ML20093F359

Testimony of a Nozzolillo Re Lilco Revenue Requirements as Benefited by Customers

ML20093F359
Person / Time
Site:	Shoreham File:Long Island Lighting Company icon.png
Issue date:	07/16/1984
From:	Nozzolillo A LONG ISLAND LIGHTING CO.
To:
Shared Package
ML20093F343	List: ML20093F339 ML20093F345 ML20093F348 ML20093F352 ML20093F355 ML20093F359 ML20093F363
References
OL-4, NUDOCS 8407190010
Download: ML20093F359 (22)

Text

LILCO, July 16, 1984

( l' UNITED STATES OF AMERICA  !

NUCLEAR REGULATORY COMMISSION Before-the Atomic Safety and Licensing Board l l

In the. Matter of ) I

)

LONG-ISLAND LIGHTING COMPANY ) Docket No. 50-322-OL-4

) (Low Power)

(Shoreham Nuclear Power Station, )

Unit 1) )

l TESTIMONY OF l ANTHONY NOZZOLILLO

'ON BEHALF OF LONG ISLAND LIGHTING COMPANY

.Q.1. Please state your name and business-address.

A. Anthony Nozzolillo, 250 Old Country Road, Mineola, New York.

Q.2. By whom are you employed?

A. Long Island Lighting Company (LILCO).

Q.3. How long have you been employed by LILCO and what posi-tions have you held?

-A. I have-been employed by LILCO since 1972. From 1972 through 1983, I was assigned to the Company's Planning Department, served as Manager of the System Planning r

l Division, and have specialized in performing economic analyses of alternative engineering and financial 8407190010 840724 QM ADOCK 050003gy PDR-t

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. options incident to various aspects of LILCO's op-erations. I have taught qualified LILCO employees the graduate level course in Engineering Studies of Econo-my. This is a course taken by engineers dealing with how to evaluate various engineering options from an economic standpoint including, among others, such fac-tors as rate of return, depreciation, federal income taxes, operation and maintenance expenses, insurance and property' taxes which are an integral part of the total revenue requirement calculation. In 1983 I became a division manager in the Electrical Engineering

' Department. In November 1983,~I accepted a temporary

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assignment to'the Legal Department to work with_the Company's legal staff in the current rate case. proceed-ing. My responsibilities in that respect were to coor-dinate the development of testimony and preparation of other aspects of the rate case. In April.1984, I_was appointed Manager of the' Financial Analysis and Plan-ning Department.

Q.4. What are'your_ responsibilities as Manager of the Finan-cial Analysis and Planning Department?

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A. To develop and maintain financial modelling systems.

g .In this capacity, I am also involved in the analysis of

-various system' development plans for economic impact on both the Company and its consumers. I also play an ac-

'tive role in the development and analysis of financial options for planning purposes.

Q.5. Will you please describe your educational background?

I_ graduated summa' cum laude-from the Polytechnic Insti-

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tute of_ Brooklyn in 1972 with a B.S. degree in Electri-cal-Engineering. In 1978, I received an M.B.A. degree

.from C.W. Post Center of Long Island University. In addition,'~I attended the Company's graduate institute course in Engineering Studies of Economy and have at-tended various seminars dealing with advanced engineer-ing economics.

Q.6. Have you previously testified concerning economic mat-ters?

A. Yes,-I have. I testified in New' York State Public Ser-vice Commission cases 27374 and 27375 on the economic r and financial impact of the inclusion of Construction Work in Progress (CWIP) in LILCO's rate base. In case O

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4 28553, I presented the Company's financial statistics

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and' quality indicators which would result from I

$281,000,000- of permanent rate relief becoming effec-

.tive on October 1, 1984. I have also testified re- -

garding the, economics of coal conversion for LILCO's LPort> Jefferson Units #3'and #4 before the Department of Environmental Conservation.

~Q.7. What-is the purpose of your testimony in this proceed-ing?

