2015 General Rate Case

Transcription

1 Application No.: Exhibit No.: SCE-, Vol. 0, Revision 1 Witnesses: J. Carrillo M. Childs P. Wong R. Fisher P. Hunt D. Lee K. Shimmel R. Worden (U -E) 01 General Rate Case Public Version ERRATA Results of Operations (R/O) Volume, Plant, Taxes, Depreciation Expense and Reserve, and Rate Base Before the Public Utilities Commission of the State of California Rosemead, California

2 SCE-: Results of Operations Volume C Plant, Taxes, Depreciation Expense and Reserve, And Rate Base Table Of Contents (Continued) Section Page Witness B. Estimates Annual Depreciation Expense... Weighted Average Depreciation Reserve...1 III. DEPRECIATION STUDY... R. Fisher A. B. Purpose and Scope... Summary of Proposal Overview of Transmission and Distribution... C. Depreciation Background Purpose of Depreciation... CPUC s Standard Practice U-... Current Gap to Accomplishing Depreciation Objectives and Meeting Requirements in Standard Practice U-...0 D. Depreciation Study Results Summary of Results...0 Use of Aged Data... E. Select Generation Assets San Onofre Generating Station Marine Mitigation... Mohave Generating Station... Solar Decommissioning... Mountainview Units 1 and Decommissioning... IV. TAXES... M. Childs A. Introduction... P. Wong -iii-

3 SCE-: Results of Operations Volume C Plant, Taxes, Depreciation Expense and Reserve, And Rate Base Table Of Contents (Continued) Section Page Witness.. Accumulated Deferred Taxes Vacation Accrual... Unfunded Pension Reserve... VI. CORPORATE PRODUCTIVITY STUDY... P. Hunt VII. SUMMARY OF OPERATIONAL EXCELLENCE SAVINGS... R. Worden A. Operational Excellence... Appendix A Witness Qualifications... Appendix B AFUDC Rate Formula... Appendix C Property Tax Tables... -viii-

4 c) Major Retirement Activity Some retirement activities, such as the decommissioning of a generating station, can be reasonably anticipated. Because we have specific information about the timing and magnitude of such events, we do not forecast such retirements by averaging recorded activity. The amortization of remaining net investment costs associated with major retirement activity is discussed in Chapter III of this Exhibit. E. Allowance for Funds Used During Construction (AFUDC) AFUDC is the standard way of capitalizing equity and debt costs incurred for financing Construction Work in Progress (CWIP). Capitalizing these costs ensures that full construction costs are paid by customers who received the services provided by the capital projects. It also ensures that investors costs incurred during construction are fully recovered after the capital projects enter service. The formula for the AFUDC rate is prescribed by the FERC Uniform System of Accounts, which SCE must follow. Appendix B provides more detail regarding the AFUDC rate formula. The formula can be expressed in a short-hand way as STD STD AFUDC s WACC 1 if STD is less than CWIP, or CWIP CWIP AFUDC s if STD is greater than or equal to CWIP Where AFUDC is the AFUDC rate, s is the cost of short-term debt, STD is the average level of short- term debt in a year, CWIP is the average CWIP balance in a year, and WACC is the weighted average cost of permanent capital (common equity, preferred equity, and long-term debt). WACC can be approximated by SCE s authorized return on rate base as set by the Commission. What the formulas above show is that the ratio of short-term debt to the CWIP balance is the primary driver of the AFUDC rate. In SCE s case, SCE has been granted two waivers by FERC to Because AFUDC is capitalized, it is a non-cash return. Cash earnings associated with AFUDC only appear when AFUDC is included in rate base and the associated return of and on capital is charged in customer rates. Only when CWIP is included in rate base, which is an exception to standard ratemaking, does CWIP provide cash earnings while a project is under construction. Electric Plant Instructions Title, Code of Federal Regulations, Chapter 1, Part 1, Section.A(). I D.0-1-0, Appendix A- ( Affiliate Transaction Rules Applicable to Large California Energy Utilities ), Section V.B.1: Utility books and records shall be kept in accordance with applicable Uniform System of Accounts (USOA) 1

