11 of 15 - Weatherby - PI EPU Financial

Rebuttal Testimony
Scott L. Weatherby
Before the Minnesota Public Utilities Commission
State of Minnesota
In the Matter of the Application of Northern States Power Company
for Authority to Increase Rates for Electric Service in Minnesota
Docket No. E002/GR-13-868
Exhibit___(SLW-2)
Prairie Island Extended Power Uprate
July 7, 2014
Table of Contents
I.
Introduction
1
II.
Accounting for Prairie Island EPU Project Costs as a Regulatory Asset 2
III.
Net Present Value Accounting of Return on Regulatory Asset
5
IV.
Conclusion
9
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I. INTRODUCTION
2
3
Q. PLEASE STATE YOUR NAME AND QUALIFICATIONS.
4
A.
My name is Scott L. Weatherby. I am the Vice President of Nuclear Finance
5
and Business Planning for Northern States Power Company (NSPM or the
6
Company).
7
8
Q. HAVE YOU PREVIOUSLY PROVIDED TESTIMONY IN THIS PROCEEDING?
9
A.
Yes. I filed Direct Testimony on behalf of the Company regarding the
10
financial tracking, support, and treatment of the costs of the Prairie Island
11
Extended Power Uprate (EPU or the Project) and Life Cycle Management
12
(LCM) program.
13
14
Q. WHAT IS THE PURPOSE OF YOUR REBUTTAL TESTIMONY?
15
A.
I respond to the Direct Testimony of the Office of Attorney General (OAG)
16
witness Mr. John Lindell regarding the accounting for the Prairie Island EPU
17
costs as a regulatory asset. I note that Company witness Ms. Lisa L. Perkett
18
also addresses Mr. Lindell’s assertions regarding AFUDC (Allowance for
19
Funds Used During Construction) recovery for cancelled project costs.
20
21
Specifically, I explain, at a high-level, that our accounting approach was
22
consistent with our interpretation of Commission guidance regarding our
23
Prairie Island changed circumstance filing and standards for recovering
24
abandoned plant costs. I also explain that our treatment of these costs as a
25
regulatory asset was consistent with the Federal Energy Regulatory
26
Commission (FERC) requirements.
27
recoverable costs by the amount of the $10.1 million Generally Accepted
1
I will also explain that reducing the
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Accounting Principles (GAAP) pre-tax charge would inappropriately disallow
2
incurred project costs and result in an additional GAAP charge to expense.
3
4
Q. HOW IS YOUR REBUTTAL TESTIMONY ORGANIZED?
5
A.
I present the remainder of my testimony in the sections as outlined below.
6
 Accounting for Prairie Island EPU Costs as a Regulatory Asset
7
 Net Present Value Accounting of Return on Regulatory Asset
8
II.
9
ACCOUNTING FOR PRAIRIE ISLAND EPU COSTS AS A
REGULATORY ASSET
10
11
12
Q.
ACCOUNTING FOR THE PRAIRIE ISLAND EPU TERMINATION?
13
14
CAN YOU PLEASE SUMMARIZE MR. LINDELL’S SUGGESTIONS REGARDING THE
A.
Mr. Lindell suggests that after it was determined by the Company and the
15
Commission that it was in the public’s interest to discontinue the Prairie
16
Island EPU Project and the Project was subsequently terminated, the
17
Company lost its ability to recover $78.9 million of Prairie Island EPU
18
Project costs because the Company did not: (a) obtain a cost deferral order
19
from the Commission for Prairie Island EPU costs capitalized as CWIP and
20
AFUDC from 2006 to 2012; or (b) address the details of cost recovery in the
21
Company’s rate case filed in November 2012.
22
23
Q.
THE
COMPANY
AGREE WITH
MR. LINDELL
THAT ITS ACCOUNTING
CLASSIFICATION FOR THE PROJECT COSTS WAS INAPPROPRIATE?
24
25
DOES
A.
No. As explained by Company witness Mr. Christopher B. Clark, in his
26
Direct Testimony, the Company believes, from a regulatory perspective, that
27
(1) it is appropriate to seek recovery of the Prairie Island EPU Project in this
2
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rate case, and (2) that the Commission’s standards for rate recovery have
2
been satisfied. To summarize, the Company chose not to request recovery
3
of the costs associated with the terminated Prairie Island EPU Project as part
4
of our last general electric rate case request because of timing. As explained
5
by Mr. Clark, when we filed our 2013 rate case, we had suspended but not
6
yet terminated the Prairie Island EPU Project, and the Commission’s final
7
decision in the Notice of Changed Circumstances docket was still pending.
8
Thus, we believed that it would be premature to include our request for cost
9
recovery as part of our 2013 rate case.
