BEFORE THE PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA COLUMBIA, SOUTH CAROLINA HEARING #16-11554 OCTOBER 13, 2016 10:30 A.M. DOCKET NO. 2016-223-E: SOUTH CAROLINA ELECTRIC & GAS COMPANY — Petition of South Carolina Electric & Gas Company for Updates and Revisions to Schedules Related to the Construction of a Nuclear Base Load Generation Facility at Jenkinsville, South Carolina TRANSCRIPT OF TESTIMONY AND PROCEEDINGS VOLUME 4 OF 4 HEARING BEFORE: Swain E. WHITFIELD, CHAIRMAN; Comer H. ‘Randy’ RANDALL, VICE CHAIRMAN; and COMMISSIONERS John E. ‘Butch’ HOWARD, Elliott F. ELAM, Jr., Elizabeth B. ‘Lib’ FLEMING, Nikiya M. ‘Nikki’ HALL, and G. O’Neal HAMILTON ADVISOR TO COMMISSION: F. David Butler, Esq. Senior Counsel STAFF: Joseph Melchers, General Counsel; James Spearman, Ph.D., Executive Assistant to Commissioners; Philip Riley, Doug Pratt, Lynn Ballentine, and Tom Ellison, Advisory Staff; Jo Elizabeth M. Wheat, CVR-CM/M-GNSC, Court Reporter; and Deborah Easterling and Calvin Woods, Hearing Room Assistants APPEARANCES: K. CHAD GISSENDANNER, ESQUIRE, and representing PETITIONER BURGESS, ESQUIRE, BELTON SOUTH CAROLINA ESQUIRE, MATTHEW W. MITCHELL WILLOUGHBY, T. ZEIGLER, ESQUIRE, ELECTRIC & GAS COMPANY, Public Service Commission of South Carolina 101 Executive Center Drive Columbia, SC 29210 Post Office Box 11649 Columbia, SC 29211 www.psc.sc.gov Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 758 APPEARANCES (Cont'g): SCOTT ELLIOTT, ESQUIRE, representing CAROLINA ENERGY USERS COMMITTEE, INTERVENOR SOUTH ROBERT GUILD, ESQUIRE, representing SIERRA CLUB, INTERVENOR FRANK R. ELLERBE, III, ESQUIRE, and JOHN H. TIENCKEN, JR., ESQUIRE, representing CENTRAL ELECTRIC POWER COOPERATIVE and THE SOUTH CAROLINA, INTERVENORS ELECTRIC COOPERATIVES OF J. BLANDING HOLMAN, IV, ESQUIRE, and GUDRUN THOMPSON, ESQUIRE, representing SOUTH CAROLINA COASTAL CONSERVATION LEAGUE, INTERVENOR SANDRA WRIGHT, appearing pro se, INTERVENOR JEFFREY M. NELSON, ESQUIRE, and SHANNON BOWYER HUDSON, ESQUIRE, representing the SOUTH CAROLINA OFFICE OF REGULATORY STAFF VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 759 I N D E X PAGE OPENING MATTERS........................................... 761 PANEL TESTIMONY OF JOSEPH M. LYNCH, Ph.D. and KEVIN R. KOCHEMS Direct Examination by Mr. Willoughby Joseph M. Lynch, Ph.D. ........................... 761 Hearing Exhibit 12 marked/received in evidence [Prefiled Exh. JML-1 ~ -3] ............... 763 Summary of prefiled direct testimony ......... 763 Prefiled direct testimony ................ 768-784 Kevin R. Kochems ................................. 785 Hearing Exhibit 13 marked/received in evidence [Prefiled Exh. KRK-1 ~ -6] ............... 786 Summary of prefiled direct testimony ......... 787 Prefiled direct testimony ................ 793-837 Cross Examination by Ms. Thompson.................... 838 Cross Examination by Mr. Guild....................... 848 Cross Examination by Ms. Wright...................... 855 Examination by Commissioner Elam..................... 874 Examination by Commissioner Howard................... 876 Examination by Commissioner Hamilton................. 878 Examination by Vice Chairman Randall................. 879 Examination by Commissioner Hall..................... 881 Examination by Commissioner Fleming.................. 882 Examination by Chairman Whitfield.................... 884 Witnesses stood aside ................................. 888 Witnesses excused ..................................... 980 VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 760 PAGE TESTIMONY OF GARY C. JONES (Expert) Direct Examination by Mr. Nelson..................... 891 Hearing Exhibit 14 marked/received in evidence [Prefiled Exh. GCJ-1 {w/corr’n}] ............. 893 Summary of prefiled direct testimony ............. 895 Prefiled direct testimony {w/corr’ns} ........ 897-931 Summary of prefiled settlement testimony ......... 932 Prefiled settlement testimony ................ 934-937 Cross Examination by Mr. Guild....................... 938 Cross Examination by Ms. Wright...................... 950 Examination by Vice Chairman Randall................. 953 Examination by Commissioner Hamilton................. 955 Examination by Commissioner Hall..................... 957 Examination by Commissioner Fleming.................. 959 Examination by Commissioner Elam..................... 966 Examination by Chairman Whitfield.................... 967 Examination by Commissioner Fleming.................. 971 Examination by Chairman Whitfield.................... 972 Witnesses stood aside ................................. 977 Witness excused...................................... 980 CLOSING MATTERS ...................................... 976 REPORTER’S CERTIFICATE.................................... 980 VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 761 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions P R O C E E D I N G S 1 CHAIRMAN WHITFIELD: 2 Please be seated. I'll 3 call this hearing back to order. 4 you and your team, you want to present your next 5 panel? MR. WILLOUGHBY: 6 And, Mr. Burgess, Mr. Chairman, members of the 7 Commission, we call next to the stand Dr. Joe Lynch 8 and Mr. Kevin Kochems. Gentlemen, come forward, and if you would 9 10 remain standing until the court reporter 11 administers the oath. [Witnesses affirmed] 12 13 THEREUPON came, J O S E P H 14 M . K E V I N 15 L Y N C H , R . P h . D . , K O C H E M S , 16 called as witnesses on behalf of the Petitioner, South 17 Carolina Electric & Gas Company, who, having been first duly 18 affirmed, were examined and testified as follows: DIRECT EXAMINATION 19 20 BY MR. WILLOUGHBY: 21 Q A [LYNCH] I'm Joseph Lynch. I'm Manager of Resource Planning for the South Carolina Electric & Gas Company. 24 25 Would you please identify yourself for the record. 22 23 Good morning, Dr. Lynch. Q In connection with this proceeding, Dr. Lynch, have you VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 caused to be prepared and prefiled direct testimony 2 consisting of 17 pages? 762 3 A [LYNCH] Yes, I have. 4 Q If I asked you the questions that appear in the direct testimony, would your answers be the same? 5 6 A [LYNCH] They would. MR. WILLOUGHBY: 7 Mr. Chairman, I would move 8 the introduction of the prefiled direct testimony 9 of Dr. Lynch, as if given orally from the stand. CHAIRMAN WHITFIELD: 10 Dr. Joe Lynch's prefiled 11 testimony will be entered into the record as if 12 given orally from the stand. 13 [See pgs 768-784]] 14 BY MR. WILLOUGHBY: 15 Q Dr. Lynch, attached to your prefiled direct testimony, 16 there were three exhibits, I believe: Exhibits JML-1, 17 JML-2, and JML-3. Is that correct? 18 A [LYNCH] Yes, sir. 19 Q Are there any corrections or changes to be made to those exhibits? 20 21 22 A [LYNCH] No. MR. WILLOUGHBY: Mr. Chairman, we would move 23 into the record as the next hearing exhibit the 24 three exhibits attached to the prefiled direct 25 testimony of Dr. Lynch. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 763 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions CHAIRMAN WHITFIELD: 1 Dr. Lynch's Exhibits 2 JML-1 through -3 will be entered into the record as 3 Hearing Exhibit No. 12. 4 [WHEREUPON, Exhibit No. 12 was marked and 5 received in evidence.] MR. WILLOUGHBY: 6 7 BY MR. WILLOUGHBY: 8 Q Thank you. Dr. Lynch, have you prepared a summary of your direct testimony? 9 10 A [LYNCH] I have. 11 Q Please deliver the summary at this time. 12 A [LYNCH] Good morning, Chairman Whitfield and members of 13 14 the Commission. The purpose of my testimony is to present the 15 results of two studies. The first study is a 16 sensitivity study that compares the costs to complete 17 construction of the units under several labor cost 18 scenarios relative to the cost of the fixed-price 19 option. 20 hour, as of December 2015, calculated as an average in 21 the categories of all direct craft workers, all indirect 22 craft workers, and all field non-manual workers. 23 analyzed the effect of labor growth rates on the project 24 of 0 percent, 2.9, 5.0, and 7.0 percent. 25 0 and 7 percent scenarios are possible, SCE&G believes In the study, SCE&G analyzed labor cost per SCE&G Although the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 764 1 they're unlikely, and that the most likely scenario for 2 future labor rates lies between the 2.9 and 5 percent 3 growth scenarios. To reflect variations in the number of hours 4 5 required to complete construction of the units, SCE&G 6 also evaluated six productivity factor, or PF, 7 scenarios. 8 various levels of efficiency with which direct craft 9 laborers are working to complete tasks, while keeping This evaluation analyzed the effect of 10 constant the ratios of indirect and field non-manual 11 labor costs. 12 December 2015 is approximately 1.75. 13 reorganization of the consortium and Fluor coming 14 on board, there is an ongoing effort to improve the PF 15 of the project. 16 likely PF range in the future will be between 1.5 and 17 2.0. The cumulative PF for this project in With the Nevertheless, SCE&G believes the most 18 When focusing on the most likely range of 2.9 19 percent to 5 percent in labor rate growth rates and the 20 PF falling between 1.5 and 2, SCE&G estimates that the 21 cost to complete the units will be between 10.9 percent 22 and 29.3 percent higher than the fixed-price option. 23 While Westinghouse may be able to make significant 24 improvements over past performance, SCE&G believes it is 25 in the best interest of its customers to choose the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 765 1 fixed-price option and remove the price uncertainty that 2 exists without it. 3 The second study is an economic study comparing the 4 impact on revenue requirements of continuing 5 construction of the units, as opposed to terminating the 6 project and building natural gas combined-cycle units 7 instead. 8 structure as a similar study presented to the Commission 9 in the 2015 update proceedings. The study uses the same methodology and The two alternatives 10 were analyzed under scenarios reflecting different 11 assumptions concerning natural gas prices, CO2 emission 12 costs, and future load growth on the system. 13 The three natural gas price scenarios were the 14 company's base-case forecast for future natural gas 15 prices, a 50 percent higher gas price, and a 100 percent 16 higher gas price forecast. 17 higher forecast most closely reflects the forecast of 18 the Energy Information Administration. Of these, the 50 percent 19 The three variations of CO2 emissions cost were $0, 20 $15, and $30 per ton, starting in 2025 and escalating at 21 5 percent per year. 22 were a base-case forecast and then a high and low 23 forecast. 24 forth in its Integrated Resource Plan, which includes 25 achieving 100 percent of SCE&G's goals for the The three load levels considered The company's base-case load forecast is set VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 766 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 distributed energy and energy efficiency programs. 2 high and low forecasts represented adjustment to the 3 base-case forecast of plus or minus 5 percent. 4 load-growth scenarios show that varying load up or down 5 5 percent does not significantly affect the value of the 6 scenarios. 7 distributed energy resources — for example, solar 8 generation — or more energy efficiency gains has the 9 same effect as reducing load growth. 10 The The This is relevant because including more In all 27 scenarios, the effect of canceling the 11 units and switching to natural gas generation increases 12 the costs to our customers by a significant amount. 13 most reasonable scenario is gas prices at a base cost 14 plus 50 percent and CO2 emissions at $15 per ton. 15 that scenario, canceling the units and switching to 16 natural gas would increase the costs to SCE&G customers 17 for electric service by about $374 million per year, on 18 average, over the 40-year planning horizon. 19 The In We also modeled how much the construction costs of 20 the units would have to increase in order to achieve a 21 breakeven point between completing the nuclear project 22 and canceling it. 23 future capital costs of the units would have to increase 24 from $7.67 billion to about $11.5 billion to reach the 25 breakeven point between the alternatives. In the most likely scenario, the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 This concludes my summary. 2 MR. WILLOUGHBY: 767 Thank you, Dr. Lynch. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 [PURSUANT TO PREVIOUS INSTRUCTION, THE 24 PREFILED DIRECT TESTIMONY OF JOSEPH M. 25 LYNCH, Ph.D., FOLLOWS AT PGS 768-784] VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 768 DIRECT TESTIMONY OF JOSEPH M. LYNCH ON BEHALF OF SOUTH CAROLINA ELECTRIC & GAS COMPANY DOCKET NO. 2016-223-E 1 Q. PLEASE STATE YOUR NAME, BUSINESS ADDRESS, AND CURRENT 2 POSITION WITH SOUTH CAROLINA ELECTRIC & GAS COMPANY 3 (“SCE&G” OR THE “COMPANY”). 4 A. My name is Joseph M. Lynch and my business address is 220 Operation 5 Way, Cayce, South Carolina. My current position with the Company is Manager 6 of Resource Planning. 7 Q. YOUR EDUCATIONAL BACKGROUND AND PROFESSIONAL EXPERIENCE. 8 9 DESCRIBE A. I graduated from St. Francis College in Brooklyn, New York, with a 10 Bachelor of Science degree in mathematics. 11 Carolina, I received a Master of Arts degree in mathematics, a Master of Business 12 Administration degree, and a Ph.D. in management science and finance. I was 13 employed by SCE&G as a Senior Budget Analyst in 1977 to develop econometric 14 models to forecast electric sales and revenue. 15 Supervisor of the Load Research Department. In 1985, I became Supervisor of 1 From the University of South In 1980, I was promoted to 769 1 Regulatory Research where I was responsible for load research and electric rate 2 design. In 1989, I became Supervisor of Forecasting and Regulatory Research, 3 and, in 1991, I was promoted to my current position of Manager of Resource 4 Planning. 5 Q. PLANNING? 6 7 WHAT ARE YOUR CURRENT DUTIES AS MANAGER OF RESOURCE A. As Manager of Resource Planning, I am responsible for producing 8 SCE&G’s forecast of energy, peak demand, and revenue; for developing the 9 Company’s generation expansion plans; and for overseeing the Company’s load research program. 10 11 Q. HAVE YOU 12 COMMISSION 13 PREVIOUSLY? 14 A. TESTIFIED OF BEFORE SOUTH THE CAROLINA PUBLIC SERVICE (“COMMISSION”) Yes. I have previously testified on a number of occasions before this Commission. 15 16 Q. 17 A. WHAT IS THE PURPOSE OF YOUR TESTIMONY? The purpose of my testimony is to present the results of two studies of the 18 cost to construct the V.C. Summer Units 2 and 3 (the “Units”) under the 19 Engineering, Procurement, and Construction Agreement (“EPC Contract”) as 20 amended by the October 27, 2015 Amendment (“Amendment”). The first study, 21 attached as Exhibit No. __ (JML-1), is a sensitivity study that analyzes the impact 22 of SCE&G’s option to transfer the majority of the remaining EPC Contract cost to 2 770 1 the Fixed Price category (the “Fixed Price” option) as provided by the 2 Amendment. This study compares the cost-to-complete construction of the Units 3 under several labor cost scenarios relative to the cost of the Fixed Price option. 4 The second study, attached as Exhibit No. __ (JML-2), is an economic study 5 comparing the impact on revenue requirements of continuing construction of the 6 Units as opposed to terminating the project and building natural gas combined- 7 cycle units instead. THE SENSITIVITY STUDY 8 9 Q. 10 A. WHAT IS THE STRUCTURE OF THE SENSITIVITY STUDY? The sensitivity study analyzes the impact of labor costs on the cost-to- 11 complete the Units. There are two primary components to labor costs: 1) the labor 12 cost per hour, and 2) the number of hours worked (specifically in this case, the 13 number of hours to complete construction of the Units). 14 Q. SENSITIVITY STUDY? 15 16 WHAT WAS THE LABOR COST PER HOUR USED IN THE A. The sensitivity study uses the labor cost per hour as of December 2015 17 calculated as an average in the categories of all direct craft workers, all indirect 18 craft workers, and all field non-manual workers. SCE&G projected these three 19 labor rates to increase by 2.9% per year over the remainder of the construction 20 period. This scenario is the “base case” or “2.9%” scenario. The 2.9% growth 21 rate was chosen because that is the 5-year compound growth rate of the Handy- 22 Whitman cost index in the “All Steam & Nuclear” category for the South Atlantic. 3 771 1 Also, by coincidence, it is the 5-year growth rate in construction labor costs 2 projected by our economic forecasting firm, IHS Global Insight, Inc. (“IHS”), over 3 the period 2016-2020 averaged over several categories of labor, again, for the 4 South Atlantic region of the country. 5 Q. SENSITIVITY STUDY? 6 7 HOW MANY DIFFERENT SCENARIOS DID SCE&G ANALYZE IN THE A. Exhibit No. __ (JML-1) reflects the results of my sensitivity study and 8 shows that four different labor growth rates for the completion of construction of 9 the Units from the current time to the Guaranteed Substantial Completion Dates (“GSCDs”) under the Amendment were analyzed. The four scenarios are: 10 11  The “no growth” or “0%” scenario represents a labor growth rate of 0%. 12 13  The “base case” or “2.9%” scenario represents a labor growth rate of 2.9%. 14 15  The “medium growth” or “5.0%”scenario represents a labor growth rate of 5.0%. 16 17  The “high growth” or “7.0%”scenario represents a labor growth rate of 7.0%. 18 Q. MOST LIKELY TO OCCUR? 19 20 WHICH LABOR RATE SCENARIO DOES SCE&G BELIEVE IS THE A. While there is much uncertainty in projecting future labor rates, SCE&G 21 believes the no growth scenario representing no growth in labor rates to be 22 unrealistically optimistic. 23 represents a strong growth in labor rates that is possible but similarly unlikely. On the other extreme, the high growth scenario 4 772 1 The base case scenario, corresponding to a 2.9% growth in labor rates, represents a 2 small premium over inflation which would be reasonable under most situations. 3 However, considering the skilled labor force required for this project and the need 4 for night time work hours, a faster growth rate is likely. Consequently, SCE&G 5 believes the most likely scenario for future labor rates is between the base case 6 (2.9%) and medium growth (5.0%) scenarios. 7 Q. HOW DID THE SENSITIVITY STUDY REFLECT VARIATIONS IN THE 8 NUMBER OF HOURS REQUIRED TO COMPLETE CONSTRUCTION 9 OF THE UNITS? 10 A. The productivity factor (“PF”) was the evaluation measure used in the 11 sensitivity study to reflect variations in the number of hours required to complete 12 construction of the Units. SCE&G defined the PF as the ratio of the number of 13 actual direct craft hours worked to complete a project compared to the number of 14 hours budgeted for that work. Six PF scenarios were studied: 1.00, 1.15, 1.25, 15 1.50, 1.75, and 2.00. 16 Q. 17 A. WHAT IS THE SIGNIFICANCE OF THE PF? The PF represents the efficiency with which direct craft laborers are 18 working to complete tasks. A PF of 1.00 means that the actual number of hours 19 required for a task was the exact number of hours budgeted for that task. For 20 example, if a certain welding job was budgeted to take 4.0 hours, then a PF of 1.25 21 would mean that the welding job actually took 5.0 hours to complete (4.0 hours × 22 1.25 PF = 5.0 hours). 5 773 1 Q. SINCE THE PF APPLIES TO DIRECT CRAFT LABOR HOURS ONLY, 2 HOW DOES THE SENSITIVITY STUDY ACCOUNT FOR INDIRECT 3 CRAFT LABOR COSTS AND FIELD NON-MANUAL LABOR COSTS? 4 A. Indirect craft labor supports direct craft labor by providing such things as 5 worker training, safety, warehouse staffing, and facilities maintenance. In order 6 for construction to be completed by the GSCDs, SCE&G estimates that 7 approximately 0.66 hours of indirect craft labor is required to support each hour of 8 direct craft labor. While the actual indirect-to-direct ratio may vary from 0.66, 9 SCE&G does not believe any variations would be significant and has kept this 10 ratio constant for the sensitivity study. Field non-manual labor represents the cost 11 of field engineers, quality assurance and control, administrative support, and 12 related non-manual labor. 13 GSCDs, SCE&G estimates that approximately 0.74 hours of field non-manual 14 labor is required to support each hour of direct craft labor. Thus, as was done with 15 indirect craft labor, the ratio of field non-manual labor-to-direct craft labor is fixed 16 at 0.74 for the study. Consequently, in the sensitivity study as direct craft labor 17 hours vary so does the number of indirect labor hours and field non-manual hours 18 as well as the associated cost for those categories of labor. In order for construction to be completed by the 6 774 1 Q. ARE YOU BEING CONSERVATIVE BY SETTING THE RATIO OF 2 INDIRECT LABOR HOURS TO DIRECT LABOR HOURS AT 0.66 AND 3 THE RATIO FOR FIELD NON-MANUAL LABOR AT 0.74? 4 A. Yes. These are very conservative assumptions in the sense that they are 5 low compared to historical experience with the project. 6 higher, the sensitivity study would reflect that the Fixed Price option would be 7 even more attractive. The historical average ratio of indirect-to-direct hours is 8 1.21 and of field non-manual-to-direct hours is 1.22. 9 assumes that Westinghouse Electric Company, LLC (“Westinghouse”) and Fluor 10 Corporation (“Fluor”) will be able to significantly reduce the need for non-direct 11 labor hours. If they are unable to do so, then the Fixed Price option becomes even 12 more valuable to SCE&G and its customers. 13 Q. The sensitivity study WHICH PF SCENARIO DOES SCE&G BELIEVE IS THE MOST LIKELY TO OCCUR? 14 15 If these ratios were A. The cumulative PF for this project through December 2015 is 16 approximately 1.75. With the reorganization of the Consortium and Fluor coming 17 onboard, there is ongoing effort to improve the PF of the project. However, 18 SCE&G believes the most likely PF range will be between 1.50 and 2.00. 7 775 1 Q. CAN THE COST-TO-COMPLETE THE UNITS UNDER THE DIFFERENT SCENARIOS BE SHOWN GRAPHICALLY? 2 3 A. Yes, it can. The following graph depicts the relationship between the cost- 4 to-complete on the vertical axis and the PF value on the horizontal axis with a 5 reference line being added to show the cost of the Fixed Price option. Cost-to-Complete the Units 4.400 4.200 $ Billion 4.000 3.800 3.600 Fixed Price Option $3.345 Billion 3.400 3.200 3.000 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00 Productivity Factor ("PF") 0.0% 6 Q. 7 A. 2.9% 5.0% 7.0% WHAT CAN BE CONCLUDED FROM THIS GRAPH? By noting where the reference line for the cost of the Fixed Price option 8 crosses each of the cost-to-complete lines, the breakeven value for the PF can be 9 observed. For example, under the 2.9% labor cost rate scenario, the cost-to- 10 complete is represented by the second line up from the bottom (the red line). The 11 breakeven PF value under this scenario is 1.130. This means that if Westinghouse 8 776 1 can achieve a PF value less than 1.130 and maintain the labor rates in the base 2 case scenario, then the Fixed Price option will increase cost to SCE&G’s 3 customers beyond the fixed price. On the other hand if the PF value is greater 4 than 1.130, then the Fixed Price option lowers costs to SCE&G customers. The 5 breakeven PF values for the 0%, 2.9%, 5.0%, and 7.0% scenarios are 6 approximately 1.248, 1.130, 1.049, and 0.976 respectively. 7 Q. 8 A. WHAT DO YOU CONCLUDE FROM THE SENSITIVITY STUDY? Table A of the sensitivity study contains the results of the sensitivity study. 9 For each combination of PF and labor cost growth rate, the table shows the cost- 10 to-complete the Units as a percentage change to the Fixed Price option. When 11 focusing on the most likely range of 2.9% to 5.0% in labor rate growth rates and 12 the PF falling between 1.50 and 2.00, SCE&G estimates that the cost-to-complete 13 the Units will be between 10.9% and 29.3% higher than the Fixed Price option. 14 While Westinghouse may be able to make significant improvements over past 15 performance, SCE&G believes it is in the best interest of its customers to choose 16 the Fixed Price option and remove the price uncertainty that exists without it. 17 THE ECONOMIC STUDY 18 Q. STUDY. 19 20 PLEASE DESCRIBE THE METHODOLOGY USED IN THE ECONOMIC A. The economic study uses the same methodology and structure as the similar 21 study presented to the Commission in 2015 in Docket No. 2015-103-E. The study 22 is based on modeling techniques that are widely accepted in the utility industry to 9 777 1 determine the relative cost and value of alternative approaches to meeting 2 customers’ electricity needs. The models used in the study include information 3 about system loads, load shapes (the number of hours each year that specific load 4 levels are reached), the available units, the ramp rates of units (the speed at which 5 units can be brought to various levels of production), the availability factors of the 6 units (how often units are off-line or have mechanical or environmental limits on 7 their generating capacity), the fuel costs of units (including environmental costs of 8 burning fuel and disposing of ash or other fuel wastes), the fuel efficiency of units 9 (how much fuel cost is incurred per megawatt (MW) of energy produced), and the 10 capital and operating costs of any new units including depreciation, abandonment 11 costs, salvage cost, production tax credits and other capital related costs or 12 benefits. Each scenario includes a different set of assumptions about one or more 13 variables. In this case, the models dispatched the system year-by-year for 40 years 14 to determine the relative cost to customers under each scenario considered. 15 Q. 16 A. WHAT SCENARIOS WERE MODELED? The two alternatives—completing construction of the Units compared to 17 terminating construction of the Units and replacing them with combined-cycle gas 18 plants—were analyzed under 27 scenarios reflecting different assumptions 19 concerning natural gas prices, carbon dioxide (“CO2”), emissions costs, and future 20 load growth on our system. 10 778 1 Q. 2 A. WHAT NATURAL GAS PRICE SCENARIOS WERE MODELED? The three natural gas price scenarios modeled were the Company’s base 3 case forecast of future natural gas prices, a 50% higher gas price and a 100% 4 higher gas price forecast. 5 Q. CHOSEN? 6 7 WHY WERE THESE THREE NATURAL GAS PRICE SCENARIOS A. The base case is a forecast that the Company compiles using reported New 8 York Mercantile Exchange (“NYMEX”) gas contracts. Future prices for contracts 9 for three years are used. 10 Beginning in year four, the forecast escalates the NYMEX price using escalation rate forecasts provided by IHS. 11 SCE&G uses the base case forecast as a starting point in modeling because 12 it is simple, objective, and less subject to bias from subjective considerations. But 13 this is also a limitation. The base case gas price may ignore important factors that 14 require subjective judgment and are not reflected in current NYMEX prices or in 15 escalation forecasts. In short, fossil fuel prices, especially natural gas prices, are 16 notoriously difficult to forecast with confidence. For this reason, SCE&G usually 17 conducts sensitivity analyses particularly with respect to future natural gas prices. 18 Therefore, in addition to the base case gas price forecast, two other price scenarios 19 were developed: one with 50% higher prices than the base case and a second with 20 100% higher prices. Higher gas prices seem very reasonable when you consider 21 ongoing and future changes that will put upward pressure on natural gas prices. 22 The most obvious of these changes include: 1) significantly increased demand in 11 779 1 the power generation sector caused by the retirement of coal plants due to the 2 Environmental Protection Agency’s (“EPA”) Mercury and Air Toxics Standards, 3 or MATS, regulations and the Clean Power Plan, as well as the practical inability 4 to add coal capacity in the future; 2) the opening of the domestic gas market to 5 higher world prices through liquefied natural gas, or LNG, exportation; 3) the 6 increasing regulatory scrutiny of “fracking” from an environmental point of view 7 which will tend to increase the cost of production and reduce the supply of gas; 8 and 4) the fact that burning natural gas emits CO2 into the atmosphere and that the 9 gas industry will likely come under environmental regulations similar to those 10 crippling the coal industry. The Energy Information Administration (“EIA”) in 11 the early release of their 2016 Annual Energy Outlook provides another scenario 12 of forecasted natural gas prices and their forecast is shown in the study as a point 13 of comparison. The EIA forecast closely approximates SCE&G’s 50% higher gas 14 price forecast. 15 Q. 16 A. WHAT CO2 PRICE SCENARIOS WERE MODELED? The three variations of CO2 emission costs were $0, $15, and $30 per ton 17 starting in 2025 and escalating at 5% per year. While the EPA’s Clean Power Plan 18 is currently subject to a judicial stay, for the purposes of this study, SCE&G 19 assumed that the EPA’s Clean Power Plan goes into effect as written. Under the 20 scenario of completing the Units, SCE&G assumes that the State of South 21 Carolina chooses the “rate-based” compliance option in which each electric 22 generating unit would be required to meet an emission rate target. Under a rate12 780 1 based compliance plan the new nuclear units would count towards compliance and 2 would generate sufficient emission rate credits such that SCE&G would not be 3 required to incur any additional CO2 compliance costs under the Clean Power 4 Plan. Therefore the cost of CO2 emissions to SCE&G and its customers will be 5 zero. 6 If SCE&G does not complete the Units but instead builds natural gas 7 combined-cycle plants, then the Company assumes the State will choose the 8 “mass-based” compliance option where an electric generating unit would be 9 allocated a CO2 emission cap. Under this option, SCE&G will be subject to a CO2 10 emission limit and will incur costs to comply. It is uncertain what the cost of CO2 11 emissions will be in the future which is the reason for studying several levels of 12 cost. 13 If SCE&G does not complete the Units but instead builds natural gas 14 combined-cycle plants, and if the State should select the rate-based compliance 15 option (which SCE&G believes to be unlikely in this scenario), then SCE&G and 16 its customers will be subject to CO2 emission costs. These costs also will be 17 substantially greater than they would have been if the State had selected the mass- 18 based compliance option instead. 19 Q. 20 A. WHAT LOAD GROWTH SCENARIOS WERE MODELED? The three load levels considered were the Company’s base case load 21 forecast and then a low and high forecast which adjusted the forecasted load plus 22 and minus 5%. 13 781 1 Q. GROWTH SCENARIOS? 2 3 WHAT IS THE VALUE OF INCLUDING THESE DIFFERENT LOAD A. The load growth scenarios show that varying load up or down 5% does not 4 significantly affect the value of the scenarios. This is relevant because including 5 more distributed energy resources (solar generation) or more energy efficiency 6 gains has the same effect as reducing load growth. Our base case forecast already 7 includes the impact of currently mandated distributed energy resources and 8 currently planned energy efficiency investments. There may be other important 9 reasons to increase investment in these resources. But the study shows that 10 increasing these resources by a substantial amount does not change the value of 11 the Units to customers in a meaningful way. 12 Q. 13 A. WHAT WERE THE RESULTS OF THE STUDY? The study shows that in all 27 scenarios, including base gas price and $0 14 carbon costs, the effect of cancelling the Units and switching to natural gas 15 generation increases the costs to our customers by a significant amount. The most 16 reasonable scenario is gas prices at base cost plus 50% and CO2 emissions at $15 17 per ton. In that scenario, cancelling the Units and switching to natural gas would 18 increase the cost to SCE&G’s customers for electric service by $374 million per 19 year on average over the 40-year planning horizon. 14 782 1 Q. INCREASE IN THE COST-TO-COMPLETE THE NUCLEAR UNITS? 2 3 HAVE YOU ANALYZED THE SENSITIVITY OF RESULTS TO AN A. Yes. My analysis is reflected in Exhibit No. ___ (JML-3), which shows, 4 based on current circumstances, the amount nuclear construction costs would need 5 to increase in order to achieve a breakeven point between completing the nuclear 6 project and cancelling it. This study includes the updates to capital costs that are 7 before the Commission in this proceeding. Thus, the total cost of completing the 8 nuclear plants is assumed to be about $7.67 billion (SCE&G’s share of the total 9 cost). Exhibit No. ___ (JML-3) shows how much this cost would have to increase 10 to make the incremental revenue requirements of cancelling the nuclear project 11 equal to those of completing it. The most reasonable scenario reflects base gas 12 cost plus 50% and $15 per ton CO2. In that scenario, the future capital costs of the 13 Units would have to increase by about $3.83 billion above current forecasts to 14 overcome the benefit of $374 million per year from completing the Units at their 15 current cost. Stated differently, from where we are today, the total construction 16 cost would have to increase from $7.67 billion to about $11.50 billion to reach the 17 breakeven point between the alternatives. 15 783 CONCLUSION 1 2 Q. BASED UPON THE STUDIES AND ANALYSES YOU HAVE 3 CONDUCTED IN CONNECTION WITH THIS PROCEEDING, WHAT IS 4 YOUR EXPERT OPINION AS TO WHETHER SCE&G SHOULD SELECT 5 THE FIXED PRICE OPTION? 