PNM Resources : Direct Testimony of Dane W. Watson Depreciation PNM 2025 Rate Request 24 00089 UT

BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF THE APPLICATION	)
OF PUBLIC SERVICE COMPANY OF NEW	)
MEXICO FOR REVISION OF ITS RETAIL	)
ELECTRIC RATES PURSUANT TO ADVICE )
NOTICE NO. 625	)	Case No. 24-00089-UT
	)
PUBLIC SERVICE COMPANY OF NEW	)
MEXICO,	)
	)
Applicant	)
	)

DIRECT TESTIMONY

OF

DANE A. WATSON

June 14, 2024

NMPRC CASE NO. 24-00089-UT

INDEX TO THE DIRECT TESTIMONY OF DANE A. WATSON

WITNESS FOR

PUBLIC SERVICE COMPANY OF NEW MEXICO

I.	INTRODUCTION AND PURPOSE	1
II.	SUMMARY OF TECHNICAL UPDATE RESULTS	2
III.	PNM'S TECHNICAL UPDATE	3
IV.	CONCLUSION	.....................................................................................................	10
PNM Exhibit DAW-1	Statement of Qualifications
PNM Exhibit DAW-2	Public Service Company of New Mexico Electric Utility
		Plant Depreciation Rate Study (Technical Update)

SELF AFFIRMATION

i

	DIRECT TESTIMONY OF
	DANE A. WATSON
	NMPRC CASE NO. 24-00089-UT
1	I. INTRODUCTION AND PURPOSE
2

1. Q. Please state your name, position, and business address.
2. A. My name is Dane A. Watson. I am the Managing Partner of the Alliance Consulting
3. Group. Alliance Consulting Group provides depreciation consulting and expert
4. services to the utility industry. My business address is 101 E. Park Blvd, Suite 220,
5. Plano, Texas 75074. Alliance Consulting Group has specialized education and
6. expertise in this area and has been providing these consulting services for over 20
7. years.

10

1. Q. On whose behalf are you testifying in this proceeding?
2. A. My testimony is on behalf of Public Service Company of New Mexico ("PNM" or
3. "Company").

14

1. Q. What is the purpose of your direct testimony in this case?
2. A. The purpose of my testimony is to support PNM's proposal to modify the terminal
3. retirement date for the Four Corners Power Plant ("Four Corners") to 2031. The
4. current terminal retirement date is 2041. Since PNM has stated that it intends to
5. exit the Four Corners plant no later than 2031, the Commission should approve a
6. 2031 terminal retirement date for Four Corners.

21

1

DIRECT TESTIMONY OF

DANE A. WATSON

NMPRC CASE NO. 24-00089-UT

1. Q. Is PNM proposing any other changes to its depreciation rates?
2. A. No. In PNM's most recent rate case, Case No. 22-00270-UT, a full Depreciation
3. Study was filed and addressed by the Commission. PNM did not believe it was
4. necessary to file another full Depreciation Study in this rate case. PNM believes
5. the remainder of its depreciation rates are accurate and reflect appropriate asset
6. lives. However, PNM, having determined how long it intends to participate in Four
7. Corners after the conclusion of the last rate case, determined it was appropriate to
8. update the retirement date of Four Corners, and its resulting depreciation rates in
9. this rate case to align depreciation with the remaining life of the plant.

10

11 Q. Have you included a description of your qualifications, duties and

1. responsibilities?
2. A. Yes. A description of my qualifications, duties, and responsibilities is included as
3. PNM Exhibit DAW-1.

15

16II. SUMMARY OF TECHNICAL UPDATE RESULTS

17

1. Q. Please explain the PNM Exhibit that you are presenting to support the
2. proposed depreciation rates.
3. A. PNM Exhibit DAW-2 presents the results of a study performed by the Alliance
4. Consulting Group in 2024 for certain depreciable production plant as of December
5. 31, 2023 ("Technical Update").

