ML11287A189
| ML11287A189 | |
| Person / Time | |
|---|---|
| Site: | Quad Cities  |
| Issue date: | 10/14/2011 |
| From: | State of IA, Dept of Commerce |
| To: | Office of Nuclear Reactor Regulation |
| Wiebe, Joel NRR/DORL/LPL3-2, 415-6606 | |
| Shared Package | |
| ML112980183 | List: |
| References | |
| RPU-07 | |
| Download: ML11287A189 (11) | |
Text
Attachment I STATE OF IOWA DEPARTMENT OF COMMERCE BEFORE THE IOWA STATE UTILITIES BOARD IN RE:
APPLICATION OF MIDAMERICAN DOCKET NO. RPU ENERGY COMPANY FOR A DETERMINATION OF RATEMAKING PRINCIPLES DIRECT TESTIMONY OF THOMAS C. FOSTER I
Q.
Please state your name and business address.
2 A.
My name is Thomas C. Foster. My business address is 666 Grand Avenue, 3
Des Moines, Iowa 50309.
4 Q.
By whom are you employed and in what position?
5 A.
I am employed by MidAmerican Energy Company ("MidAmerican" or 6
"Company"). My title is Director, Investments, Regulatory Finance and Analysis.
7 Q.
Please describe your educational background and business experience.
8 A.
I hold a Bachelor of Business Administration degree with a major in Finance and 9
a Master of Arts degree in Economics, both from the University of Iowa. I have 10 previously been employed by the Iowa Utilities Board ("Board") as a Financial I1 Analyst and later by Iowa Southern Utilities Company ("Iowa Southern") as a 12 Rate Economist. Through a series of transactions, Iowa Southern is now part of 13 Alliant Energy Corporation. While employed by the Board and Iowa Southern, I 14 had normal rate administration responsibilities and testified before the Board in a 15 number of proceedings. Later, I was employed by Iowa Wesleyan College as an I
1 Associate Professor of Business Administration and taught undergraduate courses 2
in both finance and economics. I joined Iowa-Illinois Gas & Electric Company, a 3
predecessor to MidAmerican in 1992 and served in its Rate Department 4
conducting electric embedded and marginal class cost of service studies and 5
performing rate design. When MidAmerican was formed in 1995, 1 joined the 6
Treasury Department where I was responsible for overseeing the investment of 7
the Company's pension, other post-retirement and nuclear decommissioning trust 8
funds, and preparing capital structure and cost of capital calculations for various 9
purposes, including regulatory proceedings. In 2000, my functions were moved 10 to the Financial Services Department where, in addition to the previously 11 mentioned responsibilities, I prepare or review major capital budgeting proposals 12 related to the electric generation business of the Company and am responsible for 13 analyzing the creditworthiness of transmission customers taking service under the 14 Company's open access transmission tariff.
15 I am a member of the American Economics Association, the Chartered 16 Financial Analyst ("CFA") Institute, and the CFA Society of Iowa. I have 17 previously served as chairman of the board of directors of the CFA Society of 18 Iowa and in various executive positions for that group. I also hold the designation 19 of Chartered Financial Analyst.
PURPOSE OF TESTIMONY 20 Q.
What is the purpose of your prepared direct testimony?
21 A.
The purpose of my testimony is to sponsor portions of Section 2 (Economic 22 Evaluation) of MidAmerican's Application for a Determination of Ratemaking 2
Principles ("Ratemaking Principles Application") concerning the Wind IV Iowa 2
Projects. I will describe how MidAmerican will determine if a wind project is 3
economic under the methodology outlined in the Wind IV Iowa Stipulation and 4
Agreement ("Wind IV Stipulation") entered into between the Company and the 5
Office of Consumer Advocate ("OCA"). I will also discuss how MidAmerican 6
proposes to apply portions of the amount currently included in electric rates for 7
the decommissioning of the Quad Cities Nuclear Power Station to rate 8
equalization efforts between MidAmerican's service territory zones, and perhaps 9
investment in selected power plants. In addition, I will discuss the results of an 10 economic analysis for the 75 M-W expansion to the Pomeroy Project site that is 11 described by MidAmerican witness Tom Budler and is a part of the Wind IV Iowa 12 Projects. I will also discuss the projected results for a 465 MW project (assumed 13 to be a series of projects that, for the purposes of this testimony, are collectively 14 referred to as "Project X") to be constructed in 2008. Finally, I will sponsor two 15 requested ratemaking principles, the principle describing the Economic Test for 16 Qualifying Projects and the Return on Equity principle.
