a..*. 'S f a A a 5 A 00 0 0 1 048 0 3 1 BEFORE THE ARIZONA C.CORPORATION LU1vlMl5slUn -<7 2 COMMISSIONERS #58 ll- 3 KRISTIN K. MAYES - Chairman I v`2 I l..=- e "O :MD- GARY PIERCE 4 PAUL NEWMAN SANDRA D. KENNEDY 5 BOB STUMP 6 IN THE MATTER OF THE APPLICATION OF DOCKET no. E-04204A-09-0206 7 UNS ELECTRIC, INC. FOR THE ESTABLISHMENT OF JUST AND REASONABLE RATES AND 8 CHARGES DESIGNED TO REALIZE A STAFF'S NOTICE OF FILING REASONABLE RATE OF RETURN ON THE FAIR 9 VALUE OF THE PROPERTIES OF UNS ELECTRIC, DIRECT TESTIMONY INC. DEVOTED TO ITS OPERATIONS 10 THROUGHOUT THE STATE OF ARIZONA Staff of the Arizona Corporation Commission ("Staff") hereby files the Direct Testimony of 12 Dr. Thomas H. Fish; David C. Parcell; W. Michael Lewis; and Kenneth C. Rozen of the Utilities 13 Division. An Unredacted version of both Dr. Thomas H. Fish's and Kenneth C. Rozen's Direct 14 Testimony has also been provided under seal to the Commissioners, their Assistants, the assigned 15 Administrative Law Judge and the parties that have signed the Protective Agreement in this case. 16 RESPECTFULLY SUBMITTED this 6th day of November 2009. 17 r 18 ( ( .l Senior séé Counsel 19 Maureen A. Scott Senior séé Wesley Van Clem/e, Attorney 20 Legal Division Arizona Corporation Commission 21 1200 West Washington Street Phoenix, Arizona 85007 22 (602) 542-3402 23 Arizona Comaméon Gsmmlssum Arizona Comaméon 24 Original and thirteen (la) copies _ to ,(4t*"""3° of the foregoing filed this Q 4. \ m * i t ; I E13 25 6m day of November 2009 with: may ft 2289 26 Docket Control Arizona Corporation Commission 4* s 27 1200 West Washington Street i Phoenix, Arizona 85007 v 28 1 Copiers of the foregoing mailed this 6t day of November 2009 to : 2 Michael W. Patten 3 Roshka, DeWulf & Patten, PLC One Arizona Center 4 400 East Van Buren, Suite 800 Phoenix, Arizona 85004 5 Philip J. Dion 6 Michelle Livengood UniSource Energy Services 7 One South Church Avenue Tucson, Arizona 8570 l 8 Daniel W. Pozefsky, Chief Counsel 9 Residential Utility Consumer Office ll 10 West Washington, Suite 220 10 Phoenix, Arizona 85007 11 Timothy M. Hogan Arizona Center for Law in the Public Interest 12 202 East McDowell Road, Suite 153 Phoenix, Arizona 85004 13 14 ( 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (PUBLIC) DIRECT TESTIMONY OF DR. THOMAS H. FISH DAVID c. PARCELL w. MICHAEL LEWIS KENNETH c. ROZEN DOCKET no. E-04204A-09-0-06 IN THE MATTER OF THE APPLICATION OF UNS ELECTRIC, INC. FOR THE ESTABLISHMENT OF JUST AND REASONABLE RATES AND CHARGES DESIGNED TO REALIZE A REASONABLE RATE OF RETURN ON THE FAIR VALUE OF THE PROPERTIES OF UNS ELECTRIC, INC DEVOTED TO ITS OPERATIONS THROUGHOUT THE STATE OF ARIZONA NOVEMBER 06, 2009 BEFORE THE ARIZONA CORPORAATION COMMISSION KRISTIN K. MAYES Chairman GARY PIERCE Commissioner PAUL NEWMAN Commissioner SANDRA D. KENNEDY Commissioner BOB STUMP Commissioner IN THE MATTER OF THE APPLICATION OF ) DOCKET no. E-04204A-09-0206 UNS ELECTRIC, INC. FOR THE ) ESTABLISHMENT OF JUST AND ) REASONABLE RATES AND CHARGES ) DESIGNED TO REALIZE A REASONABLE ) R.ATE OF RETURN ON THE FAIR VALUE OF ) THE PROPERTIES OF UNS ELECTRIC, INC. ) DEVOTED TO ITS OPERATIONS ) THROUGHOUT THE STATE OF ARIZONA. ) ) (PUBLIC) DIRECT TESTIMONY OF THOMAS H. FISH, PH.D. ON BEHALF OF UTILITIES DIVISION ARIZONA CORPORATION COMMISSION NOVEMBER 06, 2009 TABLE OF CONTENTS Page INTRODUCTION 1 REVENUE REQUIREMENT al 6 RATE BASE.. 9 Original Cost Rate Base .. 