April 29, Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way P.O. Box Lansing, MI 48909

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1 A CMS Energy Company April, 0 Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission Mercantile Way P.O. Box 0 Lansing, MI 0 General Offices: LEGAL DEPARTMENT One Energy Plaza Jackson, MI 0 Tel: Fax: () -00 () - JAMES E BRUNNER Senior Vice President and General Counsel *Washington Office: 0 Rhode Island Ave. N.W. Tel: (0) -0 JON R ROBINSON Suite 00 Vice President and Washington, DC 00 Fax: (0) - Deputy General Counsel Utility Law and Writer s Direct Dial Number: () -0 Regulation Writer s Address: jrrobinson@cmsenergy.com Shelley J Ruckman Kimberly C Wilson Michael G Wilson Assistant General Counsel David E Barth H Richard Chambers Neil R Fellows Gary L Kelterborn Deborah Ann Kile M Bryan Little Kathrine M Lorenz Eric V Luoma Raymond E McQuillan Rhonda M Morris Deborah A Moss* Mirče Michael Nestor Robert M Neustifter Jeffrey D. Pintar Vincent P Provenzano John C Shea Scott J Sinkwitts Charlotte A Walls Attorney Re: Case No. U-0 - In the matter of the application of Consumers Energy Company for Accounting and Rate Making Approval of Depreciation Practices for Electric and Common Utility Plant for the calendar year 00 Dear Ms. Kunkle: Enclosed please find the Rebuttal testimony and exhibits of Consumers Energy Company s witnesses Jan C. Anderson, James E. Borg, William R. Crean, David B. Kehoe, and Dane A. Watson. I have also enclosed a Proof of Service showing electronic service upon the parties. This is a paperless filing and is therefore being filed only in a PDF format. Sincerely, Jon R. Robinson cc: Hon. Mark D. Eyster (ALJ) Parties per Attachment to Proof of Service fl0--

2 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for Accounting and Rate Making ) Case No. U-0 Approval of Depreciation Practices for ) Electric and Common Utility Plant for ) the calendar year 00 ) OF JAN C. ANDERSON ON BEHALF OF CONSUMERS ENERGY COMPANY April 0

3 JAN C. ANDERSON 0 0 Q. Please state your name and business address. A. Jan C. Anderson, One Energy Plaza, Jackson, Michigan 0. Q. Are you the same Jan C. Anderson who previously submitted testimony in this case? A. Yes. Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to: ) provide a case overview of the Company s rebuttal testimony; and ) rebut portions of the direct testimony of Michigan Public Service Commission ( MPSC or Commission ) Staff witness Daniel M. Birkam and portions of the direct testimony of Association of Businesses Advocating Tariff Equity ( ABATE ) witness James T. Selecky. The areas I will be addressing in my rebuttal testimony relate to: ) the adoption of the Staff s proposed Standardized Retirement Units ( SRU s ) for electric property; ) approval of the Staff s proposed overall depreciation rate; ) the Staff s proposed next filing date for an Electric and Common Plant Depreciation Rate Case; and ) the use of the SFAS method for developing distribution net salvage rates. OVERVIEW Q. Please summarize the Company s filing position. A. Consumers filed its case on February, 00 and requested approval of updated depreciation rates, by FERC account, calculated and supported by Mr. Watson s direct testimony. The depreciation study methodology used by Mr. Watson was the Traditional Straight-Line Method consistent with the direction set forth in the Commission s order of December, 00 granting a filing extension. The rate calculations for generation plant included the costs for steam and hydro plant demolition but did not take into account a value for scrap metal. The steam plant demolition studies included a 0% contingency rte0-jca

4 JAN C. ANDERSON 0 0 based on the total estimated demolition costs. The Company did not support a change from its current standard retirement units for #. HVD Overhead Wire and #.0 Distribution Underground Wire. Q. What was the proposed annual depreciation accrual? A. The Company proposed depreciation rates that would result in annual depreciation expense of $0. M. This would have been an increase of $. M over the current rates. Q. What was the overall depreciation rate for electric and common plant? A. The overall rate for the Company s requested depreciation accrual was.%. In its rebuttal filing, the Company s witnesses discuss the adjustments proposed by the Staff and ABATE. The Company is not contesting some of the Staff s adjustments. I will provide an overview of the Company s rebuttal filing that summarizes the adjustments that the Company is not contesting and the adjustments that the Company is contesting. The rebuttal testimony of Mr. Borg, Mr. Crean, Mr. Kehoe, and Mr. Watson provide additional details. STAFF S POSITION Q. What were the staff s objections to the steam demolition studies? A. The staff witness, James LaPan took exception to the following: ) amounts and cost of imported top-soil; ) cost of road removal; ) costs for ash ponds; ) asbestos disposal costs; ) lack of salvage value for demolition scrap; ) substation disposal cost; ) inclusion of 0% contingency factor; ) overhead adder for the combustion turbine facilities; ) inclusion of guard service costs; 0) intake and discharge channel costs; ) exclusion of salvage value for equipment and machinery; and ) inclusion of % demolition project management fee. rte0-jca