6 A. It is my expert opinion that the Company should exercise the Fixed Price 7 option. As reflected in Exhibit No. ___ (JML-1), labor costs will be the principal 8 driver of changes in what Westinghouse could charge SCE&G to complete the 9 project. Given the most likely range of potential variables for labor productivity 10 and labor price rates, the cost to SCE&G and its customers to complete the Units if 11 the Fixed Price option is not chosen will be substantially greater than the Fixed 12 Price option. Rather, the Fixed Price option will save customers between 10.9% 13 and 29.3% of the cost of the project. Accordingly, it is my opinion that the Fixed 14 Price option is reasonable and prudent and that the Company should select this 15 option as being in the best interest of SCE&G and its customers. 16 Q. WHAT IS YOUR EXPERT OPINION AS TO WHETHER THE COMPANY 17 SHOULD TERMINATE CONSTRUCTION OF THE UNITS AND PURSUE 18 A NATURAL GAS STRATEGY TO MEET FUTURE GENERATION 19 NEEDS? 20 A. It is my expert opinion that abandoning construction of the Units at this 21 time and pursuing a natural gas generation strategy for base load generation needs 22 would be imprudent and would result in significantly increased costs to customers. 16 784 1 The study presented in Exhibit No. ___ (JML-2) demonstrates that the Company’s 2 nuclear strategy remains the most prudent and lowest cost strategy designed to 3 meet our customers’ needs for base load generation in the future. In fact, based 4 upon my analysis, completing construction of the Units will result in an estimated 5 cost savings of $374 million per year for 40 years. For these reasons, in my 6 opinion, the Company’s most prudent course is to continue constructing the Units 7 as previously authorized and approved by the Commission. 8 Q. 9 A. DOES THAT CONCLUDE YOUR TESTIMONY? Yes, it does. 17 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions MR. WILLOUGHBY: 1 785 Next, Mr. Chairman, I will 2 direct my attention to Mr. Kochems and ask that he 3 summarize his testimony, as well. 4 BY MR. WILLOUGHBY: 5 Q Mr. Kochems, please state your full name for the record. 6 A [KOCHEMS] My name is Kevin Kochems. 7 Q And by whom are you employed, and in what capacity? 8 A [KOCHEMS] I'm Manager of the Nuclear Financial Administration for SCANA. 9 10 Q In connection with this proceeding, Mr. Kochems, did you 11 cause to be prepared and prefiled direct testimony 12 consisting of 45 pages? 13 A [KOCHEMS] I have. 14 Q Are there any corrections or changes to be made this morning? 15 16 A [KOCHEMS] There are not. 17 Q If I asked you the questions that appear in your direct testimony, would your answers be the same? 18 19 20 A [KOCHEMS] They would. MR. WILLOUGHBY: Mr. Chairman, we would move 21 the prefiled direct testimony of Mr. Kochems into 22 the record, as if given orally from the stand. 23 CHAIRMAN WHITFIELD: Okay, Mr. Willoughby. 24 Mr. Kochems' prefiled testimony will be entered 25 into the record as if given orally from the stand. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 786 [See pgs 793-837] 1 2 BY MR. WILLOUGHBY: 3 Q Mr. Kochems, attached to your testimony, I believe, 4 there were six exhibits: Exhibits KRK-1 through KRK-6. 5 Is that correct? 6 A [KOCHEMS] That is correct. 7 Q Are there any corrections or changes to be made to those exhibits? 8 9 A [KOCHEMS] No, there are not. MR. WILLOUGHBY: 10 Mr. Chairman, we would move 11 into the record as the next hearing exhibit the six 12 exhibits attached to Mr. Kochems' prefiled direct 13 testimony. CHAIRMAN WHITFIELD: 14 Mr. Kochems' Exhibits 15 KRK-1 through -6 will be entered into the record as 16 Hearing Exhibit No. 13, Mr. Willoughby. 17 [WHEREUPON, Exhibit No. 13 was marked and 18 received in evidence.] MR. WILLOUGHBY: 19 Thank you, very much, Mr. Chairman. 20 21 BY MR. WILLOUGHBY: 22 Q Mr. Kochems, this is your first time testifying, I believe; is that correct? 23 24 A [KOCHEMS] That is correct. 25 Q Well, I think, in keeping with the tradition at the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 787 1 Commission, I'm sure the nonsettling parties will have 2 very gentle questions to ask of you today. [Laughter] 3 Have you prepared a summary of your testimony, Mr. 4 Kochems? 5 6 A [KOCHEMS] I have. 7 Q Please deliver that at this time. 8 A [KOCHEMS] Good morning, Chairman Whitfield, and members 9 of the Commission. 10 The purpose of my testimony is to present the 11 accounting, budgeting, and forecasting information 12 related to the updates in schedule costs proposed in 13 this proceeding. 14 As part of my prefiled direct testimony, I sponsor 15 Exhibit KRK-1, which is an updated schedule of capital 16 costs for construction on the units. 17 sponsoring KRK-2, which compares the updated capital- 18 cost schedule to the schedules approved in the initial 19 BLRA order. 20 CHAIRMAN WHITFIELD: 21 you in right. 22 little closer to you. 23 WITNESS KOCHEMS: 24 25 I'm also Mr. Kochems, let me break Scoot that the microphone just a Sorry about that [indicating]. CHAIRMAN WHITFIELD: Because I don't think VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 2 788 they can hear you in the back. WITNESS KOCHEMS: All right. 3 start over, or can I keep on? 4 CHAIRMAN WHITFIELD: You want me to I think you can go 5 forward from where you are, I think, but just keep 6 it a little closer. 7 WITNESS KOCHEMS: Okay. Exhibit KRK-3 8 summarizes the changes in the forecasted costs 9 approved in Order 2015-661 and sets forth the 10 11 updated escalation indices. As discussed in my testimony, in October 2015 12 SCE&G and Santee Cooper were successful in 13 finalizing negotiations of an agreement to amend 14 the EPC contract. 15 claims between the parties, including claims 16 associated with labor productivity, inefficiency 17 and delay costs, disputed change orders and notices 18 of change, and a number of other disputed claims. 19 In sum, the amendment provides additional value to 20 the project by resolving pending disputes worth 21 millions of dollars to the project, for amounts 22 substantially less than the amounts in dispute, and 23 for amounts that the company believes is most 24 advantageous to it and its customers in aggregate. 25 Further, and importantly, the amendment The amendment settled many VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 789 1 eliminates calendar-based payments and ties all 2 future payments to demonstrated construction 3 progress. 4 guaranteed substantial completion dates of the 5 units are August 31, 2019, for Unit 2, and August 6 31, 2020, for Unit 3. 7 guaranteed substantial completion date for a unit, 8 the amendment obligates Westinghouse to pay SCE&G 9 liquidated damages that accrue on a daily basis. The amendment also provides that the If Westinghouse misses the 10 The amendment also ties significant financial 11 incentives to SCE&G's receipt of federal production 12 tax credits. 13 The amendment, which settles most of the 14 outstanding disputes and provides a number of other 15 benefits to the project, increases the EPC contract 16 price by $137.5 million and reversed a credit of 17 approximately $85.5 million for liquidated damages 18 that had been included in prior cost estimates. 19 total, the amendment results in a net increase to 20 the EPC contract price of approximately $223 21 million. 22 by SCE&G and Santee Cooper, substantially all 23 remaining target, time-and-materials, and firm 24 costs would be transferred to the fixed-price 25 category. In Westinghouse also agreed that, if elected Under the fixed-price option, the price VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 790 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 under the EPC contract to complete the units would 2 be fixed at approximately $3.345 billion after June 3 30, 2015, with a limited number of scopes of work 4 being excluded from the fixed-price. 5 $1.8 billion in costs that would otherwise be 6 subject to escalation under the EPC contract would 7 be shifted to the fixed-price category. 8 result, approximately 98.5 percent of the project 9 would not be subject to escalation resulting from Approximately As a 10 inflation associated with construction of the 11 project, and going forward, Westinghouse will bear 12 this risk. 13 increase of $505.5 million to the total cost of the 14 project, in addition to the 137.5 adjustment in 15 price and the reversal of liquidated damages credit 16 in the amount of $85.5 million. 17 The fixed-price option represents an As part of its Petition, SCE&G also asked for 18 approval of 11 change orders, which increases the 19 capital costs of the project by approximately $52.5 20 million. 21 updated scopes of work that are necessary to update 22 security requirements; integrate security systems; 23 add space for anticipated staffing levels and 24 support requirements; augment training staff; 25 escrow software and documentation; enhance, These change orders address new and VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 791 1 acquire, and extend access to hardware and software 2 for the project; study the site drainage system; 3 provide ITAC maintenance; and update the location 4 of two transmission structures. 5 its Petition, owner's costs have been updated to 6 reflect the additional costs related to the change 7 in the guaranteed substantial completion dates and 8 other costs principally associated with the 9 amendment, in the amount of $20.8 million. 10 Also as part of Since the prefiling of my direct testimony in 11 this proceeding and following a detailed and 12 thorough audit by ORS, certain parties to this 13 proceeding reached a settlement agreement in this 14 case, which is more fully discussed by Company 15 Witness Kevin Marsh. 16 the company, SCE&G has agreed to a moratorium on 17 future updates, capped certain costs unresolved by 18 the amendment, and reduced its request in this 19 proceeding for change orders to $32.58 million. Among the concessions made by 20 Believing that the amendment is in the best 21 interest of its customers and the company, SCE&G 22 requests that the Commission approve the modified 23 and updated capital-cost schedule attached as 24 Exhibit 2 to the settlement agreement as the 25 approved schedule of capital costs for completion VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 792 1 of the units, subject to adjustment for escalation 2 and that of AFUDC as provided for in Order No. 3 2009-104(A), and subject to the terms of the 4 settlement. 5 This concludes my summary. 6 MR. WILLOUGHBY: 7 Thank you, very much, Mr. Kochems. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 [PURSUANT TO PREVIOUS INSTRUCTION, THE 24 PREFILED DIRECT TESTIMONY OF KEVIN R. 25 KOCHEMS FOLLOWS AT PGS 793-837] VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 793 DIRECT TESTIMONY OF KEVIN R. KOCHEMS ON BEHALF OF SOUTH CAROLINA ELECTRIC & GAS COMPANY DOCKET NO. 2016-223-E 1 Q. 2 A. PLEASE STATE YOUR FULL NAME AND BUSINESS ADDRESS. My name is Kevin R. Kochems. My business address is Highway 215 & Bradham Boulevard, Jenkinsville, South Carolina. 3 4 Q. 5 A. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? I am employed by SCANA Services, Inc. as Manager of Nuclear Financial 6 Administration. 7 Company (“SCE&G” or the “Company”). 8 Q. DESCRIBE YOUR EDUCATIONAL BACKGROUND AND BUSINESS EXPERIENCE. 9 10 I am testifying on behalf of South Carolina Electric & Gas A. I am a 1998 graduate of Canisius College, with a Bachelor of Science 11 Degree in Accounting. I worked for Safety-Kleen Inc. for seven years in the 12 Accounting and Internal Audit Department. In 2002, I joined SCANA’s Internal 13 Audit Department. After four years in Internal Audit, I accepted an accounting 14 position with SCE&G’s New Nuclear Project. In 2011, I was promoted to my 15 current level as Manager of Nuclear Financial Administration. 1 794 1 Q. 2 A. HAVE YOU TESTIFIED BEFORE THIS COMMISSION IN THE PAST? No, this is my first opportunity to appear before the Public Service Commission of South Carolina (the “Commission”). 3 4 Q. 5 A. WHAT IS THE PURPOSE OF YOUR TESTIMONY? The purpose of my testimony is to present the accounting, budgeting and 6 forecasting information related to the updates and revisions in cost schedules 7 proposed in this proceeding. As part of my testimony, I sponsor the following 8 exhibits: 9 • Exhibit No.__ (KRK-1), which is an updated schedule of capital cost for 10 construction of V.C. Summer Nuclear Station Units 2 and 3 (the “Units”) 11 that are jointly owned by SCE&G and the South Carolina Public Service 12 Authority (“Santee Cooper”). This exhibit is based on the October 27, 13 2015 Amendment (the “Amendment”) to the Engineering, Procurement, 14 and Construction Agreement (“EPC Contract”) under which the Units are 15 being built. If approved by the Commission, this schedule would become 16 the approved capital cost schedule for the Units under the Base Load 17 Review Act (“BLRA”), taking the place of and superseding Exhibit F as 18 approved in Order No. 2009-104(A), Order Exhibit No. 2 as approved in 19 Order No. 2010-12, Order Exhibit No. 1 as approved in Order No. 2011- 20 345, Order Exhibit No. 1 as approved in Order No. 2012-884, and Order 21 Exhibit No. 2 as approved in Order No. 2015-661. 2 795 1 • Exhibit No. __ (KRK-2), which shows the relative changes to the capital 2 cost schedule comparing the updated schedule of capital cost to the 3 schedule approved in Order No. 2009-104(A) and updated by Order Nos. 4 2010-12, 2011-345, 2012-884, and 2015-661. 5 • Exhibit No. __ (KRK-3), which provides a summary reconciliation of the 6 changes in forecasted cost shown in Exhibit No. __ (KRK-1) to those 7 approved in Order No. 2015-661, as well as a comparison of the escalation 8 indices in effect under Order No. 2015-661 to those currently in effect. 9 • Exhibit No. __ (KRK-4), which summarizes the original capital cost 10 approved in Order No. 2009-104(A), each of the subsequent capital cost 11 schedule changes, and the change requested in this proceeding broken 12 down according to the nine cost categories recognized in the Commission’s 13 BLRA orders. 14 • Exhibit No. __ (KRK-5), which shows the changes in forecasted cost 15 broken down according to the nine cost categories recognized in the 16 Commission’s BLRA orders, as well as the changes in cost broken down 17 into the categories and subcategories of the previously described cost 18 adjustments. 19 • Exhibit No. __ (KRK-6), which reflects the increased cost for the New 20 Nuclear Development (“NND”) and non-NND cost centers that SCE&G 21 anticipates will charge cost to the project and which identifies the labor, 22 non-labor, and total cost impacts for each functional area. 3 796 1 Q. WITH REGARD TO THE CAPITAL COST SCHEDULE? 2 3 WHAT REQUEST IS THE COMPANY MAKING IN THIS DOCKET A. SCE&G is requesting that the Commission approve Exhibit No. __ (KRK- 4 1) as the updated and approved capital cost schedule for the construction of the 5 Units going forward. 6 Q. 7 A. WHAT IS THE AUTHORITY FOR THIS REQUEST? As the South Carolina Supreme Court recognized in its opinion in South 8 Carolina Energy Users Comm. v. South Carolina Pub. Serv. Comm’n, 388 S.C. 9 486, 697 S.E.2d 587 (2010), changes to the approved capital cost schedule are 10 authorized under S.C. Code Ann. § 58-33-270(E). 11 modifications to the approved schedule of capital cost are appropriate so long as 12 they are not the result of imprudence by the utility. 13 Q. HAS THE COMPANY PREVIOUSLY Under that statute, REQUESTED THAT THE 14 COMMISSION APPROVE CHANGES TO THE CAPITAL COST 15 SCHEDULE OF THE PROJECT? 16 A. Yes. The Company has requested approval to revise the capital cost 17 schedule on four prior occasions, in Docket Nos. 2009-293-E, 2010-376-E, 2012- 18 203-E, and 2015-103-E. With certain adjustments proposed by the South Carolina 19 Office of Regulatory Staff (“ORS”), the Commission approved the previously 20 requested changes and determined that the adjustments were reasonable and 21 prudent. Exhibit No. __ (KRK-4) summarizes the original capital cost approved in 22 Order No. 2009-104(A), each of the four subsequent capital cost schedule 4 797 1 changes, and the change requested in this proceeding broken down according to 2 the nine cost categories recognized in the Commission’s BLRA orders. 3 Q. PLEASE DESCRIBE HOW YOU WILL DISCUSS THE ADJUSTMENTS 4 TO THE CAPITAL COST SCHEDULE SCE&G SEEKS APPROVAL TO 5 MAKE IN THIS PROCEEDING. 6 A. My testimony will address each of the adjustments the Company proposes 7 to make in this proceeding. These changes, which are shown in Chart A below, 8 revise, modify, and update the schedules that were approved in Order No. 2009- 9 104(A) and updated in Order Nos. 2010-12, 2011-345, 2012-884, and 2015-661. 10 After adjusting the Total Project Escalation costs to reflect SCE&G’s election of 11 the option negotiated in the Amendment to transfer the majority of the remaining 12 EPC Contract costs to the Fixed Price category (the “Fixed Price” option) and 13 after accounting for Allowance for Funds Used During Construction (“AFUDC”) 14 as provided for in Order No. 2009-104(A), the gross construction cost of the Units 15 is projected to increase approximately $846.6 million in current dollars. 1 [CHART A IS ON THE FOLLOWING PAGE] 1 Unless otherwise specified, all cost figures in this testimony are stated in 2007 dollars and reflect SCE&G’s share of the cost of the Units. The exception is the dollar amounts of liquidated damages and completion incentives, which are stated in future dollars at SCE&G’s 55% share. 5 798 Chart A 1 SUMMARY OF COST ADJUSTMENTS ($000,000) 1 2 3 4 5 EPC Contract Cost Amendment Fixed Price option Liquidated Damages (LDs) (Reverse Credit) Change Orders Total EPC Cost Changes 6 Owner’s Costs Principally Associated with Amendment 7 Total Request (EPC and Owner’s Costs) 8 9 Escalation AFUDC 137.5 505.5 85.5 52.5 781.1 20.8 801.9 2.3 42.4 10 Increase in Gross Construction Cost (Current $) 846.6 Note: Totals may not add due to rounding 2 Q. UPDATES? 3 4 WHAT IS THE EFFECT OF THESE PROPOSED MODIFICATIONS AND A. The effect of these modifications and updates on the nine cost categories 5 recognized in the Commission’s BLRA orders and the categories and 6 subcategories of the previously described cost adjustments is reflected in Exhibit 7 Nos. __ (KRK-4) and __ (KRK-5). As shown in Exhibit No. __ (KRK-1), these 8 modifications and updates, along with changes in escalation rates and AFUDC, 9 increase the gross construction cost of the Units from $6.83 billion, as projected in 10 the financial schedules that were approved in Order No. 2015-661, to $7.67 11 billion. 6 799 1 The current projections include substantial reductions to the forecasts of 2 escalation impacts to reflect the Company’s selection of the Fixed Price option, 3 subject to the Commission’s approval in this proceeding. I would note that these projections do not include any unidentified or 4 unitemized Owner’s contingency funds. 5 6 Q. CHANGES IN THE ESCALATION RATES? 7 8 WHY IS THE CAPITAL COST OF THE PROJECT AFFECTED BY A. As discussed by Company witnesses in Docket No. 2008-196-E and 9 subsequent update proceedings, the cost for the project is broken down into nine 10 cost categories. Currently, certain cost categories are escalated using the Gross 11 Domestic Product, or GDP, Chained Price Index and the following Handy- 12 Whitman indices for the South Atlantic Region: All Steam & Nuclear Generation 13 Plant Index and Total Transmission Plant Index. If the Fixed Price option is 14 approved by the Commission, approximately 98.5% of the cost-to-complete the 15 project under the Amendment to the EPC Contract will no longer be subject to 16 escalation; however, certain Change Orders, Time and Materials Allowances, 17 Owner’s Cost, and Transmission Cost will continue to be adjusted using the 18 appropriate indices approved by the Commission in Order No. 2009-104(A). 19 Exhibit No. __ (KRK-3) reflects the escalation rates as of January 2016. 7 800 I. 1 2 Q. DID THE PROJECT AND SCE&G’S CUSTOMERS BENEFIT FROM THE AMENDMENT TO THE EPC CONTRACT? 3 4 AMENDMENT TO THE EPC CONTRACT A. Yes, and the benefits are substantial. As discussed by Company Witness 5 Byrne, SCE&G and Santee Cooper were successful in negotiating an agreement 6 on October 27, 2015, to amend the EPC Contract. The Amendment allowed 7 Chicago Bridge & Iron (“CB&I”) to exit the project but required Westinghouse 8 Electric Company, LLC (“Westinghouse”) to take sole responsibility for the 9 project going forward. This change benefitted the project because it removed the 10 threat of disruption due to deteriorating relationships between Westinghouse and 11 CB&I (collectively, the “Consortium”) and placed ultimate responsibility for 12 design, engineering, and construction with a single entity. 13 Amendment resolved most of the outstanding disputes under the EPC Contract, 14 including disputes concerning labor productivity and inefficiency related costs, 15 most of the disputed change orders and notices of changes, and milestone and 16 progress payments. The resolution of these disputes avoided potential litigation 17 that would have been costly and disruptive to the project. 18 Q. WAS SCE&G ABLE TO QUANTIFY THE VALUE OF RESOLVING MOST OF THE CLAIMS IN DISPUTE? 19 20 In addition, the A. SCE&G was able to quantify values for resolving many of the claims, but 21 not for all of them. The claims in dispute generally fit into two broad categories: 22 1) claims that had progressed to the point where the amounts in dispute could be 8 801 1 reasonably estimated and valued, and 2) claims that had been asserted but had not 2 progressed to the point where the amounts could be estimated and valued. 3 For those claims that had sufficiently progressed so that the amounts in 4 dispute could be reasonably estimated and a value to the Company and its 5 customers could be determined, SCE&G quantified the total value of settling all of 6 those claims to be approximately $224.4 million. Chart B below summarizes 7 SCE&G’s analysis in quantifying the value of many of the claims settled through 8 the negotiations that resulted in the execution of the Amendment. Chart B 9 ANALYSIS OF QUANTIFIABLE ITEMS RESOLVED BY AMENDMENT ($000,000) 1 2 Productivity, Inefficiency, and Project Delay Withheld Payments Excess Escalation Due to Delay 3 Disputed Change Orders and Notices of Change Regulatory and Change in Law Claims 4 5 6 7 8 9 10 8.7 3.6 45.9 Other Target vs. Firm As-Built vs. As-Designed Plans Warranties Change Orders Unpaid Through June 30, 2015 Other Quantifiable Claims SCE&G Claims Against Westinghouse for Disputed Payments (39.4) Total 224.4 Note: Totals may not add due to rounding 9 47.5 27.5 66.0 60.3 4.3 802 1 Q. 2 A. PLEASE EXPLAIN HOW SCE&G DETERMINED THESE VALUES. In regard to SCE&G’s claims against the Consortium associated with poor 3 labor productivity, inefficiency, and delay cost, the Company had withheld 10% of 4 a number of invoices totaling $8.7 million. See Line No. 1 of Chart B. In its 5 determination of the value of resolving the outstanding disputes with the 6 Consortium, SCE&G credited to its valuation 100% of these withheld payments, 7 and estimated that the remaining 90% of these disputed payments were resolved 8 equally between the parties. SCE&G believes this estimation is reasonable given 9 the challenges and uncertainty of completely prevailing on these issues. 10 With respect to Westinghouse’s claims, SCE&G was able to determine the 11 value of 12 of the change orders and other claims listed in Exhibit A to the 12 Amendment, which had been invoiced and quantified. Although the other 18 13 items listed on Exhibit A to the Amendment included some potentially large 14 claims by Westinghouse, they were not assigned a specific value because SCE&G 15 did not receive sufficient information to quantify the amount in dispute. 16 addition, Westinghouse had issued to SCE&G 35 outstanding notices of change 17 over the course of the project that had not advanced to the point of being listed as 18 definitive claims on Exhibit A to the Amendment. Therefore, no specific value 19 was assigned to any of these claims. 20 account for these unquantifiable items, its valuation of the Amendment is 21 conservative and substantially below the true value of resolving all of the claims 22 that were settled by the Amendment. 10 In Because SCE&G’s valuation does not 803 1 Q. PLEASE EXPLAIN THE KEY POSITIONS ASSERTED BY THE 2 PARTIES REGARDING THE DISPUTES ABOUT POOR LABOR 3 PRODUCTIVITY, INEFFICIENCY, AND PROJECT DELAY. 4 A. As I previously mentioned, SCE&G had withheld payments for labor 5 productivity and inefficiency reasons which totaled $8.7 million. See Line No. 1 6 of Chart B. 7 Consortium’s actual labor productivity and efficiency had been equal to the ratios 8 that were assumed in the original cost projection for the project. We also asserted 9 that 14% of select invoices were a result of delays, which were not the fault of 10 SCE&G. SCE&G disputed the difference between the actual and recalculated 11 invoices and withheld 10% of this amount as allowed by the EPC Contract. 12 However, the Consortium argued that there was no specific contractual provision 13 requiring the Consortium to meet the productivity and efficiency ratios used in 14 preparing the original cost projections and that the referenced ratios were only 15 intended to serve as an estimate. Additionally, SCE&G recalculated labor invoices assuming the 16 Increased escalation cost due to delay to the structural modules were also 17 significantly disputed. While Fixed and Firm costs are not impacted by a delay in 18 the project, the escalation paid on the Firm costs would increase as payment 19 milestones are delayed. 20 recalculated the escalation associated with select milestones that were impacted 21 due to the structural module delay, and withheld 10% of this difference as allowed As with the process described above, SCE&G 11 804 1 by the EPC Contract. The amount of escalation withheld totaled approximately 2 $3.6 million. See Line No. 2 of Chart B. 3 SCE&G also took the position that the EPC Contract contained terms 4 requiring the Consortium to construct the Units using “Good Industry Practices,” 5 which is a defined term generally encompassing “the practices, methods, standards 6 and acts engaged in and generally acceptable to the nuclear power industry in the 7 United States.” SCE&G asserted that the poor labor productivity and inefficiency 8 experienced on the project compared to the initial estimates were the result of the 9 Consortium’s failure to use Good Industry Practices. The Consortium argued that 10 it was following Good Industry Practices and that the failure to meet projected 11 productivity and efficiency ratios was the result of things beyond its control such 12 as the newness of the AP1000 design, delays inherent to the Nuclear Regulatory 13 Commission’s (“NRC”) new licensing structure, the lack of an established supply 14 chain for new nuclear construction, and similar matters. 15 Q. 16 A. DID THE AMENDMENT RESOLVE THESE ISSUES? Yes. Disputing these amounts was highly effective in bringing financial 17 pressure on the Consortium to address its poor productivity and inefficiency 18 issues. However, litigation is costly, time consuming, and highly unpredictable, 19 and, if the matter was litigated, there was never any assurance that 100% of the 20 additional costs would be attributed to the Consortium not employing Good 21 Industry Practices. The Amendment provides certainty in bringing these disputes 22 to an end. In addition, the Amendment provides that all future payments on the 12 805 1 project will be tied to construction milestones. 2 Westinghouse’s completion of specific tasks, thereby protecting against similar 3 disputes from recurring in the future. 4 Q. PLEASE EXPLAIN THE ISSUES RELATED TO DISPUTED CHANGE ORDERS AND NOTICES OF CHANGES. 5 6 This will tie payments to A. Like many construction contracts, the EPC Contract contains provisions 7 that entitle the Consortium to additional compensation through a change order if 8 the cost of the project increases due to a change in law. Early in the project, 9 Westinghouse began taking the position that interpretations of existing laws or 10 regulations by the NRC that were more stringent than anticipated as well as 11 unanticipated positions taken by NRC personnel, including field inspectors and 12 others, constituted a change in law or regulation under the Change in Law 13 provisions of the EPC contract. For example, Westinghouse submitted an invoice 14 in December 2014 for $45.9 million (see Line No. 3 of Chart B) seeking payment 15 of additional costs that Westinghouse contended related to a change in regulatory 16 interpretation by the NRC. Similarly, because the design control documents for 17 the AP1000 units are adopted as NRC regulation, Westinghouse also took the 18 position that the strict interpretation of those design documents by the NRC could 19 constitute a change in law. 20 SCE&G vigorously contested Westinghouse’s interpretation of the Change 21 in Law provisions. To resolve these disputes and to minimize the potential for 22 future disputes over the Change in Law provisions, the Amendment adds language 13 806 1 to reduce ongoing disputes about these terms of the EPC Contract by making it 2 clear that only formal written regulatory orders or guidance by the NRC or other 3 government agency can constitute a change in law. 4 Q. AMENDMENT? 5 6 WHAT OTHER QUANTIFIABLE CLAIMS WERE SETTLED BY THE A. The Amendment also resolved disputes concerning the interpretation of 7 Target versus Firm costs within the existing EPC Contract. Many scopes of work 8 that the Consortium asserted fell within the Target or Time and Materials Price, 9 SCE&G believed were appropriately categorized as a Fixed or Firm cost. This 10 issue had become increasingly more difficult as the project progressed. The 11 balance in dispute that could be quantified related to the appropriate category of 12 costs was approximately $47.5 million. See Line No. 4 of Chart B. 13 As the Company identified the method it intended to use to maintain plant 14 design information of the Units, it also discovered Westinghouse intended to 15 provide As-Designed documents and drawings. This led to another dispute on the 16 project as SCE&G requires As-Built documents and drawings. The Amendment 17 resolved the commercial dispute related to this issue, which was estimated to be 18 approximately $27.5 million. See Line No. 5 of Chart B. 19 Because of delays in the completion of the project, the warranty on some 20 plant equipment was due to expire prior to the Units reaching full power. The 21 Amendment provided for an extension of the commencement date of the 22 warranties on plant equipment to begin to run on the actual substantial completion 14 807 1 dates of the Units and extends those warranties for two years beyond actual 2 substantial completion or two years after SCE&G accepts ownership of a 3 particular system. 4 approximately $66.0 million. See Line No. 6 of Chart B. The estimated cost of these disputed warranties is 5 In addition, the Amendment resolved a number of disputes related to 6 change orders where the Consortium had begun construction of certain scopes of 7 work, but, as of June 30, 2015, SCE&G had not paid for the work. These change 8 orders included Cyber Security; Site Layout, Phases 1 and 2; Schedule Mitigation 9 of the Shield Building Panel; and additional costs related to the Patient Protection 10 and Affordable Care Act. The value of these change orders totaled $60.3 million. 11 See Line No. 7 of Chart B. 12 The Company also settled many other claims that could be quantified 13 related to items such as the security plan for the offsite water system, fuel loading 14 software, and the construction of the secondary chemistry lab. SCE&G estimated 15 the value of these disputes to be approximately $4.3 million. See Line No. 8 of 16 Chart B. 17 Finally, as discussed in more detail by Mr. Byrne, SCE&G had several 18 claims against the Consortium for work previously completed and for which 19 SCE&G had paid 90% of the invoice associated with performance inefficiencies 20 and delay costs. The total amount of these disputed payments is approximately 21 $78.8 million. SCE&G estimates that the Amendment resolved these disputed 22 payments evenly between the parties, resulting in SCE&G being obligated for only 15 808 1 one-half of the disputed amount of $78.8 million, or approximately $39.4 million. 2 See Line No. 9 of Chart B. 3 Q. DISPUTES? 4 5 WHAT IS THE NET EFFECT OF RESOLVING THESE QUANTIFIABLE A. The result of netting all of these disputes, claims, and counterclaims is the 6 determination that the Amendment, which resulted in a $137.5 million increase in 7 price and included multiple other benefits, resolved quantifiable claims worth at 8 least $224.4 million and likely very much more. By resolving these disputes 9 through the Amendment, SCE&G also was able to avoid the inherent risk 10 associated with litigating these issues that could result in additional costs to the 11 Company and its customers. 12 Q. NOT BE QUANTIFIED? 