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July 2, 2019 INDIANA UTILITY REGULATORY COMMISSION

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July 2, 2019 INDIANA UTILITY REGULATORY COMMISSION STATE OF INDIANA INDIANA UTILITY REGULATORY COMMISSION PETITION OF DUKE ENERGY INDIANA, LLC ) PURSUANT TO IND. CODE §§ 8‐1‐2‐42.7 AND ) 8‐1‐2‐61, FOR (1) AUTHORITY TO MODIFY ) ITS RATES AND CHARGES FOR ELECTRIC ) UTILITY SERVICE THROUGH A STEP-IN OF ) NEW RATES AND CHARGES USING A ) FORECASTED TEST PERIOD; (2) APPROVAL ) CAUSE NO. 45253 OF NEW SCHEDULES OF RATES AND ) CHARGES, GENERAL RULES AND ) REGULATIONS, AND RIDERS; (3) ) APPROVAL OF A FEDERAL MANDATE ) CERTIFICATE UNDER IND. CODE § 8-1-8.4-1; ) (4) APPROVAL OF REVISED ELECTRIC ) DEPRECIATION RATES APPLICABLE TO ) ITS ELECTRIC PLANT IN SERVICE; (5) ) APPROVAL OF NECESSARY AND ) APPROPRIATE ACCOUNTING DEFERRAL ) RELIEF; AND (6) APPROVAL OF A ) REVENUE DECOUPLING MECHANISM FOR ) CERTAIN CUSTOMER CLASSES ) VERIFIED DIRECT TESTIMONY OF JOHN J. SPANOS On Behalf of Petitioner, DUKE ENERGY INDIANA, LLC Petitioner’s Exhibit 14 July 2, 2019 PETITIONER'S EXHIBIT 14 DUKE ENERGY INDIANA 2019 BASE RATE CASE DIRECT TESTIMONY OF JOHN J. SPANOS DIRECT TESTIMONY OF JOHN J. SPANOS PRESIDENT GANNETT FLEMING VALUATION AND RATE CONSULTANTS, LLC ON BEHALF OF DUKE ENERGY INDIANA, LLC BEFORE THE INDIANA UTILITY REGULATORY COMMISSION 1 I. INTRODUCTION 2 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 3 A. My name is John J. Spanos. My business address is 207 Senate Avenue, Camp 4 Hill, Pennsylvania, 17011. 5 Q. ARE YOU ASSOCIATED WITH ANY FIRM? 6 A. Yes. I am associated with the firm of Gannett Fleming Valuation and Rate 7 Consultants, LLC (Gannett Fleming). 8 Q. HOW LONG HAVE YOU BEEN ASSOCIATED WITH GANNETT 9 FLEMING? 10 A. I have been associated with the firm since college graduation in June 1986. 11 Q. WHAT IS YOUR POSITION WITH THE FIRM? 12 A. I am President. 13 Q. ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS CASE? 14 A. I am testifying on behalf of Duke Energy Indiana, LLC (“Duke Energy Indiana” or 15 “Company”). 16 Q. PLEASE STATE YOUR QUALIFICATIONS. 17 A. I have 33 years of depreciation experience which includes giving expert testimony 18 in over 300 cases before 40 regulatory commissions, including this Commission. 19 These cases have included depreciation studies in the electric, gas, water, JOHN J. SPANOS -1- PETITIONER'S EXHIBIT 14 DUKE ENERGY INDIANA 2019 BASE RATE CASE DIRECT TESTIMONY OF JOHN J. SPANOS 1 wastewater and pipeline industries. In addition to cases where I have submitted 2 testimony, I have supervised over 600 other depreciation or valuation assignments. 3 Please refer to Appendix A for my qualifications statement, which includes further 4 information with respect to my work history, case experience, and leadership in the 5 Society of Depreciation Professionals. 6 Q. WHAT IS YOUR EDUCATIONAL BACKGROUND? 7 A. I have Bachelor of Science degrees in Industrial Management and Mathematics 8 from Carnegie-Mellon University and a Master of Business Administration from 9 York College. 10 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS 11 PROCEEDING? 12 A. My testimony will support and explain the depreciation study and fair value study 13 conducted under my direction and supervision for Duke Energy Indiana. 14 II. DISCUSSION 15 Q. PLEASE DEFINE THE CONCEPT OF DEPRECIATION. 16 A. Depreciation refers to the loss in service value not restored by current maintenance, 17 incurred in connection with the consumption or prospective retirement of utility 18 plant in the course of service from causes which are known to be in current 19 operation, against which the Company is not protected by insurance. Among the 20 causes to be given consideration are wear and tear, decay, action of the elements, 21 obsolescence, changes in the art, changes in demand and the requirements of public 22 authorities. JOHN J. SPANOS -2- PETITIONER'S EXHIBIT 14 DUKE ENERGY INDIANA 2019 BASE RATE CASE DIRECT TESTIMONY OF JOHN J. SPANOS 1 Q. PLEASE IDENTIFY PETITIONER’S EXHIBIT 14-A (JJS). 2 A. Petitioner’s Exhibit 14-A (JJS) is a report entitled, “2018 Depreciation Study - 3 Calculated Annual Depreciation Accruals Related to Electric Plant as of 4 December 31, 2018.” This report sets forth the results of my depreciation study for 5 Duke Energy Indiana. 6 Q. IS PETITIONER’S EXHIBIT 14-A (JJS) A TRUE AND ACCURATE COPY 7 OF YOUR DEPRECIATION STUDY? 8 A. Yes. 9 Q. DOES PETITIONER’S EXHIBIT 14-A (JJS) ACCURATELY PORTRAY 10 THE RESULTS OF YOUR DEPRECIATION STUDY AS OF 11 DECEMBER 31, 2018? 12 A. Yes. 13 Q. IN PREPARING THE DEPRECIATION STUDY, DID YOU FOLLOW 14 GENERALLY ACCEPTED PRACTICES IN THE FIELD OF 15 DEPRECIATION AND VALUATION? 16 A. Yes. 17 Q. WHAT WAS THE PURPOSE OF YOUR DEPRECIATION STUDY? 