EXECUTIVE SUMMARIES. Mr. Fredric Stoffel

Transcription

1 EXECUTIVE SUMMARIES Mr. Fredric Stoffel Mr. Stoffel provides an overview of the Company s electric rate case filing, outlines the Company s requests, discusses the primary drivers for the revenue increase the Company is seeking, and introduces the Black Hills/Colorado Electric Utility Company, LP s ( Black Hills or the Company ) witnesses. Black Hills is filing this Phase I rate case to recover increased costs of providing electric service, including costs related to $114 million in new investments that have been or will be incurred since the Company s last rate case. Black Hills is proposing to increase base rate revenues by approximately $8 million (a 3.75% increase) annually. Black Hills proposes to implement the rate increase using a General Rate Surcharge Adjustment of 5.051%. The effect of the proposed increase on residential customers is $4.28 per month and on small commercial $15.24 per month. For this rate case, Black Hills is using a current test year for the 12 months ending The Company has endeavored to limit the impact of this filing by seeking a return on equity lower than that recommended by the Company s expert witness, incorporating expected increased sales to a large existing customer, and reducing borrowing costs through a major debt refinancing by Black Hills Corporation. In this proceeding Black Hills also seeks to: Implement a separate rate adjustment rider with a tracking mechanism to recover a return at its weighted average cost of capital on Construction Work in Progress for the LM6000 natural gas generation plant approved in Docket No. 13A-0445E pursuant to the Clean Air-Clean Jobs Act, until the plant is placed into service in early 2017; Include in rate base Black Hills 50% ownership interest in the Busch Ranch Wind Project, which was approved in Docket No. 10A-930E; Amortize the regulatory asset tied to the W.N. Clark Generating Station decommissioning costs during the two years 2015 and 2016; Roll-in to base rates costs currently being recovered under the Transmission Cost Adjustment and the Purchased capacity Cost Adjustment on a revenue-neutral basis; and Begin recovering the costs of the FutureTrack Workforce Development Program ( FutureTrack ) through an annual expense allowance to maintain a skilled workforce notwithstanding an expected wave of retirements, and establish a regulatory asset to capture the deferred expenses that deviate from the annual expense included in base rates. Because Black Hills intends to file another Phase I rate case in 2016 to include the LM6000 generating unit in base rates in early January 2017, the Company will make a separate filing to seek the Commission s approval to defer filing of the next Phase II rate case until the completion of the 2016 rate case. 1

2 Mr. Christopher Burke Mr. Burke s testimony describes the Black Hills service territory and sets forth and quantifies the economic and community development impacts Blacks Hills has in the communities it serves. He also outlines the status of potential reuse scenarios for the Pueblo 5 and 6 site and provides the Commission with an update and timeline for this process. Furthermore, Mr. Burke delineates the Company s expected level of investment in its service territory in 2014 and the future, provides an update on Black Hills customer satisfaction levels, and describes customer offerings and opportunities, e.g., DSM and small solar. He explains and quantifies Black Hills low income and payment assistance programs, as well as our community participation and involvement in the areas we serve. Finally, he describes workforce challenges facing Black Hills and the proposed FutureTrack designed to address these workforce issues. Mr. Burke provides productivity metrics for the FutureTrack program used in determining how costs for the program are proposed to be allocated between customers and the Company. 2

3 Mr. Bryan Owens Mr. Owens testimony addresses the overall components of Black Hills retail revenue requirement, including investment in rate base and the overall electric earnings. In this Phase I rate case, the base period used to develop the overall retail revenue requirement for Black Hills is the twelve-month period ending December 31, 2013 ( Base Period ). This was adjusted to reflect known and measurable and other changes that are expected to occur during the calendar year ending December 31, 2014 (the Test Period ). The adjusted Test Period is a current test year for purposes of determining the revenue requirement in this proceeding. To provide Black Hills an opportunity to earn a reasonable return, the Company is seeking an overall rate of return of 7.83%, comprised of a return on equity of 10.3% and a cost of long-term debt of 5.29%. The amount of additional revenue required based on our cost of service study for Colorado is $7,916,913, a 3.75% increase. To determine the Base Period rate base, Black Hills used a 13-month average of the Base Period plant and plant-related balances, decreased by depreciation expense and accumulated depreciation and other rate base reductions. The Test Period rate base was derived by making several adjustments to the Base Period rate base, including the following (all numbers are approximate): Normalizing and annualizing the plant in-service ( PIS ) during the Base Period; Adding back to the PIS the $8.3 million treasury grant related to the Busch Ranch Wind Project, although no depreciation or amortization expense associated with the $8.3 million is included in the overall revenue requirement; Adding plant placed in service prior to April 23, 2014 and plant expected to be placed into service prior to December 31, 2014 into PIS; Removing plant balances from PIS of the retired W.N. Clark and Pueblo 5 and 6 units; Adding a full-year increase to accumulated reserve for depreciation related to the 13- month Base Period PIS balance and 2013 annualization adjustments; Adjustments for accumulated deferred income taxes ($63.8 million reduction), materials and supplies ($1.5 million added), prepayments ($0.1 million reduction), fuel inventories ($0.4 million added), and cash working capital ($.04 million added); Adjustment for W.N. Clark Generating Station decommissioning unrecovered cost of $4 million. The Company proposes to completely amortize and recover this regulatory asset through amortization expense over two years and to include one-half of the amount in rate base; 3