13 14 ARE THERE OTHER BENEFITS SCE&G REALIZED THAT COULD A. Yes. Due to the complexity of this project and the cost of various scopes of 15 work, SCE&G was not able to specifically quantify the value of numerous other 16 open and pending disputes that were settled; however, the Company believes that 17 the value of resolving these issues is worth millions of dollars to the project. For 18 example, one dispute related to the identification and labeling of subcomponents 19 for the project. Although this issue may appear to be simple, in reality, it is 20 enormously complex as it requires identifying and labeling over 35,000 21 components and subcomponents for each Unit. 22 unquantifiable but important benefit of ensuring that labeling is consistently and 16 Resolving this issue had the 809 1 uniformly applied. This labeling reduces the burden on SCE&G’s personnel who 2 must safely operate and maintain the Units and all systems in the future. In 3 addition, the Amendment provides that SCE&G will have timely access to vendor 4 technical manuals so that the Company can develop plans and procedures to 5 operate the plant. Westinghouse also agreed to implement without a change order 6 the design changes and construction changes to the annex building wall design, the 7 annex building doors, and the auxiliary building doors in order to comply with the 8 2009 Aircraft Impact Assessment (AIA) NRC Rule. 9 Westinghouse also is required to provide Units that fully meet the NRC’s 10 Design Control Document Revision 19, which Westinghouse previously claimed 11 entitled it to additional compensation. Further, the Amendment creates a dispute 12 resolution board to resolve commercial disputes between the parties and allows 13 SCE&G to withhold 100% of disputed payments pending action by this board. 14 The Amendment also eliminates calendar-based payments, requiring all payments 15 to be tied to the accomplishment of specific construction milestones. 16 Q. PAYMENTS ALSO RESOLVED BUT NON-QUANTIFIED? 17 18 WERE THE DISPUTES RELATED TO MILESTONE AND PROGRESS A. Yes. A most important group of costs that were challenged related to 19 timing issues. Under the original EPC Contract, certain progress payments were 20 not tied to the accomplishment of specific construction milestones but were 21 calendar based. Prior to the middle of 2014, SCE&G became concerned about the 22 amount of these payments compared to the progress being made on the project. 17 810 1 SCE&G asserted that continued payment of these amounts was unjustified and 2 began withholding payments, which totaled $67.6 million. 3 vigorously disputed that position and asserted that the EPC Contract did not tie 4 these payments to construction milestones. Nevertheless, SCE&G believed that 5 language in the EPC Contract supported tying payments to construction milestones 6 and that it was important to assert this position. The Amendment provides for a 7 new schedule tying all future payments to the completion of construction 8 milestones, which substantially reduces the likelihood of future disputes related to 9 the timing of payments and is viewed by the Company as being of great benefit to SCE&G and its customers. 10 11 The Consortium Q. WHAT EFFECT DOES THE OF THE ON THE UNITS AND SUBSTANTIAL 13 LIQUIDATED DAMAGES IF THOSE DATES ARE MISSED? A. DATES HAVE 12 14 COMPLETION AMENDMENT As discussed by Mr. Byrne, the Amendment provides that the guaranteed 15 substantial completion dates (“GSCDs”) of the Units are now August 31, 2019, for 16 Unit 2 and August 31, 2020, for Unit 3. 17 Amendment obligates Westinghouse to pay SCE&G liquidated damages that 18 accrue on a daily basis. In addition, the Amendment ties certain penalties to 19 SCE&G’s receipt of Federal Production Tax Credits (“PTCs”). If schedules are 20 met for both Units, the benefit to customers resulting from the PTCs, when 21 grossed up for taxes, will be approximately $2.2 billion. However, if a Unit 22 misses the deadline for receiving the PTCs, the Amendment requires 18 If a Unit misses its GSCD, the 811 1 Westinghouse to pay a one-time penalty of $137.5 million for that Unit. Both 2 aspects of these liquidated damages are subject to a collective cap of $185.9 3 million per Unit (or $371.8 million for both Units), which is over four times the 4 previous maximum for liquidated damages of $43 million per unit (or $85.5 5 million for both Units). 6 Q. CONTRACT COST? 7 8 WHAT EFFECT DOES THE AMENDMENT HAVE ON THE EPC A. The Amendment, which settles most of the outstanding disputes and 9 provides a number of other benefits to the project, increased the EPC Contract 10 price by $137.5 million, or approximately 16% of the total change in the capital 11 cost schedule. See Line No. 1 of Chart A. In addition, the Amendment reversed 12 the credit of approximately $85.5 million for liquidated damages (see Line No. 3 13 of Chart A) that had been included in prior cost estimates, resulting in a net 14 increase to the EPC Contract price of approximately $223.0 million or 15 approximately 26% of the total change in the capital cost schedule. 16 Q. DID WESTINGHOUSE ALSO AGREE TO GRANT AN IRREVOCABLE 17 OPTION TO CONVERT THE COMPLETION OF THE UNITS UNDER 18 THE EPC CONTRACT TO A FIXED PRICE OPTION? 19 A. Yes. 19 812 1 Q. 2 A. HOW IS THE FIXED PRICE OPTION STRUCTURED? As part of the Amendment, Westinghouse agreed that, if the Fixed Price 3 option is elected by SCE&G and Santee Cooper, the remaining Target, Time and 4 Materials, and Firm costs would be transferred to the Fixed Price category. Under 5 this Fixed Price option, the price under the EPC Contract to complete the Units 6 would be fixed at approximately $3.345 billion after June 30, 2015. All amounts 7 paid under the EPC Contract after June 30, 2015, would be credited to this price. 8 A limited number of scopes of work would be excluded from the Fixed Price 9 including certain Time and Materials scopes of work valued at approximately 10 $38.3 million, future change orders that are Owner-directed or based on changed 11 circumstances, and specific items identified on Exhibit C to the Amendment (see 12 Exhibit No. __ (SAB-3) to the Direct Testimony of Company Witness Byrne). 13 SCE&G also will remain responsible for Transmission Cost and Owner’s Cost. 14 Q. WHY ARE CERTAIN TIME AND MATERIALS SCOPES OF WORK, 15 FUTURE CHANGE ORDERS, AND THE ITEMS IDENTIFIED IN 16 EXHIBIT C TO THE AMENDMENT EXCLUDED FROM THE FIXED 17 PRICE OPTION? 18 A. The parties engaged in negotiations to move these items to the Fixed Price 19 category as well; however, SCE&G did not have sufficient information from 20 Westinghouse regarding the amount in dispute in order to reach a resolution of 21 these issues. In addition, SCE&G believes it can manage the remaining Time and 22 Materials scopes of work as well as or better than Westinghouse and, therefore, 20 813 1 did not negotiate a fixed price on these items. Accordingly, the Company believes 2 that SCE&G and its customers are better served to continue the project with these 3 items remaining subject to an adjustable cost or further negotiation. 4 As to future change orders, the Amendment reduces the likelihood of 5 contractor-initiated change orders by limiting the definition of a change in law as I 6 discussed previously. Future change orders initiated by the Owner would, of 7 course, be subject to additional cost depending upon the scope of work that may 8 be required. 9 Q. CONTRACT COST? 10 11 WHAT IMPACT WILL THE FIXED PRICE OPTION HAVE ON THE EPC A. As shown in Chart C below, the Fixed Price option represents an increase 12 of $505.5 million (see also Line No. 2 of Chart A) to the total cost of the project, 13 net of the $137.5 million adjustment in price that is otherwise part of the 14 Amendment and the reversal of the $85.5 million dollar credit for liquidated 15 damages credit. This $505.5 million represents approximately 60% of the total 16 change in the capital cost schedule, or approximately 7.4% of the total forecasted 17 gross construction costs of the Units approved in Order No. 2015-661. [CHART C IS ON THE FOLLOWING PAGE] 21 814 Chart C 1 ANALYSIS OF FIXED PRICE OPTION ($000,000) 1 2 3 Fixed Price option Total Unpaid Costs moved to Fixed Total Escalation savings moved to Fixed 3,345.1 (1,844.5) (772.0) 4 Total Increase in EPC Costs 728.6 5 6 7 Breakdown of EPC Cost Drivers Liquidated Damages (LDs) (Reverse Credit) Amendment Fixed Price option 85.5 137.5 505.5 8 Total Increase in EPC Costs 728.6 Note: Totals may not add due to rounding 2 Q. COSTS ASSOCIATED WITH THE PROJECT? 3 4 HOW DOES THE FIXED PRICE OPTION AFFECT ESCALATION A. Under the Fixed Price option, approximately $1.8 billion in costs that 5 would otherwise be subject to escalation under the EPC Contract would be shifted 6 to the Fixed Price category. See Line No. 2 of Chart C. As a result, the vast 7 majority of the project would not be subject to escalation resulting from inflation 8 associated with construction of the project and, going forward, Westinghouse will 9 bear this risk. 10 To reflect this change, the EPC Contract cost for escalation decreases by approximately $772.0 million as shown on Line No. 3 of Chart C. 22 815 1 Q. IMPACT OF EACH OF THESE ADJUSTMENTS? 2 3 HAVE YOU DEVELOPED AN EXHIBIT DEMONSTRATING THE A. Yes. Exhibit No. __ (KRK-5) shows how the updated EPC Contract cost is 4 allocated among the EPC Contract cost categories. These changes, including the 5 Amendment, the reversal of the liquidated damages credit, the Fixed Price option, 6 and the cost of the change orders, represent a total cost adjustment of $781.1 7 million, or approximately 92% of the total change in the capital cost schedule. See 8 Line No. 5 of Chart A. II. 9 10 Q. CHANGES IN EPC COST DUE TO CHANGE ORDERS PLEASE DISCUSS THE CHANGE ORDERS TO THE EPC CONTRACT 11 INCLUDED IN THE UPDATED COST SCHEDULES PRESENTED IN 12 THIS PROCEEDING. 13 A. There are a total of eleven change orders to the EPC Contract and related 14 matters that increase the capital cost of the project and are included in the updated 15 capital cost schedule presented in this proceeding. They are listed below in the 16 order that I discuss them in my testimony. 17 1. Plant Layout Security, Phase 3; 18 2. Plant Security Systems Integration; 19 3. Service Building, Third Floor; 20 4. Training Staff Augmentation; 21 5. Escrow – Software and Documentation; 22 6. Corrective Action Program – Interface (“CAP-I”); 23 816 1 7. Classroom Simulator; 2 8. Probable Maximum Precipitation (“PMP”) Analysis; 3 9. Inspections, Tests, Analyses, and Acceptance Criteria (“ITAAC”) Maintenance; 4 5 10. Primavera® Access (Extension of Change Order No. 10); and 6 11. Transmission Structure Redesign/Wetlands. 7 Q. 8 A. schedule. See Line No. 4 of Chart A. 10 Q. HAS THE COMPANY EXECUTED CHANGE ORDERS FOR EACH OF THESE ITEMS? 12 13 These eleven change orders and related matters represent approximately $52.5 million, or approximately 6% of the total change in the capital cost 9 11 WHAT IS THE TOTAL COST IMPACT OF THESE CHANGE ORDERS? A. SCE&G has executed change orders for the 2015 costs associated with 14 CAP-I and for the scope of work related to the Transmission Structure 15 Redesign/Wetlands. 16 negotiated by the Company and Westinghouse; however, these scopes of work 17 will be required to complete the project as currently scheduled. The Company 18 therefore has identified, itemized, and forecasted reasonable amounts for these 19 items and is submitting these estimates for Commission approval at this time. Change orders for the remaining items are still being 24 817 A. 1 2 Q. PLEASE EXPLAIN THE BACKGROUND OF THE CHANGE ORDER RELATED TO PLANT LAYOUT SECURITY, PHASE 3. 3 4 Plant Layout Security, Phase 3 A. As addressed in Company testimony in Docket No. 2015-103-E, SCE&G 5 conducted a review of the plant layout to ensure that its physical security can be 6 maintained. This was necessary as a final stage in the design review of the Units 7 and their supporting structures and could not be done until design layouts and 8 building orientations were finalized. 9 segregated into three phases to allow the project to move forward. The plant layout security changes were Phase 1 10 involves the engineering, construction planning, and development of estimates for 11 Phase 2 and Phase 3. Phase 2 consists of the construction work related to various 12 infrastructure changes and engineering work required to prepare for Phase 3 of the 13 plant layout security changes. 14 modifications. The Commission approved Phases 1 and 2 through its Order No. 15 2015-661 and the Company advised that the cost for the scope of work for Phase 3 16 would be submitted once the Company was able to better evaluate and determine 17 the final security requirements to be addressed. 18 Q. 19 A. Phase 3 includes the remaining security HAS SCE&G PERFORMED THAT EVALUATION FOR PHASE 3? Yes. SCE&G has identified, itemized, and forecasted the cost of Phase 3 to 20 be approximately $29.6 million, or approximately 4% of the total change in the 21 capital cost schedule. 25 818 B. 1 2 Q. Plant Security Systems Integration PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED 3 WITH THE CHANGE ORDER RELATED TO PLANT SECURITY 4 SYSTEMS INTEGRATION. 5 A. The EPC Contract provides for independent plant security systems for 6 Units 2 and 3. The Owner has requested that Westinghouse integrate the two 7 security systems so that they will operate as one single functioning system. 8 SCE&G has identified, itemized, and forecasted the cost associated with this scope 9 of work to be approximately $7.1 million. C. 10 11 Q. Service Building, Third Floor PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED 12 WITH THE CHANGE ORDER RELATED TO SERVICE BUILDING, 13 THIRD FLOOR. 14 A. SCE&G has reevaluated its facilities requirements in light of anticipated 15 staffing levels and maintenance and operational support requirements. As a result, 16 the Company has identified the need to expand the Unit 2 and 3 Service Building 17 to provide additional shop space for the mechanical, electrical, and 18 instrumentation and control groups. SCE&G also has determined that additional 19 space is needed to accommodate the site management and plant engineering 20 support groups. This expansion will be accomplished by adding a third floor to 21 the building. Based upon information received from Westinghouse, SCE&G has 22 identified, itemized, and forecasted this scope of work and requests approval of 26 819 1 cost in the amount of approximately $6.9 million to add the third floor to the 2 Service Building. D. 3 4 Q. Training Staff Augmentation PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED 5 WITH THE CHANGE ORDER RELATED TO TRAINING STAFF 6 AUGMENTATION. 7 A. SCE&G employs AP1000 Senior Reactor Operators as certified operations 8 training instructors in the NND Operations Training group. These instructors 9 provide training to potential operator candidates to ensure the Company has a 10 sufficient number of operators for the Units when completed and placed into 11 service. 12 simulator on which the candidates can take exams, nearly all licensed operator 13 training will need to occur in a two and one-half year window. In order to meet 14 this schedule, the Training group determined there was a need for ten additional 15 instructors. Retaining additional training staff through contract resources allows 16 for greater flexibility and manageability than hiring internal staff to meet a short- 17 term need. Therefore, SCE&G requested a change order from Westinghouse for 18 the costs of Westinghouse staff to augment SCE&G’s Training group and fill this 19 unmet need. SCE&G has identified, itemized, and forecasted reasonable amounts 20 for this scope of work of approximately $4.4 million. As a result of the delays in the project and the unavailability of a 27 820 E. 1 2 Q. Escrow – Software and Documentation PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED 3 WITH THE CHANGE ORDER RELATED TO THE ESCROW OF 4 SOFTWARE AND DOCUMENTATION. 5 A. SCE&G has exercised its right under the EPC Contract to require 6 Westinghouse to deposit with a third-party escrow agent the source codes 7 associated with certain software for operating and maintaining the Units as well as 8 certain facility documentation. The escrow secures SCE&G’s right to access the 9 source codes and facility documentation if needed in the future. The Owner is 10 responsible for the cost associated with establishing and maintaining the escrow. 11 SCE&G has identified, itemized, and forecasted the amount of this scope of work 12 to be approximately $3.0 million. 13 F. 14 Q. PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED WITH THE CHANGE ORDER RELATED TO CAP-I. 15 16 CAP-I A. Pursuant to NRC regulation 10 C.F.R. Part 50, Appendix B, SCE&G is 17 responsible for the establishment and execution of a quality assurance program for 18 the project. As part of this program, the Company requires Westinghouse, its 19 subsidiary WECTEC, and Fluor Corporation as the current construction manager 20 for the project to implement quality assurance programs to assure that applicable 21 regulatory requirements and the design basis for the structures, systems, and 22 components of the project are correctly translated into specifications, drawings, 28 821 1 procedures, and instructions. They also are required to establish corrective action 2 programs (“CAPs”) to assure that conditions adverse to quality, such as failures, 3 malfunctions, deficiencies, deviations, defective material, and defective equipment 4 are promptly identified and corrected. However, SCE&G must have access to that 5 information so that it can provide proper oversight over the CAPs. The CAP-I 6 provides SCE&G with an administrative interface to the individual CAPs so that it 7 can satisfy its obligations in this regard. SCE&G has identified, itemized, and 8 forecasted the costs for CAP-I and estimates that the additional cost to provide 9 access to the CAP-I through the GSCDs will be approximately $679,000. G. 10 11 Q. Classroom Simulator PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED 12 WITH THE CHANGE ORDER RELATED TO THE CLASSROOM 13 SIMULATOR. 14 A. Westinghouse has developed a scaled-down version of the simulator 15 software that is suitable for use in a classroom setting in training AP1000 licensed 16 operators. SCE&G has assessed this software and determined that it would relieve 17 stress on the current simulator access schedule and support the schedule for 18 licensed operator training. 19 benefits to the project including the performance of plant system operating 20 procedure validation, instrumentation and controls (I&C) design change 21 development and validation, and remote research and troubleshooting tools for 22 Simulator Engineers. SCE&G has identified, itemized, and forecasted the cost of The classroom simulator also will provide other 29 822 1 the software necessary to implement the classroom simulator system to be 2 approximately $451,000. H. 3 4 Q. PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED WITH THE CHANGE ORDER RELATED TO THE PMP ANALYSIS. 5 6 PMP Analysis A. The PMP analysis is a study of the response of the site drainage system to 7 foreseeable high-rainfall events. SCE&G and Westinghouse determined that the 8 current study needs to be updated in light of security upgrades to the site and 9 recommendations issued in response to the Fukushima event. The parties have 10 been in disagreement as to whether updating the PMP is an Owner responsibility 11 as a component of the Final Safety Analysis Report contained in the Combined 12 Operating License (“COL”) or Westinghouse’s responsibility as part of the 13 contractor’s responsibility for establishing its programmatic controls and hold 14 points for the site drainage system that are in compliance with the COL. In 15 resolving this dispute, the parties have agreed to divide this cost equally. SCE&G 16 has identified, itemized, and forecasted the amount of the PMP Analysis to be 17 approximately $182,000. 18 I. 19 Q. 22 PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED WITH THE CHANGE ORDER RELATED TO ITAAC MAINTENANCE. 20 21 ITAAC Maintenance A. As discussed in the Company’s testimony in Docket No. 2015-103-E, the NRC implemented new regulations requiring the review of completed ITAAC 30 823 1 packages when work is done on the associated components or systems or when 2 non-conforming conditions are discovered after the ITAAC is closed. SCE&G has 3 identified, itemized, and forecasted the additional cost for ITAAC maintenance 4 resulting from the change in GSCDs to be approximately $98,000. J. 5 6 Q. PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED WITH THE CHANGE ORDER RELATED TO PRIMAVERA® ACCESS. 7 8 Primavera® Access A. This change order relates to the licenses and other costs required to allow 9 SCE&G to access Oracle’s® Primavera Project Planner® (“Primavera®”), which 10 is the software used by Westinghouse for scheduling and resource planning for the 11 project. In Order No. 2011-345, the Commission approved Change Order No. 10 12 for SCE&G to purchase licenses and have the software interface installed to allow 13 SCE&G’s NND Team to interact and collaborate electronically in real time with 14 Westinghouse concerning schedule changes. SCE&G has identified, itemized, and 15 forecasted the additional cost for Primavera® Access resulting from the change in 16 GSCDs to be approximately $45,000. K. 17 18 Q. Transmission Structure Redesign/Wetlands PLEASE EXPLAIN THE BACKGROUND AND COST ASSOCIATED 19 WITH 20 STRUCTURE REDESIGN/WETLANDS. 21 22 A. THE CHANGE ORDER RELATED TO TRANSMISSION When the project began, SCE&G was required to provide site information to the Consortium so that they could plan for the location and construction of the 31 824 1 Units, the transmission facilities, and other aspects of the project. 2 SCE&G reevaluated the site and, as a result, determined that the wetland 3 boundaries needed to be modified. Based on the new wetland boundaries, CB&I 4 determined that the planned location of two transmission structures needed to be 5 updated. As a result, this change order includes the engineering design work to 6 update the location of these transmission structures. The cost for this change order 7 is approximately $5,000. III. 8 9 Q. OWNER’S COST REVISIONS PLEASE EXPLAIN THE COST MODIFICATIONS AND UPDATES RELATED TO OWNER’S COST REVISIONS. 10 11 In 2014, A. As shown in Chart D below, the Owner’s Cost forecasts have been 12 modified and updated to reflect the change in the GSCDs for the Units, and other 13 cost principally associated with the Amendment. The total amount of Owner’s 14 Cost modifications and updates is approximately $20.8 million, or approximately 15 2% of the total request. [CHART D IS ON FOLLOWING PAGE] 32 825 Chart D 1 ANALYSIS OF UPDATED OWNER’S COST ($000,000) 1 2 3 Impact of Amendment on Owner’s Cost Labor Non-Labor Total Impact of Amendment on Owner’s Cost 4 Schedule Improvement NND Construction Contractors 5 Other Other Labor and Non-Labor Costs (2.8) 6 Total Increase 20.8 11.0 4.6 15.6 8.0 Note: Totals may not add due to rounding 2 Q. IN OWNER’S COST. 3 4 PLEASE EXPLAIN THE TYPES OF EXPENSES THAT ARE INCLUDED A. Owner’s Cost includes the cost SCE&G will incur related to overseeing the 5 construction project; recruiting, hiring and training staff for the Units; quality 6 assurance and quality control (“QA/QC”); information system technology (“IST”); 7 preparing written operating procedures for all aspects of Unit operations, 8 maintenance, safety and security; accepting, testing and maintaining the systems 9 and components of the Units as they are completed and turned over to SCE&G 10 pending completion of each Unit as a whole; obtaining licenses and permits for the 11 project; regulatory compliance such as NRC fees; and start-up testing of the Units 12 as they are completed. Owner’s Cost also includes a number of construction- 13 related items such as workers’ compensation insurance for all contractors and 33 826 1 subcontractors, builder’s risk insurance, and transportation risk insurance; and 2 payment of miscellaneous taxes including sales taxes. 3 Q. OWNER’S COST FORECASTS IN THIS PROCEEDING? 4 5 WHY IS SCE&G PROPOSING TO MODIFY AND UPDATE THE A. SCE&G has determined that it will incur additional cost related to the 6 change in the GSCDs and other cost principally associated with the Amendment. 7 SCE&G also has continued to review, refine, modify, and update the Owner’s 8 Cost projections. SCE&G has carefully done so based on its operating experience 9 with the project, and ongoing analyses of the personnel and facilities needed to 10 safely and efficiently construct and operate the Units. As a result, SCE&G has 11 modified and updated the projections of Owner’s Cost as shown in Exhibit No. __ 12 (KRK-6) representing the increased cost for the NND and non-NND cost centers 13 organized by functional area that SCE&G anticipates will charge cost to the 14 project. This Exhibit also reflects a cost-center by cost-center analysis of the 15 effect of the new GSCDs for the Units and SCE&G’s actual experience in 16 managing this project since 2008. 17 Q. 18 A. PLEASE EXPLAIN THE ROLE OF THE COMPANY’S NND TEAM. SCE&G’s NND team is primarily responsible for meeting SCE&G’s 19 obligations as owner of the project and as the holder of active NRC licenses to 20 construct and operate the Units. These obligations include responsibility for (a) 21 construction and engineering oversight of the project; (b) QA/QC oversight both 22 on site and at suppliers’ locations worldwide; (c) the training and licensing of all 34 827 1 personnel required for Unit operations; (d) the auditing of invoices from the 2 Consortium and other suppliers and the resolution of contractual and payment 3 disputes with Consortium; (e) oversight and accounting for all commercial aspects 4 of the project; (f) acceptance testing and maintenance of plant systems as they are 5 completed and turned over to SCE&G; (g) accepting the handover and 6 maintenance of engineering, QA/QC and other data necessary for operating the 7 Units; (h) drafting the procedures for plant operations and safety; (i) conducting 8 plant start-up and start-up testing; and (j) providing the administrative support, IST 9 and software necessary to sustain these functions. The Operational Readiness 10 group comprises all personnel necessary to operate and maintain the Units when in 11 service. 12 procedures for operation and maintenance of the Units and in overseeing start-up 13 and testing. In addition, they also are responsible for developing programs and 14 The NND team is comprised of approximately 600 SCANA, SCE&G, and 15 Santee Cooper employees, including highly skilled professionals in engineering, 16 nuclear construction management, QA/QC, training, operational readiness, and 17 other disciplines. Extending the duration of the construction project will require 18 SCE&G to maintain its NND team in place to support the completion of Units 2 19 and 3 through the new GSCDs. Once the Units are operational, the vast majority 20 of these professionals will transition to support plant operations and will be 21 accounted for as part of the Units’ operations and maintenance budget. 35 828 1 Q. 2 A. HOW DID SCE&G PREPARE THE OWNER’S COST BUDGET? SCE&G developed the Owner’s Cost forecast at a 100% level, inclusive of 3 Santee Cooper’s percentage to support the day-to-day management of the project, 4 and then identified each party’s share of Owner’s Cost. At the department level, 5 SCE&G prepared budgets for all cost centers that provide support for the 6 construction and future operation of the Units. These budgets were broken down 7 by month for the current year and annually thereafter until the end of the project 8 and were established at the resource code level, which is SCE&G’s accounting 9 code that identifies the nature of the cost. 10 Q. IN PREPARING THE CURRENT OWNER’S COST BUDGET, HOW DID 11 YOU OBTAIN BUDGET INFORMATION FROM AREAS OTHER THAN 12 NND? 13 A. As the Company has explained in previous dockets, SCE&G requires all 14 cost centers outside of NND to assign time and cost directly to the project based 15 on time sheets and invoices for actual work performed. These cost centers include 16 such groups as SCANA Audit Services, Legal, Environmental, Risk Management 17 and Insurance, Facilities Management, and multiple groups within current Nuclear 18 Operations such as Unit 1 Health Physics, Chemistry, Security, and Emergency 19 Planning that may assist on an as-needed basis in creating staffing plans and 20 writing operating procedures for parts of Unit 2 and 3 operations. 21 Cost centers that anticipate providing direct support to the project must 22 provide detailed budgets for their activities through the GSCDs and update the 36 829 1 budgets annually. These budgets are typically based on a review of the past 2 amount of assistance provided by the outside group to NND adjusted to reflect any 3 anomalies and to take into account an estimate of how needs for assistance are 4 likely to evolve in the future. My group then carefully reviews these budgets 5 against past actual experience and our understanding of the future needs of the 6 project. We seek adjustments to them where we disagree with the assumptions or 7 results. Finally, these budgets are reviewed in detail and approved by project 8 management intimately familiar with the project. Bear in mind, these are budgets 9 and we review what is charged to ensure that nothing is billed to the project except 10 the cost of necessary assistance actually provided. However, we are also vigilant 11 to ensure that these non-NND cost center cost forecasts are reasonable and 12 necessary in all respects. 13 We are equally vigilant as to actual cost billed to the project and these costs 14 are reviewed each month to ensure that they are accurate, necessary, and 15 appropriate. Our joint-owner, Santee Cooper, has an equal interest in making sure 16 that all charges are appropriate and reviews these charges independently on a 17 monthly basis. 18 As to the budgets being presented here, they have been fully reviewed and 19 approved by SCE&G’s Project Management Team. I also have reviewed them in 20 detail and am very familiar with them through my role in the internal review and 21 approval process and the financial administration of the project month to month. 37 830 1 It is my conclusion that they reflect reasonable, necessary, and prudent project cost 2 based upon the information currently available to SCE&G. 3 Q. WHAT STEPS DOES THE COMPANY TAKE TO ENSURE THAT NO 4 COST RELATED TO THE OPERATION OF UNIT 1 IS BILLED TO THE 5 PROJECT? 6 A. In some instances, Unit 1 employees who have specific expertise provide 7 support to the project, and the Company records the associated labor cost as a 8 direct cost related to the construction of Units 2 and 3. As well, some cost may be 9 shared between the Units in order to increase efficiencies and economies of scale, 10 with the cost being allocated to each Unit based upon their derived benefit from 11 the expenses. In all other instances, SCE&G separately accounts for the cost to 12 operate Unit 1 and ensures that this cost is not recorded as a cost of the project. 13 Q. 14 A. WHAT IS THE BACK-UP MATERIAL FOR THIS BUDGET? In the backup material for Exhibit No. __ (KRK-6), the cost is broken down 15 by summary resource codes for each of the approximately 130 NND and non- 16 NND cost centers that underlie the summary NND budget documents. For each of 17 the entries in that budget, there is a separate set of schedules that breaks this 18 summarized cost down month-by-month for 2016 and year-by-year for the period 19 of 2017 to 2020. Each cost center manager has developed a budget based on his 20 or her professional assessment of the future needs of the project and experience. 21 These budgets are supported by staffing and training plans, current corporate 22 salary structures, outside services budgets, and other cost center specific budget 38 831 1 documents as available. These detailed cost center budgets roll up and support the 2 overall budget set forth here. 3 Q. THE CURRENT BUDGET? 4 5 WHO CAN REVIEW THIS BACK-UP INFORMATION SUPPORTING A. The above-mentioned detailed cost center budgets and supporting 6 documentation information are available to ORS for review. Because in some 7 cases this information contains data about individual employees’ salaries, the 8 Company will require parties to sign confidentiality agreements if they wish to 9 inspect and review this data at the construction site. A. 10 11 Q. WHAT IMPACT DOES THE AMENDMENT HAVE ON OWNER’S LABOR COST? 12 13 Owner’s Labor Cost Revisions (see Line No. 1 of Chart D) A. We have reviewed our staffing plans to determine the impact of the new 14 GSCDs on the Owner’s labor cost. 15 reevaluated every position to determine its need and reassessed the need for future 16 hire positions in order to identify positions that could be delayed. Accordingly, 17 SCE&G has taken reasonable steps to reschedule NND hiring and to revise work 18 assignments. SCE&G forecasts that the extension of the project will increase 19 Owner’s labor costs by approximately $11.0 million, or approximately 1% of the 20 total change in the capital cost schedule, to allow SCE&G to support the NND 21 team’s role on the project for a longer period. 39 As part of these studies, the Company 832 B. 1 2 Q. HAS THE COMPANY IDENTIFIED ANY CHANGES IN OWNER’S NONLABOR COSTS THAT WILL RESULT FROM THE AMENDMENT? 3 4 Owner’s Non-Labor Cost Revisions (see Line No. 2 of Chart D) A. Yes. SCE&G has determined that the new GSCDs specified in the 5 Amendment will increase Owner’s non-labor costs for NRC resident inspectors, 6 IST, NND facilities, and other non-labor categories. In addition, Owner’s non- 7 labor costs will increase as a result of the dispute resolution board created by the 8 Amendment. 9 Q. COST? 10 11 WHY WILL THE NEW GSCDs INCREASE OWNER’S NON-LABOR A. Extending the duration of the project will increase Owner’s Cost across a 12 broad range of non-labor cost centers. For example, NRC resident inspectors will 13 be required to be on site for a longer period of time as a result of the Amendment, 14 resulting in additional NRC fees the Owner will incur. Extending the project 15 schedule also will increase the cost of IST for the project because software 16 licenses and maintenance fees, equipment maintenance cost, and other IST support 17 cost must be paid for longer periods of time. The maintenance, upkeep, and other 18 costs of office space and related support facilities also will have to be borne by the 19 project for a longer period of time. 20 Finally, the new GSCDs will increase approximately 80 non-labor cost 21 centers for items such as additional and further training of employees, as well as 40 833 1 the need to maintain computers, telephones, and other office equipment for a 2 longer period of time. 3 Q. THE DISPUTE RESOLUTION BOARD. 