Before the Minnesota Public Utilities Commission State of Minnesota. Docket No. E002/GR Exhibit (JKG-1) AFUDC Accounting

Transcription

1 Direct Testimony and Schedules James K. Guest Before the Minnesota Public Utilities Commission State of Minnesota In the Matter of the Application of Northern States Power Company for Authority to Increase Rates for Electric Service in Minnesota Exhibit (JKG-1) AFUDC Accounting November 4, 2013

2 Table of Contents I. Introduction 1 II. FERC AFUDC Formulas 3 III. FERC Audit of CWIP and AFUDC Accounting 9 IV. Conclusion 10 Schedules Statement of Qualifications Schedule 1 AFUDC Calculation Schedule FERC Audit Report Schedule 3 Company Response to FERC Data Requests Schedule 4 i Guest Direct

3 I. INTRODUCTION Q. PLEASE STATE YOUR NAME AND OCCUPATION. A. My name is James K. Guest. I am an Associate with the firm of Brown, Williams, Moorhead & Quinn, Inc. (BWMQ). BWMQ provides technical and policy assistance to various segments of the natural gas, electric and oil industries on economic, business, accounting, financial and regulatory matters. 9 Q. PLEASE SUMMARIZE YOUR QUALIFICATIONS AND EXPERIENCE. 10 A. I am a Certified Public Accountant and a member of the American Institute of 11 Certified Public Accountants. I received a Bachelor of Science degree in 12 Accounting from Indiana University of Pennsylvania in Shortly after 13 graduating, I accepted a position with the Federal Energy Regulatory 14 Commission (FERC or Commission) as a field auditor in the FERC s Office 15 of Chief Accountant. I was employed by the FERC for the next 32 years, 16 accepting positions of increasing responsibility in the area of financial 17 accounting and reporting requirements for the electric utility, natural gas 18 pipeline and oil pipeline industries. During this period, I served as Deputy 19 Director of the Division of Audits in the Office of Chief Accountant, Deputy 20 Chief Accountant, and Chief Accountant before retiring from federal service 21 in September In those positions, I was responsible for determining 22 individual company s compliance with the Commission s Uniform Systems of 23 Accounts and related reporting requirements, developing and directing 24 rulemaking proposals for needed changes in those requirements, and 25 providing counsel and advice on accounting matters to senior Commission 26 staff, the Commissioners, and the Chairman. Since my retirement from 27 federal service, I have provided professional consulting services to the 1 Guest Direct

4 regulated electric, natural gas and oil pipeline industries primarily through my association with BWMQ. My resume is attached as Exhibit (JKG-1), Schedule 1. Q. HAVE YOU PREVIOUSLY PROVIDED TESTIMONY BEFORE A REGULATORY BODY OR COURT? A. Yes. Exhibit (JKG-1), Schedule 1 includes a list of some of those appearances. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? A. I provide testimony on behalf of Northern States Power Company (NSPM) related to Construction Work in Progress (CWIP) and Allowance for Funds Used During Construction (AFUDC) in compliance with the Minnesota Public Utilities Commission (MPUC) Order in the Company s 2013 electric rate case. Specifically, Order Point 52 states: In the initial filing in the next rate case, Xcel [Energy] shall provide evidence of FERC s accounting requirements for CWIP/AFUDC and demonstrate that it has met the FERC requirements. It shall also address whether a minimum dollar level should be set for projects placed in CWIP. I will address the FERC s accounting requirements for the determination of AFUDC rates and the Company s compliance with those requirements. Company witness Ms. Lisa H. Perkett discusses in her testimony the ratemaking treatment of CWIP and AFUDC in Minnesota. Q. PLEASE PROVIDE A SUMMARY OF YOUR TESTIMONY A. My testimony explains the FERC s AFUDC rate formulas, evaluates whether the Company s calculation of its AFUDC rates comply with the FERC 2 Guest Direct

5 AFUDC rate formulas and accounting requirements, and addresses certain AFUDC issues that were raised in the Company s 2013 rate case. I also provide my thoughts on the conclusions that can be drawn from a 2012 FERC audit report regarding the Company s calculation of its AFUDC rates. Based on my review, I conclude that the Company s calculations of its AFUDC rates complies with FERC s AFUDC rate formulas and that the Company is in compliance with FERC AFUDC requirements. II. FERC AFUDC REQUIREMENTS Q. WHERE ARE THE FERC AFUDC RATE FORMULAS ESTABLISHED IN FERC RULES? A. The FERC AFUDC rate formulas are set forth in Electric Plant Instruction 3(17) in the FERC s Uniform System of Account Prescribed for Public Utilities and Licensees (18 C.F.R. Part 101). Q. PLEASE DESCRIBE THE FERC FORMULAS FOR CALCULATING AFUDC. A. The FERC has prescribed two formulas for calculating maximum allowable AFUDC rates. One formula determines the maximum rate that can be used to capitalize an allowance for borrowed funds (i.e., debt) used for construction purposes. The second formula determines the maximum rate that can be used to capitalize an allowance for other funds (e.g., common equity) used for construction purposes. The rates derived from each formula, added together, provide the total maximum allowable rate that can be used to capitalize AFUDC. 3 Guest Direct

