Index to the Direct Testimony

INDEX TO THE REBUTTAL TESTIMONY OF DANE A. WATSON, WITNESS FOR TXU ELECTRIC COMPANY (Filename: Watson Rebuttal.doc)

I. POSITION AND QUALIFICATIONS...... 2 II. PURPOSE AND SUMMARY OF REBUTTAL TESTIMONY...... 2 III. REBUTTAL OF TIEC WITNESS MR. SELECKY RELATED TO FOSSIL NET SALVAGE...... 3 IV. REBUTTAL OF CITIES WITNESS DR. ANDERSEN RELATED TO FOSSIL NET SALVAGE...... 7 V. REBUTTAL OF PUC STAFF WITNESS MR. ALMON RELATED TO ACTUAL COSTS INCURRED FOR CAPITAL IMPROVEMENTS AT GENERATION PLANTS...... 10 VI. CONCLUSION...... 11 VII. AFFIDAVIT...... 13

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 1 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 REBUTTAL TESTIMONY OF DANE A. WATSON 2 I. POSITION AND QUALIFICATIONS 3Q. PLEASE STATE YOUR NAME, BUSINESS ADDRESS, AND CURRENT 4 EMPLOYMENT POSITION. 5A. My name is Dane A. Watson and my business address is 1601 Bryan 6 Street, Dallas, Texas. I am employed by TXU Business Services. I am 7 responsible for the management of Depreciation, Records, and Property 8 Accounting for various areas within the TXU Corp. system of companies, 9 including TXU Electric Company ("TXU Electric" or "Company"). 10Q. ARE YOU THE SAME DANE A. WATSON WHO PROVIDED DIRECT 11 AND SUPPLEMENTAL DIRECT TESTIMONY EARLIER IN THIS 12 PROCEEDING? 13A. Yes, I am. 14 15 II. PURPOSE AND SUMMARY OF REBUTTAL TESTIMONY 16Q. PLEASE DESCRIBE THE PURPOSE OF YOUR REBUTTAL 17 TESTIMONY. 18A. The purpose of my rebuttal testimony is to rebut portions of the direct 19 testimony of the following witnesses: 20  Mr. James T. Selecky, representing Texas Industrial Energy 21 Consumers (“TIEC”); 22  Dr. Steven Andersen, representing Certain Cities Served by TXU 23 Electric Company ("Cities"); and 24  Mr. T. Brian Almon, representing the Public Utility Commission of 25 Texas ("Staff"). 26Q. PLEASE SUMMARIZE YOUR REBUTTAL TESTIMONY. 27A. My rebuttal testimony shows that the net salvage for fossil fired power 28 plants that I calculated for TXU Electric is appropriate and correct. My 29 calculation is based on the most current, site-specific information available

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 2 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 to make such a determination. The alternative, as suggested by TIEC 2 witness Selecky and Cities witness Andersen, is to use net salvage rates 3 for removing generating units that are based on a non-detailed, 20-year- 4 old study of 2 lignite-generating units. Using this 20-year-old information 5 would understate the amount needed to actually remove generating units 6 by over $550,000,000. I will also rebut Mr. Almon’s assertion that 7 environmental expenditures incurred prior to January 1, 1999 should not 8 be recoverable as stranded costs. I will show that approximately $20 9 million in environmental capital costs expended prior to January 1, 1999 is 10 appropriately eligible for recovery as a stranded cost. 11 12 III. REBUTTAL OF TIEC WITNESS MR. SELECKY RELATED TO FOSSIL 13 NET SALVAGE 14Q. DO YOU AGREE WITH MR. SELECKY’S ASSERTION, ON PAGES 7(1) 15 -8(5) AND 10(12-15) OF HIS DIRECT TESTIMONY, THAT SINCE THE 16 COMMISSION DID NOT ADOPT THE FOSSIL NET SALVAGE RATES 17 PROPOSED BY OTHER UTILITIES, IT SHOULD ALSO REJECT TXU 18 ELECTRIC'S PROPOSED CHANGE IN NET SALVAGE? 19A. No. It is inappropriate for Mr. Selecky to rely on the decisions concerning 20 the proposals made by CP&L and Entergy Gulf States in this matter. 21 First, the proposals made by CP&L and Entergy Gulf States were 22 not supported by site-specific studies like that which supports TXU 23 Electric’s proposal. Rather, those utilities simply relied on industry 24 averages that showed a more negative salvage value for dismantling 25 generating plants. The Company, on the other hand, has provided site- 26 specific dismantling studies performed by TLG Services, Inc., which 27 definitively demonstrate the inadequacy of its existing negative 5% net 28 salvage rates.