23

2

DIRECT TESTIMONY OF

DANE A. WATSON

NMPRC CASE NO. 24-00089-UT

1. Q. How does the annual expense reflected in the Technical Update relate to what
2. PNM is proposing with respect to depreciation and amortization expense in
3. this rate case?
4. A. The $27.5 million annual depreciation expense shown in PNM Exhibit DAW-2
5. Appendix B is based on plant balances as of December 2023. PNM witness Monroy
6. explains and supports PNM's proposals for depreciation and amortization expense
7. based on the Test Period in his Direct Testimony, and specifically requests the
8. Commission's approval of the depreciation rates for PNM's electric utility plant
9. accounts as recommended in the Technical Update. PNM's proposed annual

10 depreciation expense for the Test Period is calculated using these same

1. recommended depreciation rates from the Technical Update; however, the
2. proposed depreciation expense is based on monthly plant balances during the Test
3. Period. PNM witness Sanders provides Test Period depreciation expense.

14

15III. PNM'S TECHNICAL UPDATE

16

1. Q. Please describe the methodology used in the Technical Update.
2. A. The Technical Update follows the Commission's long-standing precedent of

19 relying in a Straight-line, Average Life Group ("ALG"), Remaining Life

1. depreciation system. In this way, all customers are charged for their appropriate
2. share of the capital expended for their benefit.

3

DIRECT TESTIMONY OF

DANE A. WATSON

NMPRC CASE NO. 24-00089-UT

1. PNM's existing depreciation rates for Production assets were established by the
2. Commission's Final Order in Case No. 22-00270-UT.1 In the study filed in that
3. last rate case, I updated accrual rates to recognize updated balances and life
4. projections regarding PNM depreciable assets.

5

1. Q. Have the analyzed life and net salvage parameters changed from what the
2. study in Case No. 22-00270-UT used?
3. A. No. This Technical Update uses the same interim retirement curves and interim net
4. salvage parameters as those approved in the prior depreciation study.

10

1. Q. What factors have changed for Four Corners since depreciation rates were
2. approved for that unit in PNM's 2015 Rate Case, Case No. 15-00261?
3. A. In the time since the depreciation rates were established for Four Corners, a few
4. factors have changed that are addressed in the Technical Update:

15	• Additional capital investment has been added to Four Corners since the
16	last study in Case No. 15-00261-UT.
17	• Additional accumulated depreciation for Four Corners has accrued since
18	Case No. 15-00261-UT.
19	• PNM has determined that it will not participate in Four Corners after its
20	current fuel supply agreement ends in 2031. Thus, updated Four

1 At the Company's request, I did not include Four Corners plant in the prior depreciation study. My understanding is that there was uncertainty that remained regarding Four Corners given the Commission's denial of PNM's request for abandonment of the plant , the resolution of which was relevant to PNM's decisions related to the Four Corners retirement addressed in the Technical Update. See Case No. 21-00017- UT. Once the New Mexico Supreme Court upheld the Commission's denial of abandonment (Supreme Court Case No. S-1-C-39138), PNM was able to determine the appropriate next steps for Four Corners.

4

	DIRECT TESTIMONY OF
	DANE A. WATSON
	NMPRC CASE NO. 24-00089-UT
1	Corners depreciation rates have been calculated using a 2031 terminal
2	retirement date.
3	• Starting with the last-approved depreciation rate for Four Corners set in
4	Case No. 15-00261-UT,but using the interim retirement and salvage
5	parameters established in Case No. 22-00270-UT, new rates for Four
6	Corners were established assuming the planned-for 2031 terminal
7	retirement date.
8

1. Q. What is your understanding as to PNM's plan regarding Four Corners?
2. A. As stated in the Direct Testimony of PNM witness Heffington, at this time, PNM
3. expects Four Corners to remain in service through the end of the current fuel supply
4. agreement, which is July 2031.

13

1. Q. Was the Four Corners depreciation rate addressed in PNM's last Depreciation
2. Study?
3. A. No. PNM directed me to not evaluate Four Corners for its last Depreciation Study
4. approved in Case No. 22-00270-UT. As PNM witness Monroy's Direct Testimony
5. explains, the determination of whether Four Corners would retire by the end of
6. 2024 was still an open issue during the pendency of the last rate case.

