20090123DeFelice Direct.pdf

RECEI\/ fJ
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL OF
REGULATORY & GOVERNENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
20ng Jf~,N 23 Pl1 12: 43
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF AVISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN THE
STATE OF IDAHO
CASE NO. AVU-E-09-01
CASE NO. AVU-G-09-01
DIRECT TESTIMONY
OF
DAVE B. DEFELICE
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
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I. INTRODUCTION
Q.Please state your name, employer and business
3 address.
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A.My name is Dave B. DeFelice.I am employed by
Avista Corporation as a Senior Business Analyst.My
6 business address is 1411 East Mission, Spokane, Washington.
7 Q.Please briefly describe' your education background
8 and professional experience.
9 A.I graduated from Eastern Washington University in
10 June of 1983 with a Bachelor of Arts Degree in Business
11 Administration majoring in Accounting.I have served in
12 various positions wi thin the Company, including Analyst
13 positions in the Finance Department (Rates Section and
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Plant Accounting)and in the Marketing/Operations
Departments, as well.In 1999, I accepted the Senior
16 Business Analyst position that focuses on economic analysis
17 of various proj ect proposals as well as evaluations and
18 recommendations pertaining to business policies and
19 practices.
20 Q.As a Senior Business Analyst, what are your
21 responsibilities?
22 A.As a Senior Business Analyst I am involved in
23 financial analysis of numerous proj ects wi thin various
24 departments such as Engineering,Operations,
25 Marketing/Sales and Finance.
DeFelice, Di 1
Avista Corporation
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Q.What is the scope of your testimony?
A.My testimony and exhibits in this proceeding will
3 cover the Company's proposed regulatory treatment of
4 capital investments in utility plant through 2009.
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Q.Are you sponsoring any exhibits?
A.Yes.I am sponsoring Exhibit No.9, Schedule 1
7 (Capi tal Expendi tures) , and Schedule 2 (2009 Capital
8 Additions Detail), which were prepared under my direction.
9 II. CAPITAL INVSTMENT RECOVERY
10 Q.What does the Company' s request for rate relief
11 include regarding new investment in utility plant to serve
12 customers?
13 A.In this filing, we are proposing to include in
14 retail rates the costs associated with utility plant that
15 is in-service, and will be used to provide energy service
16 to our customers during the pro forma rate year.This is
17 consistent with prior ratemaking practice in the State of
18 Idaho. The methodology that we use is consistent with the
19 methodology we used in the last general rate cases filed in
20 2008, Case Nos. AVU-E-08-01 and AVU-G-08-01.
21 The utility plant investment that we have included in
22 this filing represents utility plant that will be "used and
23 useful" in providing service to customers during the
24 approximate period that new retail rates from this filing
25 will be in effect.The costs associated with the
DeFelice, Di 2
Avista Corporation
1 investment will be "known and measurable," and finally,
2 including the costs associated with this investment in
3 retail rates provides a proper "matching" of revenues from
4 customers with the costs associated with providing service
5 to customers (including the cost of utility plant to serve
6 cus tomers) .
7 In the IPUC's Order No. 29602, in Case Nos. AVU-E-04-1
8 and AVU-G-04-1, dated October 8, 2004, the Commission
9 stated, at page 10, that:
10 "Once a test year is selected, adjustments are11 made to test year accounts and rate base to
12 reflect known and measurable changes so that test13 year totals accurately reflect anticipated14 amounts for the future period when rates will be
15 in effect. The Idaho Supreme Court has described16 "rate base" as "the utility's capital investment17 amount." Industrial Customers of Idaho Power v.
18 Idaho PUC 134 Idaho 285, 291, 1 P.3d 786, 79219 (2000). Adjustments to test year accounts20 generally fall into three categories: 1)21 normalizing adjustments made for unusual22 occurrences, like one-time events or extreme23 weather conditions, so they do not unduly affect
24 the test year i 2) annualizing adjustments made25 for events that occurred at some point in the26 test year to average their effect as if they had27 been in existence during the entire year ¡and 3)
28 known and measurable adjustments made to include29 events that occur outside the test year but will30 continue in the future to affect Company income31 and expenses."
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33 If utility plant investment that is being used to
34 serve customers is not reflected in retail rates then the
35 retail rates will not be "just,reasonable,and
36 sufficient," i.e., it would not be just or reasonable for
37 customers to receive the benefit provided by the utility
DeFelice, Di 3
Avista Corporation
1 investment without paying for it, and the retail rates
2 would not provide revenues "sufficient" to provide recovery
3 of the costs associated with providing service to
4 customers.
5 Q.Is the Company's application of these ratemking
6 principles in this filing consistent with prior general
7 rate cases?
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A.Yes.In prior cases, the obj ecti ve has been the
same to include in retail rates the investment, or rate
10 base, that is providing service to customers, and ensure
11 that there is a proper matching of revenues and expenses
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during the period that rates are in effect.In Case Nos.
AVU-E-08-01 and AVU-G-08-01,the Commission approved
14 including capital investment through December 31, 2008, for
15 rates that were effective October 1, 2008.
16 Q.How does new investment in utility plant change
17 rate base over time for ratemking purposes?
18 A.Historically, the annual dollars spent by the
19 Company on new utility plant were generally relatively
20 close to the level of depreciation expense, with the
21 exception of years where the Company invested in major new
22 utility projects. i I will use an example to illustrate, in
i Recognizing that a portion of the costs associated with capital additions are offset by additional
revenues.
DeFelice, Di 4
Avista Corporation
1 general terms, how new investment in utility plant changes
2 rate base over time. Let's assume that the Company i s rate
3 base (adjusted net plant in service used to serve
4 customers) at the beginning of Year 1 is $1.5 billion.
