RECOVERY OF EARLY RETIREMENTS C. Richard Clarke, CDP Director of Western Operations Gannett Fleming, Inc. Dane A. Watson, CDP, PE Managing Partner Alliance Consulting Group AGA/EEI Meeting San Antonio, TX May 21, 2014
Early Retirement In Today s World Today s changing environment is causing an unprecedented number of early retirements EPA and State Regulation related to Generating Plant Emissions Changing Technology and Customer needs In some cases, deregulation
Early Retirement In Today s World We will focus today on the principles of how to deal with early retirements from a depreciation perspective and Examples of past and present early retirements.
Early Retirement In Today s World Let s start with Generation Environmental rules, deregulation and state initiatives have caused utilities to retire or plan to retire generation earlier than originally thought. Stranding (or potentially stranding) significant investment How can this be dealt with?
EASY GENERATION EXAMPLE The facts in this scenario Coal Plant Placed in Service - 1980 Original Cost - $50 million Estimated Life - 50 years No Interim Retirements No Decommissioning Costs
Typical Power Plant Life 120 50 Years 100 80 60 40 20 0 1980 1990 2000 2010 2020 2030 2040
Change of Plan In Year 2010, the Life Shortens 10 years Could be Environmental Regulation Or Equipment Failure Or No Longer Efficient or Economical Or a Catastrophe
Basic Scenario 120 100 50 Years 40 Years 10 Years 80 60 40 20 0 1980 1990 2000 2010 2020 2030 2040
Scenario Remaining Life Technique 2.5 Annual Accrual ($, millions) 2 1.5 1 0.5 $1 M per Year = $30 M $2 M per Year = $20 M 0 1980 1985 1990 1995 2000 2005 2010 2015 2020
Options 1. Collect Remaining Net Investment Over the Remaining Life 2. Reallocate reserve from the rest of the generation fleet 3. Continue Current Rate Until Plant is Retired (2020) At that time: 1) Transfer Remaining Balance to Other Operating Units and Depreciate Over their Life 2) Set Up Regulatory Asset and Amortize Remaining Balance 1) Over Original Remaining Life of Plant 2) Over Time Between Rate Cases 3) Commission or Company Determined (e.g. 5 Years)
Pros and Cons of Options 1. Collect over shorter Remaining Life Potential Rate Shock but will recover from customers using the generation. 2. Reallocate reserve Recovers remaining investment but over the longer period of the remaining fleet and doesn t match usage as well 3. Continue as normal and 1) Transfer NBV to Other Operating Units at retirement same as reallocation but with slightly different timing 2) Created Regulatory Asset at retirement Can control timing of recovery but possible risk of future Commission reconsideration
Some Earlier Examples Earlier Examples 1. Mohave 2. Four Corners Newer Examples 1. San Onofre 2. Cobb, Weadock and Whiting 3. Tanners Creek 4. Xcel PSCo Units 5. Progress Energy Units
Mohave Mohave Generating Plant Built: 1971 Size: Two 790 MW Coal Fired Units Site: Laughlin, Nevada Original Retirement Date: 2016 (45 years) Multiple Owners, SCE Operated the Plant Early Retirement 2006 Air Water Fuel Supply
Recovery of Mohave Investment SCE: Regulatory Asset Recovery of Net Investment ($69M) Recovery of Decommissioning ($56M) Amortize Over Original R.L. (2016) Balancing Account for O/M Expenses Return Included NV Energy: Same as SCE Net Investment Decommissioning
Four Corners Four Corners Generating Station Built: Unit 1-3 1960 s Unit 4-5 1970 s Size: Unit 1-3 360 MW Combined - Coal Unit 4-5 1540 MW Combined - Coal Site: Farmington, New Mexico Original Retirement Date: 2016 Multiple Owners, APS Operated the Facility Early Retirement Unit 1-3 2012 (4 years) Extended Life Unit 4-5 2041 (25 years) Air Emissions
Recovery of Four Corners Investment APS: Shutdown Unit 1-3 APS purchase SCE share of Unit 4-5 APS will add Air Pollution Controls Remaining Net Investment Unit 1-3 reallocated to Units 4-5 and recovered over remaining life of Units 4-5