6 The formulas identify the sources of funds, the amount or balance of such funds, the applicable cost rates for such funds and the relative weight that should be given to those sources of funds in the derivation of the AFUDC rates. The sources of funds identified in the formula are short-term debt, long-term debt, preferred stock, and common equity. The amounts and cost rates for short-term debt (as well as the average balance of CWIP) are to be estimated for the current year with appropriate adjustments as actual data becomes available. The amounts for long-term debt, preferred stock and common equity are the actual book balances at the end of the prior year. The cost rates for long-term debt and preferred stock are to be determined in the manner indicated in Section of the Commission s regulations under the Federal Power Act. The cost rate for common equity is the rate granted common equity in the last rate proceeding before the ratemaking body having primary rate jurisdiction, or if none is available, the average rate actually earned during the preceding three years. Q. YOU MENTIONED THAT THE FORMULA PRESCRIBES THE RELATIVE WEIGHT THAT SHOULD BE GIVEN TO THE SOURCES OF FUNDS USED IN THE DERIVATION OF THE AFUDC RATE. PLEASE ELABORATE. A. The formulas assume that short-term debt is the first source of construction funding. If the balance of short-term debt exceeds the average balance of CWIP, the total AFUDC rate is comprised of only an allowance for borrowed funds used during construction equal to the short-term debt rate. Under those assumed facts, the rate for the allowance for other funds used during construction would be zero because all of the construction funding needs are assumed to be met by short-term debt. When the average balance of CWIP exceeds the balance of short-term debt, however, the formula assumes that the 4 Guest Direct

7 construction funding not met by short term debt is provided proportionally from long term debt, preferred stock (if any) and common equity based on their respective permanent capital ratios. My Exhibit (JKG-1), Schedule 2 illustrates how the FERC s AFUDC rate formulas incorporate the different capital sources and cost rates to arrive at the total, debt and other funds maximum allowable AFUDC rates. The inputs used on this schedule are the same as the inputs used by the Company in calculating its total AFUDC rate for the AFUDC offset in this proceeding. Q. DO THE FERC AFUDC RATE FORMULAS CONTAIN A PROVISION FOR THE EFFECTS OF COMPOUNDING? A. The FERC s AFUDC rate formulas provide for the determination of a simple AFUDC rate. However, in its Order adopting the accounting requirements for AFUDC, 1 FERC permitted semi-annual compounding of AFUDC capitalized. In order to implement semi-annual compounding, the FERC permits utilities to adjust the simple rate derived from the AFUDC rate formula to a semi-annual compound rate. The effect of compounding on the simple AFUDC rate for 2014 is presented in Schedule 14 to the Direct Testimony of Ms. Perkett. Q. HAVE YOU REVIEWED THE COMPANY CALCULATION OF ITS AFUDC SIMPLE RATE FOR THE 2014 TEST YEAR? A. Yes. I examined the calculation as contained in Schedule 14 to the Direct Testimony of Ms. Perkett. 1 FERC Order Nos. 561 (57 FPC 608 (1977) and 561-A (57 FPC 1340 (1977). 5 Guest Direct

8 Q. DO YOU BELIEVE THE COMPANY IS CALCULATING ITS AFUDC RATES IN A MANNER CONSISTENT WITH FERC RULES? A. Yes. The Company s calculation of its AFUDC rates follow the FERC AFUDC rate formulas without deviation. The calculations assume that shortterm debt is the first source of construction funding; to the extent construction funding requirements exceed the balance of short-term debt, it assumes the requirements are met proportionally from long-term debt, preferred stock and common equity. Cost rates for capital sources are determined according to the requirement prescribed in Electric Plant Instruction 3(17). Finally, the simple AFUDC rates derived from the formula are adjusted to a semi-annual compounded AFUDC rate as permitted under FERC Order 561. I note that the AFUDC rate calculated and used for the AFUDC offset to NSPM s ratemaking cost-of-service must use projections for inputs to the formula because a forward-looking test year is used for MPUC ratemaking purposes, but the calculation of the rate follows FERC s AFUDC rate formula in all respects. Q. DID THE COMPANY S CALCULATION OF ITS AFUDC RATES PROPERLY CONSIDER SHORT TERM DEBT CONSISTENT WITH FERC'S AFUDC RATE FORMULAS? A. Yes, the Company s AFUDC rate calculation assumed short-term debt was the first source of construction funds, the short-term debt component was properly weighted, and the balance and cost of short-term debt included in the calculations were based on a 13-month average. 6 Guest Direct

9 Q. YOU MENTIONED YOU WOULD ADDRESS CERTAIN ISSUES THAT WERE RAISED IN THE COMPANY S 2013 RATE CASE WITH RESPECT TO AFUDC ACCOUNTING. PLEASE ELABORATE. A. In the Company s 2013 rate case, testimony of the Office of Attorney General stated that the FERC AFUDC rate formula assumes that the lowest cost of financing short-term debt is used first to finance projects, then if construction costs are higher than the level of short-term debt, the next level of financing long-term debt is used. If the construction costs exceed the level of all outstanding debt then equity financing is used. 2 Q. IS THIS INTERPRETATION OF THE FERC AFUDC RATE FORMULAS CORRECT? A. No, it is not. As I noted earlier in my testimony, the FERC AFUDC rate formulas assume that short-term debt is the first source of construction funding, and that construction funding not met by short-term debt is provided proportionally from long term debt, preferred stock (if any), and common equity based on their respective permanent capital ratios. Thus, long-term debt is not exhausted before preferred stock and common equity are considered sources of capital for calculating the AFUDC rate. Q. ARE YOU AWARE OF ANY PUBLIC UTILITY THAT HAS APPLIED OR INTERPRETED THE FERC AFUDC RATE FORMULAS IN THE MANNER PRESENTED BY THE OAG? A. No, I am not. 2 Lindell Surrebuttal page 14 lines Guest Direct

