Control Number : Item Number: Addendum StartPage: 0

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1 Control Number : Item Number: 1090 Addendum StartPage: 0

2 SOAH DOCKET NO ^^ j^ PUC DOCKET NO ^^ = J^1( 84 t k PN 42 ^ APPLICATION OF SOUTHWESTERN BEFORE Y =4;r, -, ELECTRIC POWER COMPANY FOR PUBLIC UTILITY COMMIS4f^1 ^`^^'* 4 e AUTHORITY TO CHANGE RATES AND RECONCILE FUEL COSTS OF TEXAS TEXAS INDUSTRIAL ENERGY CONSUMERS' RESPONSE TO PROPOSED CHANGES TO PROPOSAL FOR DECISION On July 2, 2013, the ALJs submitted a number of changes and corrections to the Proposal for Decision. In attempting to correct the recommendations relating to the Turk Plant, however, the ALJs introduced several new errors. This response addresses the four proposed changes to the Turk Plant recommendations identified on page 1 of the July 2 letter. The Office of Public Utility Counsel and the State Agencies also join in this response. 1. Calculation of SWEPCO's Share of Turk Plant Costs SWEPCO's share of the Turk Plant is 73.3%.1 The original PFD erroneously applied the 73.3% reduction to the total plant costs twice, rather than once. In correcting that error in the July 2 letter, however, the ALJs erroneously quantified the effect of applying the 73.3% factor a single time. 73.3% of the $947 million of total Turk investment as of June 2010 equals $694 million, not the $703 million shown on the first page of the ALJs' July 2 letter. As discussed elsewhere, TIEC disagrees with the use of the June 2010 amount, but whatever amount is used, SWEPCO's share is 73.3%. It appears that the $703 million number used by the ALJs was introduced in a footnote to SWEPCO's Exceptions, without any citation to the record.2 SWEPCO asserted in that footnote that, while it owned only 73.3% of the Turk Plant, it somehow was responsible for 74.2% of the costs. There was no explanation for why SWEPCO's customers should pay for a larger share of the Plant than they own. Further, such a position would be inconsistent with the Commission's Order in Docket 33891, which (i) required SWEPCO to hold Texas ratepayers financially harmless from any adverse impact related to Turk not being fully subscribed by utilities or t PFD at 40; ALJs' July 2, 2013 letter at 1. 2 SWEPCO Exceptions at 25 n I 0^ 0

3 wholesale customers and (ii) "specifically disallow[ed] any allocation of the Turk Plant base rate costs that are not used for retail purposes to Texas retail ratepayers."3 The ALJs did not accept SWEPCO's 74.2% calculation, but rather specifically noted that SWEPCO's share should be 73.3%.4 Nonetheless, the ALJs appear to have used a dollar amount based on 74.2%, as opposed to 73.3%. Whatever amount the Commission ultimately adopts as the total amount of eligible Turk costs, if any, the percentage of SWEPCO's share of those costs should be 73.3% It should be noted that the above calculation of SWEPCO's share is only necessary if the Commission concludes that SWEPCO has met the conditions in the Docket CCN Order. If the Arkansas CECPN is found to be a condition of the Texas CCN, as TIEC and other parties urge, then no Turk costs would be included in base rates at this time for either Texas or Arkansas ratepayers. Alternatively, if the Commission concludes that the CCN conditions were met but that the Turk Plant should be treated as a cancelled plant, no Turk costs should be included in rate base whatsoever. Rather, the Commission would establish in this case or a subsequent case: (i) the amount of the prudent costs through the time that the Plant should have been cancelled; and (ii) the amortization period for the recovery of those costs. II. Date for Calculating Turk Costs The PFD awarded SWEPCO its construction costs for Turk through April 2010 based on costs shown in an April 30, 2010 SWEPCO accounting statement.5 This statement was included in the AEP presentation dated June 1, 2010 that showed that the Plant would be worth less than it would cost to complete. Despite the fact that this analysis showed that the Plant was uneconomic in April 2010, the ALJs now propose to allow SWEPCO to recover its costs through the end of June This adjustment to the PFD is unfounded and is contrary to the ALJs' other findings on Turk decisional prudence. SWEPCO had an ongoing duty to monitor the economics of the Turk Plant during construction.6 The ALJs found that, despite several red flags that should have caused SWEPCO 3 Docket No , Order at 9, 20 (Aug. 12, 2008). 4 July 2, 2013 letter from ALJs at 1. 'PFD at 40 & n PFD at 39. 2

