of Dominion Virginia Power, of Virginia Electric and Power by yca71986

VIEWS: 11 PAGES: 16

									                            DIRECT TESTIMONY
                                     OF
                             DAVID A. HEACOCK
                               ON BEHALF OF
                  VIRGINIA ELECTRIC AND POWER COMPANY
                                BEFORE THE
                STATE CORPORATION COMMISSION OF VIRGINIA
                           CASE NO. PUE-2009-

 1   Q.   Please state your name, position, business address and professional

 2        background.

 3   A.   My name is David A. Heacock, and I am President of Dominion Virginia Power,

 4        a functional operating division of Virginia Electric and Power Company. My

 5        business address is 120 Tredegar Street, Richmond, Virginia 23219. My

 6        background and qualifications are detailed in Appendix A to this testimony.


 7   Q.   What are your responsibilities as President of Dominion Virginia Power, and

 8        in what previous capacities have you worked for Virginia Electric and Power

 9        Company?

10   A.   I manage the regulated transmission, distribution, and customer service operations

11        of Virginia Electric and Power Company ("Dominion Virginia Power" or the

12        "Company"), a public utility regulated by the State Corporation Commission (the

13        "Commission") providing electricity service to approximately 2.4 million homes

14        and businesses from northeastern North Carolina to Northern Virginia. The

15        Company's Virginia service territory comprises approximately 65% of the

16        Commonwealth's total land area and accounts for over 80% of its population.

17        Dominion Virginia Power's electric generation fleet consists of over 18,000 MW

18        of generating capacity, transmitted over approximately 6,000 miles of

19        transmission lines and 56,000 miles of distribution lines. I spent over 28 years
 1        working on the generation side of the Company's business before assuming my

 2        current position.


 3   Q.   What is the purpose of your testimony in this proceeding?

 4   A.   I am testifying in support of the Company's response to the Commission's orders

 5        in Case No. PUE-2009-00002, initiating a review of the Company's rates, terms

 6        and conditions as required by § 56-585.1 A of the Code of Virginia ("Va. Code")

 7        (the Company's "2009 Rate Case Filing" or "Filing"). I provide an overview of

 8        the Company's Filing and explain why it is essential for the Company to obtain

 9        the rate relief it is requesting.


10        Our Filing demonstrates that because of the increased costs of providing our

11        services since our last general base rate increase in 1992, the Company's

12        combined rate of return on common equity ("ROE") on its generation and

13        distribution services, based on a 2008 test year adjusted as permitted by law, is

14        more than 50 basis points below a fair combined rate of return as determined

15        pursuant to § 56-585.1 A. The Company therefore requires an increase in its rates

16        that will provide it with the opportunity to recover its costs of providing safe and

17        reliable service to its customers. Specifically, based on an adjusted 2008 test year,

18        the Company has a total revenue requirement including fuel of approximately $6

19        billion, which represents an increase in its jurisdictional base rates of $298 million

20        over present total revenue of $5.7 billion, or a 5.2% increase in its total annual

21        operating revenue, including fuel. The annual revenue requirement calculation in

22        this case is supported principally by Company Witness M. Stuart BoIton, Jr. and




                                                2
 1        is shown on Company Exhibit No. _ , MSB, Schedule 3 attached to Mr.

 2        Bolton's testimony.


 3   Q.   What Company witnesses are filing testimony in this case?

 4   A.   The Company is presenting the following witnesses:

 5           I provide an overview of the Company's Filing and why it is crucial for the
 6           Company to obtain the rate relief it is requesting.

 7           Thomas N. Chewning, Executive Vice President and Chief Financial Officer,
 8           explains why the Company must attract sufficient equity capital at a
 9           reasonable cost to meet our customers' current and future demand for
10           electricity. He discusses why the Company's ROE serves that end.

11           Marc P. Zenner, Ph.D., Managing Director, Capital Structure Advisory and
12           Solutions group for J.P. Morgan Securities Inc., will present a capital markets
13           report on the dramatic changes in the global capital markets since the summer
14           of2007.

