STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of Case No. U-18467 UPPER PENINSULA POWER COMPANY (e-file paperless) for approval of depreciation rates and practices / MICHIGAN PUBLIC SERVICE COMMISSION STAFF S INITIAL BRIEF In accordance with the schedule set by the Administrative law Judge (ALJ) in this case, Staff files the following initial brief. I. Introduction The Upper Peninsula Power Company (UPPCo, or Company) filed its application requesting new depreciation rates on October 25, 2017. As part of its filing, the Company provided its depreciation study, sponsored by its witness Dane Watson as Exhibit A-1, and also included its proposed depreciation rates in Appendix A attached to that exhibit. That exhibit concludes that the total annual depreciation expense of the Company s integrated system and its Iron River System, taken together, amounts to a decrease of $1,808,816 of annual depreciation expense. (Exhibit A-1, p 2.) Appendix A of Exhibit A-1 provides the individual proposed depreciation rates for the individual plant accounts related to software, hydraulic plant, other production plant, distribution plant, general plant for the Integrated System and distribution plant and general plant for the Iron River System. Appendix A shows that UPPCo proposes a decrease in depreciation rates from 1
3.86% to 3.23% for its Integrated System and from 4.50% to 4.01% for its Iron River System resulting in an overall proposed reduction from 3.89% to 3.26%. (Exhibit A-1, Appendix A, pp 3-4.) Mr. Watson also included an Appendix C to Exhibit A-1 which originally assumed the existing retirement dates for the study as those which were currently projected and approved in the Company s last depreciation case, U-15989. Subsequently, Mr. Watson filed a revised Exhibit A-1 which included a revised decrease in depreciation expense of $1,808,795 and a corrected Appendix C which added 30 years onto the currently approved retirement dates for the Bergland Reservoir, the McClure hydroelectric facility, Prickett Hydroelectric facility, and Victoria Hydroelectric facility. (Revised Exhibit A-1, Corrected Appendix C, p 1.) II. UPPCo s Position To support its position, UPPCo provided the testimony of its witnesses Gradon Haehnel, and Dane Watson. Mr. Haehnel s direct testimony provided support for the proposed $1,808,816 depreciation expense reduction explained in Mr. Watson s testimony and proposed implementing this reduction for financial purposes effective the month after an order in the instant case and reflected in general service rates after the order in the Company s next general rate case. (Haehnel, p 3.) Mr. Watson provided testimony explaining the depreciation study he performed on behalf of UPPCo. He explained the classes of depreciable property 2
included in the Integrated System and the Iron River System, the usage of the term depreciation, his process of analysis, his reliance on the Average Life Group (ALG) methodology, and the time period utilized being the depreciable property recorded on the Company s books at December 31, 2015. (2 TR 19-20, 21.) Mr. Watson explained that based on his analysis, the overall depreciation rate for the Integrated System should be reduced to 3.23% and the Iron River System should be 4.01%. (2 TR 22-23.) Mr. Watson also explained that for the Integrated System hydroelectric facilities, the overall lives were extended from the currently utilized lives and the terminal removal costs for those facilities were updated. (2 TR 24.) Additionally, the significant additional investment and resulting reserve position resulted in the decrease of the depreciation expense. Mr. Watson also filed supplemental direct testimony wherein he corrected several errors in his depreciation study. The corrections were to the retirement dates identified in Appendix C, the removal of sentences carried over from the Company s prior depreciation study and corrections to Appendix A and B showing proposed hydro rates and a comparison with existing rates. As stated in the introductory section of this brief above, the corrections to the retirement dates identified in Appendix C added 30 years to the currently approved FERC license to operate those particular hydro facilities. As part of his supplemental testimony, Mr. Watson asserted that from the time of the Company s previous depreciation study in 2009, the Company invested 3