4 5 PLEASE EXPLAIN THE INCREASED OWNER’S COST RELATED TO A. The Amendment creates a dispute resolution board to resolve commercial 6 disputes between the parties. The cost of the dispute resolution board’s services is 7 borne equally by Westinghouse and the Owner. 8 Q. OWNER’S NON-LABOR COST CATEGORIES? 9 10 WHAT IS THE TOTAL AMOUNT OF THE INCREASE TO THESE A. SCE&G has determined that the effect of the new GSCDs and the cost of 11 the dispute resolution board will increase Owner’s non-labor costs by 12 approximately $4.6 million. C. 13 14 15 Q. EXPLAIN THE ADDITIONAL OWNER’S COST FOR SCHEDULE IMPROVEMENT. 16 17 PLEASE Owner’s Cost Revisions for Schedule Improvement (see Line No. 4 of Chart D) A. Westinghouse’s review of the schedule indicated a need to increase direct 18 craft labor onsite to include a fully staffed night shift of more than 1,000 workers. 19 In order to align SCE&G’s oversight with Westinghouse’s efforts, the Company 20 has implemented a new Project Management Organization (“PMO”). As part of 21 the PMO, SCE&G will employ additional contractors, such as project managers, 22 to support the night shift. These personnel will focus on emergent activities 41 834 1 dealing with engineering, procurement and construction in order to expedite 2 proper closure so activities remain on schedule. In addition, they will concentrate 3 on monitoring progress toward completion of the Westinghouse milestone 4 payment schedule, ensuring milestones are fully complete prior to issuing 5 payment. 6 oversight contractors to 50 hours per week to match Westinghouse’s schedule and, 7 therefore, will incur additional costs for overtime pay. SCE&G also will increase the average hours of the construction 8 Additionally, the PMO provides oversight of the Westinghouse Project 9 Risk Management mitigation plans, Issue Management for the NND organization 10 for significant issues that require recovery plans to help regain quality or schedule 11 margin, and maintains the V.C. Summer Multi-Unit Facilities Plan that provides 12 the long-range site plan and facilities schedule for the station. SCE&G estimates 13 that these changes for schedule improvement will increase Owner’s Cost by 14 approximately $8.0 million. D. 15 16 Q. PLEASE EXPLAIN THE COST INCLUDED IN THE CATEGORY “OTHER OWNER’S COST.” 17 18 Other Owner’s Cost (see Line No. 5 of Chart D) A. The Other Owner’s Cost category relates to items not principally associated 19 with the change in substantial completion or the schedule improvement initiative. 20 Comprised of approximately 100 cost centers, these costs include items such as 21 updating the staffing plan, the planned use of outside contractors, regulatory 22 driven changes, and the general refinement of forecasted costs. These cost centers 42 835 1 have been evaluated as previously described with some cost centers increasing and 2 others decreasing. However, the net effect of these changes results in an overall 3 decrease in Other Owner’s Cost of approximately $2.8 million. 4 Q. THE NND STAFFING PLANS PRESENTED. 5 6 PLEASE DESCRIBE THE PROCESS BY WHICH YOU HAVE UPDATED A. In previous dockets, SCE&G has explained its process of reviewing the 7 Company’s staffing plans on an ongoing basis as new information emerges 8 concerning the design of the plant, regulatory requirements, physical and Cyber 9 Security requirements for the plant, and similar matters. As a result of our careful 10 and continuous analysis, the Company has reduced its projected NND staffing 11 needs by 12 Full Time Equivalents. 12 Q. 13 A. IS SOME OF THIS STAFFING DECREASE OFFSET? Yes. As part of the analysis performed on the staffing plan, significant 14 consideration was given to the use of outside contractors. In instances when 15 specialized skills were required or the needed duration was short, NND plans to 16 use outside contractors. 17 Q. OWNER’S COST.” 18 19 DESCRIBE THE REMAINING COST DRIVERS OF THE “OTHER A. SCE&G’s forecast of Owner’s Cost has increased in other areas driven by 20 regulatory requirements, such as Phase 2 of the Probabilistic Risk Assessment 21 model related to areas including flooding, fire, seismic and other external or 22 internal events; upgrading of two waste water treatment facilities to meet new and 43 836 1 existing regulatory output limits; and the upgrade of an IST program required to 2 meet nuclear fire protection requirements. SCE&G also updated costs in a number 3 of other categories, including facilities, IST, and the fees paid to the AP 1000 4 Owners Group. As stated above, the net effect of these changes results in the “Other 5 Owner’s Cost” decreasing approximately $2.8 million. 6 CONCLUSION 7 8 Q. THE UPDATES REQUESTED IN THIS PROCEEDING REASONABLE AND PRUDENT? 9 10 ARE A. Yes, they are. I have been involved with NND since its inception providing 11 budgetary and forecasting services throughout my work with the project. Based 12 upon my training, experience, and analysis, these modifications and updates are 13 based upon reasonable and prudent forecasts and support updating the capital cost 14 schedule under the provisions of the BLRA. 15 Q. PROCEEDING? 16 17 WHAT IS SCE&G REQUESTING OF THE COMMISSION IN THIS A. The Company is requesting that the Commission approve, pursuant to S.C. 18 Code Ann. § 58-33-270(E), the modified and updated capital cost schedule in 19 Exhibit No. __ (KRK-1) as the approved schedule of capital cost for completion of 20 the Units, subject to adjustment for escalation and net of AFUDC as provided for 21 in Order No. 2009-104(A). 44 837 1 Q. DOES THIS CONCLUDE YOUR DIRECT 2 A. Yes, it does. 45 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions MR. WILLOUGHBY: 1 838 Mr. Chairman, the witnesses 2 are available for questions from the nonsettling 3 parties and the Commissioners. 4 CHAIRMAN WHITFIELD: Thank you, Mr. Willoughby. 5 6 Ms. Thompson? 7 MS. THOMPSON: 8 CHAIRMAN WHITFIELD: Thank you, Mr. Chairman. You're up. CROSS EXAMINATION 9 10 BY MS. THOMPSON: 11 Q Good morning, gentlemen. 12 A [PANEL] Good morning. 13 Q My name is Gudrun Thompson; I represent the South 14 15 Carolina Coastal Conservation League in this proceeding. CHAIRMAN WHITFIELD: 16 need to — it is on. 17 Lavalier on you, too. We might need to put a 18 MS. THOMPSON: 19 CHAIRMAN WHITFIELD: 20 21 All right. MS. THOMPSON: [Indicating.] [Laughter] 23 CHAIRMAN WHITFIELD: 25 I don't know if you're going to move around like — 22 24 Ms. Thompson, we might I don't know if you're going to move around on me like Mr. Guild. MS. THOMPSON: I'm not going to move around VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 like Mr. Guild, but I'm happy to be mic'd. 2 folks hear me now? CHAIRMAN WHITFIELD: 3 839 Can Yeah, if you stay leaned in like that, but if you want to — 4 5 MS. THOMPSON: 6 COMMISSIONER ELAM: I'll lean up. Might be a workers' comp. claim. 7 MS. THOMPSON: 8 I don't have as many questions as Mr. Guild. 9 CHAIRMAN WHITFIELD: 10 Okay, but just stay close to that mic, and we won't wire you up. 11 MS. THOMPSON: 12 Yes, sir. 13 BY MS. THOMPSON: 14 Q Gentlemen, did you hear me okay, my introduction? 15 A [PANEL] [Nodding heads.] 16 Q Dr. Lynch, in your testimony you describe the economic 17 study where the company analyzed the revenue 18 requirements of completing the Summer units — the new 19 Summer units — versus building new natural gas units 20 under various scenarios. 21 A [LYNCH] That's correct. 22 Q Correct? And am I understanding the revenue 23 requirement, in sort of layperson's terms, as the long- 24 term cost to customers? 25 A [LYNCH] Yes. It would be the revenue required to serve VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 840 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions the customers. 1 2 Q And would you agree that the company performed that 3 study because y'all have an obligation to minimize the 4 system costs which are borne by customers? 5 cost resource planning? 6 A The least- [LYNCH] Well, I think it's performed in this study to 7 provide evidence, I guess, that continuing construction 8 is a prudent thing to do. 9 doing these studies back in 2012, that was the reason. 10 Q Okay, understood. At least, when we started Would you agree that, as a general 11 principle of resource planning, the company does have an 12 obligation to minimize those costs, the long-term costs, 13 borne by customers? 14 A and so forth, but minimizing long-term costs, yes. 15 16 [LYNCH] It certainly tries that, to meet the regulation Q So going back to the economic study, a low load growth 17 scenario was studied, in which load was reduced by 5 18 percent; is that right? 19 A That's correct. 20 Q And you explain in your testimony that including more 21 energy efficiency gains has the same effect as reducing 22 load growth, correct? 23 A [LYNCH] Yes. 24 Q Similar. 25 Similar, at least, yes. So would you agree that the low load scenario in this study can be viewed as sort of a proxy for a VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 841 high energy efficiency scenario? 1 2 A [LYNCH] Yes. 3 Q And under that low load scenario, the long-term costs to 4 customers — that is, the revenue requirement — of 5 completing the V.C. Summer units was still cheaper than 6 abandoning the units and building new natural gas, 7 correct? 8 A [LYNCH] I'm sorry. 9 Q I'll break that down a little bit. Could you repeat that? Sorry, that was a 10 long question. 11 term costs to customers of completing the V.C. Summer 12 units was cheaper than building new natural gas instead, 13 correct? 14 A [LYNCH] Than stopping it — yes. Yes, ma'am, that's right. 15 16 Under the low load scenario, the long- Q And that was true, even given the sunk costs that have already been put into building the Summer units. 17 18 A [LYNCH] That's correct. 19 Q So, in other words, just to summarize, even if SCE&G 20 does enough energy efficiency to reduce load by 5 21 percent, the company believes it would still be cheaper 22 to complete and run the new Summer units? 23 A [LYNCH] That's correct. 24 Q Okay. 25 And is that — would you agree that that is because the energy efficiency displaces natural gas and VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 842 1 coal generation, rather than new nuclear — rather than 2 nuclear generation, in the model? 3 A [LYNCH] Well, I think the company would say that it's 4 cheaper to continue with the nuclear plant — I mean, it 5 is cheaper, and that's why they should continue 6 constructing the nuclear plant — 7 Q Okay. 8 A [LYNCH] — under the low load scenario. 9 Q So I'm trying to understand — I'm trying to understand 10 sort of the interaction between energy efficiency and 11 the new nuclear units, or nuclear generation in general. 12 Is it true that, when the company is — when energy 13 efficiency programs are producing savings, that is 14 displacing natural gas generation and coal, or perhaps 15 cycling coal generation, rather than base-load nuclear? 16 A [LYNCH] Yeah, I think that would be correct, yes. 17 Q Okay. And so, going back to that economic study, let me 18 just make sure I understand. So the nuclear is — the 19 nuclear, being the base-load resource, is going to run 20 pretty much all the time? 21 A [LYNCH] Yes. 22 Q And you're not going to turn it down when other resources, like solar or efficiency, are generating? 23 24 A [LYNCH] Typically, no, you would not. 25 Q Okay. So you say that that economic study that the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 843 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 company did for this proceeding shows that increasing 2 distributed solar or energy efficiency by a substantial 3 amount does not change the value of the units to 4 customers in a meaningful way. 5 A [LYNCH] Well, it wouldn't change the decision to 6 continue construction of the nuclear plants, which is 7 the point of the study. 8 Q looking at? 9 10 A [LYNCH] In terms of revenue requirements, yes. Stopping construction would increase the costs to our customers. 11 12 Okay, and that's the value to customers, is what you're Q But you do testify that there may be other important 13 reasons to increase investment in distributed energy 14 resources and energy efficiency, correct? 15 A [LYNCH] I would agree to that statement. if it's in my testimony. 16 17 Q Well — 18 A [LYNCH] — can't remember. I — But, yes — is there economic value in increasing renewables, I would say yes. 19 20 I don't know Q Okay. And so I guess I'll direct you — if you don't 21 mind — direct you to your testimony where you state, on 22 page 14, lines eight and nine — just let me know when 23 you're there. 24 A [LYNCH] I'm there. 25 Q Page 14, lines eight through nine. 14? So you testified VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 844 1 that “There may be other important reasons to increase 2 investment in” distributed energy resources and energy 3 efficiency? 4 A [LYNCH] Yes. 5 Q Okay. 6 A [LYNCH] Okay. 7 Q Let's talk about some of those reasons. I think we've 8 already touched on this, but would you agree that energy 9 efficiency can reduce the need to generate electricity from fossil fuels? 10 11 A [LYNCH] Yes. 12 Q Okay. And by avoiding fossil-fuel generation, energy efficiency also reduces air pollution, correct? 13 14 A [LYNCH] Yes. 15 Q And burning less fuel also reduces fuel costs, which are borne by customers, correct? 16 17 A [LYNCH] Burning less? 18 Q Burning less fuel reduces fuel costs? 19 A [LYNCH] It would reduce the fuel costs, certainly. 20 Q And those fuel costs are borne by customers, generally? 21 A [LYNCH] That's correct, too, yes. 22 Q Would you agree that energy efficiency can also defer or avoid the need for new generating resources? 23 24 A [LYNCH] Yes. 25 Q And because of all these aspects of energy efficiency, VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 845 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 would you agree that energy efficiency, overall, reduces 2 total system costs? 3 A [LYNCH] Well, if it was economic. 4 Q Sorry. 5 A [LYNCH] Cost-effective energy efficiency programs, yes. Cost-effective energy efficiency. Yes, it would. 6 That's correct. 7 Q I'm sorry to interrupt. 8 A [LYNCH] Yeah. 9 Q So you would agree that cost-effective energy efficiency is going to reduce total system costs — 10 11 A [LYNCH] Yes. 12 Q — for customers. 13 A [LYNCH] Yeah, well, I would interpret “cost-effective” 14 to mean that. 15 there. 16 Q Okay. It's sort of an equivalent statement Now, shifting gears a little bit, you say in your 17 testimony that — and this is on page 13, and I apologize 18 I don't have the lines, but maybe you'll just agree with 19 me that under a rate-based Clean Power Plan compliance 20 plan, the new Summer units would generate enough 21 emission rate credits that SCE&G could comply with the 22 Clean Power Plan; is that correct? 23 A [LYNCH] Yes. 24 Q Okay. 25 Are you aware of any — well, sorry. Would SCE&G actually have excess emission rate credits under that VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 846 rate-based option of the Clean Power Plan? 1 2 A [LYNCH] I believe so, yes. 3 Q Okay. 4 A [LYNCH] No. 5 Q Would those credits be worth money? Do you know how many excess credits? The company could sell them? 6 7 A [LYNCH] Potentially. 8 Q Potentially? 9 A [LYNCH] Potentially. 10 Q And customers would get the proceeds, if those credits were sold, correct? 11 12 A is how it would work. 13 14 [LYNCH] It wouldn't be my decision, but I believe that Q And the company could also generate emission rate credits with energy efficiency, correct? 15 16 A [LYNCH] I believe that's right, too. 17 Q And like excess credits from the nuclear generation, any excess credits could be sold? 18 19 A [LYNCH] Potentially, yes. 20 Q Potentially. So just to sum up, you would agree that 21 there are a number of important reasons — as stated in 22 your testimony — to increase energy efficiency savings? 23 A efficiency — 24 25 [LYNCH] Well, to increase cost-effective energy Q Thank you. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 847 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A yes, you have to. 2 3 [LYNCH] — but certainly to consider it in all respects, Q A number of important reasons to increase cost-effective energy efficiency savings. 4 5 A [LYNCH] Yes. 6 Q Were you here for the public hearing portion of this proceeding last week? 7 8 A [LYNCH] Yes. 9 Q Okay. And would you agree that many of the customers 10 who testified and also filed public comments say they're 11 struggling to pay their bills due to the rate increases 12 from construction of the Summer units? 13 A [LYNCH] Yes. 14 Q Would you agree that, in light of the fact that energy 15 efficiency can reduce system costs, offering energy 16 efficiency programs — as the company does — gives 17 customers the opportunity to save money on their bills? 18 A [LYNCH] I think particularly those low-income energy 19 efficiency programs that, I guess, Keller Kissam talked 20 about, yes, I think those help customers. 21 Q Yes. Let me see, make sure I covered everything. 22 that's all the questions I have for you. 23 Lynch. 24 A [LYNCH] Thank you, Ms. Thompson. 25 Q And I have no questions for Mr. Kochems. I think Thank you, Dr. We'll make it VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions easy on you, your first time out. 1 2 A [KOCHEMS] Appreciate it. 3 MS. THOMPSON: 4 CHAIRMAN WHITFIELD: 5 Mr. Guild? 6 MR. GUILD: Thank you, Mr. Chairman. Thank you, Ms. Thompson. Thank you, Mr. Chairman. CROSS EXAMINATION 7 8 BY MR. GUILD: 9 Q Good morning, gentlemen. 10 A [PANEL] Good morning. MR. GUILD: 11 Let me get mic'd up here 12 [indicating]. 13 to force me to do it against my will. Otherwise, the Chair will be having 14 [Laughter] 15 CHAIRMAN WHITFIELD: MR. GUILD: 17 You're absolutely right about that, I confess. 18 19 BY MR. GUILD: 20 Q Dr. Lynch, were you present in the hearing room when — CHAIRMAN WHITFIELD: 22 don't think we're on. 23 MR. GUILD: 24 25 I don't think you can stay as stationary as Ms. Thompson did. 16 21 848 All right. Hold on, one second. Oh, we're not on? I [Indicating.] I think we're on? CHAIRMAN WHITFIELD: Yeah. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 849 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 BY MR. GUILD: 2 Q Good morning, gentlemen. 3 A [LYNCH] Good morning. 4 Q Dr. Lynch, were you present in the hearing room when Kevin Marsh testified? 5 6 A [LYNCH] Yes, I was. 7 Q I would just like some help, please. His[sic ~ see Byrne direct] 8 testimony — page 45, line 19 — cites your sensitivity 9 study for the values of the potential cost savings in a 10 fixed-price-option exercise that might be borne by 11 Westinghouse in order to complete the project. 12 recall him testifying to that effect? Do you 13 A [LYNCH] Yes. 14 Q All right. And the numbers he used are a range — I'll 15 just read. It says, “Dr. Lynch’s study shows that this 16 benefit alone could be worth between approximately $363 17 million and $981 million before the project is 18 concluded.” You heard him say that? 19 A [LYNCH] Yes. 20 Q I'd just like to understand what the derivation of those 21 numbers are, if you know. Are those values that were 22 derived from your sensitivity analysis? 23 A [LYNCH] Yes, that was part of the study. 24 Q And which particular set of assumptions generated those 25 values, can you tell us? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [LYNCH] Yeah. 850 So the $363 million results if you assume 2 a productivity factor, going forward from December 2015, 3 if you have a productivity factor of 1.5. 4 Q All right. 5 A [LYNCH] And if the cost rate increases by 2.9 percent 6 per year, that results in a $363 million additional cost 7 above the fixed option, to complete the project. 8 Q what cost savings is your sensitivity? 9 10 And, conversely, if the productivity factor is at 2, A [LYNCH] At a 2, with a labor rate growth rate of 5 11 percent, that's where the $981 million increase over the 12 fixed option, how that is derived. 13 Q Understood. Have you had an opportunity to read the 14 prefiled direct testimony of ORS Expert Witness Gary 15 Jones? 16 A [LYNCH] Yes. 17 Q All right. Now, he employs values in his testimony, 18 understanding that it's using the same assumptions about 19 base labor rate costs, but his range is 355 to 855. 20 That compares to Mr. Marsh's 363 to 981. 21 to help us understand what the explanation is for the 22 difference between those values? 23 A Are you able [LYNCH] Yeah, I believe in his testimony he restricted 24 his discussion to a labor rate growth rate of 2.9 25 percent. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 851 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q All right. 2 A [LYNCH] So a PF factor of 2.0, labor growth rate of 2.9, 3 I'm showing in my table — Appendix B of Exhibit -1 — I 4 show 854. 5 involved. I think he said 855, so there's rounding 6 Q And the low value? 7 A [LYNCH] His low value was 363, right? same as mine. 8 9 Q A Any idea [LYNCH] Oh [indicating] — 355. I don't see it in my table, so I'm not sure. 12 13 No, 355, I believe, is the number he has. where that comes from? 10 11 So that was the Q Right. So we'll ask him about that. But in any event, the upper value is derived the way you just explained? 14 A [LYNCH] Right, it comes to — [indicating]. I should 16 mention the 355, that's close to the 363. So the PF 17 factor of 1.5 with a 2.9 percent, and — so it's close, 18 and I'll bet you that's what he's talking about. 19 don't know; it might be an earlier version of the table, 20 something of that sort. 15 21 Q All right. I And, again, the base labor rate cost that 22 you assume and that you understand he assumes, as well, 23 is that 2.9 value? 24 A [LYNCH] That's right, yes. 25 Q Now, in your second study, the abandonment versus VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 852 1 completion study — if I can characterize it that way — 2 what assumptions did you make about the eligibility and 3 use of production tax credits for both units? 4 A [LYNCH] We assumed the company would get all the production tax credits. 5 6 Q Right. 7 A [LYNCH] Yes. 8 Q — that both of those are available and would flow So $1.1 billion for each unit, you assumed — through to customers? 9 10 A [LYNCH] That's correct, yes. 11 Q And the unavailability for either unit would alter your analysis, wouldn't it? 12 13 A [LYNCH] That's correct. MR. GUILD: 14 A moment please, Mr. Chairman? [Brief pause] 15 16 BY MR. GUILD: 17 Q Mr. Kochems, in listening to your testimony, I believe I 18 understood you to say that exercising the fixed-price 19 option would result in fixing 98.5 percent of the 20 projected costs to complete the project; is that 21 correct? 22 A [KOCHEMS] That's correct. 23 Q That implies, does it not, that there is 1½ percent that 24 you evaluate as no longer fixed costs to complete the 25 project? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 853 1 A [KOCHEMS] That's correct. 2 Q What does that 1½ percent consist of, Mr. Kochems? 3 A [KOCHEMS] Well, included in the October 2015 amendment 4 with the consortium, we excluded certain time-and- 5 material allowances from the fixed-price option, since 6 we thought we could better manage those ourselves. 7 Q All right. But those you still have to value and they 8 represent the 1.5 percent non-fixed portion of the costs 9 to complete? 10 A [KOCHEMS] Yes, they have a value of about $38 million. 11 Q Thirty-eight [$38] million, all right. What value did 12 you place on any of the other exceptions to the contract 13 — to the settlement — strike that. The settlement agreement represents — recognizes a 14 15 series of exceptions to the fixed-price to complete that 16 the company has not assured the Commission or the 17 settling parties that will be not subject to charges to 18 ratepayers. 19 you understand what I'm driving at? That's an inartful way of putting it, but 20 A [KOCHEMS] I think I understand, yes. 21 Q Okay. And those include such things as things based in 22 changes of law — costs associated with changes in law, 23 just to take that as an example. 24 exception to the so-called guarantee or assurances by 25 the company, correct? That's one that is an VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [KOCHEMS] Correct. 2 Q All right. 854 And so your 1.5 percent non-fixed costs to 3 complete the project, how much value did you assign to 4 additional costs that are associated with changes in 5 law? 6 A [KOCHEMS] We didn't assume, going forward, that there 7 would be any change in law. 8 everything is within the fixed-price category or within 9 the time-and-materials allowance. 10 Q All right. As we sit here today, So you assumed a zero dollar value, and 11 there will be absolutely no costs associated with 12 completing the project that are associated now with the 13 change of law. 14 A [KOCHEMS] That's correct. 15 Q All right. Now, looking backwards, have there been any 16 costs that the company identifies as associated with 17 assertions that there were costs associated with a 18 change of law? 19 A the October amendment were related to changes in law. 20 21 [KOCHEMS] Certainly, some of the things settled within Q All right. So in the past, there have been costs — and 22 I'm just recollecting a number, and correct me if I've 23 got the number wrong. 24 have the number in front of me. 25 order of magnitude? I think $47 million, but I don't But something on that VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [KOCHEMS] I think that's approximately right. 2 Q All right. So $47 million in the past for changes of 3 law, $0 in the future. 4 company's making? 5 A 855 That's the assumption the [KOCHEMS] Right, with the added language that we added 6 to the amendment to kind of tighten up that requirement, 7 we — 8 Q Right. 9 A [KOCHEMS] — did not put a value on that, going forward. 10 Q And, similarly, no value for any of the other items that 11 are enumerated in the settlement agreement as exceptions 12 to the so-called guarantee at the fixed price, correct? 13 A [KOCHEMS] Correct. MR. GUILD: 14 That's all I have. Thank you, gentlemen. 15 16 CHAIRMAN WHITFIELD: 17 Ms. Wright? Thank you, Mr. Guild. CROSS EXAMINATION 18 19 BY MS. WRIGHT: 20 Q Good morning. 21 A [PANEL] Good morning. 22 Q Let me pull this down [indicating], because I'm not 23 quite as tall as Ms. Thompson was. I have several 24 questions, and I hope today not to be stopped, if I can 25 get them all out as questions. Mr. Kochems — Kochems? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 856 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [KOCHEMS] Kochems. 2 Q I'm having a problem with the c-h. How much is your yearly salary? 3 4 A [KOCHEMS] I make a little bit over $100,000. 5 Q And you work for SCANA? 6 A [KOCHEMS] That's correct. 7 Q And you're Manager of the Nuclear Financial Administration at SCANA? 8 9 A [KOCHEMS] That's right. 10 Q Did you have an accounting position with SCE&G in 2006? 11 A [KOCHEMS] I've actually been a SCANA employee since I 12 joined the company. 13 Department and subsequent to that I've gone to the New 14 Nuclear Department as — in the Accounting Department. 15 16 17 18 Q I started with the internal Audit Okay, so — CHAIRMAN WHITFIELD: Ms. Wright, hold on one second. Mr. Kochems, I need you to get a little closer 19 to your mic, and Ms. Wright, you, too. 20 we're having trouble hearing both of you. 21 what I'm being told. 22 MS. WRIGHT: 23 CHAIRMAN WHITFIELD: I think That's [Indicating.] Is that better? 24 stay close to the mic. 25 pull yours closer. I think, yeah, if you'll And, Mr. Kochems, if you'll We're having trouble hearing VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 857 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions both of you. 1 MS. WRIGHT: 2 3 BY MS. WRIGHT: 4 Q All right. These don't turn down far enough. Let's see, I want to avoid some of the 5 questions that — I guess, we're just going to get right 6 into this. 7 Mr. Kochems, “the approved capital-cost schedule for the 8 units under the Base Load Review Act”? 9 mean? What does it mean when you use the phrase, What does that 10 A [KOCHEMS] Well, it — 11 Q I think this is — it's in the beginning of your 12 testimony. 13 it. 14 schedule for the units under the Base Load Review Act.” 15 What does that mean? 16 A I didn't make a notation of when you said But you used the phrase “the approved capital-cost [KOCHEMS] So, the currently approved capital-cost schedules for the new nuclear units — 17 18 Q With the amendment. 19 A [KOCHEMS] — were approved in — I'm sorry, the currently 20 approved ones, approved by the Public Service 21 Commission, were approved in 2015, and — 22 Q 25 Those'll do. What are they? What do you mean by that? 23 24 Okay, those'll do. A [KOCHEMS] That's the cost schedule: how much we're going to pay and when we're going to pay it. And — VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 858 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q you do that? 2 3 Does that mean the customers' rates will increase when A [KOCHEMS] Well, certainly none of the costs that we're 4 paying right now, the customers are paying for. 5 paying for the financing portion of those costs. 6 Q A [KOCHEMS] That's what the customers are paying for, presently. 9 10 You're talking about the financing of those costs. 7 8 Okay. They're Q Okay. And you're saying that's the ones that are 11 approved, that we're paying for right now, at the 12 present? 13 A [KOCHEMS] Every year, we file a revised — 14 Q Before this amendment — 15 CHAIRMAN WHITFIELD: Hold on one second. Mr. 16 Kochems, we're still having a little trouble 17 hearing you in the back. 18 mic all the way around and get it kind of in front 19 of you. 20 WITNESS: 21 CHAIRMAN WHITFIELD: 22 23 If you could slide that [Indicating.] All right. close to the mics. Sorry. And both of you stay We're still having trouble. MR. WILLOUGHBY: And, Mr. Chairman, so I don't 24 have to rise to object, I might ask the questioner, 25 Ms. Wright, to let the witness complete an answer, VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 859 rather than interrupting. 1 2 CHAIRMAN WHITFIELD: 3 Please let him answer, Ms. Wright. 4 MS. WRIGHT: Yes, sir, Mr. Willoughby. I'm sorry. I thought I had. I 5 was trying to clarify what I meant, to him, because 6 he looked a little confused. CHAIRMAN WHITFIELD: 7 10 Well, let's just move forward, and ask, and let him answer. 8 9 Okay. BY MS. WRIGHT: Q Okay. Weren't these costs presented to the auditors 11 that were identified as — weren't there costs that were 12 identified as reworks? 13 A in the past. 14 15 Q A [KOCHEMS] Yes, I believe Mr. Byrne spoke about that yesterday. 18 19 And wasn't that term clarified by Mr. Byrne, that those did refer to repairs? 16 17 [KOCHEMS] Certainly, we have had rework on the project Q And those repairs, then, were made zero, and they didn't 20 count for anything towards the — in the amendment, 21 because of the settlement. 22 customers won't get any of the money back that they have 23 to pay out for those things? 24 25 A Doesn't that mean that the [KOCHEMS] Well, within the amendment, we settled all of the open claims. Some of those could be quantified, VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 860 1 some of those could not be quantified. 2 we could quantify, some of those were related to past 3 invoice disputes that we had. 4 that, at the time Westinghouse or CB&I would have 5 invoiced to us, we didn't pay. 6 that money, so we actually owed — in their eyes, we owed 7 them money. 8 settled. 9 Q For the 12 items So those would be dollars They felt they were due And those were the claims that were But in SCE&G's eyes — Westinghouse saw that you owed 10 them, but, in fact, if you had litigated and won, they 11 would have owed you; is that correct? 12 A [KOCHEMS] No. If we did go to litigation and they won, we would have to pay them. 13 14 Q That isn't what I said. 15 A [KOCHEMS] I'm sorry. 16 Q I said, if you went into litigation and you did prove 17 your point that those were, in fact, Westinghouse's or 18 CB&I's responsibility, would they have had to pay you? 19 A [KOCHEMS] No, ma'am. They sent us an invoice for 20 something they felt they were due. 21 invoice. 22 had won, we would've paid them. 23 not pay the invoice. 24 25 Q We did not pay that So if we had gone to litigation and if they If we had won, we would So you're telling me that that work was done and nobody was paid for it? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A 861 [KOCHEMS] We did not pay Westinghouse or CB&I for that work, no. 2 3 Q Who paid the employees for that? 4 A [KOCHEMS] Well, it would be Westinghouse or CB&I paid their employees or their subcontractors. 5 6 Q And you're telling me that you withheld the money? 7 A [KOCHEMS] Well, within the original EPC contract, there was a provision that allowed us that right. 8 9 Q Okay. 10 A [KOCHEMS] And we exercised that right, beginning in 2014. 11 12 Q So is the answer, then, yes? 13 A [KOCHEMS] What's the question? 14 Q Did you not pay that? Did you not pay for those rework costs and invoices? 15 16 Did you withhold the money? A [KOCHEMS] That is correct. All the items that we 17 settled within the dispute — I mean, all the disputed 18 items that we settled with the October amendment, we had 19 not paid, no. 20 Q withheld, you did not pay. 21 22 So the money that you withheld, all the money you A [KOCHEMS] Within the original EPC contract, there was a 23 provision that allowed us to withhold a portion of those 24 dollars and not pay that; that's correct. 25 Q That was a portion. What about the other portion? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 862 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [KOCHEMS] The other portion, we had to pay per the terms of the EPC contract. 