5 exclude short-term debt devoted to finance balancing accounts and short-term debt devoted to finance fuel inventories from the calculation of short-term debt in the AFUDC rate calculation. The FERC s regulations do not dictate how a utility should finance its construction activities, but instead establish formulas to allow recovery of capital financing costs incurred during construction periods-specifically, to ensure short-term debt costs incurred are properly recovered. FERC does not to mandate the amount of short-term debt to use. In fact, SCE uses its short-term debt capacity for several purposes: general corporate short-term borrowing, financing balancing account under-collections, financing fuel inventories, and financing collateral for power procurement transactions. Because SCE uses short-term debt for these multiple purposes and because it is prudent for SCE to keep a reserve level of short-term debt capacity in the event of unforeseen financing needs, SCE s short-term debt capacity will often exceed its short-term debt outstanding by a substantial margin. In the rulemaking that resulted in the AFUDC formulas, various utilities argued that shortterm debt is not necessarily the first source of construction funds, as would be indicated by the formulas. The Federal Power Commission (FPC, the FERC s predecessor) agreed that [i]t is generally impossible to specifically trace the source of funds used for various corporate purposes and it was not the purpose of our proposed rule to do so. Rather, the FPC found that short-term debt was not ordinarily included in rate proceedings, yet it was a reasonable cost of service that should be recovered. 0 The FPC used the AFUDC formula to permit the recovery of the cost of short-term debt through rates. 1 There was no intention to mandate the use of short-term debt for construction purposes. SCE s projected AFUDC rates through the post-test year period are shown in the following Table I-. Copies of these letters are included in workpapers. Order No. 1, F.P.C. 0, 0 (), aff d in relevant part by Order No. 1-A, F.P.C. (). Order No. 1, F.P.C. at Id. at 0. 1 Id. See id. at 0-0. The AFUDC rate for 01 is a forecast as of June 01.

6 emission credits, available to Mountainview at acquisition, were originally valued at $. million. The total Mountainview RTC emission credits are based upon the associated pounds of NOx credits per year and projected annual value of those credits, annually through 0. In D.0-0-0, the Commission authorized the transfer of the Mountainview Emission Credits Inventory to SCE s utility rate base. As of December 1, 01, SCE has an unrecovered balance of RTC emission credits of about $.0 million. In addition, SCAQMD required Mountainview to acquire $1,000 of volatile organic compounds (VOCs) during 00 in order to obtain a modified emissions permit. The unrecovered balance of VOCs at December 1, 01 was about $,000. These emission credits are recovered as O&M costs in ERRA as they are consumed. Based upon the forecasted purchases and scheduled consumption, the average Mountainview Emission Credits Inventory is shown in Table V- below. Table V- See page a Mountainview Emission Credits Inventory* ($000, Nominal Average Balances) Recorded Forecasted ,,0,,1,01, * Exhibit SCE-, Volume, See supporting Workpaper entitled "Mountainview Emission Credits" c) Cash Working Capital Working cash is the capital supplied by shareholders to meet day-to-day utility operational requirements by bridging the gap between the time expenditures are required for services and the time revenues are collected for those services. Working cash is included in rate base to compensate shareholders for this investment. SCE s determination of working cash utilizes the lead lag approach, set forth in Commission Standard Practice U-. The lead lag approach is a method used to determine the amount of funds required to pay operating expenses in advance of receiving customer revenues. It requires a comprehensive analysis of transactions to determine the net lag days between: (1) the time utility services are rendered and the receipt of the associated revenues for those services (Revenue Lag); and, () the time between the recording of utility costs such as purchased power, labor, materials, and so forth, and payment of those costs (Expense Lag). The lead-lag approach, however, does not fully

7 Table V- Mountainview Emissions Credit Inventory* ($000, Nominal Average Balances) Line Recorded Forecasted No. Item Emission Credits,,,0,01,,00 * Exhibit SCE-, Volume, See supporting Workpaper entitled "Mountainview Emission Credits" a