5 JAN C. ANDERSON 0 0 Q. What were the Staff s objections to the hydro demolition studies? A. Staff witness, James LaPan took exception to the following costs: ) reseeding and mulching; ) rip rap protection; ) silt fencing; ) inclusion of demolition impact studies costs; ) 0% contingency for sediment removal; ) lack of salvage value for demolition scrap; and ) inclusion of % demolition project management fee. Q. What were the Staff s objections to the requested depreciation rates? A. Staff witness, Ronald Radke took exception to the following factors used to determine depreciation rates: ) the proposed survivor curves for #. Underground Conduit, #. Underground Clearing, and #.0 Structures and Improvements; ) the proposed average service life for #.0 Poles, Towers and Fixtures; ) the proposed negative net salvage percentage for the Other Production accounts #.0 Fuel Holders, #.0 Generators, #.0 Accessory Electric Equipment, and #.0 Misc Power Plant Equipment; ) the proposed net salvage percentage for the Distribution account #.0 Overhead Conductors; and, ) the proposed net salvage rates for the General Plant accounts #.0 Office Furniture and Equipment, #.0 Tools, #.0 Laboratory Equipment, and #.0 Communications Equipment. Q. What was Staff s position with regards to the adoption of the proposed standard retirement units (SRU s) for electric plant? A. Staff continues to support the change to their proposed SRU s for #.0 Overhead Wire and #.0 Underground Wire. Q. What is Staff s position with regards to the overall depreciation rate? A. Staff calculated an overall depreciation rate of.%. rte0-jca

6 JAN C. ANDERSON 0 0 Q. What is Staff s position with regards to the next filing date? A. The Staff is recommending that the Commission order Consumers to file its next Electric and Common Plant Depreciation rate case two years from the date of the order in this case. POSITIONS OF STAFF NOT CONTESTED BY CONSUMERS ENERGY Q. Please summarize the Staff adjustments that Consumers Energy is not contesting. A.. Consumers Energy accepts the Staff s premise that a salvage value, net of preparation costs, should be included in the demolition costs for steam plant. The valuation is described in Mr. Crean s rebuttal testimony.. Consumers Energy partially accepts the Staff s proposed reduction to the contingency included in the total demolition costs. The project contingency was reduced from 0% to %.. Consumers Energy accepts the Staff s premise that a salvage value, net of preparation costs, should be included in the demolition costs for hydroelectric plant. The valuation is described in Mr. Borg s rebuttal testimony.. Consumers Energy accepts the proposed changes to the average life estimate for #.0 Poles, Towers and Fixtures and the proposed change to negative net salvage for Distribution account #.0 Overhead Conductor. Both changes are discussed by Mr. Watson in his rebuttal testimony.. Consumers Energy accepts the Staff s proposed curves for accounts #. Underground Conduit, #. Underground Clearing, and #.0 Structures and Improvements. This is explained by Mr. Watson in his rebuttal testimony. rte0-jca

7 JAN C. ANDERSON 0 0. Consumers Energy accepts the standard retirement units (SRU s) proposed by the Staff but respectfully asks for implementation considerations, explained later in my testimony. Q. Does the Company have an exhibit that summarizes the adjustments to the steam and hydro demolition costs that would result from the Staff positions not being contested by the Company? A. Yes, it does. Please see Mr. Kehoe s Exhibit A- (DBK-) Detailed Analysis of Adjustments to Steam and Hydro Demolition Costs. This exhibit shows the impact of the adjustments on the total demolition costs, as shown in Column L. The following describes the information and how it was developed: Column B - The originally filed total steam and hydro demolition costs, by site, including the 0% contingency fee for steam demolition and % project management adder. See Exhibit A- (DAW-), page of, column labeled Estimated Decommissioning Cost. Column C - This subtracts the % management adder from the amount in Column B. Column D - This identifies the 0% contingency amounts included in Column B. Column E - Each steam site s costs minus the 0% contingency and % project management adder. Each hydro site is minus the % project management adder. Column F - The estimated value of scrap metal at April 00. Column G - The amount of the road removal costs included in the original estimate. rte0-jca

8 JAN C. ANDERSON 0 0 Column H - Each steam site s costs without (i) the 0% steam contingency, (ii) the costs to remove roads, and (iii) the % steam management adder. The hydro costs only exclude the % management adder. NOTE: This column does not reduce the costs by the scrap value. Column I - The % steam contingency (decreased from 0%) multiplied by the total costs in Column H. Column J - The sum of Column H plus Column I minus Column F. Column K - The % project management adder multiplied by the revised total demolition costs in Column J. Column L - The sum of the revised demolition costs in Column J plus the % management adder from Column K. See Exhibit A- (DAW-), Appendix D-, column labeled Estimated Decommissioning Cost in Mr. Watson s rebuttal testimony. Column D, Line - Shows the adjustment for the reduction from a 0% steam demolition contingency to a % contingency. This is the difference between Column D, line and Column I, line. Column B, Line - Shows the difference in the management adder due to the adjustments made to the multiplier base (total cost). The original management adder is the difference between Column B, line and Column C, line. The revised adder is shown in Column K, line. This amount agrees with the adder change amount in Column L, line. Column L, Line - Shows the total of the scrap value adjustments. This amount agrees with the total in Column F, Line. rte0-jca

9 JAN C. ANDERSON 0 0 Column L, Line - Shows the adjustment for road removal. This amount agrees with the total in Column G, Line. Column L, Line - Shows the % contingency reduction. This amount agrees with the total in Column D, line. Column L, Line - Shows the difference in the adder due to the adjustments made to the multiplier base (total cost). This amount agrees with the amount in Column B, line. POSITIONS OF STAFF OPPOSED BY CONSUMERS ENERGY Q. Please summarize the adjustments proposed by Staff that Consumers Energy is contesting. A.. Consumers Energy opposes Mr. LaPan s proposed values for steam scrap. The reasons are set forth by Mr. Crean in his rebuttal testimony.. Consumers Energy opposes Mr. LaPan s proposed changes to the Company s steam demolition studies for imported top-soil, road removal, ash ponds, asbestos disposal, substation disposal, overhead adder for combustion turbines, guard services, intake and discharge channel, and salvage value for equipment and machinery, for the reasons explained in Mr. Crean s rebuttal testimony.. Consumers Energy opposes Mr. LaPan s proposed changes to the Company s hydro demolition studies for the costs of reseeding, rip rap, silt fence and demolition impact studies, for the reasons explained by Mr. Borg in his rebuttal testimony.. Consumers Energy opposes Mr. LaPan s proposed elimination of the project management adders, for the reasons explained by Mr. Kehoe in his rebuttal testimony. rte0-jca