2 3 Q And how much did you withhold? 4 A [KOCHEMS] That's correct. 5 Q So the 90 percent, you did pay? 6 A [KOCHEMS] The 90 percent, we had to pay, yes. 7 Q Okay. Ten percent, correct? So 90 percent of it was paid, and there was no 8 compensation to SCE&G for paying something that 9 Westinghouse should have paid for; is that correct? 10 A [KOCHEMS] Well, that was part of the — that was one of 11 the line items we had accounted for in the build-up of 12 how we justified the quantifiable items — and I'll refer 13 you to, I think it's Chart C in my testimony. 14 sorry. 15 line item number nine, I think is the 90 percent item 16 you're referring to. 17 negative number? It's Chart B of my testimony. The last line, So you can see that that's a 18 Q Okay, which one? 19 A [KOCHEMS] Chart B. 20 Q Oh, chart in your testimony. 21 A [KOCHEMS] Yes, I'm sorry. 22 Q Okay. 23 A [KOCHEMS] It's line item number nine. 24 Q All right. 25 I'm It's page nine of my testimony. Page number nine, Chart B. I was going to get to this later, but you have these withheld payments and that's what I'm talking VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 about there. 2 right? 3 A 863 And you're saying there was $8.7 million, [KOCHEMS] Well, I think the 90 percent that you're 4 referring to is actually on line item number nine, which 5 you'll see is a negative number, so I actually counted 6 that as a — 7 Q And that includes that 90 percent? 8 A [KOCHEMS] Correct. for in line item number one and number two, and the 90 9 percent is line item number nine. 10 11 Q And that's — you're saying that's what you wrote off. The 90 percent is what you wrote off? 12 13 So the 10 percent would be accounted A [KOCHEMS] I don't think we would have written anything off. 14 15 Q No, you paid it. 16 A [KOCHEMS] The 90 percent, we had paid. 17 Q Yes. Yes, ma'am. And Westinghouse did not pay it, so you 18 ultimately, did you not, paid the employees for the 19 repair work and the costs therein, all the number of 20 employees and materials and everything for rework? 21 A Q You paid Westinghouse, so they pay their employees, correct? 24 25 Westinghouse did not pay it? 22 23 [KOCHEMS] I'm a little confused. A [KOCHEMS] Correct. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 864 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q So, ultimately, we pay, SCE&G and their customers, pay 2 those employees for rework instead of Westinghouse 3 taking it out of their profit or their amount of money 4 they received, correct? 5 A us to release 90 percent of those disputes. 6 7 [KOCHEMS] Well, yes, the original EPC contract required Q Yes, ma'am. And that, I think, is what I was trying to explain as a 8 write-off. I'm trying not to ask all the questions I 9 asked yesterday, so I'm trying to find my pertinent 10 ones. Could you — no, I don't want to do that because I 11 didn't work into it. 12 how much of this new amendment will leave it open for 13 you to be able to raise the rates. 14 of a moratorium — I still have some concern about MR. WILLOUGHBY: 15 There's been mention Mr. Chairman, may I object? 16 If there's a question, we would prefer that 17 questions be asked, and commentary not be made. 18 CHAIRMAN WHITFIELD: 19 Get to the question, Ms. Wright. 20 MS. WRIGHT: 21 BY MS. WRIGHT: 22 Q 25 All right. In that moratorium, during that time — and how long is that time? 23 24 Yes, Mr. Willoughby. A [KOCHEMS] The moratorium will last till January 28, 2019. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 865 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q 2019? What happens at the end of that time? Can you 2 come to the employees — I mean, the ratepayers at that 3 time? 4 A [KOCHEMS] My understanding is, after that time, if there 5 was a need for us to come back to the Commission, we 6 would do it at that time. 7 Q If there were costs that Westinghouse refused to pay 8 during that time, at that time could those all come to 9 you as a lump, as a large figure, at the end of that 10 moratorium and you could come before the Commission at 11 that time? 12 A I'm trying to stay with you. If there's costs that Westinghouse did not pay — 13 14 [KOCHEMS] I apologize. Q All right. You had costs, did you not, that you disputed the invoices, correct? 15 16 A [KOCHEMS] Correct. 17 Q That you had questions about, correct? 18 A [KOCHEMS] That is correct. 19 Q And common sense, logic, wouldn't it tell you that you 20 probably will have some disputes and invoices that you 21 don't agree with between now and 2019? 22 A [KOCHEMS] Well, all of the issues we've had in the past 23 related to invoices we dispute, that's been under the 24 target scope of work. 25 fixed-price option. That no longer exists with the All the fixed-price-option dollars VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 866 1 will be tied to construction milestones. 2 real dispute could be, did they complete a milestone or 3 not. 4 Q And that's pretty hard to argue. So the costs in those — there will be no owner's costs in all this time, then, you're saying? 5 6 So the only A [KOCHEMS] Well, yes, ma'am, the owner's costs would be 7 our costs, and certainly wouldn't be related to 8 Westinghouse. 9 Q And what kind of costs would that include? 10 A [KOCHEMS] The owner's costs relate to the 600 people on- 11 site, their salaries, the administration of those, the 12 oversight of the project. 13 work that the owner is maintaining, related to 14 information technology, facilities, workers' comp. 15 insurance, things of that nature. 16 Q There are certain scopes of Yeah, I wanted to get to that, too. Concerning this 17 workmen's comp., who are the employees that are 18 receiving the workmen's comp.? 19 A [KOCHEMS] Well, the workmen's comp. is covered by — we 20 have what is called an OCIP Program, which is owner- 21 controlled — it's workmen's comp. that we control, so 22 that covers all the people on-site, whether they be an 23 SCE&G employee or a craft worker on-site. 24 25 Q So Westinghouse has no responsibility in paying for any of that? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 867 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [KOCHEMS] No. 2 Q Why is that? 3 A [KOCHEMS] Well, we made a decision at the beginning. We own the policy. We 4 had two options. 5 be Westinghouse's or CB&I's responsibility; at the time, 6 we thought it would be more beneficial to control that 7 ourselves. 8 Q We could have had that scope of work I really would like for you to explain why. I've been on construction sites, and — 9 MR. WILLOUGHBY: 10 Mr. Chairman, I would again object. 11 CHAIRMAN WHITFIELD: 12 13 question. 14 on — 15 BY MS. WRIGHT: 16 Q Ms. Wright, I need a I don't need to hear about you going Would you please — CHAIRMAN WHITFIELD: 17 Ms. Wright. I don't need 18 you to talk about going on construction sites; I 19 need a question for the witness. 20 he answers. 21 BY MS. WRIGHT: 22 Q A question, and That's how it works. On most construction sites with good industry practice, 23 is there not the practice of the construction — the 24 contractor hiring the people and the contractor paying 25 workmen's comp. and insurance and bonding those VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions employees? 1 2 868 A [KOCHEMS] I can't speak for other construction projects. 3 I know at the beginning we evaluated that and we made 4 the decision that was in the best interest of us, as 5 well as our customers, to hold that policy ourselves. 6 Q Well, what do you mean by “in the best interest of us”? 7 What would not be in the best interest for Westinghouse 8 to have taken it over? 9 A [KOCHEMS] Well, we felt we could control it better ourselves. 10 11 Q I'm lost as to why. 12 A [KOCHEMS] I apologize, but I don't remember exactly — the decision was made back in 2007, I believe, and — 13 14 Why would you need to control it? Q So you're telling me you don't know why SCE&G wanted 15 control of workmen's comp., the insurance, on this site, 16 on this build. 17 A [KOCHEMS] I'm telling you there was an evaluation done 18 back in 2007, and the decision was made at that time by 19 our Insurance Department as to which was the best 20 approach, and that was the approach they selected, and 21 that's what we've stayed with since then. 22 Q Okay. Mr. Lynch, I want to speak with you for a moment. Could you tell me what your salary is, a year? 23 24 A [LYNCH] I make more than $100,000, too. 25 Q Okay. This amendment nor the settlement has been VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 accepted by the Commission, has it, to this date. 2 haven't approved it yet. 869 They 3 A [LYNCH] I don't believe, no. 4 Q So they do have the option to say no, correct? 5 A [LYNCH] I believe that's — yes. 6 Q And I would like for you to tell us, please, how much 7 SCE&G has spent to date on this nuclear project. 8 much has it cost, so far? 9 A How [LYNCH] There's a schedule in the Application and then 10 in the settlement agreement of what's being spent, and I 11 remember it being $4.6 billion by the end of the year. 12 So I guess it's less than $4.6 billion, but somewhere in 13 that neighborhood. 14 Q cost from now to the end of the build? 15 16 Right, and how much are you anticipating it's going to A [LYNCH] In that same schedule, if you take the fixed option, it's $7.6 billion. 17 18 Q More? 19 A [LYNCH] Total. 20 Q Total. 21 A [LYNCH] So the difference is at three — 22 Q Three-something billion. Okay, so it's about — And you said how much, seven- point- — 23 24 A [LYNCH] Seven-point-six. 25 Q Seven-point-six [$7.6] billion. I have a question about VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 870 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 the studies that you've done, about what have you done — 2 you've done studies, correct, on gas and coal, if the 3 nuclear sites were shut down — if this build was shut 4 down, correct? 5 A [LYNCH] Well, in my testimony, there were two studies. 6 One was the sensitivity on the fixed-price option. 7 the second study was comparing continuing construction 8 of the nuclear plants versus stopping it and building 9 combined-cycle to replace that capacity. 10 Q Right. 11 A [LYNCH] So those were the two studies. 12 Q Right. And the second study is the one I'm talking about. 13 14 A [LYNCH] Okay. 15 Q All right. How much of your study was — involved solar energy? 16 17 And A [LYNCH] Well, it included us — solar was in — the 18 renewables were in our IRP, in the forecast plan. And 19 our goal, I think, is to meet 2 percent of the retail 20 peak — per the Act 236, the DER law passed by the 21 Legislature. 22 range, I believe, in the IRP. So somewhere around 100 megawatts, in that 23 Q And what is the IRP? 24 A “Integrated Resource Plan.” 25 Q And in that plan, you talked about solar energy and how What does that stand for? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 871 1 much you could generate if the nuclear plants weren't 2 there, and how much it would cost? 3 A [LYNCH] In the IRP, we didn't talk about the nuclear 4 plants not being there, but we did talk about how much 5 energy would come from solar. 6 in the plan somewhere. 7 Q I'm sure that's discussed But my question is, why would you not do a study using 8 solar, using wind, using hydro, in the event that this 9 build would have to be shut down? 10 A [LYNCH] If we didn't build the nuclear plants, you're saying — 11 12 Q Yes. 13 A [LYNCH] — if something happened that we couldn't build 14 it? 15 be a need for capacity, obviously, to replace the 16 nuclear capacity, and that would include — I'm sure it 17 would include solar; maybe wind, I'm not sure; natural 18 gas. 19 Q Yeah, then we'd figure out, you know, then there'd But you talked about, if they didn't go with the option, 20 and you talked about other plans of bringing in base- 21 load and you were talking about gas and oil, were you 22 not, or gas and — yeah — gas and coal? 23 A option? 24 25 [LYNCH] Going with the option, you mean the fixed-price Q Yeah, if you don't go with that. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 872 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [LYNCH] I'm sorry. 2 Q What I'm trying to understand is why did you not do a 3 study about how much, let's say, three-point-something 4 billion dollars would bring you if you spent it on 5 solar? Why did you not do a study — 6 A [LYNCH] Oh, I see. 7 Q — on, if you took the remaining money, including 8 anything you could get for selling parts, of shutting 9 down this site, why did you not do a study of how many — 10 how much energy you could produce by making solar 11 plants' fields, by going with hydro, and going with 12 wind? 13 tell us how much this $3 billion, from here on, would 14 get us. 15 A Why did you not do any of those studies? And [LYNCH] I guess the reason would be that to replace the 16 base-load nuclear capacity, the only way you could 17 reasonably do it — I believe — is with combined-cycle 18 natural gas. 19 solar are intermittent and costly, so they're really not 20 options. 21 can produce in South Carolina. You can't build coal. And the wind and And there's not much additional hydro that you So — 22 Q Are we using the ocean, for hydroelectric? 23 A [LYNCH] No. 24 Q And yet you say there's not much left to do for hydro, 25 when you have a whole coastline. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 873 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [LYNCH] You mean wave power? 2 Q Yes. 3 A [LYNCH] I don't think that's commercially developed, yet — I don't believe. 4 5 6 7 Q And why would you not look into that? Why would you — I don't understand why — MR. WILLOUGHBY: Mr. Chairman, the questioner 8 is being argumentative with the witness, and 9 totally inappropriate questioning. Dr. Lynch has 10 explained the purpose of his studies. She can ask 11 him about the study, what he analyzed. But she's 12 being argumentative, and we would object and ask 13 that she ask straightforward questions. 14 CHAIRMAN WHITFIELD: Ms. Wright, Dr. Lynch has 15 stated he did two studies. 16 to that and to his testimony, and stick to that. 17 18 19 MS. WRIGHT: And I need you to stick All right. I was just trying to find out why those other studies weren't done. CHAIRMAN WHITFIELD: Well, I think he has 20 already answered that question, as well. 21 you to stick to — 22 23 MS. WRIGHT: So I need Then I'm finished with these witnesses. 24 CHAIRMAN WHITFIELD: 25 Commissioners? All right. Commissioner Elam. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 874 EXAMINATION 1 2 BY COMMISSIONER ELAM: 3 Q Good morning. Mr. Kochems, is SCANA/SCE&G self-insuring for its workers' comp. coverage at the site? 4 5 A [KOCHEMS] I — 6 Q Or do you not know? 7 A [KOCHEMS] I know enough about insurance that I don't know very much. 8 9 Q Okay. 10 A [KOCHEMS] I do know that, at some level, it's insured 11 with an external party, but at some level — and I think 12 it's a dollar level — we are self-insured. 13 Q Okay. If you could look at your Exhibit KRK-4, please, 14 that shows the total project escalation from the amount 15 approved in 2009 through the amount included in this 16 case, correct? 17 A [KOCHEMS] Correct. 18 Q Can you walk us through what has actually been charged 19 to the project cost for escalation, as compared to what 20 was forecasted? 21 A [KOCHEMS] Certainly. The original forecast for 22 escalation can be seen in the first line of that chart, 23 the first number line, so that would be the $1.5 billion 24 — 1.514 — that's what we originally projected escalation 25 to be. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 875 1 Q Okay. 2 A [KOCHEMS] Our current projection of escalation is the 3 $530 million, which is the very last line, last column 4 over there, and that's due mostly to escalation we have 5 already paid. There's very little of that in the future. 6 Q It looks like the escalation is less than what you projected in '09; is that correct? 7 8 A [KOCHEMS] That is correct. 9 Q So, then, would having the vast majority of the project 10 not subject to escalation resulting from inflation be a 11 benefit to SCE&G and its ratepayers? 12 A [KOCHEMS] Certainly. 13 Q Could you explain that? 14 A [KOCHEMS] The risk associated with that escalation is 15 now being borne by Westinghouse, going forward, so any 16 kind of market fluctuations, timing-related things of 17 that nature, that risk is on Westinghouse. 18 Q Okay. 19 A [LYNCH] Yes, Commissioner. 20 Q Your natural gas scenarios, the base was current natural Mr. Lynch — Dr. Lynch, I'm sorry. gas prices? 21 22 A [LYNCH] Yes. 23 Q And you did 50 percent higher, 100 — 24 A [LYNCH] 100 — 25 Q — and 200. You didn't do any analysis of lower natural VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 876 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions gas prices. 1 2 A [LYNCH] No. 3 Q Okay. low as we're going to go? 4 5 Was there a reason that was so, or are we just as A [LYNCH] Well, I'm thinking we're about as low as we're 6 going to go. The cash market might go down. It 7 fluctuates up and down. 8 oversupply of natural gas in the market today, which 9 depresses prices, and if you go out a few years — and, But I think there's an 10 of course, the study is talking 40 years, and we're 11 evaluating a 60-year plant. 12 prices can stay that low, so it didn't seem reasonable 13 to talk about lower gas prices. 14 Q Other than natural gas, are there any other factors that could impact the sensitivity analysis? 15 16 So I don't believe gas A [LYNCH] Well, another big factor out there, of course, 17 is the carbon dioxide cost. 18 more value, certainly, to the nuclear plant. 19 Q Okay. 20 A [LYNCH] Thank you. That's all I have. Thank you. CHAIRMAN WHITFIELD: 21 Commissioner Howard. EXAMINATION 22 23 BY COMMISSIONER HOWARD: 24 Q 25 So the higher they go, the Good morning. Mr. Kochems, in your direct testimony, you stated the fixed-price option would be 3.345, and VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 that was June 30th of '15. 2 credited since June 30th of '15, presently? 3 A 877 How much has been paid and [KOCHEMS] That's a good question. If I could speak in 4 100 percent numbers, I can probably get us closer to 5 that. 6 2015, we had paid roughly, at 100 percent, about $350 7 million of that. 8 we've paid, I think, a little bit over $1 billion. 9 rough order of magnitude, a 100 percent number would be Q A Q [KOCHEMS] Well, that's certainly the amount that So, yes. What is the dollar amount to be subject to the escalation? 16 17 Do you think that remaining balance you have left is Westinghouse has committed to. 14 15 So sufficient to cover the price of the project? 12 13 And since January of 2016 to date, about $1.4 or $1.3 billion. 10 11 I believe between June of 2015 and December of A [KOCHEMS] So the primary piece of that is related to the 18 T&M allowances that we excluded from the fixed-price 19 option, so I think there's five different T&M allowances 20 that total about $38 million that will be subject to 21 escalation. 22 Q Okay, thank you. Dr. Lynch. 23 24 A [LYNCH] Yes, Commissioner. 25 Q You stated the fixed-price option would save customers VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 878 1 between 10.9 percent and 29.3 percent of the cost of the 2 project. 3 forward? 4 A Does this statement only refer to costs going [LYNCH] It refers to the cost — yes — costs going forward, relative to the fixed-price option, yes, sir. 5 COMMISSIONER HOWARD: 6 Chairman. 7 Thank you, Mr. Thank you. CHAIRMAN WHITFIELD: 8 Okay. Thank you, Commissioner Howard. 9 10 Commissioner Hamilton. 11 COMMISSIONER HAMILTON: Thank you, Mr. Chairman. 12 EXAMINATION 13 14 BY COMMISSIONER HAMILTON: 15 Q Mr. Kochems, during the hearing so far, we've talked 16 about the disputed charges a great deal, and I've still 17 got some questions I'd like for you to clarify for me. 18 I noticed that you had 35 disputed charges that you 19 didn't think — or the company did not think — were 20 eligible. 21 possibly the company thought all of these 35 would have 22 been settled in Westinghouse's favor? 23 page 10 testimony. 24 25 A The answer for this, would it be that This is from your [KOCHEMS] Well, certainly, we had concerns with the disputes and the open claims we had between us and VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 879 1 Westinghouse. We obviously had our commercial position 2 with every single one of those, and we had reasons for 3 doing it that we felt comfortable with, but we also knew 4 that Westinghouse had a commercial position, as well, 5 and we knew going to a court, through the litigation 6 process, would be lengthy, expensive, and a distraction 7 to the project. 8 turn out through the litigation, we felt that settling 9 them in the October amendment was the most prudent And not knowing how those items would action to take. 10 11 COMMISSIONER HAMILTON: 12 Dr. Lynch, I'm going to let you rest, sir. 13 CHAIRMAN WHITFIELD: Thank you, sir. Thank you, Commissioner Hamilton. 14 15 Commissioner Randall. 16 VICE CHAIRMAN RANDALL: Thank you, Mr. Chairman. 17 EXAMINATION 18 19 BY VICE CHAIRMAN RANDALL: 20 Q Just one question, Mr. Kochems. Going back and talking 21 disputes a little bit more, on page 17, up at the top, 22 you're talking — it says, “the Amendment provides that 23 SCE&G will have timely access to vendor technical 24 manuals.” 25 manuals are pretty critical to the whole preparation and Now, I'm just figuring vendor technical VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 880 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 testing for getting this plant into operation, so why 2 would we have a dispute about getting technical manuals 3 in a timely manner? 4 A [KOCHEMS] Well, there certainly was not a dispute on 5 getting the actual technical manuals; the dispute was 6 related to when we were going to get those. 7 of those technical manuals aren't going to be developed 8 by Westinghouse; they're going to be developed by the 9 vendors or the suppliers Westinghouse is using. So, a lot So our 10 requirement was that we get those much earlier than some 11 of the equipment was even going to be delivered, such 12 that we could write policies and procedures related to 13 operating and maintenance activities. 14 those much sooner than Westinghouse had originally 15 planned on providing them, or maybe much sooner than 16 Westinghouse originally planned on getting the 17 equipment. 18 manuals; it was we needed them early — sometimes, years 19 early — so that we could write procedures related to 20 them. So we wanted So, again, the issue wasn't getting the 21 Q And this amendment settles that? 22 A [KOCHEMS] Yes, sir. 23 VICE CHAIRMAN RANDALL: 24 Thank you, Mr. Chairman. 25 CHAIRMAN WHITFIELD: Okay, thank you. That's all. Thank you, Commissioner VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 881 Randall. 1 2 Commissioner Hall. 3 COMMISSIONER HALL: Thank you, Mr. Chairman. EXAMINATION 4 5 BY COMMISSIONER HALL: 6 Q Good morning, gentlemen. 7 A [PANEL] Good morning. 8 Q I promise I am not obsessed with this DRB, but I just have one question about it. 9 payment schedule, that was referred to the DRB, correct? 10 11 A [KOCHEMS] That's correct. 12 Q Okay. Why is there a disagreement on the payment schedule if it's based on the completion of milestones? 13 14 The construction milestone A [KOCHEMS] Well, certainly, the total amount that we're 15 going to pay has not been disputed. 16 lies in the specific milestones that are going to 17 trigger payments, and the dollars associated with each 18 one of those milestones. 19 bit over 600 individual milestones that we'll make 20 payments on. 21 those milestones. 22 different ways to assign a value to those milestones. 23 We had one methodology, Westinghouse had another, and we 24 could not come to some agreement on it. 25 Q The dispute really So we've agreed on a little The current dispute lies in how we value You can imagine, there's a million So the dispute is assigning the value to it, then? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 882 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A [KOCHEMS] Correct. 2 Q Okay. How would you characterize the relationship right 3 now, the working relationship, between the company and 4 Westinghouse? 5 A [KOCHEMS] I think at my level of the interactions we 6 have with Westinghouse, it's good. 7 better on the site with the actual people doing the 8 work, directing the work, things of that nature. 9 think it's certainly strong, and they're open to talking Q Okay. Do you think it's gotten better since the DRB was established? 12 13 I to us, listening to us, and moving forward. 10 11 I think it's even A [KOCHEMS] Yes, I do. 14 COMMISSIONER HALL: 15 Thank you, Mr. Chairman. 16 CHAIRMAN WHITFIELD: Okay. Thank you. Thank you, Commissioner Hall. 17 18 Commissioner Fleming. 19 COMMISSIONER FLEMING: 20 EXAMINATION Thank you. 21 BY COMMISSIONER FLEMING: 22 Q Good morning. 23 A [PANEL] Good morning. 24 Q Since prudence is the key reason we're here today, could 25 you talk about how you determine the prudence of costs VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 883 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 presented as necessary to the successful completion of 2 the project? 3 A [KOCHEMS] Certainly. We evaluated the October amendment 4 and the $137.5 million associated with settling all the 5 claims, as well as all the other things that we got for 6 the October amendment. 7 we held out the fixed-price option, actually made it an 8 option, was that we wanted to study that a little bit 9 further and make sure that was the right path to go on. 10 And we've since, you know, performed that analysis, and 11 Dr. Lynch's testimony kind of summarizes a lot of that. 12 So I think that was the main reason why we realized 13 there was a significant change in direction and we 14 wanted to do the most prudent thing by taking our time 15 and making sure that we looked at every option and every 16 possibility. 17 Q I think one of the key reasons Do you have a pristine audit trail to ensure the 18 prudence of the decisions underlying the costs that are 19 being paid? 20 A [KOCHEMS] Certainly. We evaluate all the invoices that 21 come to us from the consortium, and we evaluate that on 22 many different levels in the accounting group. 23 through all the — to simplify it — math, to make sure 24 that everything is added up right. 25 invoices in the past were literally thousands of pages We go A lot of these VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 884 1 long. 2 do, to make sure that, you know, one person on there 3 isn't being billed for, you know, 2000 hours in a week, 4 things of that nature. 5 construction evaluation that is done of the invoices, 6 where people that are SCE&G employees that are actually 7 out in the field will look at subcontractor invoices, 8 things of that nature, milestone invoices, and even take 9 pictures of, you know, completed work to prove that Q So you feel that you're meeting the standard that is required. 12 13 We also have more of a things were actually done. 10 11 We have different tests and evaluations that we A [KOCHEMS] Most certainly. And I would add that ORS 14 comes behind us and does an evaluation of that, almost 15 continuously, and supports that. 16 Q Okay. 17 A [KOCHEMS] It's a good check behind us. So they keep you on-task as well? 18 COMMISSIONER FLEMING: 19 CHAIRMAN WHITFIELD: Thank you. Thank you, Commissioner Fleming. 20 EXAMINATION 21 22 BY CHAIRMAN WHITFIELD: 23 Q Mr. Kochems, since you're new, I'm going to follow up a 24 little bit with where Commissioner Fleming was just 25 going. And I realize you're Manager of Nuclear Finance VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 885 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Administration and that you mentioned all of the field 2 engineers and the people that you have doing quality 3 control and quality assurance, from SCE&G's standpoint, 4 and also from Fluor's standpoint. 5 do you actually go out — and you stated a minute ago on 6 the stand that you can't dispute a milestone, but do you 7 actually go out, yourself, and actually view the work, 8 or you just rely on the pictures and the documents that 9 people give you? A [Laughter] 13 Q Well, I noticed you had a 215 address, so I thought you were on-site out there. 15 16 [KOCHEMS] I, personally, do not go out in the field. They don't like me out there. 12 14 Do you get a chance to go out and view it yourself? 10 11 But in your new role, A [KOCHEMS] We are on-site. We're in the administration 17 building; we're located right next to the site. 18 have a team of SCE&G employees that will actually 19 perform that for us. 20 looking at, and, again, they take pictures of it, they 21 actually sign their name on it — the field engineer 22 that's out in the field will sign his name on it, his 23 boss will sign it, and the site VP will sign it. 24 25 Q But we They actually know what they're So instead of having the old payment schedule when you paid so much a month, you don't pay until you see that VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 886 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 person's signature, name — or persons, plural — 2 approving that? 3 A [KOCHEMS] Exactly. 4 Q Okay. Sounds like a different system of checks and balances now. 5 6 A [KOCHEMS] It's trust but verify. 7 Q Yes, sir. And, Dr. Lynch, of course you state in 8 testimony the fixed-price option will save between 10.9 9 percent and 29.3 percent — save customers — for the 10 remainder of the project. 11 mentioned should SCE&G abandon the project, you had an 12 exchange with Commissioner Elam about gas. 13 course, the assumptions you used were as natural gas 14 staying where it is and not going up. 15 you didn't run the low-cost gas because, I guess, you're 16 saying if it's any lower than it is, it's going to 17 inhibit production and, therefore, you wouldn't have the 18 production. 19 A Should SCE&G — and you And, of Of course, I know [LYNCH] Yeah, I would think the low gas prices now are 20 affecting the profitability of the producers of gas, 21 too. 22 future. 23 Q I think the market is in disequilibrium now. So you're saying there's no reason for you to run a study with it — 24 25 But I can't see it staying low, going into the A [LYNCH] Going lower? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 887 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q Right, because it's where it's going to — 2 A [LYNCH] It's not realistic, no. 3 Q And what is your opinion — of course, none of us knows 4 what the future holds. 5 And I know we're looking at a 60-year — life of a 60- 6 year generation versus that many years out in the 7 natural gas. 8 9 A What is your opinion long-range? [LYNCH] Well, in the study, we say that the 50 percent higher option — so 1.5 times our base natural gas 10 forecast — that falls almost right in line with the 11 Energy Information Administration forecast. 12 have a team of economists, however they do it, who 13 forecast gas prices based on supply and demand. 14 forecast falls right on top of that 50 percent plus, the 15 50 percent scenario that I have. 16 testimony we say that that seems like the most 17 reasonable — if you're going long-term, that's the most 18 reasonable future for gas prices. 19 20 21 22 23 24 25 CHAIRMAN WHITFIELD: So they Their That's why in the Thank you, Dr. Lynch. That's all I have. If there are no more Commissioner questions, Mr. Willoughby, we'll call on you now for redirect. MR. WILLOUGHBY: We have no redirect. We would ask that the witnesses be excused. CHAIRMAN WHITFIELD: Yes, sir, Mr. Willoughby. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 888 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 2 The witnesses may step down. [WHEREUPON, the witnesses stood aside.] 3 And we're going to adjourn — excuse me. We're 4 going to recess right now for lunch, and we'll see 5 you back at 1 o'clock 6 [WHEREUPON, a lunch recess was taken from 7 11:50 a.m. to 1:00 p.m., during which 8 time Mr. Holman was excused from the 9 hearing proceedings.] 10 _______________________________________ 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 889 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A F T E R N O O N P R O C E E D I N G S 2 CHAIRMAN WHITFIELD: 3 MS. THOMPSON: Please be seated. Mr. Chairman, just a 4 preliminary matter before we get started with the 5 next witness — CHAIRMAN WHITFIELD: 6 7 go to a microphone, please? MS. THOMPSON: 8 9 Ms. Thompson, could you I apologize [indicating]. Before we get started with the next witness, Mr. 10 Holman had to return to Charleston for a previously 11 scheduled meeting with the Mayor's office. 12 conferred with Mr. Butler, who suggested that Mr. 13 Holman could be excused if another attorney agreed 14 to sponsor me, or supervise me, for the duration or 15 the remainder of the hearing, and Mr. Elliott has 16 graciously agreed to do that. 17 Commission's permission, we'd like to proceed that 18 way. 19 20 MR. ELLIOTT: We had So with the I told Mr. Holman, it probably ought to be the other way around, Mr. Chairman. 21 [Laughter] 22 CHAIRMAN WHITFIELD: I was made aware of Mr. 23 Holman's need to return to Charleston, and we're 24 going to excuse him. 25 representing your client, and with Mr. Elliott, I So you are on your own VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 890 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 guess, holding your hand or whatever you want to 2 call it. 3 MS. THOMPSON: 4 CHAIRMAN WHITFIELD: Thank you, Mr. Chairman. And he's already said it should probably be the other way around — 5 [Laughter] 6 — but we will excuse him, and we'll leave you 7 8 the sole one representing your client the rest of 9 the time. 10 MS. THOMPSON: 11 MR. ELLIOTT: 12 CHAIRMAN WHITFIELD: Thank you, Mr. Chairman. Thank you, Mr. Chairman. I'm going to now turn it over to ORS. 13 MR. NELSON: 14 Thank you, Mr. Chairman. I think 15 we're down to our last witness, and ORS would call 16 Mr. Gary Jones to the stand. CHAIRMAN WHITFIELD: 17 [Witness affirmed] 18 19 Mr. Jones, come forward. THEREUPON came, G A R Y 20 C . J O N E S , 21 called as a witness on behalf of the South Carolina Office of 22 Regulatory Staff, who, having been first duly affirmed, was 23 examined and testified as follows: 24 < 25 < VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 891 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions DIRECT EXAMINATION 1 2 BY MR. NELSON: 3 Q business address, and occupation, for the Commission? 