RATEMAKING PRINCIPLES APPLICATION 17 Q.
What information are you sponsoring in Section 2 of the Ratemaking f8 Principles Application?
19 A.
Section 2.1 (Present Value Calculations) describes the assumptions employed in 20 the analyses presented in the Ratemaking Principles Application as well as the 21 economic test that will be used to determine if a proposed project should be 22 included in the Wind IV Iowa Projects. Section 2.2 (Cost of Capital) discusses
I the RPU-04-3 proceeding. As a result, the stipulated ROE of 11.7%, slightly 2
below that allowed in RPU-04-3, appears to continue to be within the range of 3
reasonableness of ROEs previously allowed by the Board in wind ratemaking 4
proceedings. Section 5.5 of the Ratemaking Principles Application contains a 5
discussion of the return on equity principle.
6 Q.
Please describe the information contained in Section 2.3 of the Ratemaking 7
Principles Application (Revenue Requirements).
8 A.
Section 2.3 describes the calculation of the annual revenue requirement for the 9
above-described analyses. The revenue requirement will include return, 10 depreciation, taxes and operation and maintenance expenses. This calculation 11 will employ the ratemaking principles requested in the Ratemaking Principles 12 Application.
FUNDING OF THE NUCLEAR DECOMMISSIONING TRUSTS 13 Q.
Please address the proposed ratemaking provision being suggested with 14 respect to funding of the Company's nuclear decommissioning trust funds.
15 A.
After concluding a review of the funding status of the Quad Cities Nuclear 16 Decommissioning Trusts, and taking into consideration the recent 2 0-year 17 extension of the operating license for the Quad Cities nuclear units (MidAmerican 18 has a 25% ownership share; Exelon Generating Company, LLC, ("Exelon") has 19 the remaining 75% ownership share and also operates the units), MidAmerican is 20 proposing that the amount deposited to the trusts be reduced from approximately 21
$8.3 million per year to approximately $1.6 million per year (The exact amount is 22
$1,595,964). The approximate $6.7 million difference would be used to satisfy 9
1 the Board's previously required (Docket No. RPU-04-2) efforts at rate 2
equalization, as approved in that docket or as subsequently ordered by the Board.
3 MidAmerican witness Crist will further elaborate on this particular item.
4 If funds remain after the rate equalization funding, the remaining annual 5
amount would be used during the remaining period of revenue sharing to reduce 6
the Wind IV Iowa Projects' investment in rate base (including AFUDC) or the 7
investment in Council Bluffs Energy Center Unit No. 4 plant (including AFUDC),
S whichever has the highest ROE.
9 Q.
Please provide an overview of the process MidAmerican goes through to 10 determine appropriate decommissioning contribution levels for the nuclear 11 decommissioning trusts.
12 A.
It is a multi-step process. First, Exelon as the operator of the facility retains the
.13 services of an industry-recognized expert to estimate the amount of funds needed 14 to decommission the plant. Second, MidAmerican makes an assessment as to the 15 level of contributions the trusts will require to be reasonably assured that adequate 16 funds will be available at the time decommissioning is expected to begin in the 17 year 2032. This assessment is made by a MidAmerican nuclear decommissioning 18 trust committee that considers the potential escalation rates in decommissioning 19 costs, the expected after-tax returns of the trusts and the pattern of contributions.