10 JAN C. ANDERSON 0. Consumers Energy opposes Mr. Birkam s proposed negative net salvage percentages for the Other Production accounts #.0 Fuel Holders, #.0 Generators, #.0 Accessory Electric Equipment, and #.0 Misc Power Plant Equipment, for the reasons explained by Mr. Watson in his rebuttal testimony.. Consumers Energy opposes Mr. Birkam s proposed life for the Distribution account #.0 Overhead Conductors, for the reason explained by Mr. Watson in his rebuttal testimony.. Consumers Energy opposes the proposed changes to the net salvage percentages for the General Plant accounts # Office Furniture, # Tools, # Laboratory Equipment, and # Communications Equipment, for the reasons explained by Mr. Watson in his rebuttal testimony.. The Staff s recommended accrual rates and overall depreciation rate of.% must be adjusted. The Staff included all their proposed adjustments in the calculations for revising the proposed depreciation rates. As explained in his rebuttal testimony, Mr. Watson rebalanced the reserves after including the demolition cost estimate adjustments for salvage values, % reduction in steam contingency, elimination of the road removal costs and the adjustment to the total % project management adder related to these changes. For the same reason, Mr. Birkam s recommended reserve balances must be adjusted. rte0-jca

11 JAN C. ANDERSON POSITIONS OF ABATE OPPOSED BY CONSUMERS ENERGY Q. Please summarize the ABATE recommendations that are being contested by Consumers Energy.. A.. Consumers Energy opposes ABATE s recommendation to reduce demolition costs by 0 0 0%. ABATE explained that the arbitrary reduction of 0% was made to adjust the demolition cost estimates for: ) the demolition studies escalation rate; ) the elimination of contingency factors; and, ) the potential site value. Mr. Watson explains why the Employment Cost Index (ECI) is a better index for inflating demolition costs. Mr. Crean explains why it is critical to include a contingency factor in demolition cost estimates. Mr. Watson explains why a future site value should not be included in a demolition cost estimate.. Consumers Energy opposes ABATE s recommendation to use the non-power operation option as the basis for decommissioning estimates, for the reasons explained by Mr. Borg in his rebuttal testimony.. Consumers Energy disagrees with ABATE that the life of the Zeeland plant should be extended from the year life estimated by the Company to years, for the reasons explained by Mr. Kehoe in his rebuttal testimony. REBUTTAL STANDARDIZED RETIREMENT UNITS (SRU s) Q. Do you agree with Staff s position on adoption of the SRU s? A. The Company accepts the adoption of the electric SRU s, but respectfully requests that the change in retirement units be effective on the first day of the subsequent year, providing there is at least 0 days from the order date to the first day of the subsequent year. The rte0-jca

12 JAN C. ANDERSON 0 intent of this request is to avoid partial year impacts in order to facilitate annual plant account analysis, and to provide adequate time for the needed Information System changes and staff training. OVERALL DEPRECIATION RATE Q. Do you agree with the Staff s recommendation to adopt the overall depreciation rate of.%? A. No. The rebuttal witnesses have pointed out in their testimony the issues that could affect the overall rate calculation. I am requesting that the Commission adopt the overall depreciation rate of.% as calculated by Mr. Watson in his rebuttal testimony. FILING DATE Q. Do you agree with the Staff recommendation that Consumers file a new depreciation rate case two years from the date of the Commission order is this case? A. No. The expense and time to prepare a depreciation rate case for electric and common plant is significant due to the character of the generation plant. This property requires two technology specific demolition studies, one for steam generation and the other for hydroelectric plant. Each can take up to six months to prepare. Additionally, a depreciation expert must be engaged to evaluate the electric and common plant activity and prepare a depreciation study. The Company respectfully requests at least three years before its next mandated filing. rte0-jca 0

13 JAN C. ANDERSON 0 SFAS NET SALVAGE METHODOLOGY Q. Do you concur with ABATE s recommendation that the Commission should establish distribution rates using the SFAS method? A. No. In MPSC Case No. U- Accounting and Ratemaking Treatment for SFAS No., this alternative net salvage methodology was extensively evaluated and compared to the Inflation Adjusted Method and the Traditional Method. Ultimately, the Commission ordered Consumers Energy to use the Traditional Method with the Staff proposed SRU s in this filing. The Company concurs with the Staff s position, as described in Daniel Birkam s direct testimony in this case, that the Traditional Method produces a reasonable present value of the net salvage expense to be recovered without the need for a present valuation discount using an estimated discount rate of a future value reached with an estimated inflation rate. The Company requests that the Commission deny ABATE s recommendation. Q. Does this conclude your rebuttal testimony? A. Yes. rte0-jca

14 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for Accounting and Rate Making ) Case No. U-0 Approval of Depreciation Practices for ) Electric and Common Utility Plant for ) the calendar year 00 ) OF JAMES E. BORG ON BEHALF OF CONSUMERS ENERGY COMPANY April, 0