10 Q. DOES NSPM S ACCOUNTING FOR AFUDC FOLLOW FERC ACCOUNTING A. Yes. REQUIREMENTS? Q. WOULD YOU PLEASE EXPLAIN? A. For FERC financial accounting and reporting purposes, NSPM capitalizes AFUDC on CWIP at rates calculated according to FERC s AFUDC rate formula. 3 The amounts capitalized are recognized as a component of construction costs, which upon completion of the construction project, are closed to electric plant in service and are depreciated over the service life of the project assets. NSPM s accounting complies with FERC s Electric plant Instruction 3(17) which calls for the capitalization of AFUDC as a component of construction costs as well as the instructions contained in FERC Accounts: 107, Construction work in progress - Electric; 101, Electric plant in service; 108, Accumulated provision for depreciation of electric utility plant; and 403, Depreciation Expense. Q. DOES NSPM S INCLUSION OF CWIP IN RATE BASE WITH AN AFUDC OFFSET VIOLATE FERC ACCOUNTING REQUIREMENTS? A. No. It is my understanding that NSPM includes some or all of it investment in CWIP in rate base and reduces its cost-of-service for ratemaking purposes by adding the amount of AFUDC capitalized to net income (an AFUDC offset). This treatment defers rate recovery of AFUDC capitalized to future periods and is therefore consistent with the accounting concept embodied in the FERC accounting requirements for AFUDC. 3 As explained in the Direct Testimony of Ms. Perkett, NSPM does not capitalize AFUDC on construction projects that are included in rate base without an AFUDC offset. 8 Guest Direct

11 III. FERC AUDIT OF CWIP AND AFUDC ACCOUNTING Q. HAS THE FERC CONDUCTED A FINANCIAL AUDIT OF THE COMPANY S CWIP/ AFUDC ACCOUNTING PRACTICES IN THE LAST FEW YEARS? A. Yes. In 2011, the FERC Division of Audits conducted an audit of the Company s compliance with FERC Order No. 679, the FERC rule allowing utilities to seek incentives by including CWIP in rate base without an AFUDC offset for specific transmission investments. The Company was granted a CWIP incentive for its investments in specific transmission projects where the MPUC had granted a Certificate of Need. Because the Company received a current return on CWIP, it was not allowed to also capitalize the AFUDC on the FERC jurisdictional portion of these projects. The FERC issued an audit report in January is a copy of the 2012 FERC Audit Report. Q. DID THE FERC AUDIT INCLUDE A REVIEW OF THE COMPANY S AFUDC ACCOUNTING PRACTICES? A. Yes. The audit was non-public while in progress (until the audit report was issued), but the Company allowed me to review its responses to FERC staff data requests asking for documentation of its AFUDC accounting, including its calculation of AFUDC rates. Exhibit (JKG-1), Schedule 4 is a copy of the Company s response to Staff Request Nos and The responses were marked as non-public at the time they were submitted to FERC, but I understand the Company is making them public at this time. 9 Guest Direct

12 Q. THE FERC AUDIT REPORT MAKES SPECIFIC FINDINGS ON CERTAIN ISSUES BUT DOES NOT SPECIFICALLY DISCUSS ANY FINDINGS WITH RESPECT TO THE COMPANY S AFUDC ACCOUNTING. WHAT SHOULD THE MPUC CONCLUDE FROM THE LACK OF DISCUSSION OF AFUDC ACCOUNTING? A. The FERC audit report issued to the Company is what I consider an exceptions only report. An exceptions only report identifies and recommends corrective action for instances of noncompliance identified as a result of the audit work performed. In an exceptions only report the conclusion that should be drawn is that those Company practices coming within the scope of the audit comply with FERC requirements except as noted in the report. In this instance, the FERC auditors specifically requested the Company to substantiate its AFUDC rate calculation, the Company did so in its data request responses, and no audit deficiencies or exceptions were noted with respect to the calculations. Therefore, I believe the FERC audit staff considered the Company s practices for determining its AFUDC rates to be in compliance with FERC rules and regulations. IV. CONCLUSION Q. PLEASE SUMMARIZE YOUR TESTIMONY. A. The FERC AFUDC rate formulas contained in Electric Plant Instruction No. 3(17) assume short-term debt is the first source of construction funds and that construction funding requirements not met by short-term debt are provided proportionally from long-term debt, preferred stock and common equity. 10 Guest Direct

13 The Company s calculations of its AFUDC rates used to determine the CWIP AFUDC offset in this proceeding comply with the FERC AFUDC rate formulas and Commission Order Nos. 561 and 561-A. The Company's accounting for AFUDC follows FERC accounting requirements. The FERC staff examined the Company s AFUDC rate calculations in a recent audit and their 2012 audit report did not note a deficiency in its practices or any recommendations for corrective action to those practices. For that reason, one should conclude that FERC staff also believes the Company calculates its AFUDC rates in compliance with the FERC AFUDC rate formulas. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. 11 Guest Direct