5 Also assume that depreciation expense in Year 1 is $80
6 million, and the Company's new investment in utility plant
7 in Year 1 is also $80 million.During Year 1, rate base
8 increased by $80 million (new investment), and decreased by
9 $80 million (depreciation), and ended up at the same level
10 of $1.5 billion at the end of the year. In this simplified
11 example, the Company i s rate base is $1.5 billion, both at
12 the beginning of Year 1, and at the end of Year 1.
13 For ratemaking purposes, the $1.5 billion of rate base
14 is representative of the level of plant investment used to
15 serve customers, both at the beginning of the year and at
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the end of the year.Over time, if depreciation expense
continues to be approxima tely equal to new plant
18 investment, rate base would continue at a relatively
19 constant $1.5 billion. Under these circumstances, the use
20 of the $1.5 billion rate base amount from a prior year,
21 i . e., a historical test year, would be adequate for setting
22 rates for the upcoming year (pro forma rate year), because
23 there is little change in the net plant investment used to
24 serve customers.
DeFelice, Di 5
Avista Corporation
1 In a similar manner, in prior general rate cases we
2 have used a rate base amount from a historical test year as
3 the starting point for the pro forma rate year.If there
4 were no major plant additions between the historical test
5 year and the upcoming pro forma rate year, the historical
6 test year rate base amount would be used for the pro forma
7 rate year as being representative of the net plant used to
8 serve customers.
9 However, if there were known major plant additions
10 that would be in service for the pro forma rate year, such
11 as the addition of Coyote Springs II for Avista, the major
12 transmission upgrades, and the hydroelectric upgrades, then
13 rate base for the pro forma rate year is adjusted for these
14 maj or investments, so that rate base for the pro forma rate
15 year is representative of the level of investment used to
16 serve customers.
17 Q.Is Avista' s new investment in utility plant
18 exceeding its annual depreciation exense, causing an
19 increase in rate base from the test year to the pro form
20 rate year?
21 A.Yes.Avista's investment in plant in 2009 is
22 well above the annual depreciation expense, and will result
23 in an increase in net plant in service (rate base) that
24 will be used to serve customers in the pro forma rate year.
25 Much of this new investment in plant for 2009 is spread
DeFelice, Di 6
Avista Corporation
1 among many different utility plant categories, as opposed
2 to a few major plant additions.
3 Therefore, the Company's pro forma adjustment for new
4 investment in plant in this filing, as in the previous
5 general rate case filing, involves a more detailed analysis
6 of the net change in rate base from the historical test
7 period to the pro forma rate year.The end resul t ,
8 however, is the same in this case as in all prior cases -
9 to reflect in retail rates the level of net plant
10 investment that is used to serve customers during the pro
11 forma rate year, and to have a proper matching of revenues
12 and expenses.
13 Q.How was rate base for the pro form rate year
14 developed for this filing?
15 A.As in prior rate cases, Avista started with rate
16 base for the historical test year, which for this case is
17 the average of monthly averages for the twelve months ended
18 September 30, 2008.Adjustments were made to reflect new
19 additions and accumulated depreciation through December
20 2009, such that the proposed rate base reflects the net
21 plant in service that will be used to serve customers
22 during the pro forma rate year.Later in my testimony, I
23 will provide the details of the adjustments to rate base.
24 The recent rate case (Case Nos. AVU-E-08-01 and AVU-G-
25 08-01) concluded with new retail rates effective October 1,
DeFelice, Di 7
Avista Corporation
1 2008. As noted earlier, recovery of costs associated with
2 new capital additions through December 31, 2008 was
3 included in retail rates.wi th regard to the proper
4 "matching" of revenues and expenses, it can be said that
5 some of the new capital through December 31, 2008 was not
6 in place at the time new retail rates went into effect on
7 October 1, 2008.However, it is also true that the costs
8 of new capital already added, and to be added, in 2009 is
9 currently not recovered in retail rates. Although we know
10 that a perfect matching of revenues and expenses would be
11 difficult to achieve, it is very important that, during
12 this period of high capital investment, retail rates
13 reflect the true costs of providing service to customers,
14 in order to afford the Company the opportunity to recover
15 its costs and continue to attract capital under reasonable
16 terms.
17 wi th regard to the current filing, Avista is hopeful
18 that new retail rates from this case will be effective by
19 or before mid-2009.Furthermore, new rates from the next
20 general rate case will likely not be effective until
21 sometime well into 2010.December 31, 2009 represents an
22 approximate mid-point of the period in which retail rates
23 would be in place from this case and the next case.
24 Including new capital investment through the mid-point of
25 the "rate year" (approximately mid-2009 through mid-2010)
DeFelice, Di 8
Avista Corporation
1 will allow the Company the opportunity to recover the costs
2 associated with capital investment that will serve
3 customers over the course of the rate year.
4 The following chart illustrates the capital additions
5 for 2008 and 2009 that will be completed and in service
6 through December 31, 2009 .Since this case reflects
7 capital additions through only December 31, 2009, during
8 the first part of 2010 (which is the rate year associated
9 with the current case), new capital investment will
10 incurred in order to serve customers, but the costs will
11 not be reflected in the customers' rates.
12 Illustration 1
A VISTA UTILITIES
CAPITAL ADDITIONS 2008-2010
$600
_.-_.__..__.__.__._----.-.
.
I
.
I..
!.1
12131/2010
î
~ $400~
.~
~
~""¿¡ $200
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14 Q.You stated earlier that new utility investment in
15 2008 and 2009 will be substantially higher than the annual
16 depreciation expense.What is driving the significant
17 investment in new utility plant?
DeFelice, Di 9
Avista Corporation
1 A.As we explained in the recent general rate case,
2 the Company is being required to add significant new
3 transmission and distribution facili ties,including
4 strengthening the "back bone" of our system, due in part to
5 continued customer growth in our service area, reliability
requirements, and capacity upgrades.Other issues driving6
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the need for capital investment include an aging
infrastructure,physical degradation,and municipal
9 compliance issues (i. e., street/highway relocations), etc.