15 JAMES E. BORG 0 0 Q. Please state your name and business address. A. James E. Borg, 0 Watts Road, Madison, WI -00. Q. Are you the same James E. Borg who previously submitted testimony in this case? A. Yes. Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to provide rebuttal to portions of the direct testimony of Michigan Public Service Commission ( MPSC or Commission ) Staff witness James E. LaPan. The areas I will be addressing in my rebuttal testimony relate to the Staff s recommended hydroelectric plant demolition cost adjustments for: ) reseeding and mulching; ) rip rap protection; ) silt fencing; ) impact studies; ) sediment removal; and ) scrap value of salvageable material. Q. Are you sponsoring any exhibits in your rebuttal testimony? A. Yes. I am sponsoring Exhibit A- (JEB-). RESEEDING AND MULCHING Q. Do you agree with Staff s assertion in the Direct Testimony of James La Pan (lines and of page 0) that the Company s total estimate for the reseeding and mulching application should be reduced by $,,? A. No. The Staff has based its calculation of the total estimated cost for the reseeding and mulching of the reservoir areas on the State of Maine s Erosion and Sediment Control Best Management Practices (BMP). These practices are for the restoration of graded site work in easily accessible areas of less than one acre exposed during final grading. It is my opinion that these practices are not applicable for the reseeding and mulching of the ungraded reservoir areas of the Company s dam sites. These dam sites vary from rte0-jeb

16 JAMES E. BORG 0 0 acres to,0 acres, the latter which represents an area of approximately square miles. The sizes of the sites are far different from the sites at issue in the Maine BMP. Also, the Staff does not agree that a secluded and empty reservoir would have an accessibility issue. My position is that access to the reservoir areas would have difficult accessibility issues for the following two reasons: ) The Company s plan adopts a staged removal in which the reservoir levels are drawn down at a controlled rate of one foot per month. This staged removal plan would be implemented to stabilize the sediment by reestablishing the original river channel by dredging and controlling the drop in the groundwater saturation line. During the staged draw down, the access to the exposed sediment for reseeding and mulching purposes would be from the river, since the construction of access roads through the saturated reservoir sediment would be extensive in order to reach the entire area, and be both difficult and costly. ) Recent experience with the exposure of sediment in a drained reservoir resulting from a dam failure has shown that the construction of access roads through the drained reservoir for the construction of stream closure and diversion works is both difficult and costly. Staff used the State of Maine s BMP unit cost of $0./SY (square yard) for the reseeding and mulching of the reservoir areas. The unit cost for the reseeding and mulching of the three acre Stronach Reservoir, escalated to 00 prices, was $0./SY. Therefore, it is my opinion that the Company s estimated unit cost of $0.0/SY for the reseeding and mulching of the exposed reservoir areas of the Company s projects is rte0-jeb

17 JAMES E. BORG 0 0 appropriate, and that no reduction should be made to the Company s reseeding and mulching estimates. RIP RAP PROTECTION Q. Do you agree with Staff s assertion in the Direct Testimony of James La Pan (line and of page 0) that the Company s total estimate for providing rip rap protection be reduced by $,, by using less rip rap volume at a lower price and potentially using demolition debris such as concrete? A. No. The Staff has based its calculation of the rip rap volume on the assumption that 00 linear feet of protection would only require. CY (cubic yards) of material, and that the unit price for the placement of the material specified as Riprap-Heavy would be based on the 00 Wisconsin Department of Transportation (DOT) unit price of $./CY. The Staff also asserted that demolition debris, such as concrete, could be substituted for rip rap to further lower the cost for erosion protection. The retirement plan features a rip rap lined riffle section extending 00 linear feet to restore the natural river channel through the original dam site. The rip rap riffle would consist of a rip rap blanket to control erosion through the original dam cutoff cross section to the tailrace area which has experienced serious channel degradation resulting from years of spillway and powerhouse operation. The costs for the 00 linear feet of channel protection is based on the placement of 0,000 CY of rip rap specified to provide the durability necessary to control flows and erosion through this critical river section. It is my opinion that the use of concrete rubble from the demolition of the project structures should not be considered because this material would vary from site-to-site and structure-to-structure. The quantities, strengths, and gradations required for long-term rte0-jeb

18 JAMES E. BORG 0 0 durability and performance cannot be guaranteed. In addition, to provide safety to the public all of the exposed steel reinforcement rod within the rubble would need to be burned off which is a labor-intensive and costly process. The use of demolished concrete for erosion control at these sites could impact the water quality needed for the restoration of fish habitat and adversely affect the esthetics of an area restored for recreational use. The retirement study unit price of $0/CY used by the Company for the placement of the riffle resulted from the application of a degree of difficulty of. to the 00 Wisconsin DOT unit price of $./CY. This degree of difficulty is based on my previous experiences with the placement of rock fill in flowing water during the diversion of river flow around construction sites, difficult accessibility of the equipment to the riffle section, and the risks to equipment and safety of personnel working in flowing water. Therefore, it is my opinion that the price of $,00,000 for the construction of a rip rap riffle section though each of the Company s dam sites is appropriate, and that no reduction in this unit price or total cost for rip rap protection should be made. Q. Do you agree with Staff s assertion in the Direct Testimony of James La Pan (lines and of page ) that the Company s total estimate for providing rip pap protection, using a unit price of $0. per linear foot, be reduced by $,? A. No. The Staff used a unit price of $0. per linear foot for silt fencing for its calculation of the total cost of silt fencing as shown on Exhibit S-. This resulted in Staff s calculated reduction in the total cost of silt fencing of $,. It was not explained in rte0-jeb