4 5 Mr. Jones, would you please give your full name, A My full name is Gary Conrad Jones. I'm the president of 6 Jones Partners, Limited, a private electrical power 7 industry consulting engineering firm. 8 1555 North Astor — A-s-t-o-r — Street, Apartment 22W, 9 Chicago, Illinois 60610. 10 Q My address is Mr. Jones, could you please provide us with a brief 11 overview of your professional qualifications and 12 experience? 13 14 A Yes. Thank you. Mr. Chairman and Commissioners, I have over 45 15 years of experience with nuclear power plant design, 16 construction, and operations support. 17 Sargent & Lundy, an international architect, 18 engineering, and consulting firm in the electric power 19 industry. 20 senior vice president and owner of the firm. 21 that time, I led engineering design, construction 22 support, and startup support for six new nuclear power 23 plants and have led teams providing engineering design 24 and consulting services for over 50 power plants in the 25 United States and internationally. I was with I was there for 32 years, with 16 years as a During VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 892 After my retirement from Sargent Lundy, I served 1 2 for two and a half years as a senior engineering safety 3 officer at the International Atomic Energy Agency in 4 Vienna, Austria. 5 consultant and have worked with ORS on the VCS 2 and 3 6 Plants since August 2011. I am a registered Professional Engineer in the 7 States of Missouri and South Carolina. 8 Thank you. 9 10 Since that time, I have been a private Q Thank you, Mr. Jones. Did you prepare a complete 11 curriculum vitae, which was attached as Exhibit GCJ-1 to 12 your prefiled testimony? 13 A Yes, sir, I did. 14 Q And do you have any changes or corrections to that exhibit? 15 16 A Yes, I do. There is one correction to the address that 17 is provided there, and I have provided you with my new 18 address in my opening testimony there. 19 change. That's the only 20 MR. NELSON: 21 If the Commission would request or require Thank you, Mr. Jones. 22 copies of these, I can provide them at this time; 23 if not, we can file it afterwards. Again, the only 24 change is the address of Mr. Jones. I'd be happy 25 just to file it with the Court afterwards. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 893 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions CHAIRMAN WHITFIELD: 1 Nelson. 2 Later is fine. MR. NELSON: 3 Later is fine, Mr. Thank you, Mr. Chairman. We 4 would also, then, offer Exhibit GCJ-1 attached to 5 the prefiled direct testimony of Mr. Gary Jones, as 6 revised from the witness stand, into the record as 7 the next hearing exhibit. CHAIRMAN WHITFIELD: 8 Mr. Jones' prefiled direct testimony will be entered into the record as 9 10 Hearing Exhibit No. 14 — I'm sorry, his Exhibit 11 GCJ-1. 12 [WHEREUPON, Hearing Exhibit No. 14 was 13 marked and received in evidence.] 14 MR. NELSON: 15 We would also ask that the Commission qualify Thank you, Mr. Chairman. 16 Mr. Jones as an expert in the areas of nuclear 17 design, engineering, and construction, based on his 18 education, over 45 years' experience in the nuclear 19 power industry, and as shown on his curriculum 20 vitae, which is now part of the record in this 21 case. 22 the Commission. We would ask he be qualified as an expert by 23 CHAIRMAN WHITFIELD: 24 MR. NELSON: 25 So ordered. Thank you. < VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 894 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 BY MR. NELSON: 2 Q Mr. Jones, did you also prepare 34 pages of direct 3 testimony that was prefiled in this docket on September 4 1st of this year? 5 A Yes, I did. 6 Q Do you have any edits or corrections to your prefiled direct testimony? 7 8 9 10 A One minor editorial: the pagination in the testimony is incorrect. It should be 34 pages, instead of 33. MR. NELSON: And, again, I would ask, with the 11 Commission's approval, that we just file revised 12 direct testimony with those page numbers. 13 else is different, other than just the page numbers 14 were mis-numbered. 15 16 CHAIRMAN WHITFIELD: Nothing If you could file that immediately upon the end of this case. 17 MR. NELSON: 18 Mr. Chairman, we also ask that Mr. Jones' Thank you, Mr. Chairman. 19 prefiled direct testimony be entered into the 20 record as if given orally from the stand. 21 CHAIRMAN WHITFIELD: Mr. Jones’ direct 22 testimony will be entered into the record as if 23 given orally from the stand. 24 25 [See pgs 897-931] MR. NELSON: Thank you, Mr. Chairman. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 BY MR. NELSON: 2 Q Mr. Jones, have you prepared a summary of your direct testimony for this hearing? 3 4 A Yes, I did. 5 Q Would you please present that to the Commission. 6 A Yes, of course. 7 895 The purpose of my direct testimony is to provide an 8 overview of ORS's findings regarding the Petition. 9 provided a summary of the construction status of VCS 2 10 and 3, an overview of the EPC contract changes, and an 11 assessment of each of the cost elements of SCE&G's 12 Petition. 13 review included an itemized assessment, cost must be 14 considered in the overall context of SCE&G's sensitivity 15 analysis and the settlement agreement. 16 I It is important to note that, while ORS’s The major points of this assessment include: the 17 support for the $505 million premium associated with the 18 EPC contract option, in the context of the larger 19 settlement agreement; also, support for the $137.5 20 million increase associated with the October 2015 21 contract amendment, also in the context of the larger 22 settlement; also included is an analysis of the cost of 23 each change order, along with the assessment of its 24 status; also included was support of the $20.8 million 25 in owner's costs, which were well-documented and VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 896 1 reasonable; and, lastly, an assessment of other items, 2 including the Petition, some of the minor items in the 3 Petition. 4 modification to the construction schedule, which 5 includes revised guaranteed substantial completion dates 6 of August 31, 2019, for Unit 2, and August 31, 2020, for 7 Unit 3, and the revised associated BLRA milestone 8 schedule. 9 dates were justified, but cautions that uncertainty in I also included an assessment of the proposed My assessment indicated that these revised 10 this area remains, particularly in the granular details 11 of the schedule, as the resource-loaded integrated 12 schedule currently being prepared by Fluor may have a 13 significant impact on these dates. 14 Dr. Lynch's sensitivity analysis and found his analysis 15 to be supportive of SCE&G's decision to accept the EPC 16 option, providing sufficient protection was provided to 17 the South Carolina ratepayers. 18 19 Finally, I reviewed This concludes the summary of my testimony. MR. NELSON: Thank you, Mr. Jones. 20 21 22 23 [PURSUANT TO PREVIOUS INSTRUCTION, THE 24 PREFILED DIRECT TESTIMONY {W/CORRECTIONS} OF 25 GARY C. JONES FOLLOWS AT PGS 897-931] VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA The corrections noted herein reflect testimony given during the hearing in this matter. 897 THE OFFICE OF REGULATORY STAFF DIRECT TESTIMONY & EXHIBIT OF GARY C. JONES SEPTEMBER 1, 2016 DOCKET NO. 2016-223-E Petition of South Carolina Electric & Gas Company for Updates and Revisions to Schedules Related to the Construction of a Nuclear Base Load Generation Facility at Jenkinsville, South Carolina 898 Direct Testimony of Gary C. Jones, P .E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page 1 of33 1 DIRECT TESTIMONY & EXHIBIT OF 2 GARY C. JONES, P.E. 3 ON BEHALF OF 4 THE SOUTH CAROLINA OFFICE OF REGULATORY STAFF 5 DOCKET NO. 2016-223-E 6 7 8 9 IN RE: PETITION OF SOUTH CAROLINA ELECTRIC & GAS COMPANY FOR UPDATES AND REVISIONS TO SCHEDULES RELATED TO THE CONSTRUCTION OF A NUCLEAR BASE LOAD GENERATION FACILITY AT JENKINSVILLE, SOUTH CAROLINA 10 11 Q. 12 A. PLEASE STATE YOUR NAME, TITLE AND BUSINESS ADDRESS. My name is Gary C. Jones, P.E. I am President of Jones Partners, Ltd., a private 13 consulting engineering firm in the electrical power generation field. My business address 14 is 1555 North Astor Street, Apt. 22W, Chicago, Illinois, 60610-5765. 15 Q. 16 A. 17 WHAT IS THE NATURE OF YOUR BUSINESS? As a consultant, I provide professional engineering and consulting services to clients in the electric power industry. 18 Q. 19 A. PLEASE STATE YOUR EDUCATIONAL BACKGROUND AND EXPERIENCE. I received a Bachelor of Science degree in Engineering Science from Tennessee 20 Technological University in Cookeville, Tennessee, where I also participated in the Co- 21 Operative Education Program with two one-year assignments at the Oak Ridge National 22 Laboratory in Oak Ridge, Tennessee. I worked for thirty-two years at Sargent & Lundy, 23 LLC, ("S&L") an international architect-engineering and consulting engineering firm in 24 the electric power industry based in Chicago, Illinois. I held engineering positions of 25 increasing levels of responsibility working on the design, procurement, licensing, THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 899 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 2 of33 // 34 1 construction support and start-up of nuclear power plant projects, culminating in the 2 position as Senior Vice President and one of the owners of the firm for the last sixteen 3 years of my tenure. I led the engineering activities associated with the design of six nuclear 4 power plants at three nuclear power plant stations, including the LaSalle County and 5 Braidwood plants for Commonwealth Edison (now Exelon) and the Marble Hill station for 6 Public Service Indiana. I also led the engineering activities associated with the restarts of 7 the LaSalle County Station Units 1 and 2 and the D.C. Cook Plant after these plants were 8 shut down due to operation concerns. I served for two years as head of the Mechanical 9 Department at S&L. I also led the engineering activities associated with services to 10 numerous operating nuclear power plants, including modifications, technical and economic 11 studies, licensing support, procedure and process development and other consulting 12 services. 13 Among the most significant assignments on international projects were leading the 14 design review of the first indigenous Chinese nuclear power plant, Qin Shan Unit 1, and 15 participating as a senior member in the design review of the Korean nuclear power plants 16 Yonggwang Units 3 and 4. 17 Upon my retirement from S&L, I established a private consulting practice, Jones 18 Partners, Ltd., where I continued working in the nuclear power industry for two and a half 19 years until I accepted a position at the International Atomic Energy Agency ("IAEA") in 20 Vienna, Austria. There I was a Senior Engineering Safety Officer in the Engineering Safety 21 Section of the Department of Nuclear Safety and Security. My assignments included 22 developing international safety standards and performing safety reviews of nuclear power THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 900 Direct Testimony of Gary C. Jones, P.E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page3 of33 // 34 1 plants. My most significant assignment was leading the safety review of the fifteen 2 operating nuclear power plants in the Ukraine. 3 Following the completion of my assignment at the IAEA, I returned to private 4 practice as a consultant to the power industry and continue that work today. I am a licensed 5 professional engineer in the States of Missouri and South Carolina. Additional details of 6 my work experience are provided in my resume which I have included as Exhibit GCJ-1. 7 Q. 8 9 HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA ("COMMISSION" or "PSC")? A. Yes. I provided written and oral testimony associated with Docket No. 2012-203- 10 E to update the schedule and budget for the South Carolina Electric & Gas Company 11 ("SCE&G" or the "Company'') construction ofV.C. Summer Units 2 & 3 ("the Units" or 12 "the Project"). I also presented at allowable ex parte briefings to update the Commission 13 on the construction status of Units. 14 Q. REGULATORY STAFF ("ORS")? 15 16 WHAT IS YOUR ASSIGNMENT FROM THE SOUTH CAROLINA OFFICE OF A. My assignment is to assist ORS in its monitoring and tracking of the construction 17 schedule and budget related to SCE&G's construction of the Units. I began my assignment 18 with ORS in August 2011. 19 Q. 20 A. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? The purpose of my testimony is to provide on behalf of ORS a technical review of 21 specific areas in SCE&G's request for updates and revisions to its capital cost schedule 22 and construction schedule for the Units as delineated in its petition before the PSC in 23 Docket No. 2016-223-E ("Petition"). The specific areas which I will address are: THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 901 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page4of33 1 • The current construction status of the Project; 2 • The Engineering, Procurement and Construction Contract ("EPC Contract") updated 3 capital cost schedule; 4 • The EPC option premium; 5 • The EPC amendment costs; 6 • The EPC Change Orders; 7 • The revised construction schedule provided by SCE&G in the update filing, which 8 includes the Base Load Review Act ("BLRA") milestones; 9 • The Owners Cost changes; and 10 • The Sensitivity Analysis (Exhibit JML-1) of Mr. Lynch's testimony. 11 To the extent that negotiations between ORS, the Company and other parties 12 result in a settlement, Allyn Powell will address the settlement and its impact on ORS's 13 findings in her testimony. 14 Q. 15 A. PLEASE DESCRIBE THE CURRENT STATUS OF CONSTRUCTION. Overall, as of June 30, 2016, the Project is reported to be 22.4% complete based on 16 the total estimated direct construction labor man-hours. There has been significant progress 17 on the Project since this was reported in SCE&G's Quarterly Report for the quarter ending 18 June 30, 2016. As of August 15, 2016, 123 of 167 Unit 2's and 66 of 167 Unit 3's Shield 19 Building panels have been fabricated at Newport News Industrial and shipped to the site. 20 The Unit 2 Main Steam and Feedwater piping penetration through the Shield Building has 21 been set in place and the large reinforced concrete panels that permanently support this 22 penetration assembly are nearing completion. In the Unit 2 Auxiliary Building, modules THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 902 Direct Testimony of Gary C. Jones, P.E. September l, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 5 of33 // 34 1 CAOS, CA03 and CA02 have been set inside the containment vessel. This means that all 2 of the major Unit 2 structural modules (known as "Super Modules") have now been set in 3 place. Preparations continue in support of installing the Unit 2 Reactor Pressure Vessel in 4 the third quarter of 2016. Work continues to progress in the Unit 2 Annex Building, 5 although still hampered by late identified design changes and shortages of materials. 6 In Unit 3, the large Turbine Building modules CH80 and CH82 have been set in the 7 plant and work is well underway to set module CH 81 and the condensers. In the Auxiliary 8 Building, CA20, Sub-assemblies 1 & 2 have now been set in place, completing setting of 9 the entire CA20 module. 10 The Consortium (consisting of Westinghouse Electric Company ("WEC" or 11 "Westinghouse") and Chicago Bridge & Iron ("CB&I")) has been restructured. Fluor 12 Corporation ("Fluor") has been hired by Westinghouse as the sub-contracted construction 13 manager for the Project. CB&I, which was previously in charge of construction, has exited 14 the Consortium via Westinghouse's purchase of CB&I subsidiary Stone and Webster and 15 SCE&G's release ofCB&I. 16 In April 2016, Fluor assumed direct responsibility for craft labor on the Project after 17 working with Westinghouse since January 2016. The evolution of this transition has been 18 slower than anticipated, and as such the full impact of Fluor's process improvements has 19 not yet been realized. However, there are significant process and procedural changes that 20 are underway, which include implementing: more streamlined and effective construction 21 work packages to expedite work in the field; changes in the procurement areas to better 22 ensure that construction commodities are available when required and do not delay 23 construction; changes in the welding programs to expand the qualification levels of the THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 903 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page6 of33 // 34 1 welders, expedite the availability of welding commodities, and accelerate the welding 2 production; and changes in the field engineering support to reduce tum-around time on 3 design change requests and reduce construction delays. 4 These changes and other process improvements must be promptly implemented, in 5 addition to significantly increasing the construction labor force, if the increased production 6 levels required to support the Project schedule are to be obtained. 7 Q. 8 A. 9 PLEASE DESCRIBE SCE&G'S PETITION. SCE&G filed this Petition to revise the construction schedules and capital cost schedules approved by the Commission in Order No. 2015-661. The primary reasons for 10 filing the Petition are: 11 • To increase the estimated costs of the Units to reflect the impact of changes to the 12 construction and capital cost schedules on the Project. The largest portion of the 13 increase is $781.1 million in EPC Contract cost increases, comprised of: 14 o executed on October 27, 2015 ("Amendment" or "EPC Amendment"), 15 16 $13 7.5 million in costs resulting from an amendment to the EPC Contract o $505.5 million in costs resulting from SCE&G's decision (pending PSC 17 approval) to exercise an option in the EPC Amendment that moves many of the 18 EPC Contract costs to a fixed cost category ("Option"), 19 o previously granted to SCE&G's customers in Order No. 2015-661, and 20 21 $85.5 million resulting from a reversal of the credit for liquidated damages o $52.5 million in increases due to Change Orders. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 904 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 1 • 2 3 • To increase the estimated costs of the Units to reflect anticipated changes in the Owners To increase the estimated cost of the Units by $45 million due to a combination of AFUDC and Escalation; • 6 7 South Carolina Electric & Gas Company // 34 Page7 of33 Cost by approximately $20.8 million; 4 5 Docket No. 2016-223-E To increase the cost of Transmission infrastructure by $4.3 million due to modifications in the switchyard configuration; • To change the construction schedule, including a change to the guaranteed substantial 8 completion dates ("GSCDs") for the Units as agreed to by SCE&G in the Amendment, 9 which reflect delays primarily incurred due to late fabrication, delivery and erection of 10 structural modules and Shield Building panels associated with the Nuclear Island and 11 other delays associated with construction; and 12 • To advise the Commission of changes to the EPC Contract associated with the 13 withdrawal of CB&I from the Project, leaving WEC as the sole member of the 14 Consortium, and the retention of Fluor by WEC as the sub-contracted construction 15 manager of the Project. 16 The culmination of these changes is a delay of the GSCD of Unit 2 by about 2 and 17 1/2 months (from June 19, 2019 to August 31, 2019) and a delay of the GSCD of Unit 3 18 by about 2 and 1/2 months (from June 16, 2020 to August 31, 2020) from the GDSDs 19 approved by Commission Order No. 2015-661. This delay also results in changes to many 20 of the approved BLRA milestone dates. 21 With regard to costs, the SCE&G portion of the gross construction costs in future 22 dollars will increase by approximately $852 million, increasing the overall gross THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 905 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page8 of33 // 34 1 construction cost in future dollars specified in Commission Order No. 2015-661 from 2 approximately $6.827 billion to approximately $7.679 billion. 3 Q. 4 5 HOW DOES THIS PETITION DIFFER FROM PRIOR PETITIONS FILED BY THE COMPANY? This cost modification request differs from past requests in two important aspects. A. 6 First, although the Company presents the changes as an amendment to the EPC Contract, 7 the entire structure and nature of the EPC Contract has been changed. Second, there are 8 substantive differences in SCE&G's approach to justify major cost increases associated 9 with this Petition. 10 Q. RESULT OF THE AMENDMENT. 11 12 PLEASE DISCUSS THE MAJOR CHANGES TO THE EPC CONTRACT AS A A. A major change to the EPC Contract resulting from the Amendment was the 13 withdrawal of CB&I from the Consortium and the sale of Stone and Webster, CB&I's 14 nuclear construction subsidiary, to WEC. The Amendment included the terms and 15 conditions for CB&l's exit, as well as new provisions limiting its liability and releasing 16 CB&I from corporate guarantees on the Project. Therefore, WEC is now solely responsible 17 for the execution of the EPC Contract. WEC subsequently contracted with Fluor to manage 18 the construction of the Project as a sub-contractor reporting directly to WEC. 19 This contractual ownership change is a positive step forward in completing the 20 Project. The commercial relationship between WEC and CB&I had deteriorated to the 21 point that it was jeopardizing the completion of the Units. I view CB&I' s exit as a necessary 22 change. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 906 Direct Testimony of Gary C. Jones, P .E. September I, 2016 1 2 3 Docket No. 2016-223-E South Carolina Electric & Gas Company Page9 of33 // 34 In addition, there were several improvements to the EPC Contract structure which include: • The resolution of current disputes. ORS supports the concept of resolving 4 outstanding disputes and the amount for resolution is discussed separately 5 below. Disputes were diverting attention and generating non-productive 6 work for the Project team; 7 • 8 9 currently proposed GSCDs; • 10 11 • Tightening the definition of a "change in law," which had been the subject of many disputes in the past; • 14 15 The increase in liquidated damages associated with not meeting the currently proposed GSCDs; 12 13 The extension of equipment warranties to address coverage beyond the Establishing the Dispute Resolution Board ("DRB") and defining the boundaries and terms within which it will operate; • No interim lawsuits filed prior to the completion of the Units. This will 16 better ensure the Project team remains focused on Project completion, rather 17 than being diverted into supporting litigation; 18 • 19 20 Upgrading the contractual basis of the design to Design Control Document, Revision 19 to agree with the licensing basis of the plant; • Revising the construction milestone payment schedule to better align with 21 Project priorities. While this should be an improvement to the EPC 22 Contract, WEC and SCE&G have not yet been able to agree on the details THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 907 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 10 of33 // 34 1 of this payment schedule and SCE&G has been making monthly payments, 2 subject to a true up to invoices, until the final payment schedule is agreed 3 upon. ORS is concerned that this matter has not been brought to a timely 4 resolution as provided for in the Amendment. This dispute was submitted 5 to the DRB in August 2016, and may be the first issue addressed by the 6 DRB on this Project. 7 There are also changes to the EPC Contract structure that cause ORS concern. With 8 regard to the federal production tax credit completion incentive, ORS prefers an incentive 9 structure that would only provide the full incentive if the current production tax credit 10 expiration dates are met, and would be reduced on a graduated scale if Congress extends 11 the expiration dates. 12 ORS is also concerned about the level of price surety offered by the Option. 13 Although ORS has received assurances from SCE&G and WEC executive management 14 that WEC will abide by its commitment to complete the Project for the stated price, the 15 avenues of recourse available to SCE&G should WEC demand additional funding are 16 limited. 17 ORS is concerned about WEC's ability to absorb potential financial losses that 18 SCE&G's sensitivity studies identify as possible if productivity and production are not 19 significantly improved. The potential financial impacts identified in the sensitivity study 20 are in the hundreds of millions of dollars. Under the revised EPC Contract structure 21 outlined in this Petition, those costs would have to be borne by WEC or its parent company 22 Toshiba. WEC has assured ORS that it recognizes the potential risk regarding the Units 23 and Southern Company's Vogtle project, which has a similar contract, and is prepared to THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 908 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page 11 of33 1 proceed. WEC asserts it can complete both projects on schedule and understands the 2 reputational damage that could occur in the world market if WEC fails to deliver or reneges 3 on the South Carolina or the Georgia contracts. 4 ORS also has concerns about the relationship and co-operation between SCE&G 5 and WEC in the context of a "fixed price'' contract. Historically, fixed price contracts have 6 been more adversarial and confrontational than other methods of contracting. Although the 7 DRB is designed to handle conflicts and disputes expeditiously, it is not intended to be the 8 preferred means to resolve all contract issues. 9 In addition, "fixed price" contracts have generally resulted in reduced participation 10 and influence by the owners of the construction project. The sentiment and approach 11 adopted by the contractor is generally, "we have guaranteed you the project for this price; 12 leave us alone and we will deliver." This is not an acceptable approach. ORS regards 13 SCE&G's participation as essential to the satisfactory completion of the Project. 14 In response to ORS's concerns, ORS has been assured by SCE&G and WEC 15 executive management that they expect to have a co-operative and collegial relationship 16 for the remainder of the Project. However, such a relationship has yet to be fully 17 demonstrated since the Amendment was signed. More specifically, SCE&G and WEC have 18 not been able to negotiate a mutually acceptable milestone payment schedule and have had 19 a continuing conflict over the format of Change Order proposals. Recent Change Order 20 proposals have been "fixed price" proposals, and in some recent cases WEC is attempting 21 to limit its pricing disclosures in Change Orders, resulting in a lower level of detail than 22 was previously available. This lower level of detail makes it difficult for ORS to assess the THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 909 Direct Testimony of Gary C. Jones, P .E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 12 of33 // 34 1 price and construction methodology. It is critical to ORS's review process that future 2 Change Order proposals be supported by adequate price disclosure by WEC. 3 Q. 4 A. PLEASE DISCUSS THE EPC CONTRACT OPTION. The largest cost increase ($505.5 million) in this Petition is associated with the 5 Option. The premium associated with electing the Option is calculated by taking the 6 difference between the cost WEC can charge to complete the Units under the Option and 7 the corresponding price that was embedded in the schedules underlying Order No. 2015- 8 661. The documentation provided to justify the Option cost is primarily based on either 9 (1) establishing a comparison of the additional costs of the Option to forecasts of costs that 10 WEC would charge if the Project proceeded under the previous contractual basis; or (2) a 11 subjective analysis of the fixed price contract with little objective evidence of what the 12 actual cost savings from those subjective benefits would be. The Company focuses its 13 assessment of the value of the Option on the risk reduction achieved via the transfer of 14 price risk to WEC. The presumed reduction in day-to-day scope changes and the resulting 15 distraction of the dispute resolution process are cited as key benefits of the Option. 16 However, no attempt was made to quantify these benefits. While I can agree that these 17 benefits could accrue to the Project and that these benefits could reduce the friction and 18 distraction caused by continuing adversarial negotiations over scope changes, it is difficult 19 to assign a monetary benefit to these changes; and therefore, it is not possible to quantify 20 their contribution to the value of the Option. 21 Perhaps the best justification for the Option is provided in the sensitivity studies 22 offered in the testimony of Dr. Joseph M. Lynch, which indicate that SCE&G believes 23 several hundreds of millions of dollars will be saved by exercising the Option compared to THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 910 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page 13 of33 1 continuing on the basis of current contract terms. This will be discussed later in my 2 testimony. 3 However, since the start of the Project, WEC has not consistently demonstrated its 4 ability to meet contractual commitments. The benefit to the ratepayers from the Option is 5 only as good as WEC's financial ability and willingness to stand behind the EPC Contract. 6 Based on our previous experience in the Project, ORS has little confidence in WEC's 7 assurances that it will be able to deliver on its "fixed price" commitment. 8 While ORS understands the calculation of the $505.54 million for the Option as it 9 relates to EPC Contract costs, the Option was not constructed in such a way that a listing 10 of itemized costs total the premium. Rather, it represents an overall agreement that takes 11 into account both the costs to complete the project and a value WEC has assigned to its 12 risk associated with fixing these costs. 13 documentation to justify a specific list of costs making up the Option. However, ORS does 14 recognize that there are benefits to the Option, but only to the extent that SCE&G 15 guarantees its ratepayers that the Option will truly fix the cost of the Project for those items 16 and scopes included in the Option and that any additional EPC Contract costs (other than 17 for changes in law or other very specific items such as force majeure events) will not be 18 borne by SCE&G ratepayers. Absent such a guarantee from SCE&G, ORS could not 19 support the $505.5 million cost associated with the Option. 20 Q. 23 PLEASE DISCUSS THE COSTS ASSOCIATED WITH THE AMENDMENT TO THE EPC CONTRACT. 21 22 As such, ORS does not have sufficient A. The Amendment includes $137.5 million in costs to resolve outstanding disputes. While there have been previous amendments to the EPC Contract, those amendments were THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 911 Direct Testimony of Gary C. Jones, P.E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page 14 of33 1 based on detailed estimates of additional scopes of work to be done or previously 2 completed work that caused additional costs. This Amendment is different in that it served 3 as a comprehensive settlement that substantially changed the structure of the EPC Contract. 4 It changed the structure of the Consortium itself, revised bonus and liquidated damages 5 provisions, revised GSCDs, clarified definitions, resolved most outstanding disputes and 6 offered SCE&G the ability via the Option to fix many of the EPC Contract costs. As such, 7 it did not credit specific amounts to specific items. 8 For ORS to perform a thorough review of the Petition, ORS expects: 1) SCE&G 9 and WEC to be in agreement on the cost and schedule, 2) that formalized agreements in 10 the form of executed Change Orders to the EPC Contract will be in place, and 3) that 11 detailed, auditable estimates to back up changes will be provided. In lieu of signed Change 12 Orders, signed interim agreements which form the basis of future Change Orders are also 13 acceptable. 14 However, for the majority of the costs associated with the Amendment in this 15 Petition, such detailed formalized agreements or Change Orders do not exist. Instead, the 16 major costs for the Amendment are based on resolving previous disputes which have been 17 categorized by SCE&G as follows: (1) claims that could be reasonably specifically 18 quantified by estimates or have defined costs, or (2) claims that have been asserted by the 19 Consortium, but have not been specifically quantified by defined costs or estimates. 20 SCE&G's Mr. Kochems presented direct testimony to the effect that the claims that could 21 be reasonably quantified have an approximate value of $224.4 million (see Chart Bon page 22 9). However, ORS has concerns regarding the basis for these values as detailed in the 23 following paragraphs. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 912 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 15 of33 // 34 1 The first component identifies $8.7 million of withheld payments in dispute due to 2 poor labor productivity, inefficiency and delay costs, and, as part of the negotiation; these 3 costs were credited to WEC. The full credit for this amount is not supported because the 4 Consortium did not attain the stated productivity, performed substantially below the 5 targeted labor productivity rates and was responsible for significant project delays in 6 several areas, including module fabrication and delivery. Therefore, ORS cannot support 7 ~roviding a 100% credit to WEC. This same argument can be applied to the $3.6 million 8 applied to the excess escalation due to delay. 9 The second component addressed is $45.9 million in disputes arising from 10 regulatory revisions and changes in law. Many of the Consortium claims in this area were 11 not justified, and represented an overreach by the Consortium. These claims were based on 12 a very aggressive interpretation by WEC of the change in law provisions of the EPC 13 Contract. 14 specifically stated in the Final Safety Analysis Report represented a change in law, or that 15 the Nuclear Regulatory Commission's (''NRC'') practice of rigorous and literal 16 interpretation of codes and standards represented a change in law. Neither of these cases 17 can be logically considered a change in law and should not be accepted as such. Therefore, 18 ORS cannot support accepting all of the claims by the Consortium for disputes associated 19 with regulatory revisions and changes in law and crediting their full value. In many cases, the Consortium maintained that meeting the requirements 20 The third component involves $47.5 million in claims addressing work charged to 21 the Target Price category of the EPC Contract when it should have been charged to the 22 Firm Price category. ORS is aware that many of these disputes involved working on-site 23 to correct or complete sub-modules that were shipped to the site with defects or were THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 913 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 16 of33 // 34 1 incomplete, or were transferred to the site because they could not be completed at the 2 fabrication facility in time to meet construction needs. Module fabrication was originally 3 assigned to the firm price portion of the contract; therefore, ORS agrees with SCE&G's 4 original assertion that the work done on-site should also have been assigned to the Firm 5 Price cost category of the EPC Contract, and the additional costs the Consortium assigned 6 to the Target Price category was not appropriate. Therefore, ORS cannot support accepting 7 the entire $47.5 million value identified for this work. 8 The fourth component identifies $27 .5 million for producing as-built drawings 9 versus the Consortium's plan to produce only as-designed drawings. However, the EPC 10 Contract clearly states that as-builts will be provided. As-built drawings are also required 11 by NRC regulations and by the Final Safety Analysis Report. Therefore, ORS cannot 12 support accepting this value as justification for the increased costs in the Amendment. 13 The fifth component is $66.0 million dollars for extending the warranties on plant 14 equipment to provide coverage for two years beyond the actual GSCDs. ORS recognizes 15 that there is value in the warranty extensions and commends SCE&G for including this 16 item in the Amendment, especially as some components will be installed after their original 17 manufacturer warranty has expired due to the construction delays. There is no detailed 18 estimate that provides the basis for this cost, and the best estimate available was provided 19 verbally to SCE&G during a meeting with the Consortium. Therefore, although ORS 20 supports the inclusion of extended warranties and recognizes there is a cost associated with 21 this extension, based on the documentation available ORS cannot assign a value of $66.0 22 million to this item. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 914 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 17 of33 // 34 1 The sixth component of $60.3 million is associated with the resolution of disputes 2 related to Change Orders which SCE&G had accepted, and on which the Consortium had 3 begun construction, but SCE&G had not yet paid. These include cyber security on-going 4 work, site layout changes associated with Phases 1 and 2, Shield Building panel mitigation 5 which expanded the fabrication facilities at Newport News Industrial, and the on-going 6 costs of changes to health care required by the changes in federal law. The justification for 7 these changes appears to be adequately defined and appropriate. 8 The seventh component of $4.3 million is associated with expanding the security 9 for the off-site water treatment complex, providing fuel loading software and adding a 10 secondary chemistry laboratory. The justification for these items appears to be reasonable 11 and appropriate. 12 The eighth and final component is a $39.4 million credit to SCE&G for 90% of 13 $78.8 million in disputed invoices already paid; assuming a 50-50 split would have 14 ultimately resulted. Although this approach seems a reasonable compromise to resolve a 15 dispute, it is not an adequate basis for ORS to support including a specific amount as 16 justification for the cost increase. 17 With regard to those claims and disputes that Mr. Kochems defines in his direct 18 testimony as not specifically quantifiable, it is not possible for ORS to make an informed 19 judgment about the reasonableness of these costs. Mr. Kochems identifies these costs as 20 ''worth millions of dollars;" however, ORS cannot verify any specific amount. 21 22 In reviewing the specific examples cited by Mr. Kochems, ORS makes the following observations: THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 915 Direct Testimony of Gary C. Jones, P .E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 18 of33 // 34 1 As part of the Amendment, Mr. Kochems advises that WEC agreed to identify and 2 label subcomponents so that they could be specifically identified during plant operations 3 and maintenance. This was cited as a large scope of work involving over 35,000 4 components and subcomponents. However, ORS agrees with the original SCE&G position 5 which maintained that this scope was already included in the base EPC Contract. This level 6 of identification is an industry practice that has been in effect for at least twenty years and 7 has been applied on every plant with which I am familiar. SCE&G was correct to expect 8 this practice to be employed by WEC from the beginning and without additional cost. 9 Another example stated was that the Amendment resolved a dispute with WEC 10 regarding timely access to technical manuals to assist SCE&G with developing plans and 11 procedures to operate the plant. This was certainly an obligation in the original EPC 12 Contract, and it should not be cited as a basis for increased costs. 13 The third example cited was WEC's agreement to provide the design and 14 construction of the Annex Building walls and doors and the Auxiliary Building doors to 15 meet the NRC 2009 Aircraft Impact Assessment Rule. ORS agrees with SCE&G's original 16 position on this issue which was that these changes were included in the cost increases 17 associated with Order No. 2012-844. Therefore, ORS does not support the inclusion of this 18 item as a basis for increased costs 19 The final specific example addresses the elimination of calendar-based progress 20 payments and cites the $67.6 million in progress payments that SCE&G had withheld for 21 contested progress payments. Again, ORS agrees with the original SCE&G position that 22 these payments were not justified because WEC was the cause of unwarranted delays in 23 the Project that resulted in the prolongation of these payments beyond the originally THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 916 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 19 of33 // 34 1 intended intervals. ORS is in agreement that the elimination of these calendar-based 2 payments is a definite benefit to the Project and commends SCE&G for removing these 3 from the revised EPC Contract. The next important step is to negotiate the construction 4 milestone-based payment schedule. 5 While there are certainly other unquantified benefits to the Amendment that provide 6 value to the project, such as revising the definition of "change in law" to help prevent future 7 contract disputes, there is no way to assign a dollar amount to these benefits. 8 Based on the documentation provided by SCE&G, ORS has determined that $64.6 9 million of the value claimed by SCE&G can be supported by the documentation provided. 10 These amounts, however, were not presented individually for approval but as part of the 11 justification for a larger settlement. ORS has insufficient support under our normal review 12 processes to justify the approval of the total approximately $137.5 million requested by 13 SCE&G related to the EPC Contract Amendment. However, ORS does agree that the 14 Amendment added value to the Project that it is difficult to quantify and, in the context of 15 a larger settlement that included both the Option and a guarantee from SCE&G that the 16 Option will truly fix the cost of the Project and that any additional EPC Contract costs 17 (other than changes in law or other very specific items such as force majeure events) will 18 not be borne by SCE&G ratepayers, ORS could support the inclusion of costs associated 19 with the Amendment. 20 Q. 21 A. PLEASE ADDRESS THE COSTS INCLUDED IN THE CHANGE ORDERS. The total requested increase associated with the eleven Change Orders identified in 22 the Petition is approximately $52.5 million. ORS's review supports the inclusion of $32.6 23 million for these Change Orders. When evaluating Change Orders, ORS expects that the THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 917 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page20 of33 // 34 1 documentation supporting them will include signed Change Orders, signed agreements 2 with detailed documentation that will form the basis for future Change Orders, or at the 3 very least a mature level of detailed documentation supporting a Change Order that is 4 nearly ready to be signed. In evaluating the documentation submitted at the time of the 5 Petition against the ORS expectations, ORS found the support for Change Orders to be 6 generally insufficient. In many cases, the justifications prepared by WEC were 7 significantly and unilaterally modified by SCE&G. In other cases justifications were based 8 solely on SCE&G estimates without formal input from WEC. During our review, 9 documentation supporting the bases of these estimates was lacking and was by no means 10 as rigorous and detailed as ORS expected to be presented for review. 11 In response to numerous ORS requests for information, SCE&G provided 12 additional documentation, and in some cases, SCE&G subsequently obtained draft Change 13 Orders or proposals from WEC that provided minimally acceptable bases for reviewing 14 these Change Orders. Many of these came at a very late date as ORS was close to filing 15 testimony. This is not an acceptable practice. Going forward, it is the position of ORS that 16 until a Change Order has been agreed to by both parties, the costs associated with it should 17 not be included in BLRA cost forecasts. This position will ensure that the necessary level 18 of detail is provided to justify the cost and will ensure that WEC and SCE&G agree on the 19 scope, schedule and cost. 20 21 I will now address the ORS assessment of each of the Change Orders below. 1) Plant Layout Security, Phase 3 (Approximately $29.6 million) 22 The requested cost of approximately $29.6 million is based on an internal 23 estimate prepared by SCE&G. A proposal from WEC was subsequently received THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 918 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page21 of33 // 34 1 by SCE&G on July 29, 2016, and has been reviewed by ORS; however, SCE&G 2 has not yet completed its review and negotiations. The fixed price quoted by WEC 3 in its proposal is approximately $17.4 million (SCE&G's 55% share); however, the 4 completion date does not support the GSCD for Unit 2, and these changes must be 5 completed before the Unit is completed. It appears that the scope is now well 6 defined; however, the final design and a final schedule have not yet been developed. 7 The need to accelerate the schedule may increase the cost. Therefore, although ORS 8 recognizes that the cost and schedule are not yet finalized, ORS finds there is 9 sufficient definition to the scope and that the cost will in all probability be higher 10 than that currently included in the WEC proposal. On the basis that ORS finds this 11 estimate is likely lower than the final cost of the Change Order, ORS can support 12 the approval of $17.4 million for this Change Order. ORS is concerned, however, 13 that the types of changes necessary to accelerate the schedule are still unknown and 14 could result in a change in methodology that ORS has not yet evaluated. 15 2) Plant Security Systems Integration {Approximately $7.1 million) 16 The requested cost of approximately $7 .1 million was based on an internal 17 estimate prepared by SCE&G. A proposal which included a detailed technical 18 description was received on July 24, 2016 from WEC which reduces this estimate 19 to approximately $6.3 million. However, the completion schedule proposed by 20 WEC is beyond the need date required by SCE&G and a final schedule will not be 21 available until an on-site summit is held with SCE&G. ORS reviewed the proposal 22 and technical description and determined that the basis was adequately defined. 23 However, the costs will in all probability increase when the schedule is accelerated THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 919 Direct Testimony of Gary C. Jones, P .E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page22 of33 // 34 1 or when an alternate approach is developed to accommodate the needed completion 2 date. Therefore, ORS supports the inclusion of $6.3 million for this Change Order. 3 3) Service Building. Third Floor (Approximately $6.9 million) 4 SCE&G has provided adequate technical justification for the late addition 5 of the third floor in the Service Building. The need to consolidate the Operations 6 Service Center into one facility in the Service Building, rather than separate 7 facilities in each unit's Auxiliary Building, and the need for added space required 8 for maintenance shops, engineering support, outage planning and other plant 9 support services justify this addition. However, SCE&G has now decided that the 10 entire scope of the Service Building (all three floors) will be removed from the 11 scope of the EPC Contract and the Service Building will be built under SCE&G's 12 direct supervision through a separate contracted organization. This means that this 13 entire scope of work will be transferred to the Owner's Cost, and will be removed 14 from the EPC Contract. Therefore, this should no longer be evaluated as a Change 15 Order and should be removed from the costs for Change Orders and assessed under 16 the Owner's Cost. 17 4) Training Staff Augmentation (Approximately $4.4 million) 18 SCE&G has requested that WEC provide ten (10) APlOOO Senior Reactor 19 Operator certified operations training instructors to supplement its training staff 20 from May 2016 through December 2017 to assure that SCE&G meets the required 21 date for having an adequate number of certified operators available to run the plant. 22 Although this cost estimate has been developed by SCE&G with no formal proposal 23 yet submitted by WEC, there are already similar WEC instructors in place and the THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 920 Direct Testimony of Gary C. Jones, P.E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page 23 of33 // 34 1 cost was developed based on extrapolating existing costs for the required duration. 2 Therefore, ORS supports SCE&G's requested amount for this Change Order. 3 5) Escrow- Software and Documentation (Approximately $3.0 million) 4 ORS agrees with SCE&G that it is necessary to establish this escrow 5 account to assure that access to software and important plant documentation is 6 available should access through WEC not be available in the future. The technical 7 scope has been adequately defined and an estimate has been provided by WEC 8 naming an independent third party repository for this information. The technical 9 requirements were completed under the previous EPC Contract, so this is a well- 10 defined scope. Although no formal Change Order has been executed, ORS believes 11 that the cost information is well developed. Therefore, ORS supports SCE&G's 12 requested amount for this Change Order. ORS further recommends that SCE&G be 13 required to continue to update the escrowed information should delays occur that 14 extend construction beyond the scope included in the Change Order. 15 6) Corrective Action Program Interfac~"CAP-1" (Approximately $679,000) 16 The scope and costs associated with this change represent an extension of 17 an on-going program already in place through the revised completion dates of the 18 Project. Therefore, although the cost is based on an estimate from SCE&G without 19 a formal executed estimate or Change Order from WEC, the cost represents merely 20 an extension of known work. Therefore, this estimate is acceptable to ORS and 21 ORS supports the requested amount. 22 7) Classroom Simulator (Approximately $451,000) THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 921 Direct Testimony of Gary C. Jones, P.E. September l , 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page24 of33 // 34 1 ORS has assessed SCE&G's justification for adding this classroom 2 simulator and agrees that it is a necessary addition to the plant in order to assure 3 that the regular plant simulator is available to fulfill its main functions associated 4 with operator training. This PC based system allows students, instructors, 5 maintenance personnel, plant engineers and procedure writers to accomplish 6 needed tasks without tying up the Plant Reference Simulator. The stated cost also 7 includes a four year maintenance agreement. ORS supports the requested amount. 8 8) PMP Analysis (Approximately $182,000) 9 The cost represents a compromise reached between WEC and SCE&G to share on 10 a 50-50 basis the cost of updating the Probable Maximum Precipitation ("PMP") 11 analysis. A detailed WEC estimate has been provided and a draft Change Order is 12 in process. This work was required to implement an NRC requirement to update 13 the PMP analysis to reflect changes to the plant site layout and address changes 14 required as a result of Fukushima recommendations. ORS supports the requested 15 amount. 16 9) ITAAC Maintenance (Approximately $98,000) 17 This change represents an extension of on-going work through the revised 18 completion dates. SCE&G estimated the cost of maintaining the Inspection Testing 19 Analysis Acceptance Criteria ("ITAAC") program required by the NRC based on 20 extrapolating the existing cost. ORS supports the requested amount. 21 10) Primavera® Access (Approximately $45,000) THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 922 Direct Testimony of Gary C. Jones, P.E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page25 of33 // 34 1 Again this represents an extension of software license fees already held by 2 SCE&G to the revised completion dates. SCE&G has estimated these costs by 3 extrapolating current costs. ORS supports the requested amount. 4 11) Transmission Structure Redesign/Wetlands (Approximately $5,000) 5 This request represents a redesign due to a revision of wetland boundaries 6 that subsequently required the relocation of two transmission structures. 7 ORS supports the requested amount. 8 In summary, ORS does not support the approval of item 3 (Service Building Third 9 Floor Addition) as an EPC Contract Change Order for the reasons stated above but instead 10 recommends considering the request along with Owner's Costs. ORS supports the approval 11 of Change Orders in the amount of $32.6 million, as described above. 12 Q. PLEASE DISCUSS THE REVERSAL OF THE LIQUIDATED DAMAGES THAT 13 SCE&G PREVIOUSLY CREDITED AGAINST THE PROJECT AS PART OF THE 14 COST INCREASE GRANTED UNDER ORDER NO. 2015-661. 15 A. SCE&G seeks the reversal of the $85.5 million liquidated damages related to the 16 previous EPC Contract, which was credited to ratepayers in Commission Order No. 2015- 17 661. The justification for this reversal is that the terms of the EPC Contract have now 18 changed. The GSCDs that were the basis for claiming the liquidated damages have now 19 changed and the liquidated damages associated with this future date have been substantially 20 increased. 21 While ORS is concerned that this credit has been reversed, ORS understands the 22 credit may not have been enforceable due to the outstanding disputes and since it could be 23 argued that SCE&G did not actually incur the damages. The Amendment also includes THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 923 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page26of33 // 34 1 liquidated damages provisions greater than the previous provisions, giving ratepayers the 2 opportunity to gain credit for at least this amount in liquidated damages should the revised 3 GSCD's not be met. As it reflects the amended contract, ORS supports the reversal $85.5 4 million in liquidated damages. 5 Q. 6 A. PLEASE DISCUSS THE REVISED GSCDS. In its Petition, SCE&G states that the revised GS CDs are August 31, 2019 for Unit 7 2 and August 31, 2020 for Unit 3 per the Amendment. The causes for the additional delays 8 are provided by SCE&G in its filing and testimony and are supported by ORS. ORS finds 9 that the completion dates for the Units will be extended to at least these dates, and, in all 10 likelihood, will extend beyond the revised GSCDs. At this time, it does not appear that the 11 GSCDs will extend beyond the 18 month duration allowed by the Commission; however, 12 this will be better known later this year when Fluor completes its review of the construction 13 schedule. The most serious concern is that further delay of Unit 3 could jeopardize the 14 federal production tax credits for this unit if the credits are not extended by Congress 15 beyond their current December 31, 2020 expiration date. This would involve the loss of 16 over $1 billion in tax credits. 17 SCE&G explained in its testimony the reasons for its confidence in meeting the 18 revised GSCDs. ORS does not share this confidence. SCE&G still does not have a reliable 19 schedule for the Project, and will not have a reliable schedule until Fluor completes its 20 review and works through the resource-loaded integrated schedule which is due in the 21 fourth quarter of 2016. SCE&G asserted that this revision to the schedule is just a routine 22 update that is part of the on-going regular day-to-day activities on a nuclear power plant 23 project. I do not agree with this characterization. Although schedule modifications and THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 924 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page27 of33 1 refinements are a regular activity on nuclear projects, the wholesale change-out of the 2 construction contractor is not a regular event. The schedule changes that may result from 3 this major revision to how the Project work is done and the updating of time frames 4 assigned to each portion of work do not represent a business-as-usual process, and the 5 impacts of this change need to be recognized as a major event. Fluor's review of and 6 revision to the schedule represent a significant milestone for the Project. 7 Although the basic logic and sequencing of precursor and successor events and the 8 level of detail presented in identifying the tasks and work scope in the current revised 9 schedule appear sound, the assigned durations and the labor hours assigned to these tasks 10 are highly questionable in that they appear to be too low. These values are still based on 11 durations and hours determined by the previous construction contractor, and have proven 12 to be unreliable. Targeted productivity has not been achieved and performance factors for 13 each of the crafts have been significantly below expectations and goals. This strongly 14 suggests that the durations and hours assigned to tasks within the schedule are not accurate 15 and need to be increased in many cases. This also basically means that the Project will 16 either (1) take longer, or (2) will require significant improvements in efficiency and 17 productivity and/or will require considerably more resources than are currently anticipated. 18 It must also be noted that these are not strictly linear relationships. Limitations on 19 accessibility in certain areas and work sequencing may limit the numbers of construction 20 staff that can be productively assigned to the Project. This impact will only be manifested 21 when the resource-loaded integrated schedule is fully developed by Fluor. 22 ORS understands that the revised EPC Contract provides improved incentives to 23 the contractor to complete the Project on schedule; however, ORS's experience has been THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 925 Direct Testimony of Gary C. Jones, P.E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page28 of33 // 34 1 that WEC has not been able to maintain construction schedules or achieve forecasted 2 productivity increases. Based on the lack of reliability in WEC's past performance, ORS 3 is not confident that WEC can fulfill its new commitment. SCE&G also appears to 4 demonstrate a lack of confidence in the current schedule through the base case assumptions 5 in the sensitivity study provided in Dr. Lynch's direct testimony. These base case 6 assumptions utilize a significantly lower productivity factor than has been provided as the 7 basis for the revised schedule. This further bolsters ORS's skepticism about the reliability 8 of the current schedule. 9 Notwithstanding, ORS supports the process and procedure improvements that are 10 being implemented by Fluor to improve the efficiency and productivity of the construction 11 work force. However, it is not clear at this point whether these improvements will result in 12 the significant productivity and production improvements that are required in order to meet 13 the GSCDs. 14 It should also be noted that this lack of certainty surrounding the schedule has 15 hampered ORS's review of almost all other areas of the Project. Without having an 16 adequate measure of the timing of activities, it is difficult for ORS to evaluate areas such 17 as Owners Costs and Escalation. Many of these costs are related to the timing of the need 18 for specific personnel. It is also difficult to evaluate Change Orders, particularly Change 19 Orders where WEC is having difficulty meeting SCE&G's need date, without an adequate 20 understanding of the certainty of the schedule. Additionally, with neither schedule of 21 construction activities nor milestone payment schedule available, it is difficult for ORS to 22 evaluate the timing of the information in Exhibit 2 to the Petition. In the context of an 23 overall guarantee from SCE&G that the Option will truly fix the cost of the Project and THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 926 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page29 of33 // 34 1 that any additional EPC Contract costs (other than changes in law or other very specific 2 items such as force majeure events) will not be borne by SCE&G ratepayers, ORS's 3 concerns regarding the potential impacts of this schedule uncertainty are somewhat 4 diminished. 5 ORS recognizes that the change to the "fixed price" EPC Contract is designed to 6 shift the risk of meeting the revised GSCD's to WEC. However, ORS must consider what 7 happens to the Project if these dates are not met and WEC is not able to shoulder the large 8 financial burden that Dr. Lynch's sensitivity studies predict that WEC would incur under 9 such a scenario. WEC executive management assured SCE&G and ORS that WEC will 10 abide by the terms of the EPC Contract and absorb the losses that are forecasted. WEC 11 cited its need to fulfill the terms of the contract in order to secure future business and the 12 reputational damage it would suffer if it were to default as the prime motivations for 13 completing the Project under the currently proposed terms. However, ORS remains 14 skeptical for reasons previously outlined in the discussion of the Option. 15 In summary, ORS recommends that the Commission approve the proposed revised 16 GSCDs, recognizing that these are contractual dates and accurately reflect what is included 17 in the Amendment, subject to certain conditions discussed below regarding the BLRA 18 milestone schedule. 19 Q. PLEASE DISCUSS THE REVISED BLRA MILESTONE SCHEDULE. 20 SCE&G provided proposed revisions to the BLRA milestone schedule and the 21 status of milestones already completed in Exhibit 1 of the Petition and in Mr. Byrne's direct 22 testimony as Exhibit SAB-2. The revised dates reflect the impact of changing the GSCDs 23 and other adjustments. ORS is concerned regarding the impact of Fluor's fully resourceTHE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 927 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page30of33 // 34 1 loaded integrated project schedule on the BLRA milestone schedule. While the BLRA 2 milestone schedule is generally consistent with the current Project schedule logic, ORS is 3 concerned that, within only a few months of an Order being issued in this Petition, the 4 Project schedule reflecting Fluor's input may substantially alter the dates in the BLRA 5 milestone schedule. WEC has acknowledged that the current Project schedule is not 6 achievable without substantial improvements in both production and productivity. As 7 such, ORS has concerns regarding the accuracy of the BLRA milestones within the 8 schedule filed in this Petition. If the Commission chooses to approve this schedule, ORS 9 recommends that the Commission require SCE&G to report on the results of Fluor' s review 10 and revision to the resource-loaded integrated project schedule when complete. ORS 11 further recommends that the Commission require SCE&G to include in its quarterly reports 12 data regarding both production and productivity as compared to what is forecasted in 13 Fluor's revised fully resource-loaded integrated construction schedule, as well as 14 construction progress towards the milestone payments that are contained in the milestone 15 payment schedule. 16 Q. 17 A. DID YOU ALSO REVIEW THE OWNER'S COST UPDATE REQUEST? Yes, I reviewed the Owner's Cost filing submitted in the amount of approximately 18 $20.8 million in this Petition and in Mr. Kochems's testimony along with additional 19 supporting documentation furnished by SCE&G. The level of detail provided and the 20 approach utilized by SCE&G in developing its projected costs were reviewed by ORS and 21 found to be sufficient. In addition, I ensured the estimated cost numbers were properly 22 allocated and categorized. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 928 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page 31 of33 1 As detailed in Mr. Kochems's testimony, the primary costs of approximately $15.6 2 million are attributable to the changes to the GSCDs and the increased duration of the 3 SCE&G staff assigned to the Project. The SCE&G labor costs represent approximately $11 4 million of this total and the non-labor portion contributes approximately $4.6 million. 5 These non-labor costs include the extension of the NRC Resident Inspectors, continuing 6 NND facilities rental and maintenance, continuing costs for software and equipment 7 associated with testing, continuing training, continuing costs for computers, telephones and 8 other office equipment and supplies and the addition of the senior consultants who will 9 comprise the DRB which was added as a result of the contract Amendment. 10 A new cost component identified as "Schedule Improvement" in line 4 on Chart D 11 m Mr. Kochems's testimony addresses the staffing of the Project Management 12 Organization, primarily by contractors on the planned second shift. This second shift and 13 these additional staff are essential elements to aid in meeting the revised GSCDs. 14 The final component of the Owner's Cost involves a reduction of approximately 15 $2.8 million due to a comprehensive review of NND and corporate staffing across all 16 relevant cost centers. 17 Based on the ORS review of the information provided by SCE&G, it is concluded 18 that the requested increased amount of approximately $20.8 million should be approved by 19 the Commission. It should also be noted that SCE&G will need to increase this value once 20 it has determined a well-defined basis for the cost of removing the Service Building from 21 the EPC scope and transferring it Owner's Cost, as discussed in my testimony on the 22 Service Building, Third Floor Change Order. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 929 Direct Testimony of Gary C. Jones, P.E. September 1, 2016 1 Q. 2 3 Docket No. 2016-223-E South Carolina Electric & Gas Company // 34 Page 32 of33 PLEASE DISCUSS YOUR REVIEW OF THE ESCALATION AND ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION ("AFUDC") COSTS. A. In its Petition, SCE&G requested cost increases of approximately $3 million for 4 escalation costs and $42 million for increases in AFUDC. Each of these costs is derived 5 from the other cost components discussed above and their final value depends on the final 6 values determined for the above components. The increase in escalation cost is primarily 7 driven by the increases in the Owner's Cost. The original estimate also included some 8 escalation for transmission costs, which have since been removed at SCE&G's request. 