8 stable. Between 00 and 01, SCE s customer deposit balance has declined by percent, primarily as a result of changes in Commission credit policies. In 0, the Commission established a proceeding to address the increasing number of customer disconnections for non-payment due to the economic recession. This proceeding has resulted in a number of changes to customer deposits policy. SCE s deposit requirement for reestablishment of service after disconnect has declined from twice a customer s maximum monthly bill to twice the average monthly bill. Furthermore, customers in SCE s CARE program are no longer required to pay additional deposits in the event of disconnection. Finally, customers enrolled in SCE s on-line direct payment program are no longer required to make any deposits at all. The downward trend in customer deposits may reverse itself in future if the number of disconnections declines and SCE is allowed to revert to its prior policies. However, the Commission has made clear its intent to revisit these procedures if disconnections continue at high levels. Regardless of the outcome, the percent reduction in deposits makes clear that these funds are affected by events beyond SCE s control and are not necessarily permanent.. Impact of the Rate Base Offset Relative to the size of SCE s rate base, SCE s 01 customer deposits offset of $0 million may seem inconsequential. However, the relative reduction in equity and increase in debt are not minor. The Commission keeps a tight rein on the California electric utilities equity ratios, requiring that the ratemaking equity ratio be maintained on average. In addition, a utility must notify the Commission and request a waiver if its equity ratio falls one percentage point or more below authorized. The impact of SCE s rate base offset on ratemaking equity (including common and preferred) based on SCE s 01 rate base and authorized capital structure is 0. percentage points. Although currently below the waiver request level, an increase of this amount would certainly garner Commission scrutiny in Cost of Capital Proceedings. Although, as SCE has made clear in the past, this amount on its own would not be sufficient to cause a ratings downgrade, this is does not mean the In 00 SCE s customer deposits totaled $ million, compared with $ million in 01. See D.-0-0, Interim Decision Implementing Methods To Decrease The Number Of Gas And Electric Utility Service Disconnections, p.. D.0-1-0, (mimeo), p.. 0

9 Commission should ignore its consequences. The effects of the adjustment will show up in the Company s credit ratios, and it will weaken SCE s credit quality relative to its California peers. SCE will continue to face challenges from the extensive capital investments needed to support the Commission s goals, including transmission to support renewables and smart meters to improve as efficient electricity usage. Furthermore, As Standard and Poor s notes California energy policy is complex and dynamic and has shown itself capable of introducing rapid change that could upend what currently is a stable environment for regulated electric utilities. As a result, SCE s current credit ratings cannot simply be taken for granted. a) The Use of a Rate Base Offset Provides Excess Rewards to Ratepayers. The customer deposits rate base offset provides customers a rate of return equal to the long-term weighted average cost of capital (WACC). 0 Including the effects of income taxes, the rate received by customers on these deposits is. percent. Individual customer deposits earn the short-term commercial paper rate; the difference between this rate and the WACC is spread across all customers through rates. Applying the short-term interest rate to customer deposits is reasonable based upon the deposits risk profile. Individual deposits are held only until a customer has established a record of good credit. 1 Because each individual deposit is short-term in nature and the principal is repaid in full, it is appropriate to provide customers a relatively low interest rate on their outstanding balance. Customer deposits earn the same rate SCE pays its other short-term lenders, who bear equivalent risk. Customer deposits do not bear the same risks as funds from common shareholders or holders of long-term bonds, whose principal may be at substantial risk from either internal company circumstances or external market forces for up to 0 years or longer. In the capital markets, equity investors and long-term bond holders are compensated for this additional risk with higher rates of return compared to short-term lenders. However, the rate base offset means customers as a class receive the same rate of return as these long-term investors, despite the fact that they bear limited risk. Moreover, Standard and Poor s, Ratings Direct Southern California Edison Co July 0, 0, p.. 0 Assumes SCE s 01 Commission authorized rate of return on rate base of.0 percent and a corporate tax rate of 0 percent. Rate of return set in D In general, customer deposits are returned as soon as a customer makes on-time payments for 1 months or when an account closes. 1