15           Robert S. Harris, Ph.D., the C. Stewart Sheppard Professor at the University
16           of Virginia's Darden School of Business and a consultant in the area of
17           finance, estimates the Company's cost of equity and provides a
18           recommendation on that rate for the Commission's consideration.

19           David A. Christian, President and Chief Nuclear Officer-Dominion Nuclear,
20           discusses the Company's development of new generation resources to support
21           its growing load obligations, along with the substantial capital needs
22           associated with these projects. He then presents the generating plant
23           performance criteria associated with the Company's requested performance
24           incentive and describes the relevant performance of the Company's generation
25           fleet.

26           Thomas R. Bean, Vice President of Financial Management, discusses the
27           infrastructure and associated capital requirements of our transmission and
28           distribution business areas over the coming years in order to meet the
29           Company's service obligations, and then presents the support, along with Mr.
30           Christian, for the Company's request for a performance incentive in this
31           proceeding. In particular, he focuses on the operating efficiency and customer
32           service criteria under Va. Code § 56-585.1 A related to retail distribution
33           activities and our performance over the relevant period, compared to
34           nationally recognized standards for such performance.

35           Shannon L. Venable, Vice President of Integrated Resource Planning,
36           explains Dominion Virginia Power's integrated resource planning process and
37           provides an overview of the Company's Demand-Side Management ("DSM")


                                              3
 1            programs and of the Company's use of Advanced Metering Infrastructure
 2            ("AMI") technology.

 3            Patrick L. Baryenbruch, President of Baryenbruch & Company, LLC, presents
 4            the results of his study, which evaluated and confirmed the reasonableness of
 5            costs for services provided by Dominion Resources Services and other
 6            affiliates to Dominion Virginia Power during the 12 months ended December
 7            31,2008.

 8            Andrew J. Evans, Managing Director of Cost Allocation and Policy, presents
 9            the various jurisdictional, functional and class cost of service studies included
10            in our Filing and explains the cost allocation methods by which they were
11            developed.

12            M. Stuart Bolton, Jr., Senior Vice President of Regulatory Accounting,
13            presents the calculation of the increase in the Company's revenues required in
14            this case to provide the Company with the opportunity to recover its costs of
15            providing service and to earn a fair combined ROE for its generation and
16            distribution services, based on an adjusted 2008 test year, the determination of
17            the Company's "peer group" of investor-owned electric utilities and the ROE
18            "peer range" as established from that peer group.
19
20            Julius M. Griles, Jr., Manager of Electric Distribution Design, presents the
21            Company's proposed line extension plan that will expand the utilization of
22            underground lines for new services and enhance the opportunity to convert
23            overhead service feeds to underground for existing residences.

24            David F. Koogler, Director of Rates and Load Research, describes the
25            Company's proposed changes to its Rate Schedules and Terms and Conditions
26            for the Provision of Electric Service, and also introduces new voluntary
27            dynamic pricing tariffs for residential, commercial and industrial customers.


28   Q.   Do you have any preliminary comments regarding this Filing?

29   A.   The Company faces a multitude of challenges in the years ahead to succeed in

30        meeting our customers' increasing demand for electricity and providing it in a

31        reliable, cost-effective and environmentally responsible manner. Specifically, the

32        Company must fund the enormous costs of additional infrastructure in all facets of

33        its operations - generation, transmission and distribution - to meet its anticipated

34        load growth and to protect customers from short and long-term pricing risks.




                                                4
 1        Virginia currently imports more power from the wholesale market than any state

 2        in the country, except California. Continued, or increasing, reliance upon

 3        imported power subjects our customers to risks of congestion on the transmission

 4        system, substantial price increases, price volatility and reliability concerns. In

 5        2007, the Virginia General Assembly enacted a regulatory construct for the

 6        Commonwealth's electric utilities designed to reduce long-term reliance upon

 7        imported electricity (the "2007 Act"). Our long-term planning will always have at

 8        its core the goal of delivering to our customers excellent service at reasonable

 9        costs. In contrast to the outcomes we have all witnessed in California, Illinois,

10        Maryland and elsewhere, where prices became uncontrollable, this new regulatory

11        structure largely protects our state from such effects as long as the Company is

12        able to build and operate our own units, which are diverse with respect to size,

13        location, fuel and dispatch factors. Simply put, we plan to continue to take

14        advantage of marginal cost opportunities in the wholesale market when they

15        benefit our customers, but being reliant upon those markets is a result we believe

16        the General Assembly sought to guard against in the 2007 Act.