San Onofre San Onofre Generating Station Built: 1983/1984 Size: Two 1125 MW Units - Nuclear Site: San Clemente, California Original Retirement Date: 2023/2024 Multiple Owners, SCE Operated the Plant Early Retirement January 2012 - Premature wear on boiler tubes in replacement of steam generators
Recovery of San Onofre Investment SCE: Settlement with CPUC SCE Pays for Steam Generator Replacement Project ($597M) Customers Pay for Net Investment of Plant Decommissioning Trust Fund Regulatory Asset ($1.5 Billion) Recovery Over 10 Years Reduced Rate of Return
Cobb, Weadock, Whiting Cobb Units 1-5, Weadock Units 7-8 and Whiting Units 1-3 Gas Units Owner Consumers Energy Plants placed in service from 1949 thru 1958 Existing Retirement date of 2025 Early Retirement of 2015 and 2016 due to EPA s Mercury and Air Toxics Standards ( MATS ) going into effect in 2016
Recovery of Cobb, Weadock, Whiting Investment Given permission to securitize the net remaining investment in the units (up to $361.2 Million) Securitization would be over 14 years with the 15 th year used as a true-up as needed
Tanners Creek Tanners Creek Power Plant - Coal Owner Indiana-Michigan Power In service dates 1951, 1952, 1954 and 1964 for Units 1, 2, 3 and 4, respectively. Eariler Retirement date 2016 (Unit 1-3), 2030 (Units 4) New Retirement Date 2015 due to uneconomic to add pollution control equipment
Recovery of Tanners Creek Investment Requested combined investment in Tanners Creek Plant with another long-lived unit (Rockport Unit 1) And to reset combined Depreciation Rate to recover the remaining cost of Tanners Creek (including dismantling cost) over the remaining life of Rockport Unit 1 (through 2044)
Xcel-Public Service of Colorado Units Clean Air Clean Jobs Act (CACJA) passed by Colorado legislature in 2010 State chose to take action on environment rather than wait for EPA intervention. PSCo examines 900 MW of coal fired generation. Units under scrutiny were built between 1948 and 1960. Retirement dates for the units in question ranged from 2002-2020 In working with the PUC of Colorado and various intervenors, revised retirement dates were found.
Recovery of PSCo Units Investment After review by PUC, to date PSCO has retired Arapahoe, Cameo, Cherokee 1 and 2, and Zuni 1. By 2017, other units such as Cherokee 3, Valmont, and Zuni will retire. Regulatory assets are created for each plant upon retirement PUC will approve amortization period and amounts in rate proceedings.
Progress Energy Carolina (Duke Progress) Units EPA regulations proved too costly to retrofit coal plants without sulfur dioxide scrubbers Company retires coal plants without sulfur dioxide scrubbers and smaller CT s from 2011-2013 L.V. Sutton, Cape Fear, Robinson, Weatherspoon, Lee, and the 6 smaller CTs to be retired. Retirement dates from last depreciation study ranged as far out as 2039 for those units
Recovery of Progress Energy Carolina (Duke Progress) Units Investment More than 30% of the Company s coal fleet is impacted by these decisions. Ten year recovery period approved to recover net book value of its and estimated terminal dismantling cost.
Probable Future Plant Closures EEI Forecasts over 80 GW of Coal Retirements by 2020 Environmental Impacts Air Water Ash Fuel Prices EPA Mercury and Air Toxics Standards ( MATS ) California SB 1368 (Emission Standards) Nevada SB 123 (Reduction in Coal of 800 MW)
Another Major Early Retirement Non-Generation Electromechanical Meters Companies are replacing electromechanical meters with digital smart meters earlier than the physical end of life of the electromechanical meters This can create stranded investment in the electromechanical meter account
Another Major Early Retirement Non-Generation Electromechanical Meters There are a number of solutions used in the industry including: Amortize the stranded investment over a predetermined period Amortize the stranded investment over the original remaining life of the meters Include old and new meters in the same account and recover the remaining investment over the life of the new meters
QUESTIONS?