PETITIONER S EXHIBIT D PREFILED TESTIMONY OF, DIRECTOR OF RATES DUKE ENERGY BUSINESS SERVICES, LLC ON BEHALF OF DUKE ENERGY INDIANA, INC. CAUSE NO. 01 BEFORE THE INDIANA UTILITY REGULATORY COMMISSION I. INTRODUCTION 1 1 1 1 1 1 1 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Barry F. Blackwell and my business address is 00 East Main Street, Plainfield, Indiana 1. Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am employed by Duke Energy Business Services, LLC, an affiliate of Duke Energy Indiana, Inc. ( Duke Energy Indiana or Company ) as Director, Rates. Q. PLEASE DESCRIBE YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND. A. I am a graduate of Indiana University Purdue University of Indianapolis, holding a Bachelor of Science Degree in Business, with a major in Accounting. I received a Master of Business Administration Degree from the University of Indianapolis. Since my employment with the Company in 1, I have held various financial and accounting positions supporting the Company and its affiliates. My position prior to Director, Rates, was that of Director, Midwest Financial Forecasting. I have also held management positions in Cost Accounting, External Reporting, Business Unit Financial Planning, and Management Reporting. Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE COMMISSION? 00-1 -
1 1 1 1 1 1 1 1 0 1 A. Yes. In previous accounting and reporting roles I sponsored testimony in support of the Company s cost allocation processes and its affiliate agreements. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? A. Under traditional fuel adjustment clause ( FAC ) procedures and accounting, the Refined Coal Transactions ( Transactions ) described by Mr. Meehan would result in increased fuel costs to the Company's customers because the incremental charge associated with the Refined Coal Sales Agreements is the only portion of the Transactions that would normally be included in FAC calculations. My testimony will discuss the Company's proposed accounting to be used for the Transactions and will describe the regulatory treatment requested for purposes of passing the net jurisdictional benefits of the Transactions to retail customers as a part of the Company's FAC proceedings. II. PROPOSED ACCOUNTING Q. PLEASE DESCRIBE THE PROPOSED ACCOUNTING TREATMENT FOR THE REFINED COAL TRANSACTIONS. A. As discussed in the testimony of Mr. Meehan, there are several agreements that support the underlying accounting to be utilized for the Transactions. The Company's proposed accounting for each of the agreements is summarized as follows: Feedstock Supply Agreement Duke Energy Indiana will sell coal to Cottbus Associates, LLC and Marquis Industrial Company, LLC, both subsidiaries of Coal Emissions Reduction Technologies LLC (collectively referred to as CERT ), at a price equal to Duke Energy Indiana s weighted average cost of inventory ( WACI ). The sale will be recorded as a reduction to Account Fuel Inventory. - -
1 1 1 1 1 1 Refined Coal Sales Agreement Duke Energy Indiana will purchase refined coal from CERT at a price equal to Duke Energy Indiana s WACI plus an emissions premium adder. The refined coal purchases will be reflected in Account Fuel Inventory upon purchase and subsequently to Account 01 Fuel as the refined coal is consumed. Site Services Agreement CERT will pay Duke Energy Indiana for various O&M related services (e.g., coal handling). The Company is requesting Commission authority to record this payment as a reduction to Account Fuel Inventory, as a direct offset to the emissions premium paid for the refined coal. Absent such regulatory authority, the fuel handling reimbursements received from CERT would be recorded to Account 01 Fuel and would be excluded from inclusion in FAC proceedings, as fuel handling expenses are considered other O&M expenses and are currently not an includable fuel expense recovered via the FAC factor. Lease Agreement Duke Energy Indiana will lease a small parcel of land to CERT at each station to accommodate the refined coal equipment. The lease fee will be paid by CERT via a 1 monthly fixed payment that is based on CERT s expected revenues at each facility. 