14 Northern States Power Company Exhibit (JKG-1), Schedule 1 Page 1 of 2 James K. Guest Statement of Qualifications Mr. Guest received a B.S in Accounting from Indiana University of Pennsylvania in He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Mr. Guest has over thirty years experience in regulatory accounting, auditing and related fields. He was employed by the Federal Energy Regulatory Commission from August 1974 through August He began his career with five years of direct hands-on experience conducting field examinations of the books and records of major natural gas pipelines, public utilities and oil pipelines. He later accepted positions of increasing responsibility at the Commission including Deputy Director of the Division of Audits, Deputy Chief Accountant, and Chief Accountant before his retirement from federal service in September of Since retiring from federal service Mr. Guest has worked as an independent consultant on regulatory accounting, reporting and ratemaking matters, primarily in association with the well regarded energy consulting firm Brown, Williams, Moorhead and Quinn. While employed at the FERC, Mr. Guest presented expert testimony on a number of income tax and regulatory accounting matters. He also led the Commission's regulatory accounting programs through the restructuring of both the natural gas and electric utility industries and was active in the development and implementation of many important regulatory accounting policies confronting the gas pipeline, electric utility and oil pipeline industries. He provided counsel and advice to senior Commission staff and Commissioners on a wide range of financial accounting, reporting and related matters and offered industry wide guidance on emerging accounting issues through the development of rulemaking proposals for comprehensive changes to the Commission's accounting and reporting requirements. Some of the more significant Commission accounting initiatives in which Mr. Guest was deeply involved included: Order No.684, Accounting, Reporting and Record Retention Requirements Under the PUHCA of 2005; Order 668, Accounting and Reporting for Public Utilities Including RTOs; Order 646, Quarterly Financial Reporting; Order 631, Accounting and Rate Filing Requirements for Asset Retirement Obligations; Order 627, Accounting and Reporting of Financial Instruments, Comprehensive Income, Derivatives and Hedging Activities; Orders 581 and 581-A, Revisions to the Uniform System of Accounts following gas industry restructuring; Order 552, Accounting for Emission Allowances and Regulatory Assets; Docket No. AI , Accounting and Financial Reporting for Uncertainty in Income Taxes; Docket No. AI07-1, Accounting and Reporting for the Funded Status of Defined Benefit Postretirement Plans; Docket No. AI05-1, Accounting for Pipeline Assessment Costs; Docket No. AI04-2, Recognition of a Regulatory Asset for Minimum Pension Liability; Docket No. AI02-1, Accounting for Asset Retirement Obligations; and Docket No.AI93-5, Accounting for Income Taxes.

15 Northern States Power Company Exhibit (JKG-1), Schedule 1 Page 2 of 2 While in his leadership roles at FERC, Mr. Guest frequently spoke at meetings of industry accounting executives, regulatory authorities, and U. S. public accounting firms. Testimony Engagements As an independent consultant, Mr. Guest has provided expert testimony on financial accounting matters in the following proceedings: Docket No , PPL Corporation and Subsidiaries v. Commissioners of Internal Revenue, United States Tax Court; Docket No EI, Florida Power and Light Company before the Florida Public Service Commission; Docket No. PA10-13, ITC Holdings and ITC Midwest LLC before FERC; Hearing Order RH , TransCanada Pipelines Limited Business and Services Restructuring and Mainline Tolls Application before the National Energy Board of Canada; and Case No. ER , Union Electric Company before the Missouri Public Service Commission.

16 Northern States Power Company FERC FORMULA AFUDC RATE CALCULATION WORKSHEET Exhibit (JKG-1), Schedule 2 Page 1 of CWIP/ shtterm & longterm Long-term capital AFUDC Rates Construction fund sources Amount cap.ratios ratio Cost rates Total Borrowed Other Short-term debt (13 mo.avg.) $ 139, % n/a 0.353% % % Long -Term long-term debt (prior yr end ) $ 3,900, % 47% 4.88% % % preferred stock (prior yr end ) $ % 0% % % common equity (prior yr end.) $ 4,414, % 53% % % % Total long term $ 8,314, % 2.03% 4.762% AVERAGE CWIP (13 mo. avg.) $ 1,028,561

17 Northern States Power Company Page 1 of 29 FEDERAL ENERGY REGULATORY COMMISSION WASHINGTON, D.C Xcel Energy Services, Inc. Attention: Michael C. Connelly Vice President and General Counsel 414 Nicollet Mall Minneapolis, MN Dear Mr. Connelly: In Reply Refer To: Office of Enforcement Docket No. PA January 5, The Division of Audits within the Office of Enforcement has completed the audit of Xcel Energy Services, Inc. (Xcel or Company) from December 21, 2007 through December 31, The enclosed audit report explains our audit findings and recommendations. 2. On December 22, 2011, you notified us that the Company will not contest our audit findings and agrees to implement our recommendations. A copy of your response is included as an appendix to this report. I hereby approve the recommended corrective actions. Within 60 days of this letter order, Xcel should submit a plan to comply with the corrective actions. Thereafter, Xcel should make nonpublic quarterly submissions in this docket describing how and when it plans to comply with the corrective actions, including dates it has completed each corrective action. The submissions should be made no later than 30 days after the end of each calendar quarter, beginning with the first quarter after submission of the compliance plan, and continuing until all the corrective actions are completed. 3. The Commission delegated the authority to act on this matter to the Director of OE under 18 C.F.R (2011). This letter order constitutes final agency action. Your Company may file a request for rehearing with the Commission within 30 days of the date of this order under 18 C.F.R (2011). 4. This letter order is without prejudice to the Commission's right to require hereafter any adjustments it may consider proper from additional information that may come to its attention. In addition, any instance of noncompliance not addressed herein or that may occur in the future may also be subject to investigation and appropriate remedies.