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 3 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 Mr. LaGuardia has presented a summary of his 1997 study of the 2 Company generating units in his direct testimony in this proceeding. 3 When compared with the original cost of these units, Mr. LaGuardia 4 clearly shows that using a negative 5% net salvage value, as established 5 in Docket No. 1903, no longer reflects the cost of removal associated with 6 these types of facilities. Furthermore, there has been a significant 7 increase in environmental removal costs of plant components since the 8 original 1978 study. The methodology used by TLG Services in TXU 9 Electric’s site-specific studies, as described by Mr. LaGuardia in his direct 10 testimony on pages 15(7) - 17(29), has been accepted by the Commission 11 as well as by other state commissions across the country. 12 Second, the reasons referenced in the Proposal for Decision for 13 denying the change in net salvage requested Entergy Gulf States should 14 not be applied to this matter. In that case, intervenors argued that: (1) it 15 was possible that Entergy Gulf State’s units could be sold for a gain as 16 opposed to being dismantled; (2) uncertainty regarding salvage rates 17 existed because of the future impact of deregulation; and (3) land values 18 should be reflected as a reduction to the removal cost for the units. 19 It is improper to consider whether TXU Electric’s units could be sold 20 for a gain in this proceeding. The net salvage rates are inputs to the 21 ECOM model. The ECOM model reflects the total cost of generating units 22 through the end of their lives in a regulated environment. Therefore, 23 realistic demolition costs for generating units must be accurately reflected 24 in the total cost of the units through the end of their lives. Projecting the 25 sale of generating units prior to the end of their lives is contrary to the 26 purpose of the ECOM model. Based on Commission rules, the potential 27 benefit of sale of generation is to be addressed in the true-up of stranded 28 costs in 2004, not in the analysis performed in the ECOM model.

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 4 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 Furthermore, it is important to include appropriate salvage values in 2 the ECOM model at this time even though uncertainty exists due to 3 deregulation. Increasing removal costs of retired generating units is a 4 certainty. If the Company does not include the appropriate net salvage 5 values in the ECOM model, TXU will be precluded from recovery of 6 legitimate costs. The Company was required by Section 39.201(h)1 to use 7 updated company-specific inputs in the ECOM model. This can only be 8 accomplished by utilizing the recent dismantling study performed by TLG 9 and cannot be accomplished by using 20 year-old industry averages. 10 Further, if the Company does not include the appropriate net salvage 11 value in the ECOM model then, at the 2004 true-up, the market values 12 determined in that proceeding will reflect higher net salvage. 13 Finally, it is improper to consider a hypothetical increase in site or 14 land values in the net salvage calculation in this proceeding. Mr. Selecky 15 also incorrectly makes this argument on pages 8(6) - 9(20) of his 16 testimony. Taking into account the value of real property in the fossil net 17 salvage calculation and, thus, the depreciation expense, would violate 18 FERC (and Commission) rules. FERC states in 18 CFR Part 101 Electric 19 Plant Instruction 7(E) that: 20 Any difference between the amount received from the sale of 21 land or land rights, less agents’ commissions and other costs 22 incident to the sale, and the book cost of such land or rights, 23 shall be included in account 411.6, Gains from Disposition of 24 Utility Plant, or 417, Losses from Disposition of Utility Plant 25 when such property has been recorded in Account 105, 26 Electric Plant Held for Future Use, otherwise to account 27 421.1, Gain on Disposition of Property or 421.2, Loss on 28 Disposition of Property, as appropriate. 29