1 The 1 0 1 Company will record the lease revenues in Account Other Electric Revenues. The Company is requesting the Commission to authorize Duke Energy Indiana to include the revenues from the Lease Agreement within the Company s FAC proceedings as a nonfuel adjustment to the FAC rate calculations. Absent regulatory approval, this revenue 1 The monthly fixed payment may be adjusted periodically. - -
1 1 1 1 1 1 1 1 0 1 credit would not be includable in the FAC factor as the payments will be recorded to a non-fuel account (Account ). Security Agreement and Secured Promissory Note Upon the initial purchase of coal feedstock, CERT will issue a note payable to Duke Energy Indiana. The note will accrue interest semi-annually. The interest rate on the note will be equal to the revenue requirement conversion factor (the total weighted cost rate times the revenue conversion factor) in Duke Energy Indiana s Environmental Cost Recovery (ECR) rate filings in Cause No. 01. The Company will record the accrued interest to Account 1 Interest and Dividend Income. Similar to the lease revenues, Duke Energy Indiana is requesting authority to include the applicable interest payments within the FAC proceedings as a non-fuel credit adjustment to the FAC rate calculations. Q. IS THE PROPOSED ACCOUNTING CONSISTENT WITH THAT PRESCRIBED BY THE FERC S CODE OF FEDERAL REGULATIONS ( CFR )? A. Yes, with the exception of the accounting proposed for the Site Services Agreement. The CFR indicates that reimbursements for O&M related services would normally be recorded as a reduction to O&M, but the Company is proposing to record the payment received from CERT in Account Fuel Inventory as a direct offset to the emissions premium paid for the refined coal, and thereby eliminating the impacts on Duke Energy Indiana s WACI and therefore on the fuel cost to be included in the Company s fuel adjustment clause ( FAC ) proceedings. As described more fully below the Company is planning to provide retail customers with the net benefits from the refined coal transactions via the FAC proceedings. Absent approval from the Commission to modify the CFR prescribed - -
1 1 1 1 1 1 1 1 0 1 accounting thereby allowing the fuel handling (i.e., site services) expense reimbursements to be recorded as a reduction to fuel inventory, customers will see an increase in fuel costs as the emissions premium adder will increase the WACI. Q. ASIDE FROM THE ACCOUNTING TREATMENT MENTIONED ABOVE, WHAT OTHER SPECIAL ACCOUNTING TREATMENT IS THE COMPANY REQUESTING IN THIS PROCEEDING? A. Duke Energy Indiana is also requesting the use of deferral accounting treatment on an ongoing basis to ensure proper matching of the timing of recognizing the overall net benefits of the Transactions with the timing of crediting the benefits to customers through the FAC rates. Q. IS DEFERRAL ACCOUNTING TREATMENT CONSISTENTLY USED FOR OTHER FAC RELATED COSTS? A. Yes. III. COST RECOVERY AND APPROVAL Q. WHAT RETAIL RATE COST RECOVERY DOES DUKE ENERGY INDIANA PROPOSE WITH REGARD TO THE REFINED COAL TRANSACTIONS? A. The Company is proposing to include the net benefits from the Transactions in the calculation of its quarterly, retail FAC factor pursuant to the tracking provision of Ind. Code -1--(a) as administered via Standard Contract Rider 0. Q. PLEASE EXPLAIN WHAT IS MEANT BY NET BENEFITS. A. As described above, and in the testimony of Mr. Meehan, the Transactions will generate payments between CERT and Duke Energy Indiana. The Company will pay for the refined coal which will be offset by the site services payments from CERT. Additionally, - -