10 Company witness Mr. Kinney provides additional testimony on
11 some of these capital requirements.
12 In addition, although in recent months the rapid
13 increase in the cost of materials (concrete, copper, steel,
14 etc.) has subsided, they are still orders of magnitude
15 higher than what they were even a few years ago, causing
16 the cost of these new facilities to be significantly higher
17 than in the pas t .Because the cost of adding new
18 facilities is significantly higher than the original cost
19 of existing facilities, the investment in new facilities
20 will be significantly higher than the annual depreciation
21 expense on the existing facilities.
22 Q.What is causing the substantial increase in raw
23 materials for Avista, and the utility industry in general?
24 A.In September 2007,The Edison Foundation
25 commissioned a study from The Brattle Group titled, "Rising
DeFelice, Di 10
Avista Corporation
1 Utili ty Construction Costs: Sources and Impacts," which
2 identified cost trends specifically related to the utility
3 industry pertaining to critical materials and equipment, as
4 well as labor support services used for building capital
5 infrastructure. The study identifies the reasons for
6 drastic cost increases in critical raw materials, such as
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global competi tion and an aging domestic utility
infrastructure as well as the need for additional
9 infrastructure to accommodate growth in the near future.
10 Q.What are some of the key cost drivers that are
11 ci ted in the study?
12 A.The study, at page 16, cites four maj or cost
13 drivers," (1) material input costs, including the cost of
14 raw physical inputs, such as steel and cement as well as
15 increased costs of components manufactured from these
16 inputs (e.g., transformers, turbines, pumps) i (2) shop and
17 fabrication capacity for manufactured components (relative
18 to current demand) i (3) the cost of construction field
19 labor, both unskilled and craft labori and (4) the market
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for large construction proj ect management,i. e. ,the
queuing and bidding for proj ects . "The study goes on to
22 compare cost trends for various raw materials, critical
23 equipment and labor services relative to the general
24 inflation rate (GDP deflator).In addition, a cost trend
25 is sumarized by three key utility functional plant
DeFelice, Di 11
Avista Corporation
1 categories,including generation,transmission,and
2 distribution plant.The study concludes that these
3 inflation impacts have been outside the utility industry's
4 control.
5 Illustration 2 below depicts what has occurred to
6 infrastructure costs nationally.From the chart, it is
7 apparent that starting in 2003, costs of distribution,
8 transmission and generation infrastructure increased at a
9 far more significant rate than the overall economy, as
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measured by the GDP deflator.
Illustration 2
National Aterage Utilit Infastucture Cost Indlès
170
180 - - - - - - - - - - - - - - - - - - - - - - - - - - - -,- - - - - - - - - - - - - - - - - - - - --
100 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
90
191 192 W3 1994 1995 196 1991 199 199 2002001
Yea
Source" The Handy-Whi1ionCl Bulletin, No, 165 ond the U$ Bureon of Economic Anoly'¡.$imple ..eroge of 011 regional con.tietion and
equipmeitJ:ost:itdees,fórthe:~specie~c()mponettJl: "Rising-Utility_Constrction Có:its: _ Sources :andJmpacts" Prepiued by The-Brate .Grou:pf(X
The Edi.on Foundation, September 2007
DeFelice, Di 12
Avista Corporation
1 Q.Is there specific evidence that Avista is
2 experiencing cost escalations similar to that indicated in
3 the study?
4 A.Yes. As we explained in the recent general rate
5 case, a sample was compiled of some materials and equipment
6 that Avista routinely uses in order to support various
7 infrastructure construction efforts that are part of the
8 Company's annual capital requirements of purchases made
9 from 2003 through 2008.The sample of materials was
10 grouped into categories for typical electric and gas
11 distribution capital projects as well as major electric
12 substation projects. The cost sumary indicated that the
13 cost of the materials reviewed has risen sharply in most
14 categories from 2003 to 2008.For the distribution plant
15 group of materials, the average annual escalation impact
16 from 2003 through 2007 is approximately 37%, which is equal
17 to a cumulative increase over the four-year period of 178%.
18 The escalation for the substation group of materials and
19 equipment has been approximately 12% per year for the
20 purchases Avista has made from 2003 to 2008, or a
21 cumulative increase of 55%.
22 Q.What is the historical and projected level of
23 annual capital spending for Avista?
24 A.Avista's capital requirements have steadily
25 increased from approximately $100 million to over $200
DeFelice, Di 13
Avista Corporation
1 million over the last several years.Exhibit No.9,
2 Schedule 1 reflects the trend that Avista has experienced
3 and what is planned for in the near future.
4 This chart not only shows the total magnitude of
5 capital expenditures, but also clearly shows that the
6 amount of capital projects is well in excess of revenue-
7 supported capital expenditures to connect new customers,
8 and beyond the level of revenues that is being collected
9 from customers related to existing plant.The difference
10 between the total capital requirements, less the new
11 revenue related capital, and allowed revenues represent a
12 significant discrepancy that is negatively impacting the
13 Company.
14 Q.What is the likelihood that Avista's capital
15 investment will continue at this level?
16 A.There are many factors that will influence
17 capital expenditures going forward. One factor is the cost
18 of raw materials is expected to continue to cause the cost
19 of new capital expenditures to significantly exceed the
20 cost of existing capital facilities that are to be replaced
21 and the fact that there is more demand for capital proj ects
22 for such things as compliance work with municipal highway
23 and road proj ects, sewer proj ects, etc. Also, as critical
24 systems age, there will be more utility plant that will be
25 reaching the end of physical life and, in some cases, plant
DeFelice, Di 14
Avista Corporation
1 may be replaced prior to the end of its physical life based
2 on power efficiency improvements that can be recognized.
3 III. DESCRIPTION OF CAPITAL PROJECTS
4 Q.For the 2009 capital projects pro for.ed in this
5 filing, please provide a description of the projects.
