2018 GRC Workshop - Depreciation November 3, 2016 Presented by: Alan Varvis
Summary SCE took a thoughtful approach to tempering its depreciation expense request, which will mitigate the rate impact on current customers. SCE performed a rigorous analysis in order to meet the Commission’s depreciation directives from the 2015 GRC. Topics for Today’s Discussion: Overview of Request • – Depreciation Expense Request By Function – Comparison with Prior Rate Cases – Basis For Moderating Request Introduction to Depreciation Principles • – Overview of Net Salvage 2015 GRC Decision Directives • – Overview and Approach – Per Unit Analysis – Cost Assignment (Install vs. Removal) 1
Overview of Request: Depreciation Expense • Depreciation study and anticipated plant growth result in forecast 2018 expense of $2,003 million – $81 million of the total is from the moderated results of the detailed depreciation study. • SCE took a thoughtful approach to moderating the detailed depreciation study results. • T&D Lives : Proposed retaining or Proposed Changes to 2018 Depreciation ($M) extending lives for 16 out of 18 Transmission and Distribution $67 accounts. Change due to Life ($29) • T&D Net Salvage : SCE capped its Change due to Net Salvage $96 proposed increases in Net Salvage Generation $18 Rates to no more than 25% above the Solar Photovoltaic $6 currently authorized values. Hydro $11 • Generation: Revised projected Hydro All Other Generation $1 license renewal terms. General & Intangible ($5) Total Change $81 2
Current Depreciation Request Compared to Prior Rate Cases (Nominal $M) Increase as percent of then-authorized rates 6.4% 3.9% 5.6% 4.2% Study Proposals relative $101 $75 $81 $59 to then-authorized rates $2,003 $1,922 $1,818 $1,518 $1,168 Test-Year depreciation expense at then- authorized rates* 2009 GRC 2012 GRC 2015 GRC 2018 GRC The bottom bars largely represent the impact of plant growth 3
SCE’s Moderated Request • SCE’s depreciation proposals reflect a moderated request for the following reasons: – Gradualism: To reduce the rate impact on current customers, SCE’s proposal incorporates the principle of gradualism, invoked twice previously by the Commission in the depreciation context. – Forecasting: SCE’s estimate of future net salvage is based on the cost to retire assets today. In future rate cases, the CPUC’s prescribed Standard Practice U-4 affords the opportunity to refine estimates of future net salvage. • SCE moderated the request by limiting proposed increases in net salvage rates to no more than 25% above the currently authorized values. Depreciation Expense (2018 $ Millions) $3,085 -1,082 $2,003 Expense Moderated Depreciation Study Results 2018 GRC Proposed Depreciation 4
Net Salvage Study Results SCE-09, Vol. 3 p. 7 (Table I-2) FERC 2015 GRC Study 25% Above SCE's NSR Acct Description Authorized Results Authorized Proposals A B C D E=C*1.25 G=Lesser of D or E Transmission Plant 352 Structures and Improvements 35% 35% 44% 35% 353 Station Equipment 15% 10% 19% 10% 354* Towers and Fixtures 60% 185% 75% 75% 355* Poles and Fixtures 72% 499% 90% 90% 356* Overhead Conductors and Devices 80% 210% 100% 100% 357 Underground Conduit 0% 0% 0% 0% 358 Underground Conductor and Devices 15% 25% 19% 19% 359 Roads and Trails 0% 0% 0% 0% Distribution Plant 361 Structures and Improvements 25% 30% 31% 30% 362 Station Equipment 25% 50% 31% 31% 364* Poles, Towers and Fixtures 210% 488% 263% 263% 365* Overhead Conductors and Devices 115% 538% 144% 144% 366* Underground Conduit 30% 401% 38% 38% 367* Underground Conductor and Devices 60% 261% 75% 75% 368* Line Transformers 20% 47% 25% 25% 369* Services 100% 387% 125% 125% 370 Meters 5% 0% 6% 0% 373 Streetlights 30% 100% 38% 38% * Used a per-unit analysis to arrive at proposed net salvage rates 5
Introduction to Depreciation Principles 6
Introduction to Depreciation Principles • Depreciation expense allocates the original cost of the asset and the future cost to retire that asset over its useful life. • SCE uses the Straight Line Method and Remaining Life Technique prescribed by the CPUC in its Standard Practice U-4 Depreciation = Plant − Future Net Salvage − Accumulated Depreciation Remaining Service Life • Factors Affecting Depreciation – Net Salvage: salvage less removal (including decommissioning) – Accumulated Depreciation: past recorded depreciation – Remaining Life: Average Service Life less Average Age of Assets • Depreciation rates are developed for over 50 different plant accounts 7