19 JAMES E. BORG 0 0 testimony why staff reduced the unit price of silt fencing by $.0 per linear foot from the Company s estimate of $.0 per linear foot. The Company s retirement study started with a unit price of $0.0 per linear foot, based on the 00 Wisconsin DOT average unit price for silt fencing, and then a % contingency was applied to arrive at the $0.0 per linear foot unit price, as indicated in the retirement study Construction Cost Estimates tables. The application of the % contingency is consistent with the pricing approach described in Section Cost Estimating Methodology of the retirement study reports. It is my opinion that the use of the $0.0 per linear foot unit price for silt fencing is appropriate, and that no reduction in this unit price or total cost for silt fencing should be made. IMPACT STUDIES Q. Do you agree with Staff s assertion in the Direct Testimony of James La Pan (lines through of page ) that some of the Project Impact Cost studies were not necessarily applicable to every option or that they weren t applicable at all? A. No. The only specific item singled out by the Staff concerns condemnation requirements. An assessment of potential condemnation requirements and costs is included to address efforts or procedures that may be initiated by either the dam owner or by others. As a FERC licensee, dam owners seeking to surrender their license may be required to condemn lands to provide public facilities such as access roads, recreational facilities, or power lines. FERC licensees also have responsibilities under the Historic Preservation Act. When archaeological resources subject to protection under the Act are covered by impounded waters, they are considered to be in a protected state. When reservoirs are rte0-jeb

20 JAMES E. BORG 0 drained, the archaeological deposits may be exposed and require protection through data recovery or other means. If private property owners are not amenable to a cooperative approach, condemnation can be required. In summary, a number of issues could arise and would have to be resolved through condemnation. Further, it is not uncommon for local entities to initiate condemnation procedures against the owners of dams that are scheduled for removal. Mead & Hunt is currently involved in a dam removal effort which incurred considerable legal expenses to counter local efforts to avoid dam removal. Q. Do you agree with Staff s suggestion in the Direct Testimony of James La Pan (line through of page ) that the Company s estimate for the costs of the impact studies be reduced by %? A. No. The comments made by Mr. La Pan on reducing the impact study costs by % are difficult to address because they are non-specific in nature. However, it is noted that the estimates included site-specific man-hour estimates for the various impact study activities. It is my opinion that the impact studies are necessary for every dam removal option included in the retirement studies and no cost reductions should be made. rte0-jeb

21 JAMES E. BORG 0 0 SEDIMENT REMOVAL Q. Do you agree with Staff s assertion in the Direct Testimony of James La Pan (lines through of page ) that the Company s total estimate for sediment removal be reduced by $,,? A. No. The Staff incorrectly assumed that Mead & Hunt applied a % contingency to the contractor s estimate before the 0% project management and profit cost was added, and then applied an additional % to the total construction cost. In reality, a 0% contingency for the sediment removal costs was applied to the estimated volume of sediment and a separate % contingency was applied to the contractor s final removal cost. Both of these contingencies are consistent with the assumed values described in Section Cost Estimating Methodology in the retirement study reports. Mead & Hunt did not apply a second % contingency to arrive at the costs presented in the Construction Cost Estimates tables in the retirement study reports. Exhibit A- (JEB-) to my rebuttal shows that the % contingency was applied to the volume of excavation (Column ) rather than the $ per CY (Column ). However, the application of the % contingency to the sediment volume, rather than the unit price, does not change the resulting overall cost for the removal of sediment for each project (Column ). It is therefore my opinion, that the costs for the removal of sediment as presented in the Construction Cost Estimates tables in the retirement study reports are appropriate, and that no reduction for sediment removal costs should be made. rte0-jeb

22 JAMES E. BORG 0 SCRAP VALUE Q. Do you agree with Staff s recommendation in the Direct Testimony of James La Pan (lines and of page ) that the equipment salvage value of $,0, be applied to offset the Company s estimated decommissioning costs of its hydroelectric generation plants? A. No. Staff incorrectly estimated the value of scrap material by using the statistical design formulas that Mead & Hunt used to estimate the weights of steel and other materials to be removed. Staff requested the formulas in an audit request. Q. What value should be used to offset the hydroelectric retirement costs? A. I estimated the scrap value, net of preparation and handling costs, to be $,0,0. I derived this amount by adding the tons of steel listed in each site s Construction Cost Estimates table contained in the retirement studies. Mr. Kehoe gave me the tonnages of steel at the Webber and Calkins Bridge (Allegan) sites. Mr. Crean provided me with the factors he used to estimate the steam plant scrap value, which were: steel at $00/ton and the preparation and handling costs of $/ton. I calculated the gross scrap value for hydroelectric plant to be $,,000 and the cost of preparation and handling to be $0,0. Thus, the correct adjustment to reflect net scrap value for hydroelectric plant is $,0,0. The detail of tonnage, gross metal values and costs by site are shown in the table below: 0 rte0-jeb

23 JAMES E. BORG HYDROELECTRIC PLANT - NET SCRAP VALUE A B C D E F Line Hydro Site Steel Steel Scrap Prep & Net Scrap Item Tons Value Handling Costs Value $00/Ton $/Ton D minus E = F Alcona,00,, Calkins Bridge 0,00,,0 (Allegan) Cooke 0 0,00,, Croton,000,0,0 Five Channels,00,0, Foote,00,,0 Hardy,0,00,, Hodenpyl,00,, Loud,00,, 0 Mio,00,0, Rogers,00,, Tippy,00,, Webber 00 0,000,00,00 TOTAL,,,000 0,0,0,0 rte0-jeb