20

5

DIRECT TESTIMONY OF

DANE A. WATSON

NMPRC CASE NO. 24-00089-UT

1. Q. Has the terminal retirement date for Four Corners always been 2041?
2. A. No, it has not. In Case No. 15-00261-UT, while PNM sought to maintain a terminal
3. retirement date of 2031 for Four Corners, the Commission modified the retirement
4. date to 2041 in that rate case.2

5

1. Q. What definition of depreciation was used in preparing the Technical Update
2. and this Testimony?
3. A. The term "depreciation," as I use it and as it was used in preparing the Technical
4. Update, is a system of accounting that distributes the cost of assets, less net salvage
5. (if any), over the estimated useful life of the assets in a systematic and rational
6. manner. It is a process of allocation, not valuation. Depreciation expense is
7. systematically allocated to accounting periods over the life of the assets. The
8. amount allocated to any singular accounting period does not necessarily represent
9. the loss or decrease in value that will occur during that particular period. Thus,
10. depreciation is considered an expense or cost, rather than a loss or decrease in value.
11. PNM accrues depreciation based on the original cost of all property included in
12. each depreciable plant account. On retirement, the full cost of depreciable property,
13. less any net salvage amount (positive or negative), is charged to the depreciation
14. reserve.

20

2 Case No. 15-00261-UT,Recommended Decision, at 154.

6

DIRECT TESTIMONY OF

DANE A. WATSON

NMPRC CASE NO. 24-00089-UT

1. Q. What property is included in the Technical Update?
2. A. There is just one distinct class of property in this study: Steam Production. Within

3 that class, the Technical Update only addressed Four Corners. The Steam

1. Production plant functional group consists of all structures, boiler plant equipment,
2. turbogenerator equipment, accessory electrical equipment, and other miscellaneous
3. assets used to generate electricity at PNM's fossil power plants.

7

1. Q. Please describe the methodology you used to determine the life for Steam
2. Production plant.
3. A. For Steam Production plant, most components are expected to have a retirement
4. date concurrent with the planned retirement date of the generating unit. The
5. terminal retirement date refers to the year that each facility will cease operations.
6. The terminal retirement date establishes the pattern of retirement of the assets that
7. comprise a generating unit. The estimated terminal retirement dates for the two
8. generating plants were provided to me by PNM and are shown in PNM Exhibit
9. DAW-2,Appendix D. Interim retirement curves were used to model the retirement
10. of individual assets within primary plant accounts for each generating unit prior to
11. the terminal retirement of the facilities.

19

1. Q. What are interim retirement characteristics?
2. A. Interim retirement characteristics reflect the fact that some assets will retire before
3. the terminal retirement of an asset, such as a generating unit or other types of

7

DIRECT TESTIMONY OF

DANE A. WATSON

NMPRC CASE NO. 24-00089-UT

1. property. Interim retirements are those components of properties (e.g., generation
2. facilities) such as boiler walls, heating, ventilating, roof coverings, etc. that will not
3. live the full period of time from original installation until the retirement or major
4. rehabilitation of the facility. I used the same interim retirement parameters as were
5. approved in Case No. 22-00270-UT.

6

1. Q. Did the Technical Update incorporate any changes to the service lives of Steam
2. Production plant?
3. A. Yes. Based on direction from PNM, I made certain changes in service life for one
4. of PNM's units, as addressed in the Technical Update. Four Corners is the unit that
5. has had a change in retirement date. PNM witness Heffington discusses these
6. changes. The retirement dates are shown in PNM Exhibit DAW-2, Appendix D.

1. Q. Please describe how net salvage values for Steam Production plants are

1. computed.
2. A. In general, net salvage values are the amount received for retired property (salvage)
3. less any costs incurred to sell or remove the property (removal). When salvage
4. exceeds removal (positive net salvage), the net salvage reduces the amount to be
5. depreciated over time. When removal exceeds salvage (negative net salvage), the
6. negative net salvage increases the amount to be depreciated. In this Technical
7. Update, the net salvage percentages used are based on previously approved (Case

8