimation of Survivor Curves, describes the
methodology of estimating survivor curves. Parts III and IV set forth the analysis used
for determining service life and net salvage estimates. Part Y Calculation of Annual
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and Accrued Depreciation, includes the concepts of depreciation and amortization
using the remaining life. Part VI, Results of Study, describes the results of my analysis
and a summary of the depreciation calculations. Parts VII, VIII, and IX include graphs
and tables that relate to the service life and net salvage analyses, and the detailed
depreciation calculations by account. The section beginning on page VIII-2 presents
the results of the salvage analysis. The section beginning on page IX-2 presents the
depreciation calculations related to surviving original cost as of December 31, 2017 .
The table on pages VI-4 through VI-21 of the Depreciation Study presents the
estimated survivor curve, the net salvage percent, the original cost as of
December 31,2017, the book depreciation reserve, and the calculated annual
depreciation accrual and rate for each account or sub-account. The section beginning
on page VII-? presents the results of the retirement rate and simulated plant analyses
prepared as the historical basis for the service life estimates. Finally, the section in the
Appendix presents the recommended depreciation rates and parameters as of
December 31,2020.
Please explain how you performed your Depreciation Study.
I used the straight line remaining life method of depreciation, with the average service
life procedure. Under this methodology, the annual depreciation is determined by
distributing the unrecovered cost of fixed capital assets over the estimated remaining
useful life of each unit, or group of assets, in a systematic and reasonable manner.
In your analysis, how did you determine the recommended annual depreciation
accrual rates?
I did this in two phases. First, I estimated the service life and net salvage characteristics
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1 for each depreciable group, that is, each plant account or sub-account identified as
having similar characteristics. Second, 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 the Company'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 to estimate service life characteristics?
I analyzed the Company's accounting entries that recorded plant transactions during
the 1937 through 2017 period; however, the earliest year of data varied by account. The
transactions included additions, retirements, transfers, sales, and the related balances.
What method did you use to analyze the service life data?
I used the retirement rate method for most plant accounts. 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.
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Please describe how you used the retirement rate method to analyze the
Company's service life data.
I applied the retirement rate analysis to each different group of property in the study.
For each properly 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
service life. The Iowa-type survivor curves were used to perform these interpretations.
Did you use any other methods to analyze service life data?
Yes. For most distribution assets in Utah and Idaho, the Company accounting records
do not include the vintage of each transaction. Therefore, I used the simulated plant
record method to determine life characteristics.
What are "Iowa-type survivor curveso' and how did you use them to estimate the
service life characteristics for each property group?
They 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 utilities and other industrial companies had been retired.
Iowa-type curyes are used to smooth and extrapolate original survivor curves
determined by the retirement rate method. I used the Iowa curves and truncated Iowa
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curves 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
indicates the average service life, the family within the Iowa system to which the
property group belongs, and the relative height of the mode. For example, the Iowa 60-
R2 indicates an average service life of 60 years; a right-moded, or R, type curve (the
mode occurs after average life for right-moded curves); and a relatively low height, 2,
for the mode (possible modes for R type curves range from I to 5).
What approach did you use to estimate the lives of significant facilities structures
such as production plants?
I used the life span technique to estimate the lives of significant facilities for which
concurrent retirement of the entire facility is anticipated. In this technique, I describe
the survivor characteristics of such facilities by using interim survivor curves and
estimated probable retirement dates.
The interim survivor curves describe the rate of retirement related to the
replacement of elements of the facility. For example, for a building, the retirements of
its elements include plumbing, heating, doors, windows, roofs, etc., that occur during
the life of the facility. The probable retirement date provides the rate of final retirement
for each year of installation for the facility by truncating the interim survivor curve for
each installation year at its attained age at the date of probable retirement. The use of
interim survivor curves truncated at the date of probable retirement provides a
consistent method for estimating the lives of the several years of installation for a
particular facility inasmuch as a single concurrent retirement for all years of installation
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I will occur when it is retired.
IIas your firm, Gannett Fleming, used this approach in other proceedings?
Yes, we have used the life span technique in perlorming depreciation studies presented
to and accepted by many public utility commissions across the United States and
Canada. This technique was applied to develop the current depreciation rates being
used by the Company in the same manner recommended in this case.
What are "probable retirement years" and what was your bases for estimating
them for each facility?
Probable retirement years are life spans for each facility, and my estimates therefore
are based on the life assessment study, consideration of the age, use, size, nature of
construction, management outlook and typical life spans experienced and used by other
electric utilities for similar facilities, and judgment. Most of the life spans result in
probable retirement years that are many years in the future. As a result, the retirements
of these facilities are not yet subject to specific management plans. Such plans would
be premature. At the appropriate time, detailed studies of the economics of
rehabilitation and continued use or retirement of the structure will be performed and
the results incorporated in the estimation of the facility's life span.
Have you physically observed the Company's plant and equipment in
Depreciation Studies you've performed for the Company in the past?