24 JAMES E. BORG Q. Does this conclude your testimony? A. Yes, it does. rte0-jeb 0

25 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for Accounting and Rate Making ) Case No. U-0 Approval of Depreciation Practices for ) Electric and Common Utility Plant for ) the calendar year 00 ) EXHIBIT OF JAMES E. BORG ON BEHALF OF CONSUMERS ENERGY COMPANY April 0

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28 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for Accounting and Rate Making ) Case No. U-0 Approval of Depreciation Practices for ) Electric and Common Utility Plant for ) the calendar year 00 ) OF WILLIAM R. CREAN ON BEHALF OF CONSUMERS ENERGY COMPANY April 0

29 WILLIAM R. CREAN 0 0 Q. What is your full name and business address? A. My name is William R. Crean. My business address is 0 Green Court, Ann Arbor, Michigan 0. Q. Did you file direct testimony in this proceeding on behalf of Consumers Energy Company (CECo or Company)? A. Yes, I did. Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to rebut and address the following issues: The Staff s proposed adjustment for imported top-soil The Staff s proposed adjustment for road removal The Staff s proposed adjustment for ash ponds The Staff s proposed adjustment to the asbestos disposal costs The Staff s proposed adjustment for the net salvage value of demolition materials of the steam plants The Staff s proposed adjustment to the disposal of the substations The Staff s proposed adjustment for salvage value of equipment and machinery The Staff s proposed adjustment to the 0% contingency factor The Staff s proposed adjustment for the overhead adder for the combustion turbine facilities The Staff s proposed adjustment for guard service costs The Staff s proposed adjustment to the discharge channel costs rte0-wrc

30 WILLIAM R. CREAN The Association of Businesses Advocating Tariff Equity s (ABATE) proposal to reduce the demolition costs by 0%. Q. Are you sponsoring any rebuttal testimony exhibits? A. Yes. I am sponsoring the following rebuttal exhibits: Exhibit Description 0 0 A- (WRC-) Steam Generation Net Salvage Values A-0 (WRC-) Summary of Steam and Combustion Turbine Demolition Estimated Costs Q. Were these exhibits prepared by you or under your direction? A. Yes. Rebuttal of Staff Witness James LaPan ADJUSTMENT FOR TOP SOIL Q. What is Staff s proposal regarding the importing of off-site top soil? A. Staff Witness James LaPan proposes on Page, line, of his testimony and Exhibit S- Schedule, to make an adjustment to the steam demolition costs in the amount of a negative $,,0 by reducing the volume and cost of imported topsoil. He proposes utilizing the demolition material as the fill and then covering with imported topsoil. There are two problems with Mr. LaPan s recommendation. First, Mr. LaPan failed to recognize that the Company s original estimate assumed that all available crushed concrete from the demolition process would already be utilized as fill in the plant s basements. There would be insufficient material from this process, however, and the estimates therefore included gravel fill to complete backfilling the basements. JH Campbell Unit and Karn & do not have a basement and the concrete was removed offsite because, while the concrete is rte0-wrc

31 WILLIAM R. CREAN 0 0 appropriate for use in filling basements, it is not appropriate for grading sites. Therefore, because the on-site demolition material is either already used as fill for basements, or is not appropriate for use in grading sites, the quantities of imported fill and topsoil as reported in the Company s estimates can t be reduced by the use of on-site demolition material. The second problem with Mr. LaPan s adjustment is his use of pricing from the Wisconsin Department of Transportation average unit price list as the basis for changing the Company s estimate of $.0 per cubic yard for placing and spreading topsoil to $. per cubic yard. This $. per cubic yard price is for placing and spreading topsoil. For furnishing and spreading topsoil from the same Wisconsin DOT 00 awarded contracts, the price is $.. (The difference between the $. and the $. amounts represents the cost of the materials.) From the Michigan DOT 00 and 00 weighted average unit prices, the average awarded price for furnished and spreading topsoil is $0.. This average price is, however, based on an average quantity of 00 cubic yards. The Company believes that the 00 cost of $.0 is representative of the cost to furnish and spread topsoil in the quantity required by each site and the Staff s proposal to use $. is significantly understated. The Staff s disallowance of $,,0 to the Company s soil estimate should be rejected. ROAD REMOVAL Q. What is Staff s proposal regarding coverage of road costs? A. Staff Witness James LaPan proposes that the restoration of the sites to an Industrial Brownfield site not include the removal of any roads. Therefore, he assumes there would be no need to cover the removed roads with topsoil. This adjusts the estimated costs rte0-wrc

32 WILLIAM R. CREAN 0 0 downward by $,,. The Company s approach to restoring the sites to a Brownfield condition was to have an aesthetically appealing site with grass growing over the entire site and not interrupted by a patchwork of roads. This condition is generally the accepted criteria for the restoration of a site back to a Brownfield status. However, for purposes of this depreciation case, the Company is willing to assume that the roads will be left as they exist and re-visit the issue again in the future. There is a calculation error in the Staff s adjustment, however, which should be corrected. Specifically, the Staff included road coverage for the Morrow site which was not included in the Company s estimate. When corrected, this adjustment reduces the Company s estimated steam demolition costs for road removal costs by $,,. ASH PONDS Q. What is Staff s proposal regarding ash pond costs? A. Staff Witness James LaPan made several significant adjustments to the estimated remediation costs for the ash ponds at the Company s coal-fired generating plants. Whiting: Mr. LaPan reduced the cost for the Whiting Ash Ponds - from $,, to $,0,0, a reduction of $,,0 on Schedule, Exhibit S-. He has not provided calculations on this schedule nor in his testimony explaining how he reduced the cost per acre. He references a 0-year period implying that the period is from 00. Appendix C - the ARO reference material - states clearly that the data is 00 and by 0 the ponds would be closed. Thus, we have been unable to determine the basis for his adjustment. Cobb: Mr. LaPan also disallowed the $,0,0 coverage of the temporary ash pond rte0-wrc