6 A.Exhibit No.9, Schedule 2 details the capital
7 proj ects that will be transferred to plant in service in
8 2009 and included in this filing.A short description of
9 these projects with system costs follows:
10 Generation ($37.9 million):
11 Thermal - Kettle Falls Capital Projects - $1,735,00012 The primary proj ect at the Kettle Falls Generating13 Station is the replacement of the steam turbine14 control system. Other smaller projects include the
15 replacement of wood screw conveyors which feeds wood16 into the hopper, the replacement of ash screws in the17 ash removal system, and a continuation of a project to18 replace the travelling grate in the boiler.
1920 Thermal - Colstrip Capital Additions- $6,200,00021 The Colstrip capital additions for 2009 include major22 emission control proj ects for units 3 & 4. Boiler
23 modifications are being made to reduce Mercury24 emissions on units 3&4 to comply with Montana state
25 law. Also Low NOx burners are being installed on unit
26 4 to comply with Montana DEQ requirements. These NOx27 modifications were previously installed on unit 3.28 2009 is a regular overhaul year with additional major29 capital work scheduled for unit 4 including cooling30 tower fill replacement, an LP turbine overhaul, an air31 pre-heater overhaul, a generator rewind kit, and a32 variety of additional smaller capital projects to be33 completed during the outage.
3435 Thermal - Other Small Proj ects - $84,00036 Please refer to the workpapers of Mr. DeFelice for37 detailed listing of projects.
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DeFelice, Di 15
Avista Corporation
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Hydro - Cabinet Gorge Capital Project - $804,000
Replace a maj or component of the Cabinet Unit 1Turbine (discharge ring) .
Hydro - Little Falls Capital Project - $525,000
Replace the roof at the Little Falls HED.
Hydro - Long Lake Capital Project - $597,000
Replace the scroll case drain system and installation
of dam safety monitoring systems for the forebay,
tailrace, and sump.
Hydro - Noxon Capi tal Proj ect -
Replacement of the Generator
(GSU) needed to accommodate the
the turbine improvements.
$1,295,000
Step Up Transformersincreased power due to
Hydro - Upper Falls Capital Projects - $l,9l0,OOO
This proj ect will replace the old plant control and
locate all new equipment from the Post Street
Substation to the Upper Falls plant. In addition, new
equipment will be installed to both modernize the
unit, enhance the protection schemes, and to automate
the plant from the Generation Control Center.
Hydro - Noxon Capital Projects - $17,171,000
Projects include finishing the replacement of the Unit
1 stator core and stator windings, installation of a
new high efficiency turbine runner, and mechanical
overhaul on uni t # 1 .
Hydro Clark Fork Implement PME Agreement
$2,107,000
Multiple projects are planned for 2009 as part of the
protection, mitigation and enhancement (PME) plan.
These proj ects were agreed to as part of the
settlement agreement and FERC license received in
2001.
Hydro - Other Small Projects - $1,142,000
There are a number of proj ect improvements planned for
2009. These include beginning a system station sumpcontrol and monitoring systems to facilitate
anticipated license conditions, and other small
proj ects. Please refer to the workpapers of Mr.DeFelice for detailed listing of proj ects.
Other - Northeast Combustion Turbine - $944,000
The control system at the Northeast Combustion Turbinewill be upgraded for standby reserve. This proj ect is
DeFelice, Di 16
Avista Corporation
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a continuation from 2008 in that air permit issues
prevented this item from being completed.
Other - Coyote Springs 2 (CS2) Capital Proj ects
$575,000In 2009, capital costs include a spare GSU
transformer. The previous spare was installed after a
transformer failed in the spring of 2008. The capital
cost of the new spare will largely be offset by an
insurance settlement. Other smaller projects plannedfor 2009 include the purchase of a spare station
serviced transformer (reliability), duct burner fuelsystem upgrades (capacity increase), steam turbine
control upgrades (reliability), and several smaller
PGE/ Avista shared proj ects (safety /reliabili ty) .
Other - Coyote Springs 2 (CS2) LTSA - $2,000,000LTSA (Long Term Service Agreement) costs are
apportioned between capital and O&M based on predicted
gas turbine hardware replacement schedules for the
duration of the contract. These costs cover the
maintenance agreement with General Electric and cover
the gas turbine and auxiliaries.
Other Small Proj ects - $819,000
This work is primarily to install an Uninterruptable
Power Supply (UPS) system at the Boulder Park power
station to protect the engine generators and other
station auxiliaries. Currently when there is a loss
of station service, most of the control system will
shut down after only a few minutes. This system will
allow for an orderly control of the equipment during
these events. Please refer to the workpapers of Mr.
DeFelice for detailed listing of other projects.