Components of SCE’s Depreciation Analysis • Net Salvage Analysis – Performed Per-Unit Analysis on select T&D accounts Analyzed units of property to create subpopulations for each FERC prime account. • Considered function, type of equipment, characteristics marked by similar forces of • retirement. – Used traditional method (CPUC Standard Practice U-4) for remaining accounts, consistent with prior rate cases. • Service Life Analysis & Estimation – Performed actuarial service life analysis for the first time. Performed life analysis for each subpopulation. • – Utilized aged transactions from 2002-2015. – Prior rate cases utilized the Simulated Plant Record (SPR) approach. 8
What is Net Salvage and Why is it Important? + Gross Salvage Consideration received for the scrap or reuse value of a retired asset - Cost of Removal The cost incurred to remove and dispose of an asset = Net Salvage The net cost to retire an asset The goal of depreciation is to allocate capital costs (including future net salvage) over the • assets’ useful lives. Generally, cost of removal exceeds gross salvage, which leads to negative net salvage rates • and higher depreciation expense. Net Salvage is a vital part of utility cost recovery and has been a point of contention in prior • rate cases because: – Net salvage rates represent an estimate of future costs to remove when assets retire; – Negative net salvage rates increase depreciation expense; – T&D net salvage rates are increasingly negative; and – There are timing differences between when utilities recover the estimated cost of removal in rates today and when the future expenses will be incurred. 9
2015 GRC Decision Directives 10
2015 GRC Decision Directives The Commission directed SCE to provide more detail in support of its net salvage proposals for at least five of its largest accounts, as measured by proposed annual depreciation expense. At a minimum, the detail shall include: 1. A quantitative discussion of historical and future COR [Cost of Removal] on a per unit basis for the large (greater than 15% as measured by the portion of plant balance) asset classes in the account. This should identify and explain the key factors in changing or maintaining the per-unit COR. 2. Quantitative discussion of historical and future retirement mix; identify and explain the key factors in changing or maintaining this mix. 3. Quantitative discussion of asset life and original cost of assets being retired, in relation to the COR, on both a historical and prospective basis. This discussion should be integrated with and/or cross-reference the proposal for life characteristics. 4. An account-specific discussion of the process for allocating costs to COR. 11
SCE Addressed the 2015 GRC Decision Directives Compliance Directive Per-Unit Analysis Traditional Approach from 2015 GRC (Required by 2015 GRC Decision) (As Established in Standard Practice U-4) 1. Separate account into sub-populations ( e.g ., account 365 conductor vs. account Calculate COR at the account level of Perform a per-unit COR 365 switches) and calculate a per-unit detail (e.g., account 365). Math: Historical analysis COR. Math: Historical cost to retire assets cost to retire assets divided by original divided by quantities of property units cost of assets retiring. being retired within each subpopulation. 2. Apply the per-unit cost estimate results Discuss Whether to surviving plant balance assuming that Assumes that the future retirement mix Retirement Mix Will the future retirement mix will be will mimic SCE's recorded experience. Change Or Stay The Same consistent with the current plant balance. 3. Utilize original cost of current plant-in- Assume that the future average age of Integrate Salvage Analysis service and results of the life analysis to retirements, and the inflation embedded with Life Analysis estimate timing and cost of future in the cost of removal, will both mimic retirements. recorded activity. 4. Provide account-specific discussion for the process for assigning costs to cost of Discuss COR Allocation removal (versus install). 12
SCE Performed a Rigorous Analysis to Comply with the 2015 GRC Directives • Classified ~700 different units of property into ~90 subpopulations. • Combined millions of asset records with millions of cost of removal records to calculate per unit COR. • Reconciled 14 years of additions, retirements, transfers, adjustments, and balances to FERC Form 1. • Required SCE’s outside consultant to customize depreciation model to comply with directives. • Reviewed over 70,000 work orders from 2015 to conduct a COR assignment study. • Approximately 2,500 resource hours spent on developing the study results. 13
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