Exhibit DWP-300 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER 2017 Reform of Electric Transmission DIRECT TESTIMONY IN SUPPORT OF Tariff and Electric Transmission Rates DEPRECIATION RATES NANCY HELLER HUGHES, ASA, CDP Director, NewGen Strategies and Solutions, LLC Witness for the Los Angeles Department of Water and Power, Power System January 13, 2017 Exhibit DWP-300 TABLE OF CONTENTS Page INTRODUCTION................................................................................................................... 1 PURPOSE AND SCOPE ........................................................................................................ 2 DEPRECIATION STUDY ..................................................................................................... 5 CONCLUSION ..................................................................................................................... 11 EXHIBITS DWP-301 Resume and Record of Testimony of Nancy Heller Hughes, ASA, CDP DWP-302 LADWP Depreciation Study Based on Electric Plant in Service at June 30, 2015 Exhibit DWP-300 Page 1 of 11 1 INTRODUCTION 2 Q. PLEASE STATE YOUR NAME, OCCUPATION, AND BUSINESS ADDRESS. 3 A. My name is Nancy Heller Hughes. I am a Director at NewGen Strategies and 4 Solutions, LLC (“NewGen”). My business address is 20014 Southeast 19th Street, 5 Sammamish, Washington 98075. 6 Q. PLEASE OUTLINE YOUR EDUCATIONAL BACKGROUND. 7 A. I graduated from the University of Chicago with a Bachelor’s Degree in Business and 8 Statistics in 1977. I received a Master’s Degree in Business Administration at the 9 University of Chicago in 1978. 10 Q. PLEASE SUMMARIZE YOUR PROFESSIONAL EXPERIENCE. 11 A. From 1977 through 1982, I was employed by Ernst & Ernst (now Ernst & Young), working 12 primarily on telecommunications regulatory matters before the Federal Communications 13 Commission (“FCC”). From 1982 through 2012, I was employed by R. W. Beck, Inc. 14 (R. W. Beck), an engineering and consulting firm that provided services in the energy and 15 water resources utility industry. I held positions with increasing responsibilities and was 16 an owner in R. W. Beck until July 2009, when R. W. Beck was acquired by Scientific 17 Applications International Corporation (“SAIC”). In June 2012, I left SAIC to form my 18 own independent consulting firm called Heller Hughes Utility Consulting, LLC. In 19 September 2012, I became an owner and director in NewGen. 20 A substantial part of my work involves depreciation and valuation issues. I have performed 21 depreciation studies for utilities and reviewed depreciation studies filed by utilities in rate 22 proceedings. I have testified on depreciation, valuation, and other rate and regulatory 1 Exhibit DWP-300 Page 2 of 11 1 issues before the Federal Energy Regulatory Commission (“FERC”), state regulatory 2 commissions, and courts of law. A copy of my resume and record of testimony is provided 3 in Exhibit DWP-301 to this testimony. 4 Q. DO YOU HAVE ANY PROFESSIONAL CERTIFICATIONS? 5 A. Yes. I am a Certified Depreciation Professional (“CDP”), certified by the Society of 6 Depreciation Professionals. I am also an Accredited Senior Appraiser (“ASA”) of public 7 utility property certified by the American Society of Appraisers. 8 Q. ON WHOSE BEHALF ARE YOU PRESENTING TESTIMONY IN THIS 9 PROCEEDING? 10 A. I am presenting testimony on behalf of the Los Angeles Department of Water and Power 11 (“LADWP”). 12 PURPOSE AND SCOPE 13 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? 14 A. The purpose of my testimony is to summarize and support the results of the depreciation 15 study that NewGen performed in 2016 for LADWP to determine the recommended annual 16 depreciation accrual rates based on LADWP’s plant in service as of June 30, 2015 17 (hereinafter referred to as the “2016 Depreciation Study”). A copy of the 18 2016 Depreciation Study is attached to my testimony as Exhibit DWP-302. 19 Q. WHAT WAS THE SCOPE OF THE 2016 DEPRECIATION STUDY NEWGEN 20 PERFORMED FOR LADWP? 21 A. NewGen was retained by LADWP to perform a depreciation study of all depreciable 22 electric plant in service owned by LADWP as of June 30, 2015. The scope of work for the 2 Exhibit DWP-300 Page 3 of 11 1 depreciation study included the Navajo Generating Station (“NGS”) and Palo Verde 2 Nuclear Generation Station (“PVNGS”) in which LADWP had an ownership interest. The 3 scope of work for the depreciation study also excluded the Hoover Power Plant, 4 Intermountain Power Plant, and Apex Generating Plant. Although LADWP has contracts 5 to receive energy from these power plants, LADWP does not have an ownership interest 6 in these plants; therefore, the plants were not included in the scope of the depreciation 7 study. On July 1, 2016, LADWP sold its 21 percent ownership share in NGS; therefore, 8 NGS was not included in the scope of the depreciation study. 9 Q. DID THE SCOPE OF THE 2016 DEPRECIATION STUDY INCLUDE THE 10 ESTIMATION AND RECOVERY OF FUTURE POWER PLANT 11 DISMANTLEMENT COSTS? 