11 Sec. 39.201 (h) The electric utility shall use the ECOM administrative model referenced in 2Section 39.262 to determine estimated stranded costs. The model must include updated 3company-specific inputs. 4 Watson – Rebuttal – TXU Electric 5SOAH Docket No. 473-00-1015 - 5 - Stranded Cost 6PUC Docket No. 22350 Unbundled Cost of Service 1 To reflect the proceeds from the sale of land as salvage in calculating 2 depreciation on generation assets would clearly violate this FERC rule. 3 The Company's customers receive the benefit of utility service 4 provided by the land and the facilities that stand on the land. In return for 5 those services, the customers pay the cost of service associated with the 6 Company's ownership of the land. However, the shareholders of the 7 Company assume the risk of the purchase of the property because they 8 provide the funds to purchase the land. Because land is not a depreciable 9 asset, the Company receives no return of its investment from the 10 customers through the recovery of depreciation expense. Therefore, the 11 customers should have no claim on any gain or suffer any loss resulting 12 from the sale of the land. While customers pay the cost of service 13 associated with the land and receive the associated services, it is the 14 shareholders of the Company who bear the risk of the purchase of the 15 land and it is the shareholders that are entitled to the gains or losses 16 resulting from the sale of the land. The United States Supreme Court 17 agreed with this premise in Board of Public Utility Comm’rs v. New York 18 Tele. Co., 271 U.S. 23, 32 (1926) when it held that: “Customers pay for 19 service, not for the property used to render it. Their payments are not 20 contributions to depreciation or other operating expenses, or to capital of 21 the company. By paying bills for service they do not acquire any interest, 22 legal or equitable, in the property used for their convenience or in the 23 funds of the company.” Moreover, the Commission relied on Board of 24 Public Utility Comm’rs v. New York Tele. Co when it found in Inquiry of the 25 General Counsel into the Reasonableness of the Rates and Services of 26 Southwestern Bell Telephone Company, Docket No. 8585, 17 P.U.C. Bull. 27 1711, 1853 (Nov. 29, 1990) (Conclusion of Law No. 31) (citing Board of 28 Public Utility Comm’rs v. New York Tele. Co, 271 U.S. 23 (1926) that:

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 6 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 “[R]ate payers do not acquire an ownership interest in a utility’s property 2 by paying for service.” 3 Accordingly, it is inappropriate to compare the proposals of CP&L 4 and Entergy Gulf States to TXU Electric’s proposal in this case, and Mr. 5 Selecky's recommendation should be rejected. Moreover, Mr. Selecky's 6 argument that the value of the land at the Company's generation sites 7 should be considered in the net salvage calculation is improper and 8 should also be rejected. 9Q. DOES MR. SELECKY PROVIDE ANY DISMANTLING STUDIES OR 10 CITE TO ANY SPECIFIC STUDIES AS EVIDENCE THAT WOULD 11 SUPPORT HIS RECOMMENDATION TO RETAIN NEGATIVE 5% NET 12 SALVAGE? 13A. No. Mr. Selecky presents no evidence in his testimony to support his 14 recommendation. 15Q. DOES MR. SELECKY PROVIDE ANY APPRAISALS OF LAND THAT 16 SUPPORT HIS THEORY THAT THE FUTURE VALUE OF TXU 17 ELECTRIC'S LAND WOULD OFFSET ITS COST TO REMOVE THE 18 GENERATING UNITS? 19A. No. Mr. Selecky presents no evidence that there will be an increase in 20 land values at the former generating sites sufficient to offset any or all of 21 the approximately $550 million difference between the net salvage rates 22 recommended by TXU Electric and the outdated negative 5% net salvage 23 he recommends. 24 25 IV. REBUTTAL OF CITIES WITNESS DR. ANDERSEN RELATED TO 26 FOSSIL NET SALVAGE 27Q. CITIES WITNESS DR. ANDERSEN, ON PAGES 16(3-6) OF HIS DIRECT 28 TESTIMONY, PRESENTS A RECOMMENDATION TO RETAIN THE