20 Finally, if necessary, MidAmerican will seek the required rulings from the Board 21 and the Internal Revenue Service ("IRS"). The IRS approval is required in order 22 to make tax deductible contributions to the tax qualified trust funds and the IRS 10
I relies on state public utility commission decisions in approving the schedules of 2
such contributions to these trusts.
3 Q.
What was the basis for the cost estimate developed for decommissioning the 4
Quad Cities Station Nuclear Plant ("Station")?
5 A.
TLG Services, Inc. performed a site-specific study ("Study") of the Station in 6
2006, and the results of the Study are the basis for the total decommissioning 7
estimate. TLG Services, Inc. is an industry leader in nuclear power plant 8
decontamination and decommissioning planning and cost estimating. The Study 9
shows that for Unit I, MidAmerican's 25% share of the decommissioning cost, in 10 2006 dollars, is $164.806 million, and for Unit II, MidAmerican's 25% share of 11 the decommissioning cost, in 2006 dollars, is $166.805 million. These estimates 12 assume the DECON method of decommissioning, which is consistent with both 13 MidAmerican and Exelon's previous assumptions regarding the decommissioning 14 method to be employed at this facility. The DECON method is a process where 15 the equipment and structures of the facility that are radioactive are removed or 16 decontaminated to a level that permits the property to be released for unrestricted 17 use shortly after cessation of operations. The decommissioning costs for the two 18 units are very close but not identical due to design differences between the two 19 reactors and the sequencing of the decommissioning work.
20 Q.
Please describe the actions of the MidAmerican nuclear decommissioning 21 trust committee that led to the reduction in contributions to approximately 22
$1.6 million annually.
11
A.
The MidAmerican nuclear decommissioning trust committee received input from 2
NISA Investment Advisors, L.L.C. ("NISA"), a firm that has been managing 3
nuclear decommissioning trust assets since its inception in 1994. NISA is one of 4
the largest NDT investment managers in the United States and offers portfolio 5
management services, liability analysis reviews, and performance calculations.
6 NISA assisted in the evaluation of reasonable returns for funds invested in the 7
trusts and the allocation of funds to various investment classes. In January 2007 8
the MidAmerican nuclear decommissioning committee met and discussed the 9
input received from NISA. The committee focused on a long-run, after-tax return 10 assumption consistent with the trusts' actual historical experience. The I I committee also reviewed a methodology sponsored by the Nuclear Regulatory 12 Commission in order to estimate the escalation rate of decommissioning costs.
13 This led to a determination that a contribution level of approximately $1.6 million 14 annually would be likely to fulfill the decommissioning obligation. The 15 MidAmerican nuclear decommissioning trust committee will meet in the future 16 following any updates in the Study, significant changes in market conditions or 17 any other factors that require the reassessment of the adequacy of the contribution 18 levels to the trusts.
19 The proposed contribution level not only appears to give reasonable 20 assurance that the trusts will be able to meet their decommissioning liability, but 21 allows for the rate equalization efforts mentioned previously and for the possible 22 reduction in rate base to minimize long-run rate fluctuations.
12
1 Q.
What is meant by the term "tax qualification" as it relates to nuclear 2
decommissioning?
3 A.
A "tax-qualified" nuclear decommissioning trust fund is a fund that meets certain 4
criteria as defined in Section 468A of the Internal Revenue Code ("Section 5
468A"). Tax-qualified nuclear decommissioning trust funds are afforded 6
favorable tax treatment as compared to non-qualified funds. There are two main 7
tax advantages provided by a tax-qualified fund. The first is that deposits made 8
into the trust fund can be treated as current-year tax deductions. The second is 9
that earnings on the investments in the tax qualified trust fund are taxed at an 10 applicable federal tax rate of 20% as compared to a 35% federal tax rate on 11 earnings in a non-qualified trust fund.
12 Q.
Did the Energy Policy Act of 2005 include any modifications to the special 13 rules for nuclear decommissioning and Section 468A?