10
11
The Company was appreciative of the Commission’s decision in our last
12
electric rate case which directed the Company to justify its request for rate
13
recovery of the costs of the Prairie Island EPU Project in our next rate case,
14
which is this case. The Company believes the Commission’s decision to
15
allow us to move our cost recovery request forward into the next case, which
16
happens to be this case, and prior Commission guidance involving the
17
recovery of abandoned plant costs, supports the recovery of the Prairie
18
Island EPU Project costs.
19
20
From a technical financial accounting perspective, I respectfully disagree
21
with Mr. Lindell because I believe the Company has acted consistent with
22
relevant FERC accounting rules. Specifically, the FERC’s instructions for
23
regulatory asset accounts do not require a separate cost deferral order, but
24
rather require Commission authorization that cost recovery will be
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determined in a future proceeding. 1 As Mr. Clark explains in his Direct
2
Testimony, the Company believes it has received the needed authorization
3
from the Commission. Once deferral is authorized, a write-off occurs if or
4
when cost recovery is subsequently disallowed.
5
6
Q.
PARTIES?
7
8
HAVE THE COMPANY’S ACCOUNTING POSITIONS BEEN AUDITED BY OUTSIDE
A.
Yes.
Our independent external auditors did not take exception to our
9
accounting for the Prairie Island EPU costs in either their audits of the
10
Company’s 2012 and 2013 GAAP basis financial statements or their audits
11
of the Company’s 2012 and 2013 FERC basis financial statements.
12
13
The Company recognizes that the Commission’s decision on recoverability
14
of EPU costs will ultimately dictate whether our accounting treatment as a
15
regulatory asset remains appropriate, based on its deliberations in this rate
16
case. I provide the above information only to add context for our decision-
17
making process.
18
19
Q.
DO
YOU THINK THE
COMPANY
HAS MET THE STANDARD FOR COST
RECOVERY FOR THE PRAIRIE ISLAND EPU COSTS?
20
My Direct testimony and Mr. Lindell’s Direct testimony reference FERC Account 182.3, Other regulatory assets. The
Company actually used another regulatory asset account, FERC Account 182.2 Unrecovered plant and regulatory study
costs, which we determined was more appropriate for these costs. The instructions for both accounts reference
Commission authorization, with 182.2 stating “when authorized by the Commission” and 182.3 stating “ratemaking
actions of regulatory agencies.” The Commission’s decisions in the CON proceeding and the 2012 rate case that rate
recovery of the costs will be determined in a future rate case, would satisfy the requirements of either FERC
regulatory asset account.
1
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A.
Yes. I believe the Company acted prudently and has presented a request
2
consistent with Commission guidance. Mr. Clark articulates the Company’s
3
reasoning in greater detail in his Direct Testimony.
4
5
III. NET PRESENT VALUE ACCOUNTING OF RETURN ON
6
REGULATORY ASSET
7
8
Q. PLEASE
MR. LINDELL’S
RECOMMENDATION REGARDING THE
COMPANY’S ABILITY TO RECOVER ALL OF THE PRAIRIE ISLAND EPU COSTS.
9
10
SUMMARIZE
A.
Mr. Lindell suggests that the Company should not recover $10.1 million of the
11
total incurred project costs because the Company recognized a $10.1 million
12
pretax charge in 2012 in order to comply with GAAP financial reporting
13
requirements.
14
15
16
Q. WHAT
WAS THE
COMPANY’S
RATIONALE FOR TAKING THE
$10.1
MILLION
PRETAX CHARGE IN 2012?
17
A. As I explained in my Direct Testimony, under the GAAP financial reporting
18
standards for regulated operations, the Company could only record the full
19
amount of its Prairie Island EPU costs as a regulatory asset if it is considered
20
probable that all costs would both (a) be fully recoverable in rates and (b) earn
21
a return in the ratemaking process.
22
23
Although the Company believed that it should receive a return on its costs,
24
past Commission precedent has not consistently allowed a return on
25
abandoned projects. Thus, GAAP required that we record the costs on a
26
discounted cash flow basis in our financial statements. Accordingly, the $10.1
27
million pretax charge is a financial reporting convention to record the full
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regulatory asset amount on a discounted basis, using a hypothetical debt
2
discount rate over the 12-year amortization period requested by the Company.
3
4
Q. DOES THIS MEAN THAT THE COMPANY HAS PERMANENTLY WRITTEN OFF THE
$10.1 MILLION?
5
6
A. No. If the Commission approves our request to recover the Prairie Island
7
EPU costs with a return, we would reverse the 2012 charge of $10.1 million
8
consistent with GAAP standards.
9
10
If the Commission does not approve a return, then the pretax charge will be
11
amortized back into regulatory assets each year through a process called
12
accretion.
13
recognizes the total incurred costs over the regulatory amortization period.
This effectively “undiscounts” the costs over time and still
14
15
Q. DID THE COMPANY BELIEVE, OR IS THE COMPANY’S ACCOUNTING INTENDED
TO SIGNAL, THAT ANY OF THESE COSTS WOULD NOT BE RECOVERED IN RATES?