1 1 1 1 1 1 1 1 0 1 CERT will pay lease rental fees and interest to Duke Energy Indiana. When all Transactions are summarized, the Company will recognize a net benefit equal to the lease revenue and interest it receives. The applicable retail portion of these net benefits will be passed back to retail customers via the quarterly FAC rate. Q. DOES DUKE ENERGY INDIANA NEED COMMISSION APPROVAL TO INCLUDE THE NET BENEFITS FROM THE TRANSACTIONS IN THE FAC? A. Yes. In order to provide customers with the full benefits (net revenue credits) of the Transactions on a timely basis, Duke Energy Indiana needs for the Commission to provide regulatory authority to include the Site Services Agreement payments received from CERT in Account Fuel Inventory and to authorize the Company to include the revenues from the Lease Agreements and the applicable interest payments as non-fuel adjustments in the Company's FAC calculations. Q. HAS DUKE ENERGY INDIANA INCLUDED NON-FUEL ADJUSTMENTS WITHIN THE FAC BEFORE? A. Yes. The proposed treatment is similar to the Company s inclusion of Benton County Wind Renewable Energy Certificates (REC) net sales proceeds in the FAC rate calculations, as approved by the Commission in Cause No. 0. Q. ABSENT COMMISSION APPROVAL OF THE PROPOSED ACCOUNTING AND REGULATORY TREATMENT, WILL RETAIL CUSTOMERS RECEIVE THE BENEFITS FROM THE REFINED COAL TRANSACTIONS? A. Without Commission approval of the proposed accounting and regulatory treatment, retail customers would see fuel costs increase as the refined coal purchased from CERT is consumed. The offsetting credits (site services and lease revenues) would only flow back - -
1 1 1 1 1 1 1 1 0 1 to retail customers via inclusion in test period expenses and revenue credits in a retail base rate proceeding. Q. DOES DUKE ENERGY INDIANA PROPOSE TO CREDIT THE INTEREST INCOME IT RECEIVES UNDER THE SECURED PROMISSORY NOTE BACK TO RETAIL CUSTOMERS? A. The Company is proposing to share the interest payments received with retail customers via the quarterly FAC factor. Since the rates retail customers are currently paying include a return on fuel inventory, it is my opinion that it is appropriate for the Company to pass back an amount of interest received equal to the amount of return that Duke Energy Indiana currently receives on that inventory from retail customers via its approved base rates. Q. HAVE YOU ESTIMATED THE AMOUNT OF INTEREST DUKE ENERGY INDIANA PROPOSES TO FLOW BACK TO RETAIL CUSTOMERS? A. Yes. Assuming the tonnage sold to CERT remains consistent with the originally contracted two-day inventory levels, Duke Energy Indiana will credit approximately $00,000 annually to retail customers. This amount reflects the retail jurisdictional portion of the tonnage sold multiplied by the applicable stations WACI as embedded in the last retail rate case (Cause No. ), times the revenue requirement conversion factor of.% allowed in that case. Q. HOW DO YOU PROPOSE THE NET BENEFITS OF THE TRANSACTIONS BE ADMINISTERED? A. The calculation of the quarterly recovery/flow back of the Transactions' net benefits will follow standard FAC methodology. The net benefits incurred under the Refined Coal - -