18 A. The purpose of the depreciation study was to estimate the annual depreciation 19 accruals related to electric plant in service for ratemaking purposes and determine 20 appropriate average service lives and net salvage percents for each plant account. JOHN J. SPANOS -3- PETITIONER'S EXHIBIT 14 DUKE ENERGY INDIANA 2019 BASE RATE CASE DIRECT TESTIMONY OF JOHN J. SPANOS 1 Q. PLEASE DESCRIBE THE CONTENTS OF YOUR REPORT. 2 A. The Depreciation Study is presented in nine parts. Part I, Introduction, presents the 3 scope and basis for the Depreciation Study. Part II, Estimation of Survivor Curves, 4 includes descriptions of the methodology of estimating survivor curves. Parts III 5 and IV set forth the analysis for determining service life and net salvage estimates. 6 Part V, Calculation of Annual and Accrued Depreciation, includes the concepts of 7 depreciation and amortization using the remaining life. Part VI, Results of Study, 8 presents a description of the results of my analysis and a summary of the 9 depreciation calculations. Parts VII, VIII and IX include graphs and tables that 10 relate to the service life and net salvage analyses, and the detailed depreciation 11 calculations by account. 12 The Depreciation Study also includes several tables and tabulations of data 13 and calculations. Table 1 on pages VI-5 through VI-11 of the Depreciation Study 14 presents the estimated survivor curve, the net salvage percent, the original cost as 15 of December 31, 2018, the book depreciation reserve, and the calculated annual 16 depreciation accrual and rate for each account or subaccount. The section 17 beginning on page VII-2 presents the results of the retirement rate analyses 18 prepared as the historical bases for the service life estimates. The section beginning 19 on page VIII-2 presents the results of the net salvage analysis. The section 20 beginning on page IX-2 presents the depreciation calculations related to surviving 21 original cost as of December 31, 2018. JOHN J. SPANOS -4- PETITIONER'S EXHIBIT 14 DUKE ENERGY INDIANA 2019 BASE RATE CASE DIRECT TESTIMONY OF JOHN J. SPANOS 1 Q. PLEASE EXPLAIN HOW YOU PERFORMED YOUR DEPRECIATION 2 STUDY. 3 A. I used the straight line remaining life method of depreciation, with the equal life 4 group procedure for all plant assets except some general plant accounts. The annual 5 depreciation is based on a method of depreciation accounting that seeks to distribute 6 the unrecovered cost of fixed capital assets over the estimated remaining useful life 7 of each unit, or group of assets, in a systematic and rational manner. 8 For General Plant Accounts 391.0, 391.1, 393.0, 393.1, 394.0, 395.0, 397.0 9 and 398.0, I used the straight line remaining life method of amortization. The 10 annual amortization is based on amortization accounting that distributes the 11 unrecovered cost of fixed capital assets over the remaining amortization period 12 selected for each account and vintage. 13 Q. HOW DID YOU DETERMINE THE RECOMMENDED ANNUAL 14 DEPRECIATION ACCRUAL RATES? 15 A. I did this in two phases. In the first phase, I estimated the service life and net 16 salvage characteristics for each depreciable group, that is, each plant account or 17 subaccount identified as having similar characteristics. In the second phase, I 18 calculated the composite remaining lives and annual depreciation accrual rates 19 based on the service life and net salvage estimates determined in the first phase. 20 Q. PLEASE DESCRIBE THE FIRST PHASE OF THE DEPRECIATION 21 STUDY, IN WHICH YOU ESTIMATED THE SERVICE LIFE AND NET 22 SALVAGE CHARACTERISTICS FOR EACH DEPRECIABLE GROUP. JOHN J. SPANOS -5- PETITIONER'S EXHIBIT 14 DUKE ENERGY INDIANA 2019 BASE RATE CASE DIRECT TESTIMONY OF JOHN J. SPANOS 1 A. The service life and net salvage study consisted of compiling historic data from 2 records related to Duke Energy Indiana’s plant; analyzing these data to obtain 3 historic trends of survivor and net salvage characteristics; obtaining supplementary 4 information from Duke Energy Indiana’s management, and operating personnel 5 concerning practices and plans as they relate to plant operations; and interpreting 6 the above data and the estimates used by other electric utilities to form judgments 7 regarding average service life and net salvage characteristics. 8 Q. WHAT HISTORIC DATA DID YOU ANALYZE FOR THE PURPOSE OF 9 ESTIMATING SERVICE LIFE CHARACTERISTICS? 10 A. I analyzed the Company’s accounting entries that record plant transactions during 11 the period 1956 through 2018. The transactions included additions, retirements, 12 transfers, sales, and the related balances. The Company records also included 13 surviving dollar value by year installed for each plant account as of December 31, 14 2018. 15 Q. WHAT METHOD DID YOU USE TO ANALYZE THIS SERVICE LIFE 16 DATA? 17 A. I used the retirement rate method. This is the most appropriate method when aged 18 retirement data are available, because this method determines the average rates of 19 retirement actually experienced by the Company during the period of time covered 20 by the study.
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