4 Reducing the required revenue increase based on additional revenue expected in 2014 from specific large customers and other customers ($2.6 million decrease); Off-system sales revenues adjustment ($8.3 million reduction in revenues for the Test Period); ECA revenue adjustment ($67.9 million reduction in revenues for the Test Period, which is offset by the corresponding removal of ECA-related costs); Operating expense adjustments, including property taxes ($0.2 million decrease); actual/projected wage increases ($1.2 million increase); corporate costs charged to Black Hills ($0.3 million increase for Utility Holdings; $0.4 million decrease from BHC); removal of costs associated with advertising, dues and donations and consumables; costs related to generation dispatch and scheduling ($.02 million reduction); bad debt expense ($.04 million increase); rate case expenses incurred in last Phase II case and expected to be incurred in this proceeding ($1.15 million increase); unrecovered deferred costs associated with previous electric resource plans and CACJA filings ($1.6 million increase); injuries and damages ($0.2 million increase); costs to provide retiree healthcare, pension plan, and 401(k) expenses ($0.4 million decrease); FutureTrack (annual base level expense of $0.6 million); and Adjustment for expected annual depreciation with the as-adjusted PIS ($2.5 million reduction in depreciation expense). The Company also has rolled-in all transmission placed into service on or before April 23, 2014 (being recovered now under the TCA), and all purchased capacity related expenses through 2014 (being recovered now under the PCCA), into base rates on a revenue-neutral basis. The Revenue Requirement Model, which reflects all of these adjustments and others, is attached to Mr. Owens testimony as Exhibit No. BSO-1. Based upon Mr. Owens testimony, the Commission should find that the retail revenue requirement, as detailed in the Revenue Requirement Model, is reasonable for purposes of establishing rates. 4

5 Mr. Charles Gray Mr. Gray s testimony sponsors Base Period electric revenues and billing determinants for Black Hills and provides revenue adjustments to derive the Test Period billing determinants: Customer Contract Demand Adjustment, Rate Annualization Adjustment, Customer Expansion Adjustment, and Street Lighting Revenue Adjustment. Mr. Gray also explains the revenue neutral Adjustment Charges, i.e., how the costs being recovered through the PCCA and TCA are rolled into our base rates. The Customer Expansion Adjustment results in an additional $1.75 million in electric revenues not reflected in per-book revenues to the benefit of Black Hills customers. In addition, he provides pro forma billing determinants based on the current rates and the proposed rates. Mr. Gray further updates Black Hills electric rate schedule tariff and sets forth the proposed new GRSA rate factor of 5.051% to recover the total revenue deficiency of $7,916,913. Lastly, Mr. Gray introduces a new tariff adjustment rider for recovery of a return on the construction work in progress for the new LM6000 being installed pursuant to the Clean Air- Clean Job Act the CACJA Adjustment. Mr. Gray provides sample calculations for the rate impact of the CACJA Adjustment, which will help mitigate the rate increase when Black Hills files the next general rate case requesting recovery of the LM6000 investment and related costs. Based upon Mr. Gray s testimony, the Commission should find that the revenue adjustments discussed in this testimony are reasonable. In addition, the Commission should approve the new proposed base rates reflecting the roll in of the PCCA and TCA costs, the CACJA Adjustment tariff and the 5.051% GRSA. 5