18 Northern States Power Company Page 2 of I appreciate the courtesies extended to the auditors. If you have any questions, please contact Mr. Bryan K. Craig, Director and Chief Accountant, Division of Audits at (202) Sincerely, Norman C. Bay, Director Office of Enforcement Enclosure

19 Northern States Power Company Page 3 of 29 Federal Energy Regulatory Commission Audit of Xcel Energy Services, Inc. Compliance with: The requirements of Order Nos. 679 and 679A; 18 C.F.R. 35 Subpart G of Commission Regulations; Conditions approved in the Commission Order Granting Transmission Incentives; and FERC-730 filing and reporting requirements. Docket No. PA January 5, 2012 Office of Enforcement Division of Audits

20 Northern States Power Company Page 4 of 29 TABLE OF CONTENTS I. Executive Summary... 1 A. Overview... 1 B. Corporate Overview... 1 C. Summary of Compliance Finding... 2 D. Summary of Recommendations... 2 E. Compliance and Implementation of Recommendations... 3 II. Background... 4 A. Company Overview... 4 B. Commission Orders and Conditions... 7 III. Introduction... 9 A. Objectives... 9 B. Scope and Methodology... 9 IV. Findings and Recommendations Review of Rate Formula Templates FERC-730 Reporting i

21 Northern States Power Company Page 5 of 29 Xcel Energy Services Company Docket No. PA I. Executive Summary A. Overview The Division of Audits in the Office of Enforcement (OE) of the Federal Energy Regulatory Commission (Commission) commenced an audit of Xcel Energy Services, Inc. (Xcel or Company). The audit determined whether Xcel complied with: (1) Order Nos. 679 and 679-A; 1 (2) Commission regulations under 18 C.F.R. 35 Subpart G (2010), which govern incentive-based rate treatment for transmission investments; (3) the conditions established in the Commission s December 21, 2007 order in Docket No. ER ; 2 and (4) FERC-730 reporting and filing requirements. 3 The audit covered the period from December 21, 2007 to August 31, B. Corporate Overview Xcel Energy Services, Inc. (Xcel or Company) is a service company of Xcel Energy, Inc. (Xcel Energy), a major U.S. electric and natural gas company with operations in eight Western and Midwestern states (Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin). With more than $10 billion in annual revenue, Xcel Energy operates more than 300,000 miles of electric transmission and distribution facilities and 35,000 miles of natural gas pipelines, and provides service to 3.4 million electric and 1.9 million natural gas customers. Xcel Energy and its subsidiaries employ 12,325 full- and part-time employees. Xcel Energy has four operating companies: Northern States Power Company-Minnesota (NSP Minnesota), Northern States Power Company- Wisconsin (NSP Wisconsin) (collectively the NSP Companies), Public Service Company of Colorado, and Southwestern Public Service Company. These companies operate 18,100 miles of transmission lines in their service areas, with major control centers in Minneapolis, MN; Golden, CO; Eau Claire, WI; and Amarillo, TX. The NSP Companies transmission facilities are under the operational control of the MISO. They recover their revenue requirements under Attachment O of MISO s Open Access Transmission, Energy, and Operating Reserves Markets Tariff (MISO Tariff). 1 Promoting Transmission Investment through Pricing Reform, Order No. 679, FERC Stats. & Regs. 31,222 (2006), order on reh g, Order No. 679-A, FERC Stats. & Regs. 31,236, order on reh g, 119 FERC 61,062 (2007). 2 Xcel Energy Services, Inc., 121 FERC 61,284 (Incentive Order) C.F.R (h). 1

22 Northern States Power Company Page 6 of 29 Xcel Energy Services Company Docket No. PA C. Summary of Compliance Finding Below is a summary of audit staff s compliance findings. A detailed discussion is included in Section III. Audit staff found two areas of noncompliance: Review of formula rate template- Xcel did not adequately review the Rate Formula Template for the NSP Companies 2010 True-Up Adjustment for accuracy before submitting it to MISO. Due to the inadequate review, the rate base used to calculate the NSP Companies actual 2010 revenue requirement was overstated by approximately $10 million. Xcel also used an incorrect percentage when calculating its pre-funded AFUDC which increased rate base by approximately $1 million. Both errors overstated rate base which in turn overstated the revenue requirement for 2010 by approximately $1.5 million dollars. FERC-730 Reporting - Xcel improperly reported its FERC-730 for We also found that Xcel filed two of the reports late. D. Summary of Recommendations This section summarizes audit staff s recommendations to remedy this report s findings. Audit staff recommends that Xcel: Establish and implement written procedures to guide the preparation of Rate Formula Templates for the NSP Companies. Establish and implement written procedures to ensure that Xcel management conducts a rigorous review of Rate Formula Templates for the NSP Companies before it sends them to MISO. Strengthen its review and approval procedures to ensure a more rigorous review of the data reported in the FERC-730. Update its filing procedure to ensure timely submission of its FERC- 730 report. Implement written procedures for compiling capital expenditures reported in the FERC-730. Refile its FERC-730 reports for with accurate data. 2

23 Northern States Power Company Page 7 of 29 Xcel Energy Services Company Docket No. PA Resubmit its 2010 FERC Form No. 1 for the NSP Companies showing the correct amounts that should be reported for pre-funded AFUDC. E. Compliance and Implementation of Recommendations Xcel should design a compliance plan that includes procedures to implement this report s recommendations. The plan should be submitted to audit staff for review within 30 days of the date of the issuance of the final report in this docket. Thereafter, Xcel must make nonpublic quarterly submissions in Docket No. PA to audit staff, detailing its progress in implementing the corrective actions listed in this report until all are complete. Submissions should be made no later than 30 days after the end of each calendar quarter, beginning with the first full quarter after submission of the compliance plan, and continuing until Xcel completes all recommended corrective actions. 3