approximately $44 million in gross investment in hydro plant with the understanding that the investment would help facilities last beyond their respective current FERC license periods. (2 TR 31-32.) However, Mr. Watson s statement is belied, in part by the statements made by UPPCo s witness, Mr. Virgil E. Schlorke. On cross examination, Mr. Schlorke stated that the Company s investments were to meet dam safety requirements for federal energy license requirements. (2 TR 109.) When asked if the federal energy license, or FERC license requirements for which these investments were made, was the current FERC license under which these facilities are currently operating, Mr. Schlorke responded yes. (2 TR 110.) While Mr. Watson states that the investments were made, in part, to help the facilities last beyond current FERC license periods, UPPCo s witness Schlorke appears to assert that the investments were a result of identified deficienc[ies] that needed to be addressed to bring the facility up to the their (FERC s) engineering design guidelines. (2 TR 111.) From Mr. Schlorke s statements, it appears that any effect of the investments which extend the life of these facilities beyond that contemplated by the existing FERC license is merely incidental to the purpose of addressing currently existing deficiencies. III. Staff s position Staff proposed an overall depreciation rate of 3.01% which Staff initially stated resulted in an annual accrual of $431,000 less than currently approved. Staff later revised this figure in Supplemental Testimony where Staff recommended a 4
depreciation rate of 3.34% resulting in a lowering of the Company s annual accrual by $970,000. (2 TR 146, 149.) Staff maintains this position from its supplemental testimony. Staff witness Jim LaPan also identified several problems in the Company s application and testimony. At the outset, Mr. LaPan pointed out that any purported rate reduction would be in place for financial purposes the month following the issuance of an order in this case but would only be experienced by ratepayers following a Commission order in the Company s next general rate case. (2 TR 125-126.) As such, Staff recommends that any reduction in depreciation rates resulting from an order in this case be effective, for financial purposes or otherwise, with a final order in the Company s next general rate case. (2 TR 126.) Mr. LaPan also noted that, while a significant portion of the Company s rate reduction was achieved by adding an additional 30 years to the FERC-approved license lives of four of the Company s hydro facilities and one of its reservoirs, its witness Mr. Watson s prefiled direct testimony explicitly stated that the lives of the hydro facilities remained the same as the currently approved lives; meaning there was no addition of 30 years. (2 TR 127.) This error was only corrected in Mr. Watson s supplemental testimony filed shortly before the filing of Staff s prefiled direct testimony. Nonetheless, Staff does not support the addition of 30 years to the existing currently approved FERC license lives for these facilities. (2 TR 128, 129.) However, while Staff does not support extending the FERC license lives by 30 years for the purposes of calculating lower depreciation rates, at the 5
outset Staff wishes to make clear that this position in no way implies that Staff suggests these facilities will not be re-licensed. (2 TR 129.) Instead, Staff maintains that the most prudent course of action is to utilize the current FERCapproved license lives for the purposes of setting depreciation rates. Staff maintains this position because, as explained by Mr. LaPan, multiple factors, such as economics, changing safety guidelines and standards, and the possibility that even a change in ownership of a facility, or several, could occur in the more distant future. Id. Essentially, Staff wishes to impress upon the point that extending the lives so far beyond the currently approved FERC license lives introduces a degree of speculation which renders the projections unreasonable. Staff s Exhibit S-4 shows a portion of the Company s last depreciation study, performed in 2009 by Mr. Watson where the remaining depreciable lives of the hydro assets were coupled to each facility s current FERC license period. Staff maintains that this is the proper methodology to employ in this depreciation case as well, especially given the substantial amounts of time still left in the remaining lives of the Company s Hydro assets. (2 TR 130, 131.) A. Staff s recommendations and adjustments Staff recommends changes to the following areas after thorough review and analysis of the Company s case: 1. Terminal Life of hydro facilities 2. Terminal decommissioning cost estimates 6