Electric Transmission ($15.1 million):
The electric transmission proj ects that will transfer
to plant in service are described in detail in Mr.Kinney's direct testimony at pages 17 through 21. A
listing of these proj ects follows:
Lolo 230-Rebuild 230 kV Yard - $2,050,000
Spokane-CDA 115 kV Line Relay upgrades - $1,250,000
Power Circuit Breakers - $540,000
SCADA Replacement - $740,000
Noxon-Pinecreek 230kV: Ready Fiber Optic - $650,000
System-Replace/Install Capacitor Banks - $800,000
Benewah-Shawnee 230 kV Construction - $560,000
Mos23-N Moscow 115 Recond - $585,000
DeFelice, Di 17
Avista Corporation
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Burke 115 kV Protection & Metering - $525,000
Beacon Storage Yard oil Containment - $527,000
Other small specific transmission projects - $936,000
Transmission Minor Rebuild - $1,069,000
System Rebuild Transmission - $928,000
Interchange and Borderline Metering Upgrades
$642,000
pine Creek - $350,000
Replacement Programs - $2,234,000
Other small transmission proj ects - $670,000
Electric Distribution ($46.7 million):
The electric distribution proj ects that will transfer
to plant in service are described in detail in Mr.Kinney's direct testimony at pages 22 through 24. A
listing of these proj ects follows:
Electric Distribution Minor Blanket - $7,922,000
Capital Distribution Feeder Repair Work - $4,100,000
Wood Pole Management - $3,700,000
Electric Underground Replacement - $3,156,000
T&D Line Relocation - $2,297,000
Failed Electric Plant - $1,987,000
Sys-Dist Reliability-improve Fdrs - $1,100,000
Open Wire Secondary Elimination - $1,000,000
Plumer-Increase Capacity/Rebuild - $1,525,000
Idaho Road Sub/Rathdrum - $4,896,000
System Wood Substation Rebuilds - $3,600,000
Distribution Feeder Reconductor - ID - $727,000
The electric distribution proj ects specific to the
washington jurisdiction that are not described in
detail in Mr. Kinney's direct testimony follows:
Spokane Electric Network Capacity - $1,615,000
Terre View 115-Sub Construct (WSU) - $1,962,000
Otis Orchards Substation - $980,000
Othello Transformer Replacement - $665,000
Northeast Substation - $225,000
Valley Mall Transfer Capacity - $200,000
Distribution Feeder Reconductor - WA - $1,050,000
Network Transformers & Network Protectors - $800,000
Additional distribution projects follows:
Power Transformer-Distribution - $680,000
Installation of distribution power transformers asrequired.
DeFelice, Di 18
Avista Corporation
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ID AMR - $600,000
The 4-year Automated
completed in late 2008.
for network optimization.
Meter Reading Proj ect was
Additional capital will be
WSDOT Highway Franchise Consolidation - $800,000
In order to operate our electric system within State
highway rights of way, the Company needs to establish
new Franchises. Existing franchises have expired and
Avista must seek new agreements with the State or risk
penal ties or non-approval by the State.
Other small distribution proj ects - $1,083,000
Please refer to the workpapers of Mr. DeFelice for
detailed listing of proj ects.
General ($14.8 million):
Security Initiative - $508,000
Various security measures including cameras and access
controls for the office and branch facilities.
Next Generation Radio System - $1,500,000Antiquated Radio system technology necessary to
operate the business is being refreshed to comply with
changing FCC regulation.
Structures and Improvements - $3,360,000
This is a group of capital maintenance projects that
Facilities Management coordinates at the Spokane
Central Operating Facilities and Avista branch
facilities - offices and service centers. For 2009,
some of the proj ects include: roof replacements, land
acquisi tion for facility expansion, HVAC system
replacement at some branch offices, energy efficiency
projects, security projects, emergency generators,
asphalt overlays and replacement, and office furnitureaddi tions and replacement.
Stores Equipment - $598,000
Equipment utilized in warehouses and/or
recovery operations throughout the service
This includes equipment such as forklifts,
shelving, cutting/binding machines, etc.
investmentterritory.
man lifts,
Tools, Lab & Shop Equipment - $1,285,000
Expenditures in this category include all large tools
and instruments used throughout the company for gas
and/or electric construction and maintenance work,
distribution, transmission, or generation operations,
DeFelice, Di 19
Avista Corporation
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telecommunications, and some fleet equipment (hoists,
winch, etc) not permanently attached to the vehicle.
Productivity Initiative - $1,147,000
Various initiatives that increase
benefits based on future avoided costs.
producti vi ty
HVAC Renovation Proj ect - $4,159,000
The heating, ventilating, and air conditioning systemsthroughout the Spokane Central Operating Facilities
are approximately fifty years old and are in need ofreplacement. The proj ect involves replacing central
air handling units and distribution systems in three
buildings - the Spokane Service Center, the general
office building, and the cafeteria auditorium
building. The building envelope of the general office
building will also be renovated with high efficiency
glass and insulation. New controls will also be
installed which will enable energy conservation.
Spokane Central Operating Facility Crescent
Realignment - $1,500,000
Vacate a city street that bisects the Spokane campus
to eliminate public traffic across parking lots and
operating facilities, improving facility safety andsecurity.
Other Small Proj ects - $750,000
These proj ects include communication and
initiatives, radio equipment, telephone
office and other general facility upgrades.
security
systems,
Transportation ($9.6 million):
Transportation Equipment - $9,635,000
Expendi tures are for the scheduled replacement of
trucks, off-road construction equipment and trailers
that meet the company i s guidelines for replacementincluding age, mileage, hours of use and overall
condition. In addition, includes additions to the
fleet for new positions or crews working to support
the maintenance and construction of our electric andgas operations.
Technology ($11.5 million):
Information Technology Refresh Blanket - $4,410,000
A program to replace obsolete technology according to
Avista's refresh cycles that are generally driven by
DeFelice, Di 20
Avista Corporation
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hardware/software manufacturer and industry trends tomaintain business operations.
Information Technology Expansion Blanket - $981,000
A program to deliver technology associated with
expansion of existing solutions.
AFM Product Development Program - $1,115,000
Deliver enhancements to the electric and natural gas
Facility Management technology system.
Nucleus Product Development Program - $556,000
Deliver enhancements to the Nucleus energy resource
management technology system.
Web Product Development Program - $627,000
A program to deliver enhancements to the Customerbased Web technology system.
Mobile Dispatch Upgrade - $800,000
Upgrade the Mobile Dispatch application system from
V7.7 to V8.
Mobile Dispatch 2 - $1,372,000
Implement Mobile Dispatch application for electric
service and meter shop processes.
Other Small Technology Proj ects - $1,655,000
These proj ects include various small technology
proj ects including, technology to provide for field
office use of Learning Management System, a Meter Data
Management solution, a work management technology
system to the Generation Production and Substation
Support organization, and replacement of existing Real
Estate permits application which is end-of-life with
Valumation Contract Management System.