A. Der testimony will present the economic benefits to

. LILCO's customers, in. terms of present worth of revenue y-v

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%>' requirements, resulting from a three-month earlier com-mercial operating date for.tJun Shoreham Nuclear Power

. Station which may be achieved if the exemption permit-ting-low power testing is granted as requested.

Q.8. What'do you mean by present worth of revenue' require-I mentc?-

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JL - It is appropriate to look at benefits in terms of LILCO's revenue requirements because rates are normally L

set'on-that basis. InLdiscussing revenue requirements

[ 'over a period of time, it is'necessary to discuss them h

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- ;aE in' terms of present worch which allows a direct compar-

- ison of revenue requirements over different periods of

' time. I have simply looked at the present worth sum of

, .those re' venue requirements over a period of years dur-ing which LILCO's operation will be affected by the

, generation of power-at Shoreham.

t 1 Q.9. In performing your analysis of potential economic bene-fit, what commercial operating dates for the Shoreham plant did you consider?

3, A.- According to the Company's scheduling estimates, July o 1, 1985 is the earliest date that commercial operation y,_V -

K\-e' ~ could commence'if all required permits are granted in a C

timely fashion'. The alternate in-service date I con-6

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sidered is October 1, 1985, which represents a three-month slip from July 1985. For purposes of analyzing

,- any potential economic benefit, I have analyzed two a

synchronization dates for the July in-service date.

Obviously, the dates lack certainty, Nevertheless, my gh, C..T' cnalysis using either of these dates gives a good indi-R. '

caticn of the magnitude of the potential economic bene-

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- q fit if low power testing can be conducted early and L '

allow the plant to reach commercial operation sooner.

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If the dates-were changed, the range of the potential i benefit might change, but in my opinion there would still be a benefit if the plant achieves commercial op-4 eration 3 months earlier as a result of this exemption.

Q.10. ;What are the economic benefits for a July 1, 1985 rath-i' er than an October 1, 1985 in-service date?

JA. In terms of present. worth of revenue requirements, theseLbenefits are in the range of $8-45 million.

F Q.11. How did.you calculate this range of benefits?

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i- -To. quantify this benefit, I used two computer programs

which LILCO routinely uses in its financial forecasts.

To' establish an' estimate of the total annual revenue  ;

requirements for the! scenarios outlined above, I used LILCO's Strategic Financial Planning model (SFP). The

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SFP model-is a computer based long-range financial tool

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! for combination electric and gas utilities. This com-

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puter model makes financial and revenue forecasts for a p utility' based on a' seti of assumptions and/or projec-tions concerning energy demand, capital expenditures, c.

operating costs, and financial-and regulatory policies.

This model.is used by'LILCO in its own internal long A

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. range planning and has been used by the Public Service Commission and the State Energy Office. For example, s

the State Energy Office has used it in matters related to the State Energy Master Plan and for analyzing the Nine Mile Point 2 investment. I utilized LILCO's Plan-ning Production Cost Evaluation Program to estimate

. total production fuel costs.

This program simulates the dispatch of generation (and interchange power

. availability) to meet the system load. Again, the Planning Production Cost Evaluation Program is rou-tinely used in normal business operation by LILCO.

Moreover, the model was reviewed and adopted by the G Technical Committee in PSC Case 28252 under the title "Shoreham Nuclear Generating Station Ratemaking Princi-ples." The results of this program were an input to the SFP mndel.

Q.12. What ars the basic assumptions that you used in per-forming your analysis?

A. The basic assump.: na e contained in a 13-page docu-ment entitled "Baaic Pruaises and Assumptions" which was prepared under my direction and supervision and is

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Attachment 1 to this testimony. I have reviewed and am J

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V familiar with all of the assumptions. Each is based on information routinely generated by LILCO or on my pro-fessional judgment, where such information is not available. -

Q.13. Mr. Nozzolillo, you have stated that the benefits for an earlier in-service date are in the range of $8-45 million in terms of present worth of revenue require-ments. What.are the significant elements that consti-tute this economic benefit?