Yes. I made field reviews of the Company's property as part of a past study in May and
June 2072 to observe representative portions of plant and equipment. I conduct field
reviews to become familiar with Company operations, understand the function of the
plant, and gather information on the reasons for past retirements and the expected
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future causes of retirements. I incorporated this knowledge as well as information from
other discussions with management 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 1992 through 2017 and considered estimates for other electric companies. The
net salvage percentages are based on a combination of statistical analyses and informed
judgment. The statistical analyses consider the cost of removal and gross salvage ratios
to the associated retirements during the 26-year period. I also measured the trends of
these data based on three-year moving averages and the most recent five-year
indications.
Were the net salvage percentages for generation facilities based on the same
analyses?
Yes, for the interim analyses. The net salvage percentages for generation facilities were
based on two components-the interim net salvage percentage and the final net salvage
percentage. The interim net salvage percentage is determined based on the historical
indications from the 1992-2017 period, of the cost of removal and gross salvage
amounts as a percentage of the associated plant retired. I determined the final net
salvage or dismantlement component based on the assets anticipated to be retired at the
concurrent date of final retirement.
Have you included a dismantlement component into the overall recovery of
generation facilities?
Yes. A dismantlement component was included in the net salvage percentage for steam
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1 and other production facilities. There is a separate decommissioning reserve for small
hydro facilities which are soon to be retired, as the dismantlement component for hydro
facilities in the study is zero.
Can you explain how the dismantlement component is included in the
Depreciation Study?
Yes. The dismantlement component is part of the overall net salvage for each location
within the production assets. Based on studies for other utilities and the Company's
cost estimates, I determined that the dismantlement or decommissioning costs for steam
production and other production facilities is best calculated on a $/I(W factor based on
surviving plant at final retirement. These amounts at a location basis are added to the
interim net salvage percentage ofthe assets anticipated to be retired on an interim basis
to produce the weighted net salvage percentage for each location. The detailed
calculation for each location is set forth on pages VIII-2 through VIII-l2 of
Exhibit No. 2.
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
accrual rates.
After estimating 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 Iine remaining life method of depreciation.
The straight line remaining life method of depreciation allocates the original cost of the
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property, less accumulated depreciation, less future net salvage, in equal amounts to
each year of remaining service life.
Please illustrate how the annual depreciation accrual rate for a particular group
of property is presented in your Depreciation Study.
I will use Account 353, Station Equipment, as an example because it is one of the largest
depreciable mass accounts and represents approximately nine percent of depreciable
plant.
I used the retirement rate method to analyze the survivor characteristics of this
property group. I compiled aged plant accounting data from 1924 through 2017 and
analyzed it in periods thatbest represent the overall service life of this property. The
life tables for the T924-2017 and 1988-2017 experience bands are presented on pages
VII-95 through YII-97 of the Depreciation Study. The life table displays the retirement
and surviving ratios of the aged plant data exposed to retirement by age interval. For
example, page VII-95 shows $2,133,875 retired at age 0.5 with $2,347,756,170
exposed to retirement. Consequently, the retirement ratio is 0.0009 and the surviving
ratio is 0.9991. These life tables, or original survivor curves, are plotted along with the
estimated smooth survivor curve, the 58-50 on page YII-94.
The net salvage percent is presented on pages VIII-49 and VIII-50. The
percentage is based on the result of annual gross salvage minus the cost to remove plant
assets as compared to the original cost of plant retired during the 1992 through 2017
period. The 26-year period experienced $20,503,595 ($8,621,261-$29,124,856) in net
salvage for $179,971,886 plant retired. The result is negative net salvage of eleven
percent ($20,503,5951$179,971,886). Although recent trends show more negative
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indications, I determined that, based on industry ranges and Company expectations,
negative ten percent was the most appropriate estimate.
My calculation of the annual depreciation related to the original cost at
December 31,2017, of electric plant is presented on pages IX-299 through IX-301. The
calculation is based on the 58-50 survivor curve, ten percent 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 VI-18.
CONCLUSION
Please summarize the results of the Depreciation Study.
The depreciation rates as of December 31, 2017 appropriately reflect the rates at which
the values of the Company's assets have been consumed over their useful lives to date.
These rates are based on the most commonly used methods and procedures for
determining depreciation rates. The life and salvage parameters are based on widely
used techniques and the depreciation rates are based on the average service life
procedure and remaining life method. Therefore, the depreciation rates set forth on
pages VI-4 through VI-21 of Exhibit No. 2 represent the calculated rates as of
December 31,2017 .
Does your Depreciation Study recommend new depreciation rates based on
December 31,2020 plant and reserve balances?
Yes. The depreciation accrual rates set forth in the Appendix to Exhibit No. 2 represent
the rates most applicable in this proceeding. These rates use all of the same methods
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1 and procedures described in the Depreciation Study but apply the parameters to the
projected December 31,2020 plant and reserve balances. The projected plant and book
reserve balances as of December 31, 2020 properly established the most reasonable
rate base when the rates will go into effect. Thus, I recommend approval of the
depreciation accrual rates in the Appendix as being just and reasonable and in the public
interest.
Does this conclude your direct testimony?
Yes.
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