4 to "thoroughly analyze and re-evaluate continuing the construction of the Turk Plant,"7 SWEPCO failed to comply with this duty.8 Indeed, the record shows that despite (i) the shale-gas boom that caused the Plant's economics to crash,9 (ii) a global financial crisis that depressed SWEPCO's demand,10 and (iii) the loss of the CECPN that SWEPCO had told the PUC was necessary for construction,ll SWEPCO never undertook an adequate study of the Plant's economics during construction.12 In fact, SWEPCO/AEP did not undertake any analysis of the expected value of Turk compared to its cost to complete until the draft presentation dated June 1, Based on the foregoing, the ALJs found that SWEPCO could not meet its burden of proving that its decision to continue constructing the Turk Plant was prudent. Despite this finding, the ALJs now adopt SWEPCO's position that it should be permitted to recover costs through June This revision to the PFD is apparently based on the fact that certain AEP personnel included the April data in a draft presentation dated June 1, But it was SWEPCO's burden to prove that completing construction was prudent, not the PUC Staff and intervenors' burden to show that it was imprudent as of a given time. And as the ALJs correctly found, SWEPCO should have been monitoring the economics of the Plant on a continuing basis. The fact that SWEPCO did not bother to study the economics of the Plant sooner does not entitle it to a greater recovery. In determining that SWEPCO was entitled to recover these imprudently incurred costs, the ALJs may have been misled by SWEPCO's mischaracterization of TIEC witness Charles Griffey's testimony. In SWEPCO's Replies to Exceptions, it stated, for the first time, that Mr. Griffey "proposed a disallowance calculation expressly based on a June 2010 cancellation date," and that TIEC's recommendation of a June 2009 cancellation date was contrary to Mr. Griffey's testimony.13 This is false. Mr. Griffey did not recommend that a disallowance be based on a June ' PFD at (summarizing red flags). $ Id. at Id. at Id. at " Id. at d. at ("The ALJs further find these studies insufficient in purpose, content and analysis to be viewed as contemporaneous evidence that SWEPCO took care to identify, gather information about, and evaluate risks and options available to it when faced with extraordinary changes in circumstances.") 13 SWEPCO's Replies to Exceptions at 11. 3

5 2010 date. Mr. Griffey's testimony was that the June 2010 presentation showed that SWEPCO should have cancelled the Plant "no later than June 2010."14 He expressly testified that: "Should the Commission agree that SWEPCO behaved imprudently, it should disallow that portion of Turk construction costs that was incurred after the point at which the plant should have been cancelled." 15 He also stated that: "If it is determined that SWEPCO failed to meet its burden of proof that the plant should have been cancelled at an even earlier time, the sunk cost at the earlier time should be used.,16 Mr. Griffey's testimony was that SWEPCO failed to adequately monitor the Plant;17 that when it finally undertook an economic analysis, the analysis showed the Plant was uneconomic;18 and that SWEPCO is entitled to recover only prudently incurred costs up to the point at which continuing construction was no longer prudent.19 SWEPCO's attempt to mischaracterize this testimony as Mr. Griffey recommending a June 2010 disallowance date only highlights the weakness of SWEPCO's prudence case. SWEPCO had the burden of proving that it was prudent to complete the Turk Plant. SWEPCO cannot meet this burden as of June 2009, when the economic case for the Plant had collapsed and SWEPCO lost the Arkansas CECPN.20 However, given that SWEPCO/AEP's own analysis showed that the Plant was uneconomic as of April 2010, there clearly should be no recovery after that time. Allowing SWEPCO to recover May and June 2010 costs would reward it for failing to comply with its duty to monitor the economics of the Plant and would incentivize utilities to avoid evaluating the prudence of large construction projects on an ongoing basis. Given that SWEPCO was imprudent in deciding to complete construction of the Turk Plant, the Commission's task in this case is to determine the date after which SWEPCO has not met its burden of proving that construction should have continued, and to determine the prudently incurred costs as of that date. To that end, TIEC provides the following chart of construction costs and AFUDC by month for the Turk Plant. The chart was compiled from data 'a TIEC Ex. 4 at Id. at Id at Id. at Id. at Id. at See TIEC's Reply to Exceptions at