10 Introduction.. 10 Post Test-Year Non-Revenue Producing Plant in Service. 11 Working Capital.. 17 RCND Rate Base . 18 Introduction.. 18 RCND Derivation.. 18 RCND Example .. 20 Pro Forma RCND Rate Base Ainustments.. 21 FairVa1ue Rate Base . 22 Introduction.. 22 FVRB Derivation.. 22 OPERATING INCOME ADJUSTMENTS.. 23 Incentive Compensation and Executive CompH3enefits (SERP and PEP) 23 Payroll Tax Expense (SERP/PEP) .. 24 Call Center . 24 Industry Association Dues .. 26 Outside Legal Expenses .. 28 Fleet Fuel Expense .. 29 Rate Case Expense .. 30 Customer Assistance Residential Energy Support ("CARES") Discounts 31 Bad Debt Expense .. 32 Depreciation and Property Tax for Post test year planting Service... 34 Income Tax . 34 AFFILIATE TRANSACTIONS . 34 Introduction.. 34 Allocations and Pricing.. 36 Structure.. 40 DEPRECIATION RATES c< 40 PURCHASED POWER AND FUEL ADJUSTMENT CLAUSE 0 , 42 Introduction.. 42 Development and Operation of the PPFAC .. 43 Proposed Changes to PPFAC Interest Rate... 47 Proposed Recovery of Credit Support Costs.. 48 Forward Component Cap .. 49 BLACK MOUNTAIN GENERATING STATION u 50 Introduction .. 50 Background .. 51 Previous Commission BMGS Considerations 52 Broken Blade . 54 BMGS Recommendation . 54 PRUDENCE REVIEW OF FUEL AND PURCHASED POWER PCLICY In 56 Introduction.. 56 Organization, Staffing, and Controls .4 57 Fuel Management.. 60 Fuel and Purchased Power Contracts.. 61 Hedging and Risk Management.. 63 Forecasting and Modeling.. 65 Purchased Power and Off-System Sales. 66 Conclusions.. 68 Recommendations ., 69 SCHEDULES Schedules Accompanying The Direct Testimony of Thomas H. Fish, Ph.D. Schedule Description THF-1 Attachment 1, Resume of Thomas H. Fish, Ph.D. THF-2 Attachment 2, Revenue Requirement Schedules Revenue Requirement THF A-1 Computation of Increase in Gross Revenue Requirement Rate Base THF B-1 Ort_ • 'pal Cost, RCND, and Fair Value Rate Base THF B-2 Pro Forma Adjustments to Original Cost Rate Base THF B-3 Lead/Lag Study Results THF B-4 Post test year planting Service Operating Income Adjustments THF C-1 Adjusted Test Year Income THF C-2 Income Pro Forma Adjustments THF C-3 Incentive Compensation-PEP THF C-4 Incentive Compensation-SERP THF C-5 Pa oil Tax Expense THF C-6 Call Center Expense THF C-7 Industry Association Dues THF C-8 Legal Expenses THF C-9 Fleet Fuel Expense THF C-10 Rate Case Expense THF c-11 CARES THF C-12 Bad Debt Expense THF C-13 Depreciation and Property Tax, Post Test Year PIS EXECUTIVE SUMMARY UNS ELECTRIC INC. DOCKET NO. E-04204A-09-0206 My testimony addresses the following issues: • The Company's proposed revenue requirement. • Adjustments to test year data. • Rate base • Test year revenues • Affiliate transactions • Depreciation rates • The Company's requested modifications to the Purchased Power and Fuel Adjustment Clause ("PPFAC") and Staffs proposed modification to the PPFAC • Prudence review of the Company's PPFAC policies • The Company's proposed ratemaking treatment for the Black Mountain Generating Station ("BMGS") My