A. There are several elements. The earlier Shoreham oper-ates, the sooner consumers start realizing the benefits

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resulting from the displacement of fossil fuel. Also,

-the sooner the plant goes commercial, the lower the ul-timate cost of the facility. A lower total investment translates into-lower annual revenue requirements for return on net-investment,-depreciation, associated fed-eral income taxes and gross revenue taxes, all of which comprise the revenue requirements on the basis of which rates are set. This is a benefit that will continue

-over the life of the facility.

All of these factors are reflected in my analysis.

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Q.14. Mr. Nozzolillo,-why is there such a broad range in the benefits which you have established?

A. The upper range of $45 million results from the tax de-preciation associated with synchronization of the plant into our' system if the synchronization were to occur in 1984. The $8 million figure assumes a 1985 synchroni-zation date. Another factor that affects the benefits is the timing as to when LILCO can utilize the invest-ment-tax credit carried forward as a credit on LILCO's tax returns. After 1984, this amount is well in excess of.$200 million. The sooner the Company is able to L

( ) utilize this credit for federal income tax purposes, the more beneficial it is for its consumers due to.the time value of money.

Q.15. Please summarize your testimony.

A. If, as a result of obtaining the requested exemption, Shoreham reaches commercial operation three months sooner than it would otherwise, LILCO's customers will l

L see a' benefit of $8 to $45 million dollars in terms of present worth of revenue requirements. Therefore, from the standpoint of economics, expediting the commercial operation of Shoreham is in the public interest.

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ATTACHMENT 1 BASIC PREMISES AND ASSUMPTIONS

- The following fis a description of the Premises and Assumptions which are comon to all three of the following cases unless otherwise noted:

' Case I: Shoreham I/S* 7/85; synchronized 12/84 Case II: Shoreham I/S 7/85; synchronized 1/85 Case III: Shoreham I/S 10/85; synchronized 3/85

l. Study Period 1984 through the year 2000 i- . 2. . Load Forecast .

The following ' tabulates _ the energy and peak load demand forecast.that.was used.in the analysis.

FORECAST Summer I. m ): Peak Requirements ** Sales k/' Year (MW)- (GWH) (GWH) l 1984 3210 14539 13315 1985 3270 14876 13566 1986 3315- -15097 13753 1987- 3360~ 15333 13954

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H .1988 3360 15372 13990 l

1989. 3390 15474 14083 H 1990 3445 15788 14370 1991- 3505 16122 14675 s 1992- 3585 16542 15059 y

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• In service.

• • ' Sales plus losses and Company use.

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Summer Peak Requirements Sales Year (MW) (GWH) (GWH)

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-1993 3670 17038 15512 1994- 3760 17543 15974 1995 3855 18056 16443 1996 3940 18556 16909 1997~ 4035- 19084 17382 1998 4125 19612 17865 1999 4220 20143 18350 2000 4315 20678 18839

, - 3. Inflation Rates

= Year Value 1984 5.0%-

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(.,/ 1985 5.7%

1986 5.8%

1987 5.7%

1988 - Balance of Study 6.0%

4. Austerity Program Both the total corporate capital budget and the total

. electric operation and maintenance (0 & M) budget reflect austerit'y measures for the calendar year 1984. Beginning with-1985, both budgets begin a transition towards a nor-mal. level. The transition-is smooth rather'than a step function. Depending on the items being addressed, this transition could take up to two years. Thus, by 1987, we should be back to a normal level.

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Construction Budget This-budget is developed-consistent with No. 4 above.

Following is a description of the major components :

.Shoreham Book Cost

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'7/85 C.O. date - $4.07 billion 10/85 C.O. date - $4.22 billion

-These costs were established: consistent with-the Company's proposal in its current rate case filing re-

garding :the Financial Stability Adjustment (FSA) revenues.

Capital- estimates for post-commercial expendi-tures (including capital modifications and retrofits).

Shoreham - Post-Commercial Capital Costs Year $X Million 1985 22.8 for 7/85 I/S and 11.4 for 10/85 I/S l- {:

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1986 44.6 1987- 48.2 1988 46.4 e

1989 21.7-1990 26.1-1991 27.1 L 1992 25.9 1993 31.1 1994 32.9 L1995 30.8

.1996 37.0 1997 39.2 1998 36.7 m-

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Year- $X Million h- '

1999 44.1 2000 46.7 For the purposes of this presentation, a 30 year book life was assumed for Shoreham starting from the beginning of conxnercial operation.