Jackson Prairie Storage ($0.3 million):
Jackson Prairie Storage Project - $306,000
This completes the capital project that Avista and its
partners started for an expansion proj ect at Jackson
Prairie for deliverability that was in service in the
fall of 2008.
Natural Gas Distribution ($22.2 million):
Replace Deteriorated Pipe - $1,000,000
This annual proj ect will replace sections of existing
gas piping that are suspect for failure or have
DeFelice, Di 21
Avista Corporation
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deteriorated within the gas system. This project will
address the replacement of sections of gas main that
no longer operate reliably and/or safely. Sections of
the gas system require replacement due to many factors
including material failures, environmental impact,
increase leak frequency, or coating problems. Thisproj ect will identify and replace sections of main to
improve public safety and system reliability.
Gas Replacement Street and Highways - $1,200,000
This annual proj ect will replace sections of existing
gas piping that require replacement due to relocation
or improvement of streets or highways in areas where
gas piping is installed. Avista installs many of its
facilities in public right-of-way under established
franchise agreements. Avista is required under the
franchise agreements, in most cases, to relocate its
facilities when they are in conflict with road or
highway improvements.
Gas Non-Revenue Blanket - $2,500,000
This annual proj ect will replace sections of existing
gas piping that require replacement to improve theoperation of the gas system but are not directly
linked to new revenue. The proj ect includes relocation
of main related to overbuilds, improvement in
equipment and/or technology to improve system
operation and/or maintenance, replacement of obsolete
facili ties, replacement of main to improve cathodic
performance, and proj ects to improve public safety
and/ or improve sys tem rel iabi 1 i ty .
East Medford Reinforcement Proj ect - $4,451,000
This Oregon gas distribution project is not includedin this filing.
Replace Gas ERT's w/ Batteries ~10yrs - $2,700,000
This proj ect will replace Gas ERT' s that are greater
than 10 years old, which is their economic life. ERT
battery life is finite and although that life is
greater than 10 years, it is cost effective to replace
the ERTS' s prior to them failing in the field. This
proj ect will ensure continued reliable metering
operation by ensuring the ERT technology operates
properly. Approximately 12,000 ERT's will be replacedin Washington and 21, 000 in Oregon.
Kettle Falls Relocation - $5,198,000
This multi-phased project installed a new gate station
in 2008 on the west side of Spokane to serve the
DeFelice, Di 22
Avista Corporation
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existing high pressure (HP) distribution and future
replacement pipe that is part of the Kettle Falls HP
main. The existing Kettle Falls Gate Station and HP
Kettle Falls main have experienced significant
encroachment due to growth in the north Spokane area.
Seètions of the main will be relocated to ensure
continued safe reliable operation of the pipe system.
The new gate station will improve the safety and
reliabili ty of operating the high pressure main and
improve the gate station delivery capacity into theKettle Falls HP system. Future phases of this project
will re-route sections of the existing HP Kettle Falls
main to improve system capacity and public safety.
US2 North Spokane HP Reinforcement (Kaiser Property) -
$1,199,000
This proj ect will reinforce the north central portion
of Spokane near US2 by extending the existing HP
piping system and installing a new regulator station
to reinforce the existing distribution system. The
north Spokane distribution system experiences lowpressures during high system demand in the winter.
The area fails the gas planning model for a designday. Growth in the area has reduced Avis ta 's abi 1 i ty
to reliably serve gas from its existing distribution
system during a design day. This proj ect will improve
delivery pressure and reliability.
Other Small Projects - $3,901,000
Please refer to the workpapers of Mr. DeFelice for
detailed listing of proj ects.
iV. ADJUSTMNT METHODOLOGY
Q.What was the general approach to computing the
36 pro form adjustments for investment in capital projects?
37
38
A.The Company used the same general approach that
was used in the previous general rate case.The 2008 and
39 2009 capital investments were tracked separately to
40 simplify the computation and to make it easier to follow.
41 For each vintage, capital additions, depreciation and DFIT
42 were computed to derive rate base at December 31, 2008 and
DeFelice, Di 23
Avista Corporation
1 December 31, 2009 and to compute operating expenses in the
2 pro forma rate year.
3 Q.What reports or data were used in the
4 computation?
5 A.The Company maintains results of operations
6 reports that are prepared for each service and jurisdiction
7 on an average of monthly averages (AM) basis and on an end
8 of period (EOP) basis that were used in this computation.
9 Actual 2008 plant additions were used from the plant
10 accounting system to determine the month of addition and
11 the amount of additions that were for revenue producing
12 projects.Capital additions for 2009 (described above)
13 were based on specific capital requirements for 2009.
14 Capital additions for 2009 that were for revenue producing
15 projects were separated out and excluded. The Company did
16 not include any 2010 capital additions in this filing.
17 Q.Are the computations for all services and
18 jurisdictions the same?
19 A.Yes, they are.Because of this, only the Idaho
20 electric data will be used below to describe the
21 methodology for computing the adjustments. The adjustments
22 for Idaho gas were computed in a similar manner.
23 Q.Please explain in detail the computation of the
24 adjustment as it relates to rate base.
DeFelice, Di 24
Avista Corporation
1 A.There are three steps to determine the rate base
2 adjustment at December 31, 2008 and December 31, 2009, as
3 follows:
4 Step 1 - Adjust AH Septemer 30, 2008 to EOP Decemer 31,
5 2008 (Pro Form Capital Additions 2008 Adjustment)
6
7 The first step was to determine an adjusted December
8 31, 2008 EOP net plant balance that includes only the AM
9 revenue producing capital through September 30, 2008. The
10 Company's December 31, 2007 EOP results of operations
11 reports was the starting point.