3. Escalation of decommissioning costs estimates 4. Net Salvage estimates for Account 364.00 5. Accrual calculation for intangible plant Account 303.7 SAP 6. Interim retirement ratio other generation As explained in part above, Staff does not support an end of life for hydro assets for the purpose of calculating depreciation rates 30 years beyond the FERC license lives of those assets. Staff maintains that utilizing an asset life estimated to end in 2073 is unreasonable. Mr. LaPan explained that typically, the re-licensing process can begin approximately 5 years prior to the end of the current FERC license, which leaves approximately 22 years before UPPCo would likely begin the re-licensing process. (2 TR 135.) Furthermore, there is no record evidence that re-licensing by FERC will occur 22 years into the future. Id. While Staff does not claim that relicensing will likely not happen, the essentially speculative nature of guessing what will happen more than two decades hence does not provide a sound basis on which to base rates. Additionally, Mr. LaPan noted that significant portions of the Company s recent investment in the hydro facilities resulted from increased regulatory oversight and were intended to maintain each sites physical integrity and safety requirements in compliance with FERC s current safety regulations. (2 TR 135.) Mr. LaPan s assertions are supported by the cross-examination testimony of UPPCo s witness Mr. Schlorke where he states that FERC inspects the sites annually (2 TR 108), that deficiencies were identified in the current designs (2 TR 7
109), that FERC was looking to enhance the stability and integrity of these hydro facilities (Id), and compliance with the currently effective licenses under which these facilities are operating. (2 TR 110.) As such, the primary purpose of these investments appears to have been for compliance with existing standards with any benefits to the extension of the facility s life being an ancillary benefit. Staff also recommends that the Company s depreciation rates be calculated without escalation for inflation of its decommissioning costs estimates beyond the current FERC operating license period. (2 TR 136.) Based on the same premise stated above, that an additional 30 years tacked onto the existing FERC license life introduces an unreasonable degree of speculation, Staff maintains that the reduction of 30 years of cost inflation will result in a lower decommissioning cost to be recovered over the remaining operating/license life. (2 TR 137.) Regarding the decommissioning cost estimates, Staff points out that the Company states that it has no asset retirement obligations. (Exhibit S-3, p 7.) Therefore, Staff maintains that only the terminal costs associated with compliance with safety requirements be included. (2 TR 137.) Additionally, Mr. LaPan pointed out that the Company included costs in its decommissioning estimates for activities that will not be required to meet minimum safety requirements. Id. Therefore, the Company s estimates for terminal decommissioning costs should be lowered from $7,554,414 to $2,687,345. (2 TR 138.) 8
However, Staff noted several errors in its initially filed testimony and corrected for these errors in the supplemental direct testimony of its witness Mr. LaPan. Staff noted in its supplemental testimony that it does support escalation of decommissioning cost estimates from the end of 2015 through retirement, which should be determined by the FERC operating licenses. (2 TR 147.) Mr. LaPan explained that Staff s initial filing only include escalation for one hydro facility, Hoist, which was not escalated past 2015. Mr. LaPan summarized the calculation as: 0.0049 x remaining life x 2009 cost estimate. Id. Further, Staff s adjustments to the Company s hydraulic production plant terminal decommissioning cost estimates were not correctly applied to Staff s initial rate calculations. Id. Staff s adjustments to demolition costs for Hoist, McClure, Prickett and Victoria facilities were not reflected in their respective hydro rate calculations. Mr. LaPan corrected for this and presented the corrections in Exhibit S-7. Mr. LaPan also removed construction costs from the decommissioning costs estimates. (2 TR 148.) Staff s calculation of the hydro rates now excludes construction costs. Additionally, Mr. LaPan also adjusted its depreciation rates for the Company s hydraulic plant because these rates presented in the initial Exhibit S-5 did not include Staff s decommissioning cost estimate adjustments. Revised Exhibit S-5 now presents the hydraulic depreciation rates incorporating those adjustments. 9