Nine Mile Point #2 For the year 1984, it was assumed that LILCO will continue to cover all interest expenses incurred by

the trust but will make no further contributions

.towards direct construction expenditures. Starting in 1985, LILCO will satisfy its obligations in full, including the amounts not covered in 1984.

For the purpose of this analysis, a January 1, 1987 in-service date was assumed.

New 345 kV Interconnection It is assumed.that LILCO builds and owns the next-interconnection and' associated internal transmis-sion reinforcements. The in-service date is

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g- 1/1/91. The capital requirements are as follows:

l.  %. .

L Year -SX Million 1985 1 1986 2 1987 8

. 1988 45 i:

1989 56 1990 62 i

[ Coal Conversion No coal conversions are assumed.

Future Generation Additions Coal generating units will be added based upon i

need. Need is defined as a reserve deficiency

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after the reallocation of NYPA hydropower. New

' units will be added for a reserve deficiency'of 200 MW or more.

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The capital requirements for future coal units, based on the UE&C Report (January 1983-Jamesport Study), for the dates 1998 and 2000, are as follows:

Future Coal Units Capital Requirements (Excluding AFC)

(S Millions)

C.O. Date 1/98 1/2000 Size 400 MW 400 MW Unit Type. Type 1 Type 2 Year .

1985-

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1987 - -

1988 1 -

-1989 1 -

'1990. 8 -

o 1991 12 1

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-1992 30 1 s

1993 138 2 1994 281 25 1995 293 76 1996 336 88 1997 238 232 1998 391 i 1999 238 Other in-service dates were adjusted by inflation.

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• Transmission Regttirements for Future Coal Units

The following are the capital requirements for transmission system reinforcements to accommodate l- - the_ future coal units.

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Future Transmission Capital Requirements (Excluding AFC)

(S_ Millions)

First Coal Unit 1/98 C.O. Date T

Year-h 1987 -

1988 -

1989 -

1990 -

1991- 2 1992 4 1993 23 1994- 59 1995 77 1

1996 100 1997 52 Bokum, New Haven, Jamesport The following assumptions were incorporated for these projects:

New O Haven Jamesport Bokum d.

Date of Amortization 1/85 1/87 1/88 Period of Amortization 10 yrs. 10 yrs. 10 yrs.

Method St. Line St. Line St. Line Full Recovery Return on + Return of- Yes Yes Yes

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"Other Capital" This item represents the balance of the total capital budget for the electric and gas systems adjusted in accordance with the austerity program outlined in No. 4 above. Common plant is allocated 837. to the electric system and 177.

to the gas system. Capital requirements for this item assumed in this study are as follows:

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Other Capital

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(5X Millions)

' Year. 1983 1984 1985- 1986 1987 1988 1989 1990

-Electric System '59 47 62 77 95 101 107 113 Gas System 18 15 15 15 16 17 18 19 Total 77 62- 77 92 111 118 125 132 After -1990, capital expenditures were escalated at 6% per year, using 1990 as the base.

Capital.To Extend Service Life of Existing Plants The'following' capital expenditures were added to i- approximate the cost of improvements to extend the service lives of LILCO s existing fossil Pu steam plants from 35 to 45 years (the assumed

[" ' retirement dates for this study).

Extension of Service Life Capital Requirements

-(@X Millions)

I-- 1986- 1988 1990 1992 1994 1996 1999 Total 5 5 5 17 28 32- 26 6.

Total Electric 0 & M Budget (excluding fuel)

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The starting point for the annual 0 & M expenses was LILCO's current rate case filing. Budget figures for the years 1984-89, inclusive, were developed consis-tent with'No. 4 (Austerity Program)'above. Future projections are _ based on the extrapolation of this data.