12 The gross plant at December 31, 2007 at EOP includes
13 all revenue producing capital added in 2007.Since the
14 test period begins with October 1,2007, it is necessary to
15 remove the average of monthly averages of those additions
16 for the last three months of 2007, since 2007 test year
17 includes AM customers and revenue (this is explained
18 further below). The 2008 capital additions, excluding all
19 revenue producing capital, were added.In addition, the
20 average of monthly averages of the revenue producing
21 capital for the nine months ended September 30, 2008 was
22 also added.
23 The EOP gross plant at December 31, 2008 was computed
24 as follows:
25
26
DeFelice, Di 25
Avista Corporation
EOP Gross Plant at 12/31/07 per Results of Operations
Add: 2008 Capital Additions (Excluding Revenue Producing)
($OOO's)
$912,978
$32,380
Less: October - December 2007 Revenue Producing Capital
Additions
Add: January - September 2008 AMA Revenue Producing
Capital Additions
($1,590)
$2.821
EOP Adjusted Gross Plant at 12/31/08 $946,589
1
2 The pro forma capital additions 2008 adjustment in
3 Company witness Ms. Andrews' testimony at Exhibit No. 10,
4 Schedule 1, page 8, for gross plant of $27,213,000 was
5 computed by subtracting the AM gross plant balance used in
6 the filing of $919,376,000 from the calculated EOP adjusted
7 gross plant balance of $946,589,000.Addi tional details
8 regarding these adjustments are provided in Ms. Andrews'
9 workpapers .
10 This same process was used for both accumulated
11 depreciation and deferred income taxes, to arrive at EOP
12 adjusted amount at December 31, 2008 for the 2008 vintage
13 plant assets. The pro forma capital additions adjustment
14 for accumulated depreciation of $19,393,000 was computed by
15 subtracting the AM accumulated depreciation balance used
16 in the filing of $314,219,000 from the calculated EOP
17 adjusted accumulated depreciation balance of $333,612,000.
18 The pro forma capital additions adjustment for DFIT of
19 ($4,162,000) was computed by subtracting the AM DFIT
DeFelice, Di 26
Avista Corporation
1 balance used in the filing of ($82,407,000) from the
2 calculated EOP adjusted DFIT balance of ($86,5695,000).
3 Step 2 - Adjust 2008 Vintage Plant to EOP Decemer 31, 2009
4 (Pro For. Capital Additions 2009 Adjustment - Part A)
5 The second step was to determine rate base at December
6 31, 2009 for the 2008 vintage plant assets.Only
7 accumulated depreciation and deferred taxes are impacted.
8 Depreciation expense of $25,467,000 was computed on gross
9 plant at December 31, 2008, adjusted for projected 2009
10 retirements, using the average effective depreciation rates
11 by functional plant group.Depreciation expense on the
12 2008 revenue producing capital additions has been excluded.
13 The deferred tax impact on the 2008 vintage plant assets,
14 was ($3,460,000).These changes to rate base at December
15 31, 2009 are added to the 2009 vintage plant additions
16 (discussed below) to derive the pro forma capital additions
17 adjustment for 2009, detailed in Ms. Andrews' testimony at
18 Exhibi t No. 10, Schedule 1, page 8.Additional details
19 regarding these adjustments are provided in Ms. Andrews'
20 workpapers .
21 Step 3 - Add 2009 Vintage Plant to EOP Decemer 31, 200922 (Pro For.a Capital Additions 2009 Adjustment - Part B)
23 The capital additions for 2009 were sumarized by
24 functional plant categories and either directly assigned or
25 allocated to the services and jurisdictions based on
26 standard Company practices.The amoun t 0 f revenue
DeFelice, Di 27
Avista Corporation
1 producing capital additions in 2009 by service and
2 jurisdiction was excluded.The additions were further
3 summarized by the month they are expected to be transferred
4 to plant in service.Using the average effective
5 depreciation rates by functional plant group,AM
6 depreciation expense was computed in order to include the
7 partial year convention of depreciation that will actually
8 be recorded in 2009.
9 For the Idaho electric service, plant additions were
10 $47,447,000, depreciation expense was $846,000 and DFIT was
11 ($778,000). These 2009 costs are added to the 2008 vintage
12 plant 2009 costs (discussed above) to derive the pro forma
13 capital additions adjustment to rate base for 2009.
14 A summary of the pro forma capital additions 2009
15 adjustment follows:
($OOO's)Part A Part B Total
2008 Vintage 2009 Vintage Adjustment to
Plant Plant Rate Base
Plant in Service $0 $47,447 $47,447
Accumulated Depreciation $25,467 $846 $26,313
DFIT ($3,460)($778)($4,238)
16
17
18 Q.What other impact does the '2008 and 2009 capital
19 additions have on this case in addition to the rate base
20 impact?
DeFelice, Di 28
Avista Corporation
1 A.Depreciation expense and property taxes have been
2 computed for the 2008 and 2009 plant vintages for the pro
3 forma rate year.
4 The pro forma capital additions 2007 pre-tax
5 depreciation adjustment of $246,000 is computed as follows:
6
7
($OOO's)
Estimated full-year of depreciation expense on the 2008 vintage plant balanceat December 31, 2009 $25,360
12 Months Ended September 30, 2008 test year depreciation expense,adjusted for the depreciation true-up adjustment. $25,111State Taxes ~
Pro forma Capital Additions 2007 Adjustment - Depreciation Expense $246
8
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10 The pro forma capital additions 2009 pre-tax
11 depreciation and property tax adjustment of $2,603,000 is
12 computed as follows:
13
($OOO's)
Estimated full-year of depreciation expense on the 2009 vintage plant balanceat December 31,2009 $1,932
Estimated full-year of property taxes on the 2009 vintage plant balance atDecember 31, 2009 $699State Taxes ~
Pro Forma Capital Additions 2009 Adjustment - Depreciation and Propert Tax $2.603
Expense
14
15
DeFelice, Di 29
Avista Corporation
1
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V. OTHER CONSIDERATIONS
Q.What is the rationale behind the removal of
3 capital expenditures for connecting new customers?