Staff recommends that the Commission order UPPCo to adjust its proposed net salvage estimates for Account 364 Poles, Towers and Fixtures for its currently approved rates to negative 50% and recalculate its depreciation rates based on this new figure. This will result in further reduction of the Company s annual depreciation expense. Exhibit S-1, p 3 presents Mr. Watson s field notes taken in relation to this depreciation case. Staff performed the calculations taking into account the parameters and cost assumptions in Mr. Watson s field notes and the result supports a negative 47% net salvage. (2 TR 140-141.) Further, Staff took into account the fact that the Company was a stand-alone entity prior to 1999 as it again is today. Therefore, Staff gave more weight to the historical experiences from the 1992-1998 period for the Company and maintains that those years give a more accurate representation of likely future activities than the period in the interim. Lastly, in making its net salvage recommendation, Staff also took into account that less gross salvage may result from the retirement of metal poles and the associated possibility of lower, or no landfill costs. (2 TR 140.) Mr. LaPan explained that a significant portion of hazardous, creosote treated poles would have already been retired. Therefore, a much smaller remaining amount of hazardous material to be landfilled will result in a reduced cost of removal because hazardous material is typically more expensive to remove than non-hazardous material. (2 TR 141.) Regarding Account 303.7 Intangible Plant, Staff did not initially support the Company s change to this account. Id. Mr. LaPan had explained that Staff s 10
annual accrual for the Company s software account is $26,452, which is $1,239,355 less than the Company s projected amount. Id. This difference is the result of Staff only considering Account 303.50 Software licenses and the currently approved 20% rate. Id. However, in Mr. LaPan s Supplemental Testimony, he explained that the Company s proposed 15-year life for Account 303.70 SAP is reasonable. (2 TR 149.) Mr. LaPan further explained that because the Company s plant balance at the end of 2015 was zero dollars, if the Commission were to approve a 6.67% rate for this account, it would have an effect on Staff s proposed annual accrual. Id. However, because a large plant balance will be added to this account pursuant to the Commission s September 8, 2016 Oder in UPPCo s last rate case, U-17895, Mr. LaPan created Exhibit S-8 which includes the proposed 6.67% rate and shows the effect of the higher balance of $18,590,315. Id. Staff recommends that for Other Generation Plant, the Company utilize the life span procedure to calculate the interim retirement of those assets. (2 TR 142.) Mr. LaPan explained that this method relies on historical retirements and judgments and takes into account known and anticipated future changes that might affect the dispersion pattern. Id. Staff maintains that this methodology takes into account the fact that certain depreciable plants will retire before the terminal life of the facility and is, therefore, a more appropriate method for determining the interim retirement rates for facilities that do not have an end of life dictated by a license or contract. Id. 11
IV. Conclusion For the reasons stated in Staff s testimony, supplemental direct testimony, exhibits and revised exhibit, and in this initial brief, Staff respectfully requests the Commission approve a total overall depreciation rate of 3.55% and an annual accrual of $10,208,161. Respectfully submitted, MICHIGAN PUBLIC SERVICE COMMISSION STAFF DATED: September 7, 2018 18467/Initial Brief Amit T. Singh (P75492) Monica M. Stephens (P73782) Assistant Attorneys General Public Service Division 7109 W. Saginaw Hwy., 3rd Floor Lansing, MI 48917 Telephone: (517) 284-8140 12
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of UPPER PENINSULA POWER COMPANY Case No. U-18467 for approval of depreciation rates and practices. (e-file paperless) / STATE OF MICHIGAN ) ) ss COUNTY OF EATON ) PROOF OF SERVICE TINA BIBBS, being first duly sworn, deposes and says that on September 7, 2018, she served a true copy of the Michigan Public Service Commission Staff s Initial Brief upon the following parties via e-mail only: Upper Peninsula Power Company Paul M. Collins Sherri A. Wellman Miller, Canfield, Paddock and Stone One Michigan Avenue, Suite 900 Lansing, MI collinsp@millercanfield.com wellmans@millercanfield.com Administrative Law Judge Hon. Martin D. Snider Administrative Law Judge Michigan Public Service Comm. 7109 W. Saginaw Hwy., 3 rd Floor Lansing, MI 48917 sniderm@michigan.gov TINA L. BIBBS Subscribed and sworn to before me this 7th day of September, 2018. Pamela A. Pung, Notary Public State of Michigan, County of Clinton Acting in the County of Eaton My Commission Expires: 5-7-2025