findings and recommendations for each of these areas are as follows: • The Company is proposing an increase in gross revenue requirement of $13,500,000 which represents a weighted average cost of capital of 10.38 percent (of which 1.34 percent is fair value adjustment). I am recommending an increase in gross revenue requirement of $7,517,565 which represents a weighted average cost of capital of 8.4 percent (plus a fair value adjustment of 1.5 percent on the increment in fair value rate base over original cost rate base). • The following adjustments to UNS Electric's proposed original cost and fair value rate base should be made: Summary of Staff Adjustments to Rate Base Original Cost Fair Value Adj . Increase Increase No. Description (Decrease) (Decrease) B-3 Remove post test-year plant in service ($7,263,614) ($7,263,614) B-4 Cash working capital - lead/lag study ($61,025) ($61,025) Total of Staff Adjustments ($7,324,639) ($7,324,639) UNS Proposed Rate Base 3175,818,913 $354,485,222 Staff Recommended Rate Base $168,494,274 $347,160,583 • The following adjustments to UNS Electric's proposed revenues, expenses and net operating income should be made: Adj. Increase No. Description (Decrease) C-3 Incentive Compensation PEP ($132,159) C-4 Incentive Compensation SERP ($102,142) C-5 Payroll Tax Expense PEP $10,110) C-6 Call Center Expense $281,581) C-7 Industry Association Dues $40,792 C-8 Legal Expense ($58,722) C-9 Fuel Expense $75,798 C-10 Rate Case Expense $66,667) C-11 CARES Expense (Revenue Shortfall) $61,797 C-12 Bad Debt Expense ($105,487) C-13 Dept. & Property tax for Post TY PIS ($442,526 C-2 Income Tax $481,859 Total of Staff Adjustments to Operating income $895,923 Company Adjusted Test Year Operating Income $10,003,347 Staff Adjusted Test Year Operating Income $10,899,270 • The Company proposed technical updates to its depreciation schedules. The proposed schedules are reasonable and should be implemented. • The Company proposed changing the PPFAC interest rate to London Interbank Offered Rate plus 1.0 percent and proposed including Credit Support Costs in PPFAC. I recommend leaving the interest rate based on the One-Year Nominal U.S. Treasury Constant Maturities Rate. This is consistent with the Commission's recent decisions regarding interest rates and will provide incentive for the Company to reduce the bank balance. I also recommend denying the request to include Credit Support Costs in PPFAC. Only Federal Energy Regulatory Commission accounts 501, 547, 555, and 565 that deal directly with fuel and purchased power costs should be included in PPFAC. I recommend that the forward component cap be updated to reflect the first year's operation of the PPFAC. With respect to affiliate transactions the Company is adhering to the National Association of Regulatory Utility Commissioners ("NARUC") guidelines for affiliate transactions. Based upon the information supplied by the Company, it appears they are complying with all of NARUC'S guidelines • The Company's PPFAC policies are prudent with only minor modifications required. These include more frequent internal audits and use of Tucson Electric Power Company resources to minimize natural gas costs via pipeline availability analysis.