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 7 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 CURRENT NEGATIVE FIVE-PERCENT NET SALVAGE FOR ALL 2 FOSSIL UNITS. DO YOU AGREE? 3A. No. Similar to the proposals by Mr. Selecky, Dr. Andersen has not 4 conducted any dismantling studies, nor has he cited any specific studies 5 or other evidence to support his recommendation of negative 5% net 6 salvage. As Mr. LaGuardia has demonstrated in his most recent study 7 performed for the Company in 1997, there have been dramatic increases 8 in the removal costs associated with these types of facilities since the 9 current level of negative 5% net salvage was established in 1978. Using a 10 negative 5% net salvage is inadequate to recover the true costs of 11 dismantling a generating unit. Furthermore, the three points Dr. Andersen 12 raises in criticism of TXU Electric fossil net salvage proposal are 13 inappropriate. Accordingly, Dr. Andersen's proposal should be rejected. 14Q. DR. ANDERSEN’S FIRST POINT ARGUES THAT THE HISTORIC 15 NEGATIVE 5% RATE SHOULD BE MAINTAINED BECAUSE TXU 16 ELECTRIC DID NOT INCLUDE LAND VALUES IN ITS CALCULATION. 17 DO YOU AGREE? 18A. No. Dr. Andersen suggests that because theoretically the value of land at 19 a generating site could be more than the original cost of the land, then any 20 removal cost of generating units above negative 5% net salvage would be 21 covered by the theoretical gain on the land sale. As I have previously 22 testified in this rebuttal testimony, this improper treatment of a gain or loss 23 on disposal as a salvage value would be a violation of FERC and 24 Commission rules. 25 Moreover, Dr. Andersen only offers one general sentence in his 26 direct testimony as support for his allegation. On page 16(16-18) of his 27 testimony, Dr. Andersen asserts that because these sites have access to 28 gas pipelines, rail transportation, water resources and transmission lines, 29 the land could be sold to recover not only its original cost but also all of the

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 8 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 difference in costs between negative 5% and the proposals for net salvage 2 made by TXU Electric in this proceeding. As previously mentioned, that 3 difference amounts to over $550 million in removal costs. As with Mr. 4 Selecky, Dr. Andersen presents no evidence to support the speculation 5 that the sites could be sold for such a profit. 6Q. DO YOU AGREE WITH DR. ANDERSEN’S SECOND POINT, ON PAGE 7 16(19-27) OF HIS DIRECT TESTIMONY, REGARDING THE REMAINING 8 LIFE ESTIMATES OF THE GENERATING UNITS? 9A. No. Dr. Andersen states that simply increasing the remaining life of 10 generating stations by 1.5 years would allow the recovery of the $220 11 million in removal costs. This is incorrect and wholly misrepresents the 12 depreciation analysis. The demolition cost that must be recovered for 13 each generating asset is independent of the remaining life the of 14 generating asset. In other words, $220 million (in today’s dollars) will still 15 need to be recovered in order to dismantle lignite plants whether the life is 16 1.5 years longer or 1.5 years shorter. Extending the life would reduce the 17 annual amount of depreciation, but it would not change the total amount 18 that needs to be recovered. Interestingly, if Dr. Andersen's suggestion 19 was applied to the Gas/Oil generating units, it would require a life 20 extension of approximately 20 years for all Gas/Oil generation. 21 Not only does Dr. Andersen’s criticism misrepresent the 22 depreciation analysis, it is also not supported by any evidence. Dr. 23 Andersen presents no testimony that would support the capability or the 24 economic advisability of extending the lives of any TXU Electric generating 25 unit. Moreover, he recognizes that fuel constraints would have to be 26 addressed before that could be done. Finally, he fails to address the 27 capital investments that would be required to extend the units' lives. 28Q. DO YOU AGREE WITH DR. ANDERSEN’S THIRD POINT, ON PAGES 29 16(28)-17(3) OF HIS DIRECT TESTIMONY, REGARDING THE