17   Q.   Please discuss key components of the Company's infrastructure needs.

18   A.   The Company's service territory lies in one of the fastest growing regions in the

19        country. Virginia's economy has consistently out-paced the national economy

20        over the past 20 years. In 2009, Dominion Virginia Power projects connections to

21        more than 30,000 new customers, even with the current economic downturn. As

22        Company Witness Christian relates, the 2009 Load Forecast Report released by

23        PJM Interconnection, LLC ("PJM") on January 22,2009, provides strong



                                                5
 1   evidence that Virginia will continue to experience significant electric demand

 2   growth well into the next decade.


 3   Historically, peak demand grew more than 3,800 MW over the 10-year period

 4   from 1998 to 2008, representing an annual average growth rate of2.3% in the

 5   Dominion Zone ("DOM Zone"), representing the majority of electric load in

 6   Virginia. The PJM 2009 Load Forecast Report, which Mr. Christian discusses,

 7   forecasts an increased demand of approximately 4,600 additional MWs during the

 8   next decade (2009 to 2019) in the DOM Zone, representing an annual average

 9   growth rate of2.2%. As of the summer of2009, the Company will own or

10   control approximately 18,182 MW of generation dedicated to serving our Virginia

11   and North Carolina customers. Obviously, the Company has a responsibility not

12   only to serve these loads, but it must in addition maintain an adequate reserve

13   margin. That margin is now 15.0 % for this year, and it grows to 15.5% in 2010

14   for PJM' s Installed Reserve Margin.


15   The Company's provision of reliable electric service to operations that are central

16   to the nation's security should not be overlooked. In 2007, the Department of

17   Energy ("DOE") established two National Interest Transmission Corridors based

18   upon its assessment of risks to national defense and homeland security, national

19   energy independence and the economic vitality of the region. One of the

20   designated corridors, the Mid-Atlantic Area National Interest Electric

21   Transmission Corridor, is located in PJM and includes the Washington, DC and

22   Northern Virginia markets. In making this designation, the DOE explained:




                                            6
 1          The Mid-Atlantic Critical Congestion Area is home to 55
 2          million people (19 percent of the Nation's 2005 population)
 3          and is responsible for $2.3 trillion of gross state product (18
 4          percent ofthe 2005 gross national product). Given the
 5          large number of military and other facilities in the Mid-
 6          Atlantic Critical Congestion Area that are extremely
 7          important to the national defense and homeland security, as
 8          well as the vital importance of this populous area to the
 9          Nation as an economic center, any deterioration of the
10          electric reliability or economic health of this area would
11          constitute a serious risk to the well-being of the Nation.

12   72 Fed. Reg. 25,838, 25,896 (May 7, 2007) (internal footnote omitted).


13   The Company's responsibility to serve this particular region's growing need for

14   power (as well as vital needs in other areas of our service territory) places

15   tremendous importance on planning, construction, customer service and funding

16   in all major areas of our operations - generation, transmission and distribution.

17   Each of these components of an integrated system must necessarily adopt a long-

18   term perspective. Each regulatory proceeding should be viewed with an eye

19   toward achieving far-reaching goals and not solely with a view of the immediate

20   horizon. We believe it would be short-sighted to regard this pending rate review

21   as relating only to the Company's proper rate levels from now until the next

22   occasion for those rates to be reviewed. As Mr. Chewning will testify, decisions

23   made in, and resulting from, this case will set the tone and lay the groundwork for

24   how this Company will fund its operations for years to come. Based in large

25   measure upon the outcome of this proceeding, the capital markets, broadly

26   defined, will, by its actions, quickly declare how it intends to price the Company's

27   future capital funding requirements.




                                            7
 1   Q.   What are the Company's plans for meeting its long-term infrastructure

 2        demands?