6 provided in SWEPCO's response to TIEC RFI 13-8, which shows SWEPCO's share of Turk construction costs by month and includes AFUDC.21 Cumulative Turk22 Cumulative23 Total Plant Investment AFUDC Sept-08 (Texas CCN issued) 421,896,352 * * 26,507,411 * 448,403,763 Jun ,910,049 53,078, ,988,336 Jul ,039,933 57,088, ,128,885 Aug ,830,194 60,643, ,473,618 Sep ,625,076 64,741, ,366,602 Oct ,363,257 68,983, ,346,686 Nov ,384,391 73,333, ,718,188 Dec ,241,478 77,800, ,041,906 Jan ,547,820 82,402, ,949,940 Feb ,445,841 87,001, ,447,520 Mar ,258,559 91,663, ,922,468 Apr ,306,415 96,460, ,772,444 May ,786, ,220, ,006,816 Jun ,090, ,070, ,160,873 III. Inclusion of Transmission Costs TIEC agrees with the ALJs' July 2 correction eliminating the inappropriate inclusion of transmission costs in Turk invested capital. However, it appears that an additional adjustment to transmission costs must be made to carry through the ALJs' recommendation to disallow Turkrelated costs after a certain date. This is because the PFD still apparently includes in rate base 21 TIEC Ex. 4B at CSG-2 at Bates No (Conf.), SWEPCO's Response to TIEC The chart provided by SWEPCO on this page includes font that is difficult to read. TIEC has therefore reproduced this chart for the Commissioners' convenience. TIEC's reproduction is attached hereto as Exhibit A. SWEPCO's original response to TIEC's RFI 13-8 is attached hereto as Exhibit B. To obtain the total cumulative cost of the Plant by month, add the "cumulative direct costs" figure to the "cumulative indirect costs" figure. For example, this calculation yields $762 million for April 2010, which is the same figure that appears in the accounting statement in the June 2010 Presentation. TIEC Ex. 4D at Exhibit CSG-3 at 123 (Conf.). SWEPCO has agreed to declassify this chart through the end of the test year in December This figure was obtained by adding the "cumulative direct costs" figure for a month to the total "overheads" accrued by that month. Notably, it appears that SWEPCO calculates its share of Turk costs as 74.2% of total costs as opposed to 73.3%, its ownership share. SWEPCO's Exceptions at 25 n.126. It thus appears that the cumulative Turk Plant investment numbers listed in the above chart, and the construction costs listed on SWEPCO's response to TIEC 13-8, should be adjusted downward to account for the fact that SWEPCO is only authorized to recover 73.3% of Turk construction costs. 23 This figure was obtained by totaling the AFUDC that had accrued by each listed month.

7 approximately $56 million in Turk transmission costs through December This amount has not been reduced to reflect costs as of a cancellation date.25 SWEPCO should only be permitted to recover Turk-related transmission costs incurred prior to the date the Plant should have been cancelled. IV. Inclusion of AFUDC The PFD initially included $96 million of AFUDC in the calculation of SWEPCO's costs as of April The ALJs now propose to include $143 million of AFUDC in Turk costs.27 TIEC submits that it would be entirely appropriate to exclude AFUDC from the costs allowed for a plant that should have been cancelled. If, however, AFUDC is allowed, the calculation in the ALJs' July 2 letter substantially overstates the amount of AFUDC. As to whether AFUDC should be included at all, there is no statutory entitlement to the recovery of AFUDC for a cancelled plant, and a decision of whether or not to allow AFUDC is within the discretion of the Commission. In the River Bend 2 case, the Commission appears to have allowed AFUDC up through the point that the plant was cancelled.28 There is nothing in that case to suggest, however, that the result was anything other than an exercise of Commission discretion given the specific facts of that case, which included that the utility prudently chose to cancel rather than to complete an uneconomic plant. If the Commission were to allow AFUDC through the time the Plant should have been cancelled, the amount should not be the $143 million shown on page 1 of the July 2 letter. SWEPCO provided a chart that showed the calculation of AFUDC by month for SWEPCO's 24 Compare Direct Testimony and Exhibits of Brenda Myers at BFM-2, SWEPCO Ex. 37 with PFD, Attachment A at 5 (showing no disallowance to SWEPCO's transmission request for the $56 million in Turk transmission assets in service shown on BFM-2). 25 In its Exceptions, SWEPCO explained that the base rate adjustment it requested for the Turk Plant does not include transmission investment. SWEPCO's Exceptions at 25 n.129. The PFD's recommended disallowance is based on this figure and thus apparently does not disallow any transmission investment for Turk imprudence. Id. 26 PFD at 40. Footnote 100 references SWEPCO Ex. 8, which shows the $96 million in AFUDC as of April ALJs' July 2, 2013 letter at Application of Gulf States Utilities Company for a Rate Increase, Docket No. 5560, 10 Tex. P.U.C. BULL. 405 at 20 (1984). 6