4 A.The pro forma capital expenditures for 2009 that
5 the Company included in this filing excludes distribution
6 related capital expenditures made that are associated with
7 connecting new customers to the Company's system.The
8 Company recognizes the fact that new customers provide
9 incremental revenue that helps offset the revenue
10 requirements of the distribution related capital additions
11 that the Company incurs to provide service to those
12 customers. These adjustments completely eliminated the AM
13 2008 and EOP 2009 capital activity related to new customer
14 connections in order to avoid an unintended mismatch of
15 revenues exceeding the cost to serve customers.
16 Q.In addi tion to excluding capi tal addi tions
17 related to new customers, does the Comany address the
18 2009/2008 revenue difference in other ways?
19
20
A.Yes.The production property adjustment
(discussed in Ms.Andrews'testimony)addresses the
21 production and transmission related retail revenue that
22 would be produced by the change in retail load expected in
23 2009/2010 compared to the 2008 normalized test year.All
24 pro forma production and transmission rate base and related
25 expenses from these capital additions adjustments, are
DeFelice, Di 30
Avista Corporation
1 reduced in order to reflect the amount needed to be
2 recovered from 2008 sales volumes.
3 VI. CONCLUSION
4
5
Q.What is the impact of the pro form adjustment?
A.The proposed adjustment will result in a closer
6 matching of revenues to cost of service to customers during
7 the period new rates will be in effect from this general
8 rate proceeding.without the proposed adjustment, the
9 Company would not have the opportunity to earn its allowed
10 rate of return on investment during the rate year.
11 Q.Does this conclude your pre-filed direct
12 testimony?
13 A.Yes, it does.
DeFelice, Di 31
Avista Corporation
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL OF 2009 JAN 23 PM 12: 43
REGULATORY & GOVERNENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKAE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-09-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-09-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 9
AND NATURAL GAS CUSTOMERS IN THE )STATE OF IDAHO ) DAVE B. DEFELICE
)
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
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Avista 2009 Capital Additions Detail (System)!1 !1Ge:Ge:Th - Ke Fal Cata Prje 1,735 Sety Intive 50
Th - Colstrp Capta Adtions 6,2 Next Geon Rao Sys 1,50
Th- Ot sm prjec 84 Stttu & Imvets 3,36Hyd - Cain Go Cata Prjec 80 Sto Eqpmt 598
Hyd - Litt Fal Capta Prjec 525 Tools La & Sho Eqpmt 1,2
Hyd - Lo La Caita Prje 591 Prtivity Intive 1,147
Hyd - Noxon Capta Prje 1,25 COF HV AC Imvet 4,159
Hyd - Upp Fal Cata Prje 1.910 Spo Cetr Op Fac N Crt Regi 1.s
Hyd - Noxon Raids Unit 1 Run Upg 17,171 Ot sma gen prjec 750Hyd - Cl Fo Imlet PM Agt 2,107 14JHyd - Ot sm prje 1.142
Ot - Nor Combustion Tu Prje 94 Trrt:
Ot - CS2 Capta Prjec 575 Traon Eqpmt 9,6
Ot - CS2 LTSA 2.00
Ot sm geon prje 81937,9 Ted:Inoron Teclo Re Bla 4,410E1ee TI':Inor Teclo Expaon Bla 981
Low 23 - Rebui 23 tV Yar 2.05 AF Pr Deopt Pr 1,115SpoA 115 tV Li Relay Upg 1.25 Nucleu Prct Deelopt Prgr 556
Power Cit Bre 54 Web Pruc Delot Pr 627
SCADA Relat 740 Mobi Disp Upg 80
Noxon-Pi 23tV:Reay Fibe Opc 65 Mobe Disp 2 1,372
SysteRelata Cato Ban 80 Ot sm telogy prje 1.655Bealhawn 23 tv Conon 560 11,516
M0sN Mosw 115 Rec 585Bur 115 tv Pron & Metg 52S Ga StongBe Sto Yar Oil Cotat 527 Jac Pre Sto 3ØOt sm spefi trmission prje 936Tramion Mi Reb 1.06 Nat Ga DI:
Sys Rebd Trasmion 92 Rela Deorg Ga Syste 1,00Intehage an Bor Metng Upg 642 Gas ReJat&wy 1,2
Pi Cr 350 Ga Ditrbution NonRevenue Bla 2.sReplat Prgr 2.Ea Med Reiont 4,451Ot sm trmion prjec 670 Rela Ga ERTs wI Baes :: 10 yr 2.700
ReRte Ke Fal Fd & Ga Staon 5,198
15,1 US2 N Spo Ga HP Reon (Kase Pr)1,199
El Dition:Ot sm dibution prje 3,901
Elc Distbution Mi Bla 7.922 P.15Capta Distrbution Fe Rep Work 4.100Woo Pole Mat 3.700 Tot NoReene Ca 1504El Und Replat 3,156
T&D Li Relotion 2,291 Grwtveue - Prg 47,510
Faied Elc Plt 1,987
Spo Elc Netor Caty 1,615
SysDi Reliabty-Imve Fd 1,100 Tot Capita Addti in 20 20,558
Op Wir Secnd Elon 1,00
Plum-In CatylRebui 1,525ld Roa Sub 4,896
Syste Woo Subon Rebds 3,60
Ter View 1 15-Sub Constr (WSU)1.962
Ot Orha Subson 980Otll Tra Relat 66
Nor Subson 22
Val Ma Tra Capty 20
Power Xf-Distbution 68Distbution Fe Recet - ID 727
Dibution Fe Recdu - W A 1.05
IDAM 60Net Traom & Net Pr 80
WSDO Highway Frahi Conlidaon 80
Oter sma ditrbution prts 1,083
460
Exhbit No.9
Case Nos. A VU-E--Oland A VU-G-0-0L
D. DeFelice, A vista
Schedule 2, p. 1 of 1