. Electric System O&M Budget (Excluding Fuel & Nuclear) u ($ X Million)

Year 1983 -1984 1985 1986 1987 1988 1989 Total 205 '163 .190 230 260 275 295 1 From 1990 on, escalate at 6K per year using the 1989 figure as~ the base.

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.Shoreham Operating Costs Shoreham O&M

(@ X Million)

Year 1985 32.2'for 7/85 I/S and 16.1 for 10/85 I/S 1986 68.0 1987 82.6 1988 85.6 1989 80.8 1990 96.2 1991 102.0

-1992 96.2 1993 114.6 1994 121.5 1995 114.5 1996 136.5 1997 144.7 1998 136.4 f3, 1999 162.5

(/ 2000 172.2 Future Coal Units O&M expenses for future coal units were also added to the above. The O&M assumed for a 400 MW, Type 1 coal unit installed in 1998 is

$68 million, and for a 400 MW, Type 2 coal unit installed in 2000 is $38 million (both in current year dollars).

7. Gas System O&M Budget The following gas system O&M budget was developed lLn accordance with the austerity measures outlined above in No. 4:

Gas System O&M Budget (5 X Millions)

Year 1983 1984 198'5 1986 1987 1988 1989 Total 57 48 50 55 60 64 67 From 1990 on, expenditures were escalated at 67, per

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year using the 1989 figure as the base.

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8. Property Taxes Existing System The property taxes assumed for the existing electric and gas systema are as follows:

Property Taxes - Existing System (Non-Nuclear)

(5 X Millions)

Year 1984 1985 1986 1987 1988 1989 Electric 129 139 150 162 175 189 Gas 23 25 27 29 31 34 Total 152 164 177 191 206 223 From 1990 on, property taxes were escalated at 67. per year using 1989, figure as the base. .

Shoreham The Shoreham property taxes assumed are as follows:

~'i Shoreham Property Taxes (1985 C.O.) $

"((_/ _(5 X Million) 1985 1986 1987 1988 1989 1990 1991 1992 1993-2000 5 per 67 .73 _ 81 89 97 107 118 Escalate month at 6%

NOTE: Property taxes prior to commercial operation are capitalized.

Other Property Taxes i

Additional property taxes assumed for the next interconnection and the future coal units are as follows:

L Other Property Taxes (S X Million)

Interconnection 20 (1991$ - Escalate at 6%)

Future 400 MW Coa 3. Units Type 1 .C.O. 1/98 57 (1998$ - Escalate at 6%) <

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/y Type 2 - C.O. 1/2000 48 (2000$ - Escalate at 6%)

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(j 9. - Fuel -Costs Oil The basis for the fuel oil costs used in this study is the Fuels Purchasing official forecast for 1984-11988, dated 9/12/83 which was reconfirmed on April 3, 1984. It is assumed that special limitations will not be renewed. A premium is applied to the

. cost of low sulphur fuels in 1985 to reflect the

. loss of bargaining power as a result of the elimina-tion of special limitations. Beyond 1988, fuel oil is assumed to escalate at 2% real.

FUEL OIL COSTS Cost Plant %S Units 1984 1985 1986 1987 1988 Npt. 1 2.8 $/MBTU 4.36 - - - -

$/ Bbl. 27.65 1.0 $/MBTU -

5.31 5.42 5.52 5.77

$/ Bbl. 32.80 33.45 34.10 35.65 W 2.8

() Pt. Jeff 3-4 $/MBTU 4.42 - - - -

$/ Bbl. 28.05 Pt. Jeff 1-4 1.0 $/MBTU -

5.38 5.48 5.59 5.84

$/ Bbl. -

33.20 33.85 34.50 36.05 Glenwood-4-5 0.37 $/MBTU 5.31 5.56 5.67 5.77 6.04 E.F.B.-1-2 1.5 $/ Bbl. 32.58 34.08 34.75 35.40 37.03 Npt. 4 0.7 $/MBTU 5.08 5.35 5.46 5.56 5.82 l $/ Bbl. 31.38 33.03 33.70 34.35 35.93 F. Rockaway 4 0.3 $/MBTU 5.35 5.57 5.68 5.79 6.06

$/ Bbl. 32.78 34.18 34.85 35.50 37.13

Gas Turbines #2 $/MBTU 6.52 6.70 6.88 6.88 7.25

$/ Bbl. 37.80 39.06 39.90 39.90 42.00 Coal i- -

Coal cost estimates used in this study are based

. upon forecasts provided by Fuels Purchasing in 11/82 for delivery to Long Island updated for O -

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current inflation estimates. Beyond 1988, coal is assumed to escalate at 1% real.