14 A.
Yes. The Energy Policy Act of 2005 included a number of modifications to the 15 special rules for nuclear decommissioning. Among the modifications were 16 amendments to Section 468A which governs the tax qualification of nuclear 17 decommissioning trust funds. These amendments are effective for taxable years 18 beginning after December 31, 2005.
19 Q.
What were the requirements for tax qualification under Section 468A prior 20 to the changes resulting from the Energy Policy Act of 2005?
21 A.
In order to ensure the continued tax qualification of the trust, any change in the 22 funding levels had to be filed with and approved by the IRS. The IRS required a 23 statement from an order of the state commission (a) approving the schedule of 13
1 decommissioning cost accruals; (b) finding that the decommissioning cost 2
accruals were included in cost of service and were included in rates for 3
ratemaking purposes; and (c) finding that the earnings rate assumed for the trust 4
takes into consideration the tax rate change and the removal of the investment 5
restrictions resulting from the Energy Policy Act of 1992.
6 Q.
How have the requirements for tax qualification changed as a result of the 7
changes to Section 468A?
8 A.
There is no longer a cost of service requirement for tax-qualified funds.
9 Previously, deposits into a tax-qualified fund were limited by the amount included 10 in cost of service for ratemaking purposes so long as that amount did not provide 11 greater than level funding (i.e., not front-loaded). Regarding the allowed level of 12 funding into a tax-qualified fund, the revised Section 468A only states that "the 13 amount which a taxpayer may put into the fund for any taxable year shall not
.14 exceed the ruling amount applicable to such taxable year."
15 Q.
What was the rationale for the elimination of the cost of service 16 requirement?
17 A.
The cost of service requirement was primarily eliminated to allow nuclear owners 18 in states that now have deregulated generation to maintain the tax-qualified status 19 of their trust funds in the absence of cost of service-based regulation.
20 Q.
How will the IRS determine the allowable level of funding to a tax-qualified 21 fund if it no longer has a state commission-ordered cost of service amount for 22 decommissioning funding upon which to rely?
14
A.
Because the elimination of the cost of service requirement has only recently 2
become effective it is not yet evident how the IRS will rule when it does not have 3
a state comminssion-ordered funding amount.
4 Q.
Given the elimination of the cost of service requirement for the tax-5 qualification of the fund, what language would you request that the Board 6
put in its order regarding the amount of decommissioning funding in cost of 7
service for ratemaking purposes?
8 A.
MidAmerican respectfully requests that the Board use the same type of language 9
in the order approving the decommissioning funding level that was required prior 10 to the changes to Section 468A. Because of the uncertainty at this time regarding 11 potential IRS treatment, use of the prior Section 468A language provides the 12 greatest assurance of continued tax-qualified decommissioning funding.
13 MidAmerican respectfully requests that the Board provide an order that states the 14 following:
15 MidAmerican's annual Iowa jurisdictional decommissioning costs 16 included in the cost-of-service shall be $1,595,964 divided equally 17 between the two units commencing on January 1, 2007.
18 19 Q.
Please explain how the above-mentioned $6.7 million difference will be used 20 to reduce investment in rate base, if any of that amount remains after rate 21 equalization efforts.