6 Mr. Brian Iverson Mr. Iverson is the Company s principal witness supporting the Company s capital structure and other matters affecting financial integrity, including the Company s recommendation for a 10.3% return on equity. In particular, Mr. Iverson supports the Company s proposed capital structure of 50.54% equity and 49.46% debt, which is Black Hills projected actual capital structure as of December 31, While acknowledging that Black Hills does not have direct access to capital markets, Mr. Iverson explains that use of the Company s actual capital structure is appropriate for ratemaking because (1) the Company has assumed $350 million in long-term debt financing, and (2) management is committed to maintaining the Company s capital structure to support the credit quality and financial profile of Black Hills Corporation. The Company s capital structure is managed to the appropriate and prudent level of capitalization necessary to support the financial integrity of Black Hills Corporation, consistent with the metrics used by creditors and ratings agencies, as well as the expectations of both debt and equity investors. Mr. Iverson supports the Company s proposed return on equity of 10.3%, which is less than that recommended by Dr. Avera, as a means for Black Hills to balance the need to maintain financial performance required to ensure access to capital with the economic situation in the Company s service territory. Additionally, Mr. Iverson supports a pro forma cost of debt of 5.29%, which is a substantial reduction from the cost of debt approved in the Company s last rate case of 7.22%. Based on these inputs, the resulting weighted-average cost of capital is 7.83%. Mr. Iverson also certifies the Company s books and records as being in accordance with the Commission s regulations, the FERC s Uniform System of Accounts, and generally-accepted accounting principles. Lastly, Mr. Iverson explains that the Company is not seeking recovery of any portion of the acquisition premium related to the 2008 acquisition of the electric utility assets of Aquila, Inc. 6

7 Dr. William Avera Dr. Avera addresses Black Hills requested ROE of 10.3% in this case. He uses a variety of quantitative analyses commonly relied upon in the utility industry to independently evaluate this recommendation and arrive at adjusted cost of equity estimates for each method. Ultimately, he concludes that Black Hills 10.3% ROE request falls over 30 basis points below the midpoint ROE for the proxy group identified in his quantitative analyses. His independent evaluation considers circumstances specific to Black Hills in evaluating the appropriate ROE for the Company. In particular, his testimony evaluates the impact of the Company s smaller size for Black Hills relative investment risk, and the appropriate ROE given this risk. Additionally, he examines the implications of Black Hills greater investment risks relative to other utilities under the Commission s jurisdiction. His testimony concludes that Black Hills 10.3% request is conservative given the Company s unique risk factors and estimates of investors required rate of return for proxy groups of utility and non-utility companies as compared to the request of Black Hills in this proceeding. Dr. Avera s analyses indicate that the recommended ROE of 10.3% represents a reasonable compromise between balancing the impact on customers and the need to provide Black Hills with an opportunity to earn a return that is adequate to compensate its investors, maintain financial integrity, and attract capital. 7

8 Mr. Richard Kinzley Mr. Kinzley s prepared direct testimony describes and sponsors the Company s Cost Assignment and Allocation Manual ( CAAM ) and Fully Distributed Cost ( FDC ) Study, which are being filed in accordance with Commission rules. In particular, his testimony discusses the CAAM, along with several attachments included as part of the CAAM, and explains the cost assignment and allocation methods Black Hills uses to segregate and account for revenues, expenses, assets, liabilities, and rate base cost components assigned or allocated to the Colorado jurisdictional activities of Black Hills. Also, Mr. Kinzley provides updated information relating to accounting for investments, expenses and revenues associated with both regulated and non-regulated activities in Colorado. Mr. Kinzley determines that the Company s CAAM is consistent with Commission regulations. Regarding the FDC Study, Mr. Kinzley supports this Study and reports the results of the assignments and allocations from Black Hills to its non-regulated activities. Prior to discussing the CAAM or FDC Study in detail, Mr. Kinzley provides an overview of the corporate organizational structure of Black Hills parent company, BHC, including a discussion of the holding company and service company within BHC that provide various services to Black Hills and its affiliates that are regulated in other jurisdictions. 8