10 SOUTHERN CALIFORNIA EDISON COMPANY QUALIFICATIONS AND PREPARED TESTIMONY OF MARK W. CHILDS Q. Please state your name and business address for the record. A. My name is Mark W. Childs, and my business address is Walnut Grove Avenue, Rosemead, California 0 Q. Briefly describe your present responsibilities at the Southern California Edison Company. A. I am the Assistant Director of Tax for Southern California Edison Company. In this capacity, I am responsible for managing and directing all of the tax accounting and tax regulatory functions for the Company including all tax matters in the CPUC rate filings made by the Company. Q. Briefly describe your educational and professional background. A. I hold a Bachelor of Science degree in Accounting from Pepperdine University. I joined the Southern California Edison Company in 0 and was then promoted into my current role shortly after joining the Company. Prior to joining the Company, I spent sixteen years with Mattel, Inc. most recently as the Senior Director of Tax. My primary responsibilities there included the tax implementation and continued compliance with Sarbanes-Oxley as well as managing and directing all of the tax accounting functions. Q. What is the purpose of your testimony in this proceeding? A. The purpose of my testimony in this proceeding is to sponsor those portions of Exhibit SCE-, Volume entitled Results of Operations Plant, Taxes, Depreciation Expense and Reserve, and Rate Base, as identified in the Tables of Contents thereto. Q. Was this material prepared by you or under your supervision? A. Yes, it was. Q. Insofar as this material is factual in nature, do you believe it to be correct? A. Yes, I do. Q. Insofar as this material is in the nature of opinion or judgment, does it represent your best judgment? A. Yes, it does. Q. Does this conclude your qualifications and prepared testimony? A. Yes, it does. A-

11 SOUTHERN CALIFORNIA EDISON COMPANY QUALIFICATIONS AND PREPARED TESTIMONY OF PATRICIA Y. WONG Q. Please state your name and business address for the record. A. My name is Patricia Y. Wong, and my business address is Walnut Grove Avenue, Rosemead, California 0. Q. Briefly describe your present responsibilities at the Southern California Edison Company. A. I am Managing Director of Tax for Southern California Edison Company. In this capacity, I am responsible for managing and directing the Tax functions for the Company including all tax matters in CPUC rate filings made by the Company. Q. Briefly describe your educational and professional background. A. I hold an undergraduate degree in Business Administration (emphasis in Accounting) from the University of Southern California and also a Master s degree in Business Taxation from the University of Southern California. I am a licensed California Certified Public Accountant. I joined the Southern California Edison Tax Department in. I have held various positions in the department having responsibility for Federal Tax Compliance & Forecasting, State Tax Planning & Compliance, Accounting for Income Taxes, Tax Planning, Federal Tax Audits as well as Regulatory Taxes. Prior to joining Southern California Edison, I worked as Manager of Income Taxes for another utility and for a Big Four CPA firm. Q. What is the purpose of your testimony in this proceeding? A. The purpose of my testimony in this proceeding is to sponsor the portions of Exhibit SCE-, Volume, Revision 1 entitles Results of Operations; Exhibit SCE-, Volume C, Revision 1 entitled Results of Operations; and Exhibit SCE-, entitled Results of Operations, as identified in the Table of Contents thereto. Q. Was this material prepared by you or under your supervision? A. Yes, it was. Q. Insofar as this material is factual in nature, do you believe it to be correct? A-a

12 A. Yes, I do. Q. Insofar as this material is in the nature of opinion or judgment, does it represent your best judgment? A. Yes, it does. Q. Does this conclude your qualifications and prepared testimony? A. Yes, it does. A-b

13 AFUDC RATE FORMULA The AFUDC rate is defined by the Federal Energy Regulatory Commission and is part of the Uniform System of Accounts. The total AFUDC rate is the sum of A i, the gross allowance for borrowed funds used during construction rate and A e, the allowance for other funds used during construction rate. A i accounts for the cost of debt, both short-term and long-term, used to finance construction work in progress ( CWIP ), while A e accounts for the cost of preferred equity and common equity used to finance construction work in progress. They are given by the following formulas: S D S A i s d 1 (1) W D P C W where S = average general purpose short-term debt, s = short-term debt interest rate, D = long-term debt, d = long-term debt interest rate, preferred P = Preferred stock, p = preferred stock cost rate, C = common equity, c = common equity cost rate, and S P C A e 1 p c () W D P C D P C Title, Code of Federal Regulations, Subchapter C, Part 1, Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act, Electric Plant Instructions, Section.A.. This can be found on the Internet at The Commission adopted this section of the Uniform System of Accounts in D., dated October 1,. The Uniform System of Accounts does not reference general purpose short-term debt, but only short-term debt. However, SCE is permitted to exclude short-term debt associated with financing balancing accounts and fuel inventories from the AFUDC calculation. Letters from FERC Chief Accountant to SCE, dated February 1, and February,. B-1