8 share of the Turk Plant.29 Relevant excerpts of that document are included on page 5 of this response. That document shows AFUDC for SWEPCO's share through April 2010 as $96 million.30 If June 2010 were used instead, SWEPCO accrued an additional $10 million of AFUDC through that time for a total of $106 million.31 SWEPCO's June 1, 2010 presentation also demonstrates that SWEPCO believed that recovery of $96 million in AFUDC through April 2010 (combined with $665 million of April 2010 Turk investment for a total of approximately $762 million) would make SWEPCO entirely whole. The decision tree of the June 2010 presentation includes a branch for a scenario in which SWEPCO did not proceed with construction.32 The decision tree shows that, if SWEPCO were to recover its "incurred costs" with "no loss," it would recover $762 million.33 This is precisely the number that the ALJs used for calculating the disallowance based on the June 2010 presentation prior to the erroneous revision.34 SWEPCO is not entitled to more than what its own analysts calculated was necessary to make it whole. The $143 million number used in the July 2 letter was set forth in a footnote to SWEPCO's Exceptions to the PFD. It appears that SWEPCO has attempted to add $37 million to the June 2010 AFUDC balance for the Turk Plant (for Texas ratepayers only) by using a return on equity of 15.7%.35 SWEPCO's apparent justification for using an AFUDC rate with a return on equity far in excess of SWEPCO's cost of capital is that this was the ROE approved in a settlement of its 1983 rate case. SWEPCO's proposed application of an outdated ROE would be punitive to Texas ratepayers and should be rejected. If the Commission allows AFUDC on the Turk Plant through the date it should have been cancelled, the amount shown on SWEPCO's 29 TIEC Ex. 4B at CSG-2 at Bates No. 0017, attached as Ex. B hereto. 30 Id. at See Chart on page 5 of this brief. 31 See TIEC Ex. 4D at Exhibit CSG-3 at 119 (Conf.). This page of the June 2010 Presentation is attached to his brief as Exhibit C (conf.). 33 Id 34 See PFD at 40. This number, which includes AFUDC, comes straight from page 8 of 11 of the June 2010 presentation. TIEC Ex. 4D at Exhibit CSG-3 at 123 (Conf.). 35 SWEPCO's exceptions at 25 at n See also WPB , B at 4-7 of 13, SWEPCO Ex. 10A ( showing a 15.7% ROE for Texas jurisdictional AFUDC). 7

9 own calculations for its share of Turk should be used. The amounts of AFUDC as of June 2009, April 2010, and June 2010, respectively, were $53,078,287, $96,466,029 and $106,070, TIEC respectfully requests that the Commission modify the recommendations in the ALJs' July 2, 2013 letter as described above, and for such other relief to which it may be entitled. Respectfully submitted, DREWS KURTH LLP Rex D. VanMiddlesworth State Bar No Meghan Griffiths State Bar No Benjamin Hallmark State Bar No James Nortey State Bar No Congress Avenue, Suite 1700 Austin, Texas (512) (512) FAX ATTORNEYS FOR TEXAS INDUSTRIAL ENERGY CONSUMERS CERTIFICATE OF SERVICE I, Benjamin Hallmark, Attorney for Texas Industrial Energy Consumers, hereby certify that a copy of TIEC Response to Proposed Changes to the Proposal for Decision was served on all parties of record in this proceeding on July 12, 2013 by electronic mail, facsimile, and/or First Class, U.S. Mail, Postage Prepaid., allmark 36 TIEC Ex. 4B at CSG-2 at Bates No. 0017, attached as Exhibit B hereto; see also the chart on page 5 of this brief. 8