9 Mr. Robert Hollibaugh Mr. Hollibaugh supports the Company s Test Period property tax expense allowance, which was based on the same valuation approach followed by the Colorado Property Tax Division, the actual weighted-average mill levy from 2013, and the updated plant in-service reflected in the Test Period rate base. Mr. Hollibaugh also supports the Company s calculation of Accumulated Deferred Income Tax for the Test Period ( ADIT ), which effects a net reduction to rate base of over $63.8 million. ADIT reflects the income tax effect of the appropriate temporary differences between income taxes and book/regulatory accounting including the temporary difference resulting from accelerated and bonus depreciation and the application of income tax normalization for ratemaking purposes. Mr. Hollibaugh reviews the income tax normalization requirements under the Internal Revenue Code, which are mandatory for utilities to be able to claim deductions for accelerated and bonus depreciation. He discusses the benefits to customers of income tax normalization, and explains the effect of the Company s realization in recent years of a Net Operating Loss for income taxes, and the resulting adjustment to ADIT of $11.5 million in the Test Period. Mr. Hollibaugh presents the Company s accounting for the $8.3 million grant received from the Department of Treasury under the American Recovery and Reinvestment Act of 2009 in connection with the Busch Ranch Wind Project. As discussed by Mr. Hollibaugh, the Company pursued and was awarded the Treasury grant in lieu of an investment tax credit and has treated such grant consistent with the normalization rules applicable to investment tax credits for purposes of this rate case. Under this treatment, the amount of the Treasury grant is included as part of the Busch Ranch investment in rate base, but the revenue requirement is reduced through lower book depreciation expense. 9

10 Mr. Mark Lux Mr. Lux presents the measurable costs for decommissioning the W.N. Clark Generating Station and Pueblo 5 and 6 generating units (depending on the outcome of Pueblo 5 and 6 reuse discussions with the City of Pueblo and Pueblo County). The Company has followed a reasonable approach for the determination of costs associated with decommissioning and demolition of W.N. Clark and Pueblo 5 and 6 through a competitive bid process that takes advantage of economies of scale by obtaining firm, lump sum price bids for the decommissioning and demolition of five facilities. In addition, Black Hills has obtained the necessary flexibility to continue discussions with the City and County by obtaining the ability to remove the Pueblo 5 and 6 decommissioning work with no price penalty. Accordingly, the Commission should find that the cost recovery proposed for the decommissioning and demolition work is reasonable. The Company is not seeking cost recovery for the Pueblo 5 and 6 work in this rate case. Finally, Mr. Lux provides the LM6000 construction costs used by Mr. Gray in his calculation of the CACJA Adjustment. These costs are fair and reasonable based on Mr. Lux s experience with similar types of projects. 10

11 Ms. Laura Patterson Ms. Patterson describes and supports the general compensation program for BHC s employees, and particularly the employees of Black Hills, including the variable compensation programs, equity compensation programs, and health, welfare, and retirement benefits. Ms. Patterson also discusses the steps the Company has been taking to address our overall compensation and benefits programs to ensure that we are prudently managing our costs. Further, Ms. Patterson establishes why the overall compensation program and its associated costs are reasonable and necessary to attract, motivate and retain qualified and competent employees to support utility operations. The overall compensation program and its components are fair and competitive as tested against prevailing market comparisons. The total employee compensation costs supported by Ms. Patterson are included as part of the overall benefits adjustment made in Schedules H-1 and H-13 in Exhibit No. BSO-1. Finally, Ms. Patterson, along with Mr. Burke, introduces the industry workforce concerns giving rise to the FutureTrack strategic plan described in more detail by Ms. Landis. 11

12 Ms. Jennifer Landis Ms. Landis provides a summary of current electric power industry workforce concerns, an overview of Black Hills workforce concerns, and a description of the proposed FutureTrack, the Company s recruitment and training program to address pending retirements. The primary function of FutureTrack is to recruit talent within critical areas and to complete the advanced training necessary to fill the highly skilled positions upon retirement of existing employees. The training provided to employees hired into the FutureTrack program will be flexible and innovatively tailored to the education and experience level of the individual employee. Most of the training will occur on the job and under very close supervision. Some positions will require bookwork, classroom-based training, and examinations. In addition, potential candidates may be offered a scholarship covering tuition, books, and tools, to a Colorado vocational school to receive training necessary to meet minimum qualifications for FutureTrack positions. We will strive to recruit local candidates that have or intend to put down roots in Black Hills communities. The scholarship component is critical to broaden the pool of potential participants and provide otherwise unattainable opportunities for local individuals. Ms. Landis provides an example of the progression of a newly recruited high school student into FutureTrack and his or her progress through the program. In addition, she discusses how a FutureTrack employee s compensation is proposed to be charged to the FutureTrack regulatory asset during the entire training period. Ms. Landis supports the anticipated total annual cost for the program of $632,708 for each of the next eight years. 12