1 1 1 1 1 1 1 1 0 1 Transactions will be included in developing the fuel cost factor to be applied to retail sales and will be reconciled in future periods to actual retail sales as a part of the standard FAC reconciliation. The actual net benefits of the Refined Coal Transactions for each month will be shown as a separate component of the fuel costs incurred for the month, on Exhibit A Schedules and included in Duke Energy Indiana's quarterly FAC filings. Petitioner's Exhibits D-1 and D- are examples of those schedules. Q. PLEASE EXPLAIN HOW THE TRANSACTIONS' NET BENEFITS WOULD BE REFLECTED ON FAC EXHIBIT A SCHEDULES AND. A. If approved, the refined fuel costs and the offsetting site services revenues would be included on Exhibit A, Schedule, line, Native Load Fuel Cost, consistent with all other native load fuel costs. The lease revenues would be reflected on Exhibit A, Schedule, line 1, Refined Coal Lease Revenue. These amounts will be included in the calculation of the total native load fuel costs. The interest income applicable to retail customers will be included on Exhibit A, Schedule, column (D), Refined Coal Interest Revenue Adjustment. Q. WILL THE COSTS / BENEFITS OF THE TRANSACTIONS BE ALLOCATED BETWEEN RETAIL AND WHOLESALE JURISDICTIONAL SALES? A. Yes. The Company is proposing that the costs / benefits be allocated between retail and wholesale jurisdictional sales using the same methodology as is used for the other costs included in the FAC (i.e., developing a factor using total sales, then applying the factor to billed retail sales). The interest income included on Exhibit A, Schedule, Column (D) Refined Coal-Interest Revenue Adjustment reflects the amount of interest income to be credited to retail customers and no further allocation is required. - -
1 1 1 1 1 1 1 1 0 1 Q. WILL YOUR PROPOSED REGULATORY TREATMENT OF THE NET BENEFITS FROM THE TRANSACTIONS BE A BURDEN UPON OR SLOW THE PROCESSING OF THE QUARTERLY FAC? A. In my opinion, it should not. As illustrated in Petitioner's Exhibits D-1 and D-, the net benefits of the Transactions included in each fuel clause filing will be readily identifiable in the filed FAC exhibits. Duke Energy Indiana will pay CERT for refined coal monthly based on invoices rendered to Duke Energy Indiana. Those invoices will be provided to the Office of the Utility Consumers Counselor s (OUCC) auditor, as are other fuel invoices that are chosen as part of the audit sample. Additionally, the invoices issued by Duke Energy Indiana and paid by CERT under the Site Services and Lease agreements will also be provided to the OUCC for auditing. Q. WHAT IS THE ESTIMATED NET BENEFITS TO BE CREDITED TO RETAIL CUSTOMERS ASSOCIATED WITH THE TRANSACTIONS? A. Based on assumed coal consumption similar to that experienced in 0 and the proposed accounting and regulatory treatment, the Company is estimating the annual net benefit to be credited to retail customers via the FAC will be approximately $.0 million. Q. HOW WILL DUKE ENERGY INDIANA HANDLE THE OTHER POTENTIAL BENEFITS DESCRIBED IN MR. PULSKAMP S TESTIMONY? A. If the refined coal projects result in lower reagent costs and/or lower emission allowance costs than would otherwise be the case absent the Refined Coal Transactions, the Company will flow the applicable benefits back to retail customers via Standard Contract Rider SO and NOx Emission Allowance Adjustment and Rider 1 Clean Coal Operating Cost Revenue Adjustment through the normal process. - -
Q. HAS THE COMPANY ASSUMED ANY ADDITIONAL ENVIRONMENTAL BENEFITS TO BE PASSED ON TO RETAIL CUSTOMERS AT THIS TIME? A. No. IV. CONCLUSION Q. WERE PETITIONER'S EXHIBITS D-1 AND D- PREPARED BY YOU OR UNDER YOUR SUPERVISION? A. Yes. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes. - -