16
17
A. No. To the contrary, these costs were recorded on the assumption that all
18
costs would be recovered but a return was not assured.
Should the
19
Commission allow a return on the Prairie Island EPU costs as we have
20
requested, the $10.1 million pretax charge would be reversed.
21
22
Q. WHAT
MR. LINDELL’S
RECOMMENDATION WAS
ACCEPTED?
23
24
WOULD THE IMPACT BE IF
A.
Stated simply, Mr. Lindell’s recommendation inappropriately double-counts
25
the $10.1 million charge. If the Company was prohibited from both earning a
26
return on the incurred costs and recovering capitalized project costs equal to
27
the $10.1 million pretax charge, GAAP would require the Company to
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recognize an impairment charge for a direct disallowance of $10.1 million of
2
incurred costs, in addition to the GAAP pre-tax charge already recognized to
3
present the full amount of incurred costs on a discounted basis.
4
5
Q. HAS
PRAIRIE ISLAND EPU
COSTS WERE
NOT PRUDENTLY INCURRED?
6
7
ANY PARTY SUGGESTED THAT THE
A.
No. Thus, Mr. Lindell’s ratemaking proposal inappropriately compounds the
8
impact of the GAAP pretax charge meant to recognize only the lost time value
9
of money of all costs incurred.
10
11
Q.
MR. LINDELL’S
PROPOSAL ON THE
COMPANY.
12
13
PLEASE SUMMARIZE THE EFFECT OF
A.
The Company’s GAAP financial records assume full recovery of the incurred
14
costs of $78.9 million (including AFUDC) with no return on investment.
15
Under this method, the GAAP and ratemaking records would be as follows:
16
Company’s Accounting with No Assumed Return
17
18
GAAP
Costs Incurred (Including AFUDC)
19
GAAP Pretax Charge Previously Recorded
20
Net Regulatory Asset to Amortize
21
$ 78.9
Ratemaking
$
78.9
(10.1)
-
68.8
78.9
Test Year Recovery – EPU cost amortization over 12 Years
22
Annual Amortization Expense – Regulatory Asset
5.8
6.6
23
Amortization of Annual Accretion on GAAP Pretax Charge
0.8
-
Total Annual Amortization Expense – EPU costs
6.6
6.6
Total Costs Amortized/Recovered Over 12 Years
$ 78.9
24
25
$
78.9
26
27
Mr. Lindell’s proposal to disallow the $10.1 million GAAP pretax charge and
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provide for no return would ensure the Company only recovers $68.8 million
2
of the actual costs incurred, as follows:
3
Mr. Lindell's Proposed Accounting
4
5
6
7
8
GAAP
Ratemaking
$
$
Costs Incurred (Including AFUDC)
78.9
Ratemaking Disallowance Proposed
(10.1)
GAAP Pretax Charge Previously Recorded2
(10.1)
Net Regulatory Asset to Amortize
78.9
(10.1)
-
58.7
68.8
Annual Amortization Expense – Regulatory Asset
5.0
5.7
Amortization of Annual Accretion on GAAP Pretax Charge2
0.8
-
Total Annual Amortization Expense – EPU costs
5.7
5.7
9
10
11
12
Test Year Recovery – EPU cost amortization over 12 Years
13
14
Total Costs Amortized/Recovered Over 12 Years
$
68.8
$
68.8
15
16
As presented above, Mr. Lindell’s proposal requires the Company to recover
17
$10.1 2 million less of the costs incurred, in addition to earning no rate of return
18
on the investment, and thereby double count the effect of the $10.1 million
19
GAAP pretax charge already recorded by the Company.
2
20
2 This accounting example is for illustrative purposes, using the GAAP amounts from the previous table. If the full
amount of incurred costs is not allowed recovery, the initial GAAP charge to discount recoverable costs and
subsequent accretion would be recalculated accordingly.
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IV.
CONCLUSION
2
3
Q. PLEASE SUMMARIZE YOUR TESTIMONY.
4
A.
In summary, we believe that we accounted for Prairie Island EPU Project
5
costs due to our interpretation of relevant Commission guidance and in light
6
of timing considerations, which are thoroughly addressed in Mr. Clark’s Direct
7
Testimony. Additionally, our accounting treatment, as a regulatory asset, was
8
consistent with FERC and GAAP requirements. We recognize that the final
9
ratemaking impact of the costs is a separate matter to be resolved in this
proceeding.
10
11
12
We continue to seek full recovery of the approximately $79 million in the EPU
13
regulatory asset plus a carrying charge, which we believe is appropriate in light
14
of the reasonableness of the underlying costs, the purpose of AFUDC, and
15
our method of accounting for such costs.
16
17
Q. DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY?
18
A.
Yes, it does.
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