24 Northern States Power Company Page 8 of 29 Xcel Energy Services Company Docket No. PA A. Company Overview Transmission Incentives II. Background On September 28, 2007 in Docket No. ER , Xcel, on behalf of the NSP Companies, filed an application with the Commission under section 205 of the Federal Power Act seeking incentive rate treatment for six transmission expansion projects (NSP Expansion Projects, or Projects) that will cost approximately $1 billion. The projects were the BRIGO and Chisago-Apple River projects and four CapX2020 projects. On December 17, 2007, the Commission granted the NSP Companies two incentive rate treatments for the six projects: 100 percent Construction Work in Process (CWIP) recovery, and abandoned plant recovery. Order No. 679 noted that recovery of 100 percent of CWIP in rate base will further the goals of section by providing upfront regulatory certainty, rate stability, and improved cash flow for applicants, thereby reducing the pressures on their finances caused by investing in transmission projects. Consistent with Order No. 679, the Commission found that authorizing 100 percent of CWIP treatment would enhance the NSP Companies cash flow, reduce interest expense, assist with financing, and improve the NSP Companies coverage ratios that rating agencies use to determine credit quality by replacing noncash Allowance for Funds Used During Construction (AFUDC) with cash earnings. NSP Companies stated, and the Commission acknowledged, that inclusion of CWIP in rate base affects only the timing, and not the level of cost recovery. The Commission also granted recovery of 100 percent of prudently incurred costs associated with abandonment of the projects, provided the abandonment resulted from factors outside the control of the NSP Companies, and was demonstrated in a section filing for recovery of abandoned plant. New Transmission Projects The Chisago-Apple River Project consists of a 41-mile, 115/161 kv transmission line upgrade of an existing 69 kv line between Chisago County, MN, 4 The Energy Policy Act of 2005 directed the Commission to develop incentive-based rate treatments for transmission of electric energy in interstate commerce, adding section 219 to the Federal Power Act. 5 Section 205 as well as other sections of the FPA that deal with rates and financial matters. 4

25 Northern States Power Company Page 9 of 29 Xcel Energy Services Company Docket No. PA and the Apple River substation owned by Dairyland Power Cooperative in Amery, WI. 6 Eighteen miles of this line are in Minnesota, and 23 miles are in Wisconsin. The total estimated cost of the project to the NSP Companies is $48.7 million. The project was placed in service in Installation of the final segment of conduit to accommodate an underground transmission line began in July The Buffalo Ridge Incremental Generation Outlet (BRIGO) project consists of three new 115 kv transmission lines totaling approximately miles and several new substations. The project provides expanded transmission outlet and delivery capability for new wind generation in the Buffalo Ridge area of southwestern Minnesota, which the NSP Companies say is one of the most promising sites for wind generation in the United States. The total estimated cost was $72.5 million. The project went into service in December 2009, which was ahead of schedule and came in under budget with a final cost of approximately $55 million. It increased the system s export capacity from 260 MW in 1999 to approximately 1,200 MW in 2009; enough wind energy to power 300,000 homes. Xcel Energy is a partner in CapX2020, a joint initiative of 11 transmissionowning utilities in Minnesota and surrounding states. Its purpose is to expand the electric transmission grid to ensure customers continue to receive reliable, lowcost electricity, and increase access to renewable energy sources. The first group of CapX2020 proposed projects is made up of four 345 kv transmission lines, and one 230 kv line and associated substations. The proposed lines represent one of the largest single transmission initiatives in the region in decades, spanning nearly 700 miles. Group 1 of the proposed plan consists of these projects: Fargo-St. Cloud, about 210 miles, 345 kv (projected cost of $390 million to $560 million, including the Monticello-St. Cloud project) Monticello-St. Cloud, about 28 miles, 345 kv (projected cost of $390 million to $560 million, includes Fargo-St. Cloud) Bemidji-Grand Rapids, 68 miles, 230 kv (projected cost of $600 million to $665 million) Hampton-Rochester-La Crosse, 150 miles, 345 kv (projected cost of $330 million to $360 million) 6 Dairyland Power Cooperative is a generation and transmission cooperative that provides wholesale electrical requirements and other services for 25 electric distribution cooperatives and 16 municipal utilities in the Upper Midwest. 5

26 Northern States Power Company Page 10 of 29 Xcel Energy Services Company Docket No. PA Brookings County-Hampton, 200 miles, 345 kv (projected cost of $70 million) The Monticello-St. Cloud project is a double-circuit cable, 345 kv transmission line being built between the new Quarry substation west of St. Cloud, MN and the existing Monticello substation in Monticello, MN. This project will reinforce the electric grid to help serve the growing St. Cloud region, improve regional reliability, and add capacity for future generation, including renewable energy. The Fargo-St. Cloud 345 kv transmission line will improve reliability in the Southern Red River Valley and the Fargo, Alexandria, and St. Cloud areas. The project will also support additional generation development, including renewable generation, in eastern North Dakota and western Minnesota. The double-circuit cable, 345 kv transmission line will be built between the new Bison substation west of Fargo, ND, the existing Alexandria switching station in Alexandria, MN, and the new Quarry substation west of St. Cloud. These projects will be jointly constructed and owned by NSP Minnesota and four other utilities in the region. NSP Minnesota will own a 36 percent share. The Monticello-St. Cloud project was energized December 21, 2011, while the expected completion date for Fargo-St. Cloud is The Bemidji-Grand Rapids project is a single-circuit, 230 kv transmission line that will connect the Wilton substation near Bemidji, MN, and the Boswell substation in Grand Rapids, MN. The project will improve reliability in Bemidji, Grand Rapids, the Red River Valley, and north central Minnesota. The expected completion date is The Hampton-Rochester-La Crosse 345 kv transmission line will improve reliability for the Twin Cities, Rochester, and La Crosse, and surrounding rural areas, and improve access to generation in southern and eastern Minnesota. The double-circuit cable line will run between a new substation near Hampton, MN and a new substation north of Pine Island, MN, and continue on to cross the Mississippi River near Alma, WI. The project will be jointly constructed and owned by the NSP Companies and four other utilities in the region, with NSP Minnesota owning a 64 percent share. The Hampton-Rochester-La Crosse project has a targeted in-service date of The Brookings County-Hampton project is a double-circuit, 345 kv transmission line (Some segments will be double circuit-cable.) being built between the Brookings County Substation near Brookings, SD, and the Hampton substation in Hampton, MN. The project will help meet projected electricity growth in southern and western Minnesota and the growing areas south of the 6