PETITIONER'S EXHIBIT D -1 EXHIBIT A SCHEDULE Page 1 of DUKE ENERGY INDIANA, INC. Reconciliation of Actual Incremental Cost of Fuel Incurred to Actual Incremental Cost of Fuel Billed Retail Customers for the Xxxxx 0XX Billing Cycle Base Cost Actual Cost Actual Actual Incremental Fuel of Fuel of Fuel Refined Incremental Incremental Fuel Cost Clause Revenues Included in Incurred - Coal - Actual Cost of Fuel Cost of Fuel Variance to be Reconciled Fuel Cost Rates XX.XXX Interest Incremental Billed Billed from Cause with Actual Variance Line MWh 1. Mills/kWh Revenue Cost of Fuel Including Utility Excluding Utility No. 0- Incremental Cost (Over) or Under Line No. Class of Customers Sold Mills/kWh (See Sch. ) Adjustment Incurred Receipts Tax Receipts Tax FACXX of Fuel Incurred Billing No. (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (Col. C - Col. B - Col. D) (Col. G) - (Col. H) (Col. E) - (Col. I) 1 Total Residential - $ - $ - $ - $ - $ - $ - $ - $ - $ - 1 Total Commercial - - - - - - - - - - Total Industrial - - - - - - - - - - Total Other - - - - - - - - - - Total Retail kwh Sales Subject to Fuel Clause Adjustment - $ - $ - $ - $ - $ - $ - $ - $ - $ - Retail kwh Sales Not Subject to the Fuel Clause Adjustment - kwh Sales for Resale - Sales - P:\FAC\Application\Exhibits D-1 and D-.xlsx D-1 Exh A Sch Pg 1
PETITIONER'S EXHIBIT D - EXHIBIT A SCHEDULE DUKE ENERGY INDIANA, INC. Determination of Fuel Cost Per kwh Based on Actual Fuel Cost for Xxxxx 0XX Line Total Actual WVPA 0MW Wholesale Formula Adjusted Actual Line No. Description Xxxxx 0XX Firm Sale Rate ASM / Xxxxx 0XX No. (A) (B) (C) (D) kwh Sales (000's): Native Load Sales Retail 1 Residential - - 1 Commercial - - Industrial - - Public Street and Highway Lighting - - Other Public Authorities - - Total Billed Sales - - Unbilled Retail Sales - - Wholesale Sales - - - - Total Native Load Sales (S) - - - - Fuel Cost: Native Load Fuel Cost, Including Virtual Energy Amounts 1/, / $ - $ - $ - $ - Realized Hedging Activity, Excluding Virtual Energy Amounts / - - - - 1 Wabash River Unit 1 -- ARR Credits / - - - - 1 1 Benton County REC Proceeds / - - - - 1 1 Refined Coal Lease Revenue / - - - - 1 1 Prior Period Hedging Adjustment / - - - - 1 1 Prior Period Cost Adjustments / - - - - 1 1 Total Fuel Cost (F) $ - $ - $ - $ - 1 1 Fuel Cost - Mills per kwh (F/S) $ - $ - $ - $ - 1 1/ In accordance with the Commission's June 1, 00 Order in Cause No. and pertinent subsequent Commission directives, the Company's total native load fuel cost (line ) includes applicable MISO costs which were incurred to serve Duke Energy Indiana's native load customers' energy requirements. / Hedging component subtotals follow: / Prior Period Adjustment Totals by month: Prior Period Adjustment WVPA 0 by month: Prior Period Adjustment Wholesale Formula Rate by month: / Adjustment to native load fuel cost to reflect that certain of the Company's wholesale formula rates customers are billed directly by the Midwest ISO for the three ASM cost distribution charge types (i.e. regulation, spinning, and supplemental) related to their load. Therefore, the full amount of these three charge types is directly attributable to the Company's remaining native load customers. / Portion of Auction Revenue Right (ARR) revenue related specifically to Wabash River Unit 1 that has been received from the Midwest ISO and is payable to WVPA due to their ownership of this generating unit. / Net proceeds received during the month from the sale of Benton County renewable energy credits (RECs). / Prior Period Hedging Adjustment Totals by Month: / In accordance with the Commission's Order in Cause No. XXXXX, the Company's total native load fuel cost (line ) includes the costs related to the Refined Coal Sales Agreement and the offsetting revenues related to the Site Services Agreement. / Includes revenues associated with the lease component of the Refined Coal Transactions as approved by the Commission's Order in Cause No. XXXXX. P:\FAC\Application\Exhibits D-1 and D-.xlsx D- Exhibit A Schedule Page 1
VERIFICATION T, Barry F. Blackwell, affirm under penalties for perjury that the foregoing, I rcprc$entations are true to the best of my knowledge, information, and helief.,,1<-- Dated this _",,_ day of September, 0. I i I I!,.,. I I I, I I!,