 3   A.   The Company plans to construct a combination of baseload, intermediate and

 4        peaking plants with carefully considered sizes, in-service dates, fuel types and

 5        locations, as well as new DSM programs, and to commit significant capital on the

 6        transmission and distribution side. Company Witnesses Christian and Bean

 7        describe these extensive plans in more detail in their testimony and the billions of

 8        dollars those plans will entail. Mr. Chewning testifies that the Company must

 9        have access to capital at a reasonable cost in order to implement this plan, and

10        explains why we must attract new equity capital at the most opportune times and

11        in the amounts necessary if we are to maintain critical investment grade ratings.

12        In addition, Mr. Chewning testifies about the relationship between these

13        investment grade ratings and the costs borne ultimately by customers. He then

14        explains why the ROE Commission determines in this proceeding is the most

15        significant factor in the Company's preparation of its financial plans.


16        Significantly, and as Company Witnesses Christian and Bean explain, the

17        Company's planned capital expenditures for generation total approximately $1.8

18        billion, $1.4 billion and $1.6 billion in 2009, 2010 and 2011, respectively. That is

19        a three-year total of approximately $4.8 billion. For transmission and

20        distribution those numbers are approximately $0.9 billion in each of those same

21        three years, or approximately $2.7 billion in total for 2009-2011. Roughly $3.7

22        billion of these short-term capital expenditures are included in the Company's

23        base cost of service over the coming rate period. The Company's long-term



                                                8
 1   capital requirements for generation, transmission and distribution for the period

 2   2012 to 2018 are expected to total an additional approximately [BEGIN

 3   CONFIDENTIAL]                       .[END CONFIDENTIAL] Over the entire 10-

 4   year period (2009-2018), capital needs are projected to approach [BEGIN

 5   CONFIDENTIAL] _                    [END CONFIDENTIAL].


 6   This long-term plan places an emphasis upon Company-built and Company-

 7   owned generating plants. As noted, market purchases, generally to address short-

 8   term needs, will be made when they are cost-effective. This focus on construction

 9   and ownership of our own generation is fully consistent with the view of Virginia

10   utilities as vertically-integrated, regulated entities - a view endorsed by the 2007

11   Act. This approach will promote reliable and stable power supplies, from a

12   diversified portfolio of plants employing a proper mix of fuel sources, with long

13   service lives, along with the extra benefits of greater cost control and

14   predictability - all of which will result in less financial and operational risk for

15   our customers. Furthermore, this plan will greatly assist the Company in

16   mitigating the risks of transmission system congestion and price volatility that

17   comes with increased reliance on purchased power.


18   Moreover, this flexibility and diversity will be important in helping our Company

19   manage the inevitable future costs associated with climate change legislation.

20   That legislation will likely affect all types of generation plants, regardless of their

21   ownership status. We believe our customers' best hope relies upon our Company

22   managing and planning for this new responsibility.




                                            9
 1   Q.   Mr. Heacock, with that general background, what are some of the specific

 2        factors that drive the Company's need for rate relief for the rate period from

 3        now until the first biennial rate review in 2011 ?

 4   A.   Prior to the rate adjustment clause ("RAC") that took effect on January 1, 2009

 5        related to the Virginia City Hybrid Energy Center ("VCHEC"), our customers'

 6        base rates had not increased since 1992. In fact, there was a refund of $150

 7        million and a two-phased base rate reduction resulting from a Stipulation

 8        approved by the Commission in Case No. PUE-1996-00296. The first reduction

 9        was $100 million per annum beginning March 1, 1998, followed by an additional

10        $50 million per annum reduction beginning March 1, 1999. After the second

11        phase of the reduction took effect, rates were then frozen until March 1, 2002.

12        Subsequent to this rate freeze, rates were capped under action taken by the

13        General Assembly.


14        Quite obviously, costs in virtually all areas of our operations have increased

15        substantially from 1992 to 2008, as evidenced by the 48.15% increase in the

16        Consumer Price Index for All Urban Consumers ("CPI-U") in that time. Our

17        customers' base rates, though, have remained the same. On an inflation-adjusted

18        basis they are actually down 36.55%. At the same time, we have added

19        approximately 714,000 new customers to our system, and electricity usage per

20        residential customer has also increased by 12.05% (non-weather-normalized).