12 A. No. At LADWP’s direction, the scope of work for the 2016 Depreciation Study excluded 13 power plant dismantlement costs. Therefore, the recommended depreciation rates in the 14 2016 Depreciation Study do not include recovery of power plant dismantlement costs 15 through depreciation expense; however, the 2016 Depreciation Study recommends that 16 LADWP perform a dismantlement cost study in the future to estimate the cost to dismantle 17 its generating units upon retirement, net of salvage value. 18 Q. DO LADWP’S EXISTING DEPRECIATION RATES INCLUDE THE RECOVERY 19 OF POWER PLANT DISMANTLEMENT COSTS? 20 A. No. LADWP’s existing depreciation rates do not include the recovery of power plant 21 dismantlement costs through depreciation expense. Although LADWP’s last depreciation 22 study, performed in 2003 by another consulting firm, included power plant dismantlement 3 Exhibit DWP-300 Page 4 of 11 1 costs (i.e., terminal net salvage) in developing depreciation rates for production plant, 2 LADWP did not implement this recommendation of the study. As confirmed by my review 3 of LADWP fixed asset records, the existing depreciation rates for LADWP’s production 4 plant accounts do not include the recovery of power plant dismantlement costs. 5 Q. WHAT WAS YOUR ROLE IN PREPARING THE 2016 DEPRECIATION STUDY 6 FOR LADWP? 7 A. I was the project manager for the 2016 Depreciation Study, responsible for directing all 8 work on the study. I was also responsible for evaluating the analyses performed and 9 determining the recommended depreciation parameters (i.e., average service lives, life 10 spans, survivor curves, interim retirement rates, and net salvage rates) used to calculate the 11 recommended depreciation accrual rates. 12 Q. DID YOU PERFORM FIELD REVIEWS OF LADWP FACILITIES IN 13 CONNECTION WITH THE DEPRECIATION STUDY? 14 A. Yes. I conducted field reviews of the LADWP system on July 25–29, 2016. My review 15 of the facilities was limited to a visual and external observation of the facilities for the 16 purpose of the depreciation study, and was not of such depth as would be required to reveal 17 conditions with respect to safety or to conformance with codes, permits, rules, or 18 regulations. During the field review, I interviewed LADWP managers and staff 19 responsible for the operation and maintenance of the utility’s plant to get their input 20 regarding the life characteristics of the utility plant and plans, procedures, and programs of 21 the utility that may affect plant service lives and net salvage rates. This is an industry 22 accepted method to perform field reviews for depreciation studies. 4 Exhibit DWP-300 Page 5 of 11 1 2 DEPRECIATION STUDY 3 Q. PLEASE DESCRIBE THE PROCESS NEWGEN USED TO DEVELOP THE 4 RECOMMENDED ANNUAL DEPRECIATION RATES DESCRIBED IN 5 EXHIBIT DWP-302? 6 A. NewGen used industry accepted depreciation methods to perform the 2016 Depreciation 7 Study. The process NewGen used in the depreciation study to develop the recommended 8 annual depreciation accrual rates for LADWP consisted of the following steps: 9 . Conduct field review and interviews with LADWP staff; 10 . Compile plant accounting data; 11 . Perform life analyses using the forecast (or life span) method for production plant 12 and the survivor curve method for transmission, distribution, and general plant; 13 . Perform net salvage analyses; 14 . Prepare account narratives with recommended remaining life spans, interim 15 retirement rates, and net salvage rates for LADWP’s production plant and 16 recommended average service lives, survivor curves, and net salvage rates for 17 LADWP’s transmission, distribution, and general plant accounts; 18 . Calculate recommended annual depreciation rates; and 19 . Prepare written report with summary schedules. 20 The above steps are described in greater detail in Section 4 of the depreciation study 21 attached hereto as Exhibit DWP-302. 5 Exhibit DWP-300 Page 6 of 11 1 Q. WHAT METHOD OF DEPRECIATION DID YOU USE TO CALCULATE THE 2 RECOMMENDED DEPRECIATION RATES FOR LADWP? 3 A. The annual depreciation accrual rates for the majority of LADWP plant were developed 4 using the straight line method, broad group procedure, and remaining life technique, which 5 is an industry accepted method for developing depreciation rates. The remaining life 6 technique provides for the recovery of the undepreciated original cost of plant assets 7 (i.e., net plant), adjusted for net salvage, over the remaining life of the property. The 8 formula for computing the annual depreciation accrual using the remaining life technique 9 is: 1 – NS – R D = RL 10 where: D = depreciation accrual rate 11 NS = estimated net salvage ratio 12 R = depreciation reserve ratio 13 RL = average remaining life 14 The annual depreciation accrual rate is calculated as a percentage of gross plant and is 15 applied to the gross plant investment on the utility’s books. 16 Q. WERE ANY OTHER METHODS OF DEPRECIATION USED TO CALCULATE 17 THE RECOMMENDED DEPRECIATION RATES FOR LADWP? 18 A. Yes. The sinking fund method was used to calculate depreciation accrual rates for 19 depreciation groups that LADWP has historically depreciated using the sinking fund 20 method.