27 Northern States Power Company Page 11 of 29 Xcel Energy Services Company Docket No. PA Twin Cities, particularly Scott and Dakota counties, where the population has more than doubled since the last major transmission upgrade. Minnesota has one of the most aggressive renewable energy standards in the country, requiring 25 percent of electricity to come from renewable sources like wind. The Brookings County-Hampton project will also provide access to the central part of Buffalo Ridge, one of the nation s windiest areas. The project will be jointly constructed and owned by the NSP Companies and four other utilities in the region, with NSP Minnesota owning a 72 percent share. The Brookings County-Hampton project has a targeted in-service date of Group 1 projects are estimated to cost $1.7 billion, plus an additional $200 million for upsizing to double circuit-capable structures. Transmission costs generally make up 7-10 percent of a customer s monthly bill. Xcel Energy customers can expect an incremental bill increase of about $3 per month at the peak of construction. B. Commission Orders and Conditions This audit reviewed Xcel s compliance with conditions established by Order Nos. 679 and 679A, 18 C.F.R. 35 Subpart G of Commission regulations, and the Incentive Order. Audit staff evaluated these conditions: Order 679 and 679-A and 18 CFR 35 Subpart G, Transmission Infrastructure Investment FERC Form 730 Reporting Requirements - Xcel must submit an annual report detailing its actual capital investment for the most recent calendar year, planned investments for the next five years, and for all projects whose costs are included in the actual and projected capital spending table, a project-by-project listing that specifies for each project the expected completion date, percentage completion as of the date of filing, and reasons for delay, if applicable. 18 CFR 35.25, Construction Work in Progress Accounting Procedures to Prevent Double Recovery of AFUDC and CWIP Included in Rate Base - When a public utility files to include CWIP in rate base, it must propose accounting procedures that ensure that wholesale customers will not be charged for: both capitalized AFUDC and corresponding amounts of CWIP proposed to be included in rate base; and any corresponding AFUDC capitalized as a result of different accounting or ratemaking treatments accorded CWIP by state or local regulatory authorities. 7

28 Northern States Power Company Page 12 of 29 Xcel Energy Services Company Docket No. PA The Commission imposed no additional conditions on Xcel in the incentive order. The Company must abide by the regulations in Order 679 and the 18 C.F.R. 35 Subpart G of Commission regulations. 8

29 Northern States Power Company Page 13 of 29 Xcel Energy Services Company Docket No. PA III. Introduction A. Objectives Audit objectives were to evaluate Xcel s compliance with: (1) the requirements of Order Nos. 679 and 679A; (2) 18 C.F.R. 35 Subpart G of Commission regulations, which governs rate incentives for transmission expansion projects; (3) conditions approved in the Incentive Order; and (4) FERC-730 filing and reporting requirements under 18 C.F.R h (2010). The audit covered the period from December 21, 2007 to August 31, B. Scope and Methodology Audit staff performed these steps to facilitate and perform the audit: Before audit commencement, reviewed publicly available materials including Company filings with FERC and the Securities and Exchange Commission (SEC), trade press and newspaper articles, and material on the Company s web site to obtain a baseline understanding of the BRIGO, Chisago-Apple River, and CapX2020 projects and the Company s nature, operations, and regulatory activities. Searched elibrary for Company filings, Commission orders, and formal complaints against the Company. Reviewed financial statements (FERC Form No. 1 and FERC Form 3- Q, and SEC Forms 10-K, 10-Q, and 8-K) for significant developments, practices, and procedures related to the audit objectives, and financial information related to revenues, income, sales, and purchases. Reviewed the Company s transmission expansion project applications, applications for transmission incentives, and related compliance filings. Reviewed Company submittals to RTO regional planning processes. Evaluated Company compliance with Commission rules, regulations, and other requirements related to the NSP Expansion Projects. Analyzed tariff sheets and formula rate filings with the MISO. 9

30 Northern States Power Company Page 14 of 29 Xcel Energy Services Company Docket No. PA Conducted teleconferences with Company employees to discuss practices, procedures, and controls relevant to audit objectives, obtain background information about the projects, and gathered supporting evidence throughout the audit. Conferred with other Commission staff on transmission incentive issues to ensure potential audit findings would be consistent with Commission precedent and policy. For example, audit staff met with staff in the Office of Energy Market Regulation, who advised the Commission in drafting the Incentive Order, and accounting and legal advisory staff within the Commission. Obtained data related to Xcel Energy s corporate compliance program and identified compliance measures within the audit scope. Before testing compliance with the Commission orders and regulations summarized above, audit staff conducted substantial analysis to verify that Xcel properly accounted for the costs of the BRIGO, Chisago-Apple River, and CapX2020 projects, and did not charge or allocate to them the costs of non incentive projects. Cost Accounting Procedures To evaluate the procedures used to account for project costs, audit staff studied Xcel Energy s corporate accounting systems and practices, and examined the procedures for opening and closing work orders, reviewed charges to work orders, and audits on project costs during and after the projects completion of the projects performed by internal audit staff. Audit staff also reviewed the Internal Audit department s report on the BRIGO, Chisago-Apple River, and CapX2020 projects audits and checked whether project costs were appropriate, properly recorded, and reflected in work orders. Procedures and Controls to Ensure Accurate Accounting of Employee Time and Expenses To determine if employee time and expenses were properly charged to the projects, audit staff reviewed Xcel s corporate policies on charging employee time and expenses, and examined procedures for entering time and expenses into the corporate accounting system. Where supervisors do not approve time or expenses within the allotted time, Xcel procedures require managers to investigate and resolve such instances in a timely manner. To determine if Xcel properly applied 10