10 EXHIBIT A TOTAL PROJECT MONTHLY CASHFLOWS CUMULATIVE DIRECT ANNUAL DIRECT CUMULATIVE ANNUAL DIRECT COSTS COSTS COSTS OVERHEADS T AFUDC INDIRECT COSTS INDIRECT COSTS Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 5,504,736 5,504,736 1,194,457 1,194,457 Oct-06 19,668,757 25,173, ,777 22,509 1,416,743 Nov-06 6,414,019 31,587, ,307 58,513 1,783,563 Dec-06 18,464,047 50,051,559 50,051, ,889 62,766 2,166,218 2,166,218 Jan-07 12,517,296 62,568, , ,857 2,714,191 Feb-07 10,730,871 73,299, , ,412 3,234,636 Mar-07 11,947,462 85,247, , ,834 3,976,357 Apr-07 24,669, ,916,499 99, ,284 4,624,828 May-07 32,257, ,174, , ,151 5,458,753 Jun-07 19,934, ,108, , ,949 6,541,740 Jul-07 13,013, ,121, , ,730 7,873,205 Aug-07 16,128, ,250, ,059 1,120,004 9,598,268 Sep-07 3,812, ,063, ,208 1,475,626 11,350,102 Oct-07 32,068, ,131, ,177 1,399,321 13,223,600 Nov-07 17,544, ,675, ,928 1,310,939 14,717,467 Dec-07 11,780, ,456, ,404, , ,048 15,633,259 13,467,041 Jan-08 6,629, ,085, ,237 1,482,960 17,672,456 Feb-08 10,773, ,859, ,789 1,169,429 19,321,674 Mar-08 17,492, ,351, ,562 2,058,091 21,786,327 Apr-08 23,561, ,912, ,247 1,661,046 24,070,620 May-08 15,862, ,774, ,660 1,617,498 26,162,778 Jun-08 22,861, ,636, ,418 1,725,800 28,555,996 Jul-08 12,590, ,227,061 1,630,545 2,040,805 32,227,346 Aug-08 28,850, ,077, ,380 2,275,943 35,206,669 Sep-08 15,287, ,364, ,635 2,348,896 38,039,200 Oct-08 10,921, ,286, ,084 2,416,229 41,131,513 Nov-08 8,963, ,249, ,705 2,519,589 44,246,807 Dec-08 32,590, ,840, ,384, ,207 2,798,851 47,438,865 31,805,606 Jan-09-25,740, ,099, ,180 2,912,644 50,888,689 Feb-09 15,054, ,154, ,121-2,165,899 49,407,911 Mar-09-29,598, ,555, ,502 7,427,788 57,447,201 Apr-09 22,755, ,311, ,714 2,682,645 60,827,560 May-09 33,621, ,933, ,444 2,836,035 64,129,039 Jun-09 11,046, ,979, ,837 5,142,994 70,008,870 Jul-09 13,337, ,316, ,702 4,010,665 74,812,237 Aug-09 36,214, ,530, ,974 3,554,472 78,942,683 Sep , ,722, ,218 4,098,102 83,644,003 Oct-09 16,418, ,140, ,863 4,241,903 88,205,769 Nov-09 6,714, ,855, ,822 4,350,368 92,862,958 Dec-09 28,495, ,350, ,510, ,809 4,466,631 97,691,399 50,252,534 Jan-10 6,690, ,040, ,274 4,601, ,909,366 Feb-10 16,283, ,323, ,750 4,599, ,123,874 Mar-10 13,135, ,459,258 2,677,306 4,662, ,463,210 Apr-10 14,290, ,750, ,984 4,802, ,022,314 May-10 10,201, ,951, ,491 4,754, ,055,536 Jun-10 25,605, ,556, ,022 4,849, ,604,376

11 EXHIBIT B CONFIDENTIAL

12 EXHIBIT C CONFIDENTIAL