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 9 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 COMPANY'S PROJECTION OF NET SALVAGE OF THE GENERATING 2 UNITS? 3A. No. As Mr. Moseley states in his rebuttal testimony, Dr. Andersen is not 4 correct in his interpretation of Senate Bill No. 7 on the topic of stranded 5 costs as they relate to generation assets. Dr. Andersen's attempt to 6 compare net book value with net salvage value is not only unreasonable 7 but also illogical. When all generation is 100% depreciated (i.e., zero net 8 book value), then it will still require approximately $724 million of removal 9 cost (i.e., removal cost greater than the net book value) to make the 10 Company whole. 11 12 V. REBUTTAL OF PUC STAFF WITNESS MR. ALMON RELATED TO 13 ACTUAL COSTS INCURRED FOR CAPITAL IMPROVEMENTS AT 14 GENERATION PLANTS 15Q. STAFF WITNESS ALMON, ON PAGES 10(9)-11(2), ASSERTS THAT 16 APPROXIMATELY $20 MILLION IN COSTS THAT TXU ELECTRIC 17 ACTUALLY EXPENDED PRIOR TO JANUARY 1, 1999 ARE INELIGIBLE 18 FOR RECOVERY AS STRANDED COSTS. DO YOU AGREE WITH MR. 19 ALMON’S CONCLUSION? 20A. No. TXU Electric has already incurred these costs. Mr. Almon’s 21 recommendation that the $20 million be removed from the total amount of 22 environmental improvement costs fails to recognize that the $20 million 23 would nonetheless have to be reflected in the Company’s estimate of 24 stranded costs. If Mr. Platt had not included the approximately $20 million 25 of actual expenditures in the total amount of environmental improvement 26 costs that he describes, I would have included that same amount in my 27 forecasted electric plant in service for years after 1999 since the 28 equipment associated with those costs was placed in service after 1999. 29 That increased amount would then have been used as an ECOM model

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 10 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1 input. Consequently, that amount would appropriately have been included 2 in the Company’s estimate of stranded costs, even if Mr. Platt had 3 excluded it from the total amount of environmental improvement costs. 4 Because Mr. Almon’s recommendation would simply change the place in 5 the Company’s estimate of stranded costs at which the approximately $20 6 million is accounted for, but could not logically alter the total amount of 7 estimated stranded costs, his recommendation should be rejected. 8 Alternatively, if his recommendation is accepted, it should be 9 accompanied by a recognition that I will need to increase the forecasted 10 amounts of electric plant in service to incorporate the same amount that is 11 deducted from the total amount of environmental improvement costs. 12 13 VI. CONCLUSION 14Q. PLEASE SUMMARIZE YOUR REBUTTAL TESTIMONY. 15A. My rebuttal testimony shows that my calculation of net salvage is 16 appropriate and correct because it is based upon current, site-specific 17 studies of several Company-owned generating units performed by a 18 recognized authority on dismantling complex generating units, rather than 19 on outdated 20-year old rates that are recommended by Dr. Andersen and 20 Mr. Selecky. Furthermore, my testimony rebuts the inappropriate and 21 incorrect arguments of Dr. Anderson and Mr. Selecky concerning net 22 salvage calculations. Most notably, I demonstrate that it is improper to 23 include consideration of any gain or loss of land that is based on 24 speculation and that would be in violation of FERC and Commission rules. 25 My rebuttal testimony also shows that actual expenditures of $20 26 million for environmental costs incurred prior to January 1, 1999 are 27 appropriately included in TXU Electric’s stranded cost estimate regardless 28 of whether the costs are shown in Mr. Platt’s total for environmental 29 improvement costs or in my forecast of electric plant in service.

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 11 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service 1Q. DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY? 2A. Yes, it does.

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 12 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service STATE OF TEXAS § § COUNTY OF DALLAS §

BEFORE ME, the undersigned authority, on this day personally appeared Dane A. Watson, who, having been placed under oath by me, did depose as follows: My name is Dane A. Watson. I am of legal age and a resident of the State of Texas. The foregoing supplemental direct testimony and the attached exhibits offered by me are true and correct, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true and correct.

______Dane A. Watson

SUBSCRIBED AND SWORN TO BEFORE ME by the said Dane A. Watson this ______day of October 2000.

______Notary Public, State of Texas

1 Watson – Rebuttal – TXU Electric 2SOAH Docket No. 473-00-1015 - 13 - Stranded Cost 3PUC Docket No. 22350 Unbundled Cost of Service