22 A.
I have included a presentation that illustrates how reductions in rate base and the 23 amortization of a regulatory liability over the life of the proposed project would 24 be accomplished on confidential Tables 2.1-2(a) through 2.1-2(c) of the 25 Ratemaking Principles Application. It is MidAmerican's belief that this 15
Exhibit_ (TCF-1)
MidAmerican Energy Company Contributions to Quad Cities Station Nuclear Decommissioning Trusts IRR:
5.27%
0 2006 1 2007 2
2008 3 2009 4
2010 5
2011 6 2012 7 2013 8
2014 9
2015 10 2016 11 2017 12 2018 13 2019 14 2020 15 2021 16 2022 17 2023 18 2024 19 2025 20 2026 21 2027 22 2028 23 2029 24 2030 25 2031 26 2032 27 2033 28 2034 29 2035 30 2036 31 2037 32 2038 33 2039 34 2040 35 2041 36 2042 37 2043 38 2044 39 2045 40 2046 41 2047 42 2048 43 2049 Beginning Balance 246,998,000 261,360,164 277,350,165 294,215,449 312,003,926 330,766,132 350,555,369 371,427,854 393,442,886 416,663,005 441,154,177 466,985,979 494,231,796 522,969,031 553,279,322 585,248,778 618,968,219 654,533,440 692,045,476 731,610,896 773,342,099 817,357,640 862,791,132 909,610,191 957,775,625 1,007,241,255 1,055,488,075 1,048,945,678 961,264,379 814,073,579 642,776,997 477,074,760 319,342,015 217,396,347 166,402,671 134,921,602 123,005,149 114,486,819 104,911,856 94,219,813 82,348,673 44,927,363 6,347,627 Contributions 797,982 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 1,595,964 797,980 Balance Before Earnings 247,795,982 262,956,128 278,946,129 295,811,413 313,599,890 332,362,096 352,151,333 373,023,818 395,038,850 418,258,969 442,750,141 468,581,943 495,827,760 524,564,995 554,875,286 586,844,742 620,564,183 656,129,404 693,641,440 733,206,860 774,938,063 818,953,604 864,387,096 911,206,155 959,371,589 1,008,837,219 1,056,286,055 1,048,945,678 961,264,379 814,073,579 642,776,997 477,074,760 319,342,015 217,396,347 166,402,671 134,921,602 123,005,149 114,486,819 104,911,856 94,219,813 82,348,673 44,927,363 6,347,627 Earnings 13,564,182 14,394,038 15,269,319 16,192,513 17,166,242 18,193,273 19,276,522 20,419,067 21,624,155 22,895,208 24,235,838 25,649,853 27,141,271 28,714,327 30,373,492 32,123,478 33,969,257 35,916,072 37,969,455 40,135,239 42,419,577 43,837,529 45,223,095 46,569,470 47,869,666 49,116,546 48,869,166 48,529,563 44,472,980 37,663,185 29,738,134 22,071,905 14,774,386 10,057,861 7,698,634 6,242,160 5,690,844 5,296,743 4,853,756 4,359,088 3,809,868 2,078,568 293,673 Liabilities Ending (Future $)
Balance 246,998,000 261,360,164 277,350,165 294,215,449 312,003,926 330,766,132 350,555,369 371,427,854 393,442,886 416,663,005 441,154,177 466,985,979 494,231,796 522,969,031 553,279,322 585,248,776 618,968,219 654,533,440 692,045,476 731,610,896 773,342,099 817,357,640 862,791,132 909,610,191 957,775,625 1,007,241,255 2,465,690 1,055,488,075 56,209,543 1,046,945,67B 136,210,862 961,264,379 191,663,780 814,073,579 208,959,767 642,776,997 195,440,370 477,074,760 179,804,651 319,342,015 116,720,054 217,396,347 61,051,537 166,402,671 39,179,703 134,921,602 18,158,613 123,005,149 14,209,175 114,486,819 14,871,706 104,911,856 15,545,798 94,219,813 16,230,229 82,348,673 41,231,178 44,927,363 40,658,305 6,347,627 6,641,300 0
1,355,252,259 FLOWS for IRR (247,795,982)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964)
(1,595,964) 1,667,710 56,209,543 136,210,862 191,663,780 208,959,767 195,440,370 179,804,651 116,720,054 61,051,537 39,179,703 18,158,613 14,209,175 14,871,706 15,545,798 16,230,229 41,231,178 40,658,305 6,641,300 Notes 1 The rate of return to net the trust assets to zero at the end of decommissioning represents a return after-taxes, investment management fees, trustee fees and trading commissions. It represents a full liquidation rate of return.
2 Annual earnings of the trust reflect the allocation of investments among equities and fixed income securities. As decommissioning approaches the asset allocation becomes more heavily weighted to fixed income securities.