21        Our system has kept pace with this demand at significant expense.


22        During this time, the Company managed, among many other items, a 3.5-year

23        period of unrecovered increases in fuel expenses, damages from major storms,


                                               10
 1   environmental upgrades and settlements, reactor vessel head replacements at

 2   Surry and North Anna Power Stations, other power station upgrades, and

 3   substantial increases in expenses related to payroll, taxes, health care benefits and

 4   other administrative costs. Yet, because of the capped rate provisions of prior

 5   law, none of these events or expenditures resulted in base rate increases to our

 6   customers until the VCHEC RAC. The enactment of the 2007 Act, which are the

 7   impetus for this proceeding, was timely, because rate relief is needed if the

 8   Company is to recover its reasonable costs of service.


 9   It is plain that the costs of operating the Company for the benefit of our

10   customers, as explained in detail by Company Witnesses Bolton and others, are

11   higher now than our existing rate levels will support. Those costs will continue

12   that upward movement in the future. While it is true that recovery of some

13   significant categories of these costs can be sought through the new RAC

14   mechanisms of the law, there are still large amounts of capital costs (providing

15   not only for new growth, but also maintenance and uprates of our systems), as

16   well as expenses, that do not flow through the RACs and that must be covered

17   through base rate revisions.


18   This Filing will address our base cost of service through November 2011, a nearly

19   three-year planning horizon that will see a substantial need for increased capital

20   and operating funds, based on reasonably predictable cost levels during that time.


21   For example, Mr. Christian will describe projected expenditures included in base

22   cost of service for peaking and uprate projects that are expected to total $545



                                          11
 1   million between 2009 and 2011. These expenditures reflect the Company's

 2   efforts to increase the capacity of its existing generating units over the past

 3   several years, and through 2011 they will add over 1,000 MW of available

 4   generation resources to our portfolio. Additional generation-related maintenance,

 5   environmental and other capital expenditures included in base cost of service are

 6   projected at $1.56 billion over the 2009-2011 period. These base rate capital

 7   requirements are over and above specific projects, such as needed new baseload

 8   and intermediate capacity power stations and DSM programs, which may be

 9   eligible for RAC treatment.


10   For the same planning horizon, Mr. Bean will address the fact that, between now

11   and the end of2011, the Company expects to connect approximately 90,000 new

12   customers. This system growth will require continuing distribution infrastructure

13   growth and maintenance capital expenditures of an additional $1.6 billion that

14   must be covered by base rates. These capital requirements to meet customer

15   demand and service needs will be accompanied by increases in a large number of

16   other specific cost categories, discussed by Company Witness Bolton, such as

17   depreciation expense, employee salary and benefit increases, property taxes, debt

18   service costs, and other normal operating expense increases over this three-year

19   horizon.


20   Also, as discussed by Company Witnesses Evans and Bolton, the Company's

21   existing contract for supplemental sales with Old Dominion Electric Cooperative

22   will expire on December 31, 2009, resulting in a need to recalculate Virginia

23   jurisdictional allocation factors to reflect this loss ofload effective January 1,


                                           12
 1        2010. Another significant adjustment is related to investments and upgrades in

 2        new distribution technology, including deployment of AMI discussed specifically

 3        by Company Witness Shannon L. Venable, and the accelerated depreciation of

 4        existing meters associated with this initiative, as discussed by Mr. Bolton. There

 5        are also adjustments for increases in the nuclear refueling outage schedule for the

 6        rate period compared to the test year.


 7        In short, significant cost factors such as those above, and many others, are the

 8        driving forces behind the revenue requirement in this case. Mr. Bolton and other

 9        Company witnesses will discuss in detail the basis for these individual

10        adjustments, as well as the development of our cost of service statements in

11        general.


12   Q.   After providing for sufficient revenues to cover these capital and operating

13        cost levels, what ROE does the Company propose in this case?

14   A.   As Company Witnesses Harris and Chewning will testify, the Company's cost of

15        equity is 12.5%. The Company also proposes an additional 100 basis point

16        performance incentive in recognition of its high levels of performance, as

17        discussed by Company Witnesses Christian and Bean.