33 WILLIAM R. CREAN at Cobb without any explanation for this action. This acreage is a holding area for the Cobb s ash before it is trucked to the JH Campbell Plant. At the end of the BC Cobb plant service life, this area will have to be remediated. JH Campbell Unit : Mr. LaPan reduced the cost of the JH Campbell Unit ash ponds by averaging two blended probability costs from the Weadock and JH Campbell Units &. The options in these two probability cases are: Coverage similar to BC Cobb Utilizing Bottom Ash as final cover Only maintenance of the already covered cells 0 0 None of these options are applicable to the JH Campbell Unit plant since () ash is being placed dry vertically as opposed to the low horizontal configuration at the BC Cobb ash fields; () bottom ash at JH Campbell Unit is not suitable as cover; and () the cells don t exist at JH Campbell Unit and therefore the maintenance cost can t be applied. It appears that the Staff did not accept the $0,000 per acre (stated in 00 dollars; 00 dollars would be $,000) for JH Campbell Unit, but the Staff has not considered the degree of difficulty of applying membrane liner and soil on a slope hill side which increases the final cost to cover the ash pond. The Company s original estimate did assume vertical stacking of the ash, which does reduce the final acreage required for the disposal of ash. JH Campbell Units & : Mr. LaPan adjusted the cost figures for the JH Campbell Units &. The JH Campbell Units & final ruling from the Michigan Department of Environmental Quality has not been issued. Only ponds B, C, and D have special grass engineered by Michigan State University growing in the ash on top of the ponds. The rte0-wrc

34 WILLIAM R. CREAN 0 remaining alphabet ponds (A, and E through K) are still active. With the Environmental Protection Agency s (EPA) increased emphasis on treatment of hazardous ash products, the likely requirements for the coverage of these ponds will be a membrane liner with two and a half feet of soil coverage. For the above stated reasons, the Staff s steam demolition cost reduction recommendation related to ash pond remediation should be rejected. ASBESTOS DISPOSAL Q. What is Staff s proposal regarding asbestos disposal costs? A. Mr. LaPan s recommended reduction of asbestos disposal costs as stated in his testimony on pages thru 0 is based on two premises; ) reduction of the disposal supplies to $.0 per man-hour, and ) reduction of the amount of volume to be landfilled to twice the volume of asbestos removed instead of. times the volume of asbestos, as was estimated by the Company. The Staff assumed that a large removal project will use less handling supplies than a small interim project. This is incorrect as workers handling asbestos will perform the same work and comply with the same handling requirements regardless of the size of the asbestos remediation project; i.e., the unit cost of this work does not change as the volume increases. These jobs do not benefit from economies of scale. Therefore, the Staff s proposal to reduce steam demolition costs for lower asbestos disposal costs should be rejected. rte0-wrc

35 WILLIAM R. CREAN 0 0 NET SALVAGE VALUE Q. Has the Company s position on salvage value changed from that presented in the steam plant demolition study Exhibit A- (WRC-)? A. Yes. As explained by Company witness Jan Anderson in her rebuttal testimony, Consumers Energy is modifying its position to reflect a positive net salvage value. While the Company still adheres to its contention that the volatility of the scrap metal market makes predicting the future value for the offsetting cost of the dismantling of the Company s fossil plants an extremely risky and problematical exercise, the Company does accept that there may be an offsetting cost to the demolition of a plant which is the scrap value of the components. While the cost of removal representing the labor and equipment components will increase annually at a rate that is predictable, the salvage value goes up and down and cannot be easily predicted. A review of the indices for the last several years supports this statement. While the Company is willing to accept a positive net salvage value, the Staff s calculation of net salvage is incorrect. To measure the impact of the Staff s calculation errors, the Company utilized the quantities for the fossil plants and for the combustion turbine plants estimated the component weights. This is similar to the Staff s approach. However, the Staff treated conduit and cable tray as stainless steel. In fact, these components are galvanized steel and should be treated as ferrous metal. Similarly transformer metal is treated as transformer (copper and ferrous material) and not aluminum as the Staff categorized it. Finally, April 00 is the data date for the demolition estimates and April 00 is the date the Company used for the scrap metal pricing from Global Scrap. To use any other rte0-wrc

36 WILLIAM R. CREAN 0 0 date introduces another element of uncertainty. It is unclear what the various indices dates are on Staff s Schedule. Q. Have you developed a corrected scrap estimate? A. Yes, my Exhibit A- (WRC-) details the net salvage value for steam plant. Q. How did you determine the values on Exhibit A- (WRC-)? A. The weight of the material component was multiplied times the cost of the scrap material listed at the top of the column. This is the same general method as Mr. LaPan used. As noted above, I determined the prices based upon the April 00 price from Global Scrap, which has a web site with historical data. Again my source is the same as Mr. LaPan. The prices listed by Global Scrap are the prices paid at the mill and exclude the cost of preparing the scrap material and transporting the scrap. The preparation and handling costs need to be accounted for in determining the final value to the demolition contractor. This charge is subtracted from the price received at the mill. On Exhibit A- (WRC-), a cost of $ per ton is applied against the weight of the ferrous metal to account for this cost. On Staff s Schedule, it appears that the Staff used % of the total of the column labeled as Value of Scrap Metal plus the column labeled Preparation & Handling to develop the costs for Preparation and Handling. This is a confusing and somewhat circular calculation and results in a gross overstatement of scrap value. The Staff s Schedule 0 - Hydro Salvage Value appropriately subtracts the preparation and handling costs from the total value of scrap. This is the same methodology used by the Company. The Company believes that a cost per ton is more accurate than using a percentage, however, since preparation, handling and transportation is more fixed and will not be influenced by the swings in scrap values. rte0-wrc