31 Northern States Power Company Page 15 of 29 Xcel Energy Services Company Docket No. PA these controls, audit staff reviewed records of nonsupervisory-approved time from July 2010 through July 2011 and checked if managers investigated and resolved them as the procedures required. Allocation of Overhead To determine if Xcel properly allocated overhead to the projects, audit staff first reviewed Xcel s procedures for allocating administrative and general and engineering and supervisory costs. Audit staff then reviewed the methodology Xcel used to develop allocation rates for these expenses. Audit staff examined a sample of work orders for the projects to verify that the allocations were made using established rates. Finally, audit staff reviewed biannual time motion studies Xcel has done to arrive at adjusted overhead allocation rates to use in preceding periods for the projects. Audit staff performed these specific steps to evaluate Xcel s compliance with Order Nos. 679 and 679-A, 18 C.F.R. 35 Subpart G, and the Incentive Order. FERC-730 Reporting Requirements To verify compliance with the FERC-730 reporting requirements, audit staff reviewed Xcel s annual FERC-730 filings and checked whether they were timely, complete, and conformed with 18 C.F.R h. To test whether the data were accurate, audit staff examined charges to the NSP expansion project work orders, and compared them with the FERC-730 data. Audit staff had a teleconference and issued data requests to clarify Xcel s method for identifying advanced technology charges and review inconsistencies in the data. Also, audit staff examined Xcel s procedures for reviewing and approving data reported in FERC-730. Costs Eligible for Incentive Rate Treatment To verify that Xcel recovered only costs eligible for incentive rate treatment in its formula rates, audit staff reviewed the Rate Formula Templates and associated work papers that Xcel prepared for the NSP Companies Attachment O True-Up Adjustments. True up Adjustments calculate the NSP Companies actual revenue requirements based primarily on data reported in the FERC Form No. 1. To ensure that true-up adjustments were calculated properly, audit staff compared monthly CWIP balances for each NSP expansion 11

32 Northern States Power Company Page 16 of 29 Xcel Energy Services Company Docket No. PA project with the charges recorded to its work orders, and checked that the CWIP balances did not include any AFUDC. Also, audit staff checked that Xcel subtracted prefunded AFUDC from rate base. Audit staff then verified that Xcel used only CWIP recorded after a project received the final certificate order from its state regulatory commission in calculating the formula rates. Finally, audit staff checked that Xcel deducted from the Attachment O revenue requirement any revenues that received partial regional recovery under Attachment GG. Accounting Procedures to Prevent Double Recovery of AFUDC and CWIP Included in Rate Base To determine if Xcel complied with 18 C.F.R (f), audit staff examined accounting procedures Xcel proposed in Docket No. ER to prevent double recovery of AFUDC and corresponding amounts of CWIP included in rate base. Xcel has two classes of customers: wholesale and retail. Wholesale customers are charged the cost of CWIP in rate base, while the retail customers will either be charged AFUDC accumulated on the infrastructure during construction or be charged the cost of CWIP in rate base, depending on the project and the state jurisdiction. Audit staff obtained evidence that Xcel billed the cost of CWIP and AFUDC to the appropriate customers by obtaining invoices that showed what each class of customers paid for. 12

33 Northern States Power Company Page 17 of 29 Xcel Energy Services Company Docket No. PA IV. Findings and Recommendations 1. Review of Rate Formula Templates Xcel did not adequately review the Rate Formula Template for the NSP Companies 2010 True-Up Adjustment for accuracy before submitting it to MISO. Due to the inadequate review, the rate base used to calculate the NSP Companies actual 2010 revenue requirement was overstated by approximately $10 million. Xcel also used an incorrect percentage when calculating its pre-funded AFUDC. The error overstated rate base used to calculate the revenue requirement by approximately $1 million dollars. Pertinent Guidance Background Attachment O of the MISO Tariff states in pertinent part: The Transmission Provider will review each [Rate Formula Template] and the appropriate publicly available data (Form No. 1, Form No. 12, or Form No. 412) for accuracy. In addition to the incentive recovery granted under Order No. 679, NSP- Wisconsin and NSP-Minnesota operate in jurisdictions where state regulatory authorities have authorized recovery of AFUDC on construction work in progress (CWIP) in advance, rather than when the facilities are placed in service. To avoid double recovery of AFUDC in formula rates, the Attachment O-NSP Rate Formula Template contains an Adjustment to Rate Base for Net Prefunded AFUDC on CWIP. The adjustment reduces rate base by the amount of prefunded AFUDC collected. Similar adjustments are made in those jurisdictions where state regulatory authorities authorize it. In reviewing the Rate Formula Templates Xcel prepared for the NSP Companies during the audit period, audit staff determined that Xcel appropriately subtracted prefunded AFUDC from rate base in the 2008 and 2009 True Up Adjustments. However, in the 2010 True Up, audit staff found that Xcel added prefunded AFUDC to rate base rather than subtracting it. As a consequence, the rate base used to calculate the NSP Companies actual revenue requirement for 2010 was overstated by approximately $10 million. If not corrected, this error would have caused the actual 2010 revenue requirement to be overstated by about $1.4 million, which would have a negative impact on 2012 wholesale customer rates. 13