18   Q.   Do you have any concluding remarks?

19   A.   Yes. This Company is committed to meeting its public service obligation to

20        provide excellent, reliable and environmentally responsible electric utility service

21        to this Commonwealth at fair and reasonable rates, and we believe that we do it

22        better than anyone in the business. Fulfilling this obligation to our customers



                                               13
 1   requires expertise and experience in engineering, finance and a range of many

 2   other disciplines. It also depends upon cooperative and supportive relationships

 3   with regulators, investors, and creditors. In this regard, the Company respectfully

 4   requests the assurance it vitally needs from this Commission that the spending and

 5   capital investment program that Dominion Virginia Power proposes for the long-

 6   term future will be appropriately supported through regulatory actions. In

 7   particular, we urge the Commission's approval of the Company's proposed

 8   revenue requirement in this proceeding, based on our cost of service statements,

 9   as well as the adoption of a fair ROE.


10   Some participants in this case will undoubtedly advocate for a short-term

11   approach, always with an eye to paring returns to their lowest levels and denying

12   or paring cost recovery to their lowest conceivable levels. This approach, if

13   adopted, would deprive the Company of the support it needs to complete the

14   enormous tasks ahead of it. The interests of our customers and the

15   Commonwealth require that we plan for the long term to address the challenges of

16   improving our infrastructure by adding to our native generation resources and by

17   updating our transmission and distribution systems as part of modernizing the

18   nation's power grid. Of course, we will try to minimize the costs to our

19   customers while doing so. Our Company's plans entail only the spending that

20   which is necessary to "keep the lights on," and we will do this in a manner that

21   will provide greater reliability and price stability for our customers over many

22   years to come. But as Company Witness Chewning describes, in the near future,

23   we must ask investors and creditors to finance billions of dollars of construction



                                          14
 1        and upgrades to modernize our generation, transmission and distribution systems.

 2        Those initiatives will take the Company well beyond the rate period to implement.

 3        We will outline a plan in this proceeding to fortify and enhance our electric plant

 4        with technologies made to serve our customers in the 21 st Century. This case will

 5        determine how successfully we can proceed with these vital efforts. Its outcome

 6        will affect this Company's, and this Commission's, vision for many years to

 7        come.


 8        The eventual economic recovery that we all look forward to will need to be

 9        sustained by many essential components of the nation's infrastructure. There is

10        no more vital infrastructure than that which delivers safe and reliable electric

11        service at levels adequate to satisfy demand, with prices that are just and

12        reasonable. Dominion Virginia Power stands ready to meet its considerable

13        responsibilities to its many constituents in this arena, and we look forward to the

14        Commission's validation and support of our efforts.


15   Q.   Does this conclude your direct testimony?

16   A.   Yes, it does.




                                               15
                                                                         APPENDIX A


                            Background and Qualifications
                                        of
                                 David A. Heacock

I received a Bachelor's degree in Nuclear Engineering from the University of Virginia in

1979. I am a professional engineer registered in Virginia.


I joined Virginia Electric and Power Company in 1979 as an assistant engineer at the

North Anna Nuclear Power Station, and was promoted to associate engineer in 1980, and

engineer in 1981. In March 1985, I was promoted to senior engineer, and in August of

that year became Supervisor of Surveillance and Test Engineering. I received my

Nuclear Regulatory Commission senior reactor operator license in 1985.


In 1989, I was appointed Superintendent of Station Engineering, and in 1990 I became

Superintendent of Technical Services. In June 1994, I was promoted to Assistant Station

Manager, Nuclear Safety and Licensing at North Anna. I assumed the position of

Manager, Nuclear Safety and Licensing in March 1998. In June 1998, I was appointed

Manager, Station Operations and Maintenance. I was named Site Vice President at North

Anna Power Station in May 2000.


In December 2003, I was named Vice President, Fossil & Hydro System Operations, and

became Senior Vice President, Fossil and Hydro in April 2005. I assumed my current

position of President of Dominion Virginia Power on October 1,2007.


I was appointed to the Governor's Commission on Climate Change by Virginia Governor

Timothy Kaine in 2007.

								
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