37 WILLIAM R. CREAN 0 As a result, my estimate for gross scrap value is $,,0 with an offsetting cost for preparation and handling of $,,. The net salvage value is $,,. If net salvage value is reflected in the final order in this case, the Commission should utilize this amount. SUBSTATION REMOVAL Q. What is Staff s proposal regarding substation costs? A. The approach by the Company and Mr. LaPan in determining the removal substation cost is the same in that a cost to remove the entire substation was multiplied by the Company s ownership percentage in each plant substation. The difference is that Mr. LaPan elected to take a cost removal estimate from of $, without knowing the basis of what may have been included in that estimate, and then escalated it to 00 dollars, $,000 as shown on Schedule. The Company s approach was to develop a current revised cost for an entire substation removal which would be consistent with the assumptions for the associated generating plant removal. The revised representative cost for the substation as stated in the footnotes on each plant s estimate is $0,000. The Company believes that its estimate for the complete removal of the substation is more accurate than the Staff s proposal. rte0-wrc

38 WILLIAM R. CREAN 0 0 EQUIPMENT AND MACHINERY SALVAGE VALUE Q. Do any of the components in the plants have any additional value other than scrap? A. No. Mr. LaPan in his testimony on page indicates that he has not calculated any salvage value for reuseable site equipment and machinery, explaining that he was waiting on the Company to furnish him information. The Company responded to the Staff s audit question # and provided the following information: With a plant at the end of its service life, any equipment and buildings within the plant are worn or obsolete and have no use at any other facility and therefore its resale value is zero. This opinion has not changed. Indeed, with the increasing number of coal fossil units nationwide that are planned to be retired, any potential use for this equipment and machinery is highly unlikely. CONTINGENCY FACTOR Q. Do you agree with Mr. LaPan s statement on page of his testimony to reduce the contingency factor from 0% to 0%? A. No, Mr. LaPan accepts the concept that the demolition estimate should have a contingency factor. His rationale for not accepting the 0% factor is that the estimates prepared for the demolition of the hydro plants used % and the Black & Veatch (B&V) initial estimates for three steam plants were.% lower than a demolition contractor. B&V then used this guidance to raise the estimates by that percentage. Mr. LaPan uses this adjustment to lower the 0% contingency factor by the value of the.%. Staff Witness LaPan states, on page of his testimony, that: Reductions in cost contingencies should be realized from rte0-wrc 0

39 WILLIAM R. CREAN 0 0 experienced gained on similar projects. Staff believes that the expertise of the consultants should result in a reduction of the cost contingency in the amount of any premium charged for its level of experience. Therefore Staff has adjusted the contingency from 0% to 0%. He also states on page that the contingency factor should be applied to the demolition costs less the value from scrap metal. Whatever contingency factor is used, it should not be applied to the resultant costs after scrap value is subtracted from the demolition estimate. Increasing the reduction for the steam scrap value (as discussed above) implies that either the weight amounts of the plant will increase and/or the cost per unit of scrap will go up. There is no data to verify how accurate the estimates are for the weight components in plants, thus increasing the uncertainty underlying the need for a contingency. This is a more accurate method for the calculation. Q. The Staff points out that the hydro plant demolition estimate used a % contingency, while the fossil study used a 0% estimate. What is the impact of this difference? A. Refer to Exhibit A- (DBK-), Column I, row. Due to lowering the base dollars by adjusting for the market value of scrap, the Company s contingency value at % with the accepted reduction for road removal costs, would be $,0, million compared to the previous Company contingency at 0% of $,,. If a % contingency on steam removal costs is adopted, it decreases the Company s originally estimated steam demolition costs by $,, (see Exhibit A- (DBK-), Column D, row. rte0-wrc

40 WILLIAM R. CREAN 0 0 Q. What amount should the Commission include for contingencies? A. The Commission should include an amount no less than $,0,. The contingency factor is a cost allowance for field-related problems that are likely to occur. A % contingency factor in this fossil study results in a reasonable budgetary estimate of demolition costs for Consumers Energy Company s steam production power plants and the combustion turbine projects, and would be consistent with the approach used for the hydro plants. I believe that the net salvage estimate, including the scrap and contingency assumptions, provided for the demolition of the fossil burning power plants is reasonable when compared to past demolition estimates of the Company s steam production power plants and demolition estimates for other steam production power plants. COMBUSTION TURBINE OVERHEAD Q. What is Staff s proposal regarding Project Overhead Costs for the Combustion Turbine Estimates? A. Mr. LaPan states at page of his testimony that the contractor s project overhead has been accounted for twice in the Company s estimate; once in the items in Category D and again as a calculation at the end of the estimate. He is proposing a reduction of $,. Category D summarizes the costs associated with operating the project site activities. The % calculation at the end of the estimate is for the demolition contractor recovery of its corporate overhead expenses and doesn t duplicate the project site costs. For a company to continue as a going concern, it has to recover its corporate overhead, i.e. the % charge. The Staff s proposed adjustments to the combustion turbine estimated demolition costs should be rejected. rte0-wrc