Coal Costs Year 1984 1985 1986 1987 1988 1989-2000

$/MBTU '

2.32 2.44 2.58 2.76 2.88 Escalate at 7%

Nuclear Fuel '

Nuclear fuel costs are based on the latest Company estimates.. These estimates, which were for a January 1,1985 in-service' date, were adjusted to reflect the assumed 1985 in-service date. The nuclear

. fuel costs include principal, interest and spent fuel disposal costs. The spent fuel disposal costs are based on a U.S. Department of Energy Contract that requires a fee of 1. mil /kwh of nuclear generation (gross) 'to be collected.

These estimates.were developed for the years 1985-1988; thereafter the total cost was escalated on a $/MBTU basis at an escalation rate of 6% per W year.

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Nuclear Fuel Costs - Shoreham I/S 1985 t

! -Year 1985 ~1986 1987 1988 1989-2000

$/MBTU .789 .857 .917 .961 Escalate at 6%

- 10. - Other Production Assumptions LILCO's inihouse production costing model was used to determine total LILCO annual fuel costs.for the study period. Total annual production fuel costs are consistent with the assumptions stated herein. In addition to those

, ' factors already noted above,~the following'are also taken 1 .

into account in the determination of total fuel costs:

, All LILCO-owned generating units cost t

'% < ~*- NYPP economy transactions The addition of' 100 MW of refuse-fired or other unconventional generation sources by 1990.

P NYPA hydro reallocated to LILCO on a gradual schedule reachin 123 MW by 1995 in accordance with a schedule c I proposekbytheEnergyAssociationasfollows:

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'd NYPA Hydro Reallocated To LILCO Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995-2000 MW - 34. 34 39 44 49 87 90 98 106 114 123

. Firm Capacity Purchase For those years when there is an installed reserve deficiency, it is assumed that firm capacity can be

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purchased to satisfy reserve requirements. Firm capacity is priced at the cost of an intermediate load fossil steam unit built in the early 1970's such as those included under the existing capacity exchange agreement with NUSCO.

Total Production Fuel Costs Table 4 provides the total annual production. fuel cost for the two assumed Shoreham in-service dates.

Production Fuel' Costs (S X Million) c Shoreham C.O. 7/1/85 10/1/85

(

(f) - Year E

1985 676 726 1986 583 583 1987 611 615 1988 633 636 1989 616 616 1990 732 734 1991 741 741 1992 739 739 1993 881 881 1994 988 988 1995 1108 1108 1996 1243 1243 1997 1399 1399 1998 1415 1415 1999 1588 1588 2000 1619 1619

11. Return, Interest and AFC Rates The following reflects the assumptions used in this study:

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Return on Interest Trust Equity. (%) Rate (%) Interest Year Comm. Pref. LTD STD Rate (%)

1984 16.0 - -

11.0 11.0 1985 16.0 - -

13.5 13.5 1986 15.0 13.0 13.0 12.0 12.0 1987 :14 ~. 0 12.0 12.0 11.0 11.0 1988-2000- 14.0 12.0 12.0 11.0 11.0 NOTES:

A " " indicates that the program was precluded from issuing this type of security in the year indicated. 1 The AFC rate utilized in a given year is based on the prior

-year weighed average cost of capital.

12. Other Assumptions The discount rate for purposes of present worthing is

!- 13.0%.

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The amount of rate relief granted was assumed to be equal to the revenues required. No regulatory lag was assumed. That is, the SFP model was executed in

l. the " bottom up" mode assuming conventional rate treat-l ment.

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