9 ORS's review verified the values of $2.3 million for escalation and $42.4 million for 10 AFUDC cited in Mr. Kochems testimony. ORS recognizes, however, that this is an 11 estimate and may change with shifts of items between cost categories and based on the 12 revised milestone payment schedule, when issued. As such, there is still some uncertainty 13 regarding this calculation. 14 Q. COULD YOU PLEASE DISCUSS YOUR REVIEW OF THE SENSITIVITY 15 ANALYSIS PROVIDED IN THE DIRECT TESTIMONY OF DR. JOSEPH M. 16 LYNCH? 17 A. The portion of Dr. Lynch's testimony which I will address is a sensitivity study that 18 assesses the efficacy of SCE&G's decision to exercise the Option by comparing the 19 projected costs of the Option against those of completing the Project under the previous 20 terms and conditions. This study is designated Exhibit No. JML-1 in Dr. Lynch's 21 testimony. Dr. Lynch uses four different labor rates and six different performance factor 22 scenarios to compare these options. He also provides the basis of the ratios he utilizes for 23 field non-manual labor/direct labor (0.74) and indirect labor/direct labor (0.66) and THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 930 Direct Testimony of Gary C. Jones, P.E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page33 of33 // 34 1 compares them with current ratios (1.22 and 1.21, respectively) to establish that those he 2 uses in his study are conservatively lower and that using the current rates would make the 3 "fixed price" option even more attractive. 4 Dr. Lynch's assumptions and the scenarios selected are appropriate and 5 meaningful. His selections of the "Base Case" for labor growth rates (2.9%) and "Most 6 Likely'' range for performance factors (1.5 to 2.0) cases are reasonable and the boundaries 7 selected for the other cases also represent reasonable limits and are appropriately 8 represented. The results demonstrate that for any reasonable scenario, the "fixed price" 9 option is a good deal for SCE&G. For the purpose here, I will confine my remarks to only 10 the "Base Case/"Most Likely'' case presented by Dr. Lynch. 11 Referring to the "Cost-to-Complete the Units" chart on page 8 of Dr. Lynch's 12 testimony and using the second from the bottom line, at a performance factor of 1.5 the 13 cost to complete is about $3.7 billion compared to the "fixed price" amount of $3.345 14 billion. At a performance factor of 2.0, the cost to complete is approximately $4.2 billion. 15 This indicates that SCE&G expects WEC to lose from $355 million to $855 million on this 16 Project irrespective of penalties or bonuses. If the labor growth rates are higher than the 17 base case the losses would be even higher. This is a cause for concern. 18 If WEC is in fact willing to absorb losses and meet the obligations of the EPC 19 Contract, then this is a good deal for both SCE&G and its ratepayers compared to the 20 alternative. However, the benefits to the ratepayer are not so apparent if WEC does not 21 meet its obligations. IfWEC were to succeed in demands for additional funds to complete 22 the Project, the ratepayers would bear the burden, not SCE&G. To the extent that SCE&G THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 931 Direct Testimony of Gary C. Jones, P .E. September I, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page34 of33 // 34 1 guarantees the Option, shielding ratepayers from WEC's potential failure to meet the terms 2 of the contract, ORS would agree that the Option has value to ratepayers. 3 Q. 4 A. DOES THIS CONCLUDE YOUR TESTIMONY? Yes, it does. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 BY MR. NELSON: 2 Q 932 Did you also prepare three pages of settlement 3 testimony, which was filed with this Commission on 4 October 29th of this year? 5 A Yes. 6 Q Do you have any edits or corrections to your prefiled settlement testimony? 7 8 A No, I do not. MR. NELSON: 9 Mr. Chairman, I would ask the 10 prefiled settlement testimony of Mr. Jones be read 11 into the record as if given orally from the stand. CHAIRMAN WHITFIELD: 12 Yes, sir, Mr. Nelson. 13 Mr. Jones' prefiled settlement testimony will be 14 entered into the record as if given orally from the 15 stand. [See pgs 934-937] 16 MR. NELSON: 17 18 BY MR. NELSON: 19 Q Thank you, Mr. Chairman. Mr. Jones, did you prepare a summary of your settlement testimony? 20 21 A Yes. 22 Q Would you please present it to the Commission. 23 A Yes, thank you. 24 25 Short and sweet: With regard to my settlement testimony, I fully support the settlement agreement. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 2 933 And that concludes my summary. MR. NELSON: Thank you, Mr. Jones. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 [PURSUANT TO PREVIOUS INSTRUCTION, THE 24 PREFILED SETTLEMENT TESTIMONY OF GARY C. 25 JONES FOLLOWS AT PGS 934-937] VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 934 THE OFFICE OF REGULATORY STAFF SETTLEMENT TESTIMONY OF GARY C. JONES SEPTEMBER 28, 2016 DOCKET NO. 2016-223-E Petition of South Carolina Electric & Gas Company for Updates and Revisions to Schedules Related to the Construction of a Nuclear Base Load Generation · Facility at Jenkinsville, South Carolina 935 Settlement Testimony of Gary C. Jones September 28, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page I of3 1 SETTLEMENT TESTIMONY OF 2 GARY C. JONES 3 ON BEHALF OF 4 THE SOUTH CAROLINA OFFICE OF REGULATORY STAFF 5 DOCKET NO. 2016-223-E 6 7 8 9 10 IN RE: PETITION OF SOUTH CAROLINA ELECTRIC & GAS COMPANY FOR UPDATES AND REVISIONS TO SCHEDULES RELATED TO THE CONSTRUCTION OF A NUCLEAR BASE LOAD GENERATION FACILITY AT JENKINSVILLE, SOUTH CAROLINA 11 Q. 12 A. PLEASE STATE YOUR NAME, BUSINESS ADDRESS AND OCCUPATION. My name is Gary C. Jones, P .E. I am President of Jones Partners, Ltd., a private 13 consulting engineering firm in the electrical power generation field. My business address 14 is 1555 North Astor Street, Apt. 22W, Chicago, Illinois, 60610-5765. 15 Q. 16 A. 17 Q. Yes, I did. WHAT IS THE PURPOSE OF YOUR SETTLEMENT TESTIMONY IN THIS PROCEEDING? 18 19 DID YOU PREVIOUSLY FILE DIRECT TESTIMONY IN THIS DOCKET? A. The purpose of my settlement testimony is to provide ORS's support for the 20 Settlement Agreement ("SA") reached in this docket for SCE&G's Petition for Updates 21 and Revisions to Schedules Related to the Construction of a Nuclear Base Load Generation 22 Facility at Jenkinsville, SC ("Petition"). 23 Q. 24 A. 25 WHO ARE THE PARTIES TO THE SETTLEMENT AGREEMENT? ORS, SCE&G, The Electric Cooperatives of South Carolina, Inc., Central Electric Power Cooperative, Inc., Frank Knapp, Jr., and the South Carolina Energy Users THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 936 Settlement Testimony of Gary C. Jones September 28, 2016 1 2 South Carolina Electric & Gas Company Page 2 of3 Committee ("Settling Parties"). Q. WHAT ARE THE MAJOR TOPICS ADDRESSED IN THE SETTLEMENT AGREEMENT? 3 4 Docket No. 2016-223-E A. In the Settlement Agreement ("SA"), the Settling Parties agree to support the new 5 Guaranteed Substantial Completion Dates of August 31, 2019 and August 31, 2020, 6 respectively. Of the $852 million requested in the Petition, the Settling Parties agree to 7 support $831.3 million. SCE&G agrees to fix the price to consumers for EPC contract 8 costs according to the terms of the Settlement Agreement ("the Guarantee") (SA paragraph 9 #12). The Settlement Agreement sets a moratorium for filing future modification requests 10 on items not covered by the Guarantee until at least January 28, 2019 ("the Moratorium") 11 (SA paragraph# 13) and for revised rates beginning in 2017, the return on equity ("ROE") 12 is reduced from 10.50% to 10.25% (SA paragraph #18). These are the major components 13 of the Settlement Agreement. 14 Q. CONSIDER MOST IMPORTANT? 15 16 WHAT COMPONENT OF THE SETTLEMENT AGREEMENT DO YOU A. All of the terms of the Settlement Agreement are important because they work 17 together to benefit ratepayers. From my perspective, the Guarantee is the most important 18 aspect of the Settlement Agreement because this provision encourages accountability for 19 construction costs and preserves the benefits to ratepayers from electing the Option. 20 Q. OPINION ON THE COSTS ASSOCIATED WITH THE PETITION? 21 22 23 IN THE CONTEXT OF THE SETTLEMENT AGREEMENT, WHAT IS YOUR A. The Settlement Agreement mitigates the risks associated with electing the Option. In the context of the Settlement Agreement and the potential costs outlined in SCE&G's THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 937 Settlement Testimony of Gary C. Jones September 28, 2016 Docket No. 2016-223-E South Carolina Electric & Gas Company Page3 of3 sensitivity analysis, the collective Settlement Agreement is reasonable. 1 2 Q. 3 A. DO YOU SUPPORT THIS SETTLEMENT AGREEMENT? Yes, I support this Settlement Agreement. It represents a collaborative effort to 4 address the concerns raised by ORS and the Settling Parties during our review of the 5 Petition. 6 Q. 7 A. 8 Q. 9 A. WHAT IS YOUR RECOMMENDATION? I recommend that the Commission approve the Settlement Agreement. DOES THIS CONCLUDE YOUR TESTIMONY? Yes, it does. THE OFFICE OF REGULATORY STAFF 1401 Main Street, Suite 900 Columbia, SC 29201 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions MR. NELSON: 1 938 Mr. Chairman, Mr. Jones is 2 available for questioning from the nonsettling 3 parties or from the Commissioners. 4 CHAIRMAN WHITFIELD: 5 Ms. Thompson. 6 MS. THOMPSON: Thank you, Mr. Nelson. No questions. Thank you, Mr. Chairman. 7 8 CHAIRMAN WHITFIELD: 9 MR. GUILD: Thank you, Mr. Chairman. CHAIRMAN WHITFIELD: 10 Mr. Guild. Let's go ahead and mic you up. 11 MR. GUILD: 12 Yes, sir. [Brief pause] 13 CROSS EXAMINATION 14 15 BY MR. GUILD: 16 Q Good afternoon, Mr. Jones. 17 A How do you do, sir? 18 Q So, I'm a little puzzled, Mr. Jones, about some of the 19 timing aspects of your testimony. 20 testimony bears a date of September 1, this year, does 21 it not? 22 A Yes. 23 Q All right. Your prefiled direct And as does the settlement agreement entered 24 into by your client, ORS, and the other settling parties 25 also: September 1, 2016. Correct? VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 939 1 A Yes. 2 Q So, is it fair to say that you prepared your prefiled 3 direct testimony in contemplation of the execution of 4 the settlement agreement on that day? 5 A Yes. 6 Q Were you a party to the settlement agreement — settlement discussions, should I say, or negotiations? 7 8 A agreement relative to what we believed would be a fair 9 settlement for the ratepayers of South Carolina. 10 11 Q Right, and so what aspect of the agreement itself would that represent? 12 13 I was a party to drafting the terms of the settlement A I think it represents the majority of the agreement. 14 There were certain things that I wasn't involved with. 15 For example, I had no input relative to the change in 16 the ORE[sic]. 17 Q I'm sorry? 18 A The ORE, the return — 19 Q The return on equity, the adjustment to the return on equity? 20 21 A Right. 22 Q All right. Do you have a settlement agreement available to you? 23 24 A Yes. 25 Q Would you turn to page 14-of-22 of that document, VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 940 1 please? And for those who don't have the document 2 handy, or just to focus your mind, if you would, would 3 you just read paragraph 21 for the record, please? 4 A Again, would you repeat the — 5 Q Number 21, and that's page 14-of-22. 6 A “The settling parties agree to cooperate in good faith Paragraph 21. 7 with one another in recommending to the Commission that 8 this settlement agreement be accepted and approved by 9 the Commission as a fair, reasonable and full resolution 10 of all issues in the above-captioned proceeding, and 11 shall neither take any position contrary to the good 12 faith duty agreed to herein nor encourage or aid any 13 other Intervenors to take a position contrary to the 14 terms of this settlement agreement. The settling parties 15 agree to use reasonable efforts to defend and support 16 any Commission order with no other provisions issued 17 approving this settlement agreement and the terms and 18 conditions contained herein.” 19 Q All right. And did you have that provision of the 20 settlement agreement in mind when you prepared your 21 prefiled direct testimony in this case? 22 A I could say that I would — yes, I would be aware that — 23 I had participated in settlement agreements before and 24 there's usually some statement to that effect. 25 Q So you were aware, when you prepared your direct VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 941 1 testimony, in the event that the settlement agreement 2 that was inked that day and contemplated by you, that it 3 would bind you to defending the settlement agreement in 4 your testimony before the Commission. 5 A Yes. 6 Q Thank you. All right. Now, I have your prefiled direct 7 testimony, and if I could direct your attention to page 8 33. 9 and not 33-of-33, but I believe it's 33. I think it's correctly numbered 33. It's 33-of-34 And I wanted 10 to direct your attention to the testimony that begins on 11 line 15. 12 15 on that page says, “This indicates that SCE&G...” 13 Are we on the same page? And as a preliminary, to make sure — that line 14 A Yes, sir. 15 Q Okay, good. So as a preliminary, I wanted to just 16 confirm you were present in the hearing room during Mr. 17 Marsh's testimony for the company? 18 A Yes. 19 Q And during Dr. Lynch's testimony for the company? 20 A Yes, right. 21 Q And so, we had this discussion I trust you heard about 22 Dr. Lynch's sensitivity analysis and his conclusion that 23 the fixed-price option was advantageous to the company 24 because Westinghouse would face a range of costs that it 25 was obligated to absorb under that option, in order to VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 942 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 complete the project, given the sensitivity analysis of 2 Dr. Lynch. 3 A Yes. 4 Q Okay. You hear that testimony? Now we'll delve into that in a moment, but with 5 that in mind, and you were referring to that sensitivity 6 analysis at this point in your testimony, would you read 7 your testimony at that page — again, 33 — beginning at 8 line 15, please. 9 A “This indicates that SCE&G expects WEC,” Westinghouse, 10 “to lose from $355 million to $855 million on this 11 project, irrespective of penalties or bonuses.” 12 want me to continue? You 13 Q Yeah, please. 14 A “If the labor growth rates are higher than the base 15 case, the losses would be even higher. This is a cause 16 for concern.” 17 Q All right. 18 A “If WEC is, in fact, willing to absorb losses and meet Please continue. 19 the obligations of the EPC contract, then this is a good 20 deal for both SCE&G and its ratepayers, compared to the 21 alternative. 22 not so apparent if WEC does not meet its obligations. 23 If WEC were to succeed in demands for additional funds 24 to complete the project, the ratepayers would bear the 25 burden, not SCE&G. However, the benefits to the ratepayer are To the extent that SCE&G guarantees VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 943 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 the option, shielding ratepayers from WEC's potential 2 failure to meet the terms of the contract, ORS would 3 agree that the option has value to ratepayers.” 4 Q Okay. 5 A Yes. 6 Q Let's look, please, at page 29 of your prefiled direct And you stand by that testimony today? 7 testimony, Mr. Jones. 8 to line five and the testimony that begins there. 9 you read that for the record, beginning at line five, Would please, page 29-of-34? 10 11 I want to direct your attention A From the start, you want me to read the entire paragraph? 12 13 Q Yes, please. 14 A All right. “ORS recognizes that the change to the 15 fixed-price EPC contract is designed to shift the risk 16 of meeting the revised GSCDs to WEC. 17 consider what happens to the project if these dates are 18 not met and WEC is not able to shoulder the large 19 financial burden that Dr. Lynch's sensitivity studies 20 predict that WEC would incur under such a scenario. 21 executive management assured SCE&G and ORS that WEC will 22 abide by the terms of the EPC contract and absorb the 23 losses that are forecasted. 24 fulfill the terms of the contract in order to secure 25 future business and the reputational damage it would However, ORS must WEC WEC cited its need to VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 944 1 suffer if it were to default as the prime motivations 2 for completing the project under the currently proposed 3 terms. 4 previously outlined in the discussion of the option.” However, ORS remains skeptical for reasons 5 Q All right. 6 A Yes. 7 Q What are the reasons you allude to, at the conclusion of Thank you. You stand by that testimony? 8 that paragraph, that you are skeptical about 9 Westinghouse's ability to complete the project on time? 10 A What are the reasons? Oh, okay. Well, I think one of 11 the reasons is we were concerned about their performance 12 to date. 13 previously, we are aware of some financial difficulties 14 with their parent organization. 15 that the amounts of money involved were substantial. 16 Q A Have you followed the progress of Westinghouse's Only through standard press releases and that kind of thing, what's in the industry press. 19 20 And, also, the fact management of the Levy project in Florida? 17 18 Okay. Also, as you have alluded to in the hearing Q You understand that Westinghouse suffered significant 21 losses as a result of the cancellation of the Levy 22 project? 23 A write-offs on that project, yes. 24 25 I am aware that they have indicated that there were some Q And are you aware that the write-offs on that project VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 945 1 were the source of a large portion of the fraudulent 2 accounting attributable to the parent, Toshiba 3 Corporation, understating losses at the Levy project? 4 A I am aware that Toshiba has, I think, been charged with 5 that. 6 investigation going on. 7 Q As far as I know, there's a continuing Right, an investigation by the US Department of Justice 8 and the Securities and Exchange Commission in this 9 country? 10 A Yes, that's my understanding. 11 Q And findings adverse to Toshiba by the authorities in 12 Japan resulted in substantial fines against the Toshiba 13 Corporation? 14 A I have read of those, yes, sir. 15 Q And resignation and, as we learned from Mr. Marsh I 16 believe, a complete replacement of the Board of Toshiba, 17 the parent of Westinghouse. 18 A I can't say I'm aware of that detail. I'm aware of the 19 resignation of the chief executive, but I don't recall 20 the resignation of the entire Board. 21 Q And so, to the extent that, in the hypothetical 22 circumstance, that, as you have expressed with regard to 23 the skepticism about Westinghouse's performance, to the 24 extent that we assume the worst — and that is, that 25 Westinghouse defaults on this obligation — ratepayers VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 946 1 are only protected to the extent that the guarantee, as 2 you characterize it, in the settlement agreement 3 obligates SCANA Corporation to absorb those losses; 4 isn't that correct? 5 A I think the settlement agreement that we reached is 6 related to the EPC contract. So, if there is scope 7 still within the EPC contract at the time that this 8 default occurred, and Toshiba would not or could not 9 stand behind the contract — if we speculate all those 10 things, that there is still scope remaining in the 11 original scope, or in the current scope of the EPC 12 contract — then our settlement agreement indicates that 13 SCE&G would stand by that, those costs. 14 Q And you rely on the terms of the settlement agreement, as executed, to provide that assurance, correct? 15 16 A Yes. 17 Q To the extent that that settlement agreement, which will 18 speak for itself — the language is before the Commission 19 — to the extent it does not protect ratepayers or has 20 loopholes in it, ratepayers would not be protected under 21 those circumstances, correct? 22 A If you speculate that that's the case — I would say, if 23 there are loopholes that we are not aware of and if you 24 speculate that to be the case, then they would not be 25 protected if there were obvious — or, hidden loopholes. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 947 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q Well, I'm not asking you to speculate. The agreement — 2 the settlement agreement will speak for itself. 3 terms are in writing and before the Commission for their 4 review. 5 participated in negotiating this agreement, you, I 6 assume, exercised due diligence — you didn't just 7 speculate — exercised due diligence to try to assure 8 that ratepayers were protected under a series of 9 reasonable circumstances that might evolve in this 11 But I'm asking you, Mr. Jones, when you project. 10 A Yes. Its Isn't that the case? Our primary objective was to assure that the 12 fixed-price was a fixed price of the EPC contract and 13 would be so carried out to the South Carolina 14 ratepayers. 15 Q And your concerns, your uncertainty, about 16 Westinghouse's ability to absorb the very losses that 17 SCANA projects may occur, those weren't speculation; 18 those were based on sound judgment on your part, were 19 they not? 20 A I would not say that we speculated that this was going 21 to happen — I mean, forecasted that this was going to 22 happen, but we wanted some protection to ensure that, in 23 the event it did happen, that the ratepayers would be 24 protected. 25 Q All right. Has ORS asked you to opine or assess what VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 948 1 the potential responses might be, should 2 Toshiba/Westinghouse walk away from this project and, 3 essentially, default on its obligation to complete the 4 plants? 5 A We had some discussions about what options could be, 6 such as bringing in another contractor, whether that 7 would be feasible or not. 8 outline various scenarios, no. 9 discussions in that realm. 10 Q But to formally ask me to We did have some And in the context of those discussions, did you 11 understand that any of those options might entail 12 additional cost burdens to ratepayers above and beyond 13 the fixed price that's assumed to be the outcome of the 14 amended EPC contract with option? 15 A Yes, sir. There may be additional cost above and beyond 16 the EPC contract, some of which are addressed in the 17 agreement. 18 has been discussed several times in the hearings: 19 changes in law. 20 selected to choose another contractor, there might be 21 costs above and beyond the EPC contract included there, 22 also. 23 Q be? 24 25 All right. A There's potential, as we've discussed — as But, also, if, in fact, the option was And how much would those additional costs Order of magnitude best estimate. I cannot say, because it is totally dependent on the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 949 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 status of the project at the time. 2 take a while to exhaust the funds that are there, so 3 more than likely, you know, it would be — there would 4 not be much of the project left to complete. 5 really — the costs could range considerably, based on 6 the timing of when such an event occurred. 7 Q You know, it will I can't You open your testimony by observing that, at least as 8 of June 30th of this year, using direct labor man-hours 9 as the measure of completion, that the project was only 22 percent complete; is that right? 10 11 A Yes, sir, and I want to emphasize that — and I put it in 12 my testimony — this was based on construction man-hours 13 only. 14 site, and it was only associated with the EPC contract, 15 so it did not include site work, any of those things. 16 It was the labor man-hours associated with the EPC 17 contract. 18 Q It did not include equipment delivered to the And those measures were measures that were used in reporting by the company or — 19 20 A Yes, sir — I'm sorry. 21 Q I'm sorry, go ahead. 22 A I obtained that information from reports by the contractor, themselves. 23 24 25 Q And labor man-hours is an appropriate measure; it's a measure used by Dr. Lynch, in part, in assessing his VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 950 1 sensitivity analysis of the value of the fixed-price 2 contract, isn't it? 3 A Yes, I believe it's — and it's a good measure of the 4 current state the project is in, because the majority of 5 costs remaining on the project are, in fact, labor 6 hours. 7 Q As a witness for the company stated, most of the 8 components are on-site, we've paid for them already; 9 we've got to put them together, right? labor. 10 11 That's the A Yes. MR. GUILD: 12 That's all I have, Mr. Chairman. 13 Thank you, Mr. Chairman. 14 CHAIRMAN WHITFIELD: 15 Ms. Wright? I appreciate it. Thank you, Mr. Guild. CROSS EXAMINATION 16 17 BY MS. WRIGHT: 18 Q Good afternoon. 19 A How you doing? 20 Q All right. 21 A I'm fine. 22 Q I just have a few questions for you. How are you? I'll have to think 23 about how I have to ask you this. In your direct 24 testimony, did you say WEC was not — had not 25 consistently demonstrated its ability to meet VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 951 contractual commitments? 1 2 A I believe that is the case. 3 Q I think that's page 13 in the first paragraph. 4 A [Indicating.] Yes, ma'am, that is correct. 5 Q And didn't you also say the ORS has little confidence in I would — 6 WEC's assurances that it will be able to deliver on its 7 fixed-price option? 8 A Yes, ma'am, I believe that's also correct. 9 Q And now you are in support of this option? 10 A Yes, ma'am. 11 Q Okay. Would you say that the main reason you've had a 12 change is that the ORS has agreed to the settlement, and 13 that would be the change in your attitude to these 14 problems that you had with the amendment to begin with? 15 A in the settlement agreement itself. 16 17 I believe my major support for this is due to the terms Q Didn't you have about 25 — and I can go through and find 18 them, if you like — points that you felt that the ORS 19 could not support — the ORS finds — it cannot make an 20 informed judgment because of information that hadn't 21 been forthright? 22 A Well, don't recall the exact number, but I believe what you're — 23 24 Q Right. 25 A — asking me is, were there things that I thought that VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 952 1 SCE&G had not provided sufficient documentation for us 2 to make an assessment that they were, in fact, justified 3 as cost increases. 4 Q Okay. That is part of my testimony, yes. Could you give me a reason why it wouldn't be 5 prudent now to stop this build before it goes any 6 further? 7 A Well, I think the primary reason, as has been pointed 8 out by Dr. Lynch's testimony and that he establishes, is 9 that stopping it would not be beneficial to the ratepayers of South Carolina. 10 11 Q But isn't it true that it's 70 percent still to go, that 12 it's only 30 percent complete by the labor man-hours' 13 rates that you're using? 14 A Again, that is the labor associated with the EPC 15 contract, and that number has, of course, changed 16 somewhat since the time of the preparation of the 17 testimony. 18 front left to do. 19 Q Well, didn't you say it was 22, and therefore when I say 70 percent, it's actually more than 70 percent? 20 21 But there's still a lot of work on the labor A Well, the timing is the issue, ma'am. At the time that I testified, I think that number was good — 22 23 Q So — 24 A — as of August 1st, or — I'd have to look at the 25 testimony to get the date. But work has progressed VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 953 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 beyond that since then, so the number's a little bit 2 different than 70 percent. 3 Q So you don't believe they should stop the build, even 4 though there is still 5 yet to go to be placed on this build? 6 A No, ma'am, I do not think they should stop. MS. WRIGHT: 7 three-point-some-figure billion All right. That's all the questions I have. 8 CHAIRMAN WHITFIELD: 9 Thank you, Ms. Wright. 10 Commissioners? Commissioner Randall. 11 VICE CHAIRMAN RANDALL: Thank you, sir. EXAMINATION 12 13 BY VICE CHAIRMAN RANDALL: 14 Q Mr. Jones, reading on page 12, I think, of your direct 15 testimony — it's the very top part of that — you said 16 it's critical to ORS's review process that future 17 change-order proposals be supported by adequate price 18 disclosure by Westinghouse. 19 comprehensive input from ORS is critical to the 20 Commission, and what we can do, what our decisions come 21 to, what can be done to make sure that ORS is supplied 22 with all the information it needs, in your opinion? 23 A Since critical and Well, there's a couple of things, I think. And SCE&G 24 supports this also. They have pursued with Westinghouse 25 to expand — there have been some costs that are in VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 954 1 preparation, some cost estimates that are in 2 preparation, and SCE&G was also concerned that 3 Westinghouse was taking the tack of not providing 4 adequate backup and just providing a fixed price, in 5 essence. 6 and expansive cost accounting, if you want to say, for 7 Westinghouse, when they submit any cost increases. 8 was evident and, as we were preparing testimony and 9 since the filing began, many of the change orders that So SCE&G, itself, is pursuing a more detailed This 10 were in the original Petition, Westinghouse subsequently 11 provided change order — formal change orders to those. 12 From our standpoint, from ORS' standpoint, what we 13 want to see, and actually what was also added to the 14 settlement agreement, was, any cost changes in the 15 future that are to come before the Commission are to 16 have a signed, approved change order associated with 17 them, and if we've got that, we feel we'll have 18 sufficient documentation for those changes. 19 VICE CHAIRMAN RANDALL: 20 Thank you, Mr. Chairman, that's all I've got. 21 CHAIRMAN WHITFIELD: 22 Thank you, Commissioner Randall. 23 Commissioner Hamilton. 24 COMMISSIONER HAMILTON: 25 Okay, thank you. Thank you, Mr. Chairman. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 955 EXAMINATION 1 2 BY COMMISSIONER HAMILTON: 3 Q How are you, Mr. Jones? 4 A Fine. 5 Q Looks like you're the last man standing. Thank you, sir. [Laughter] 6 Mr. Jones, let me ask you — I'm not sure of your — 7 8 how your work relationship is with the site, but how 9 much time do you spend on the site? 10 A In an average month, I visit the site once a month. We 11 have a site tour where we review the construction status 12 by visually verifying it. 13 meetings with each of the senior managers from SCE&G. 14 We also have a briefing with the lead Westinghouse man 15 on-site, Carl Churchman, and he's accompanied by the 16 leading Fluor construction manager on-site, Jeff 17 Hawkins. 18 days, usually. 19 the site, I do a lot of documentation review; I look at 20 the status reports, the plan of the day, all the 21 progress reports that are generated, construction 22 metrics. 23 site also, in addition to the on-site reviews that 24 occur. 25 Q All right. Then we have a series of So this series of meetings extends over two In addition to that, while I'm away from So I do a lot of document review away from the Have you and your team — do you realize or VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 956 1 see any tangible evidence of a better working 2 relationship now, with Fluor, than it was with CB&I? 3 A Absolutely, yes, sir. The craft, themselves, reflect 4 the different attitude. You know, it's anecdotal, but 5 you actually see the craft smiling and talking to you 6 when you go out to the job site now. 7 wasn't happening. 8 reflected in their work. Before, that They weren't happy and that was 9 We see Mr. Churchman as a very positive leader. He 10 is focused on completing the project, and he is much 11 more assertive and direct in his approach to the project 12 than the previous leadership. In addition to that, I think one of the things I'm 13 14 most pleased to see is a greater role and a greater 15 acceptance of that role, of SCE&G's role on the project. 16 They have an organization on-site that's called the 17 project management office. 18 an SCE&G management person in that project management 19 office, and they have direct input into the day-to-day 20 construction at the site. And that office is — there's So since Fluor has come on-board, I've seen a lot 21 22 of positive changes, both in management, management 23 attention, management focus, and down to the craft 24 level, itself. 25 Q I assume, then, you're telling me it's a very positive VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions move? 1 2 957 A Yes, sir. COMMISSIONER HAMILTON: 3 Thank you, sir, Mr. Jones. 4 5 CHAIRMAN WHITFIELD: 6 COMMISSIONER HALL: Commissioner Hall. Thank you, Mr. Chairman. EXAMINATION 7 8 BY COMMISSIONER HALL: 9 Q Good afternoon, Mr. Jones. In your direct testimony, 10 page six, you indicate the changes and other process 11 improvements need to be promptly implemented, in 12 addition to significantly increasing the labor force. 13 Are you concerned that there's a lag between the 14 implementation of the new, improved processes and an 15 actual demonstration of increased productivity? 16 A I think the progress was slower than we would have liked 17 to have seen in the beginning, but it has since picked 18 up. 19 procurement area, for example, in the welding program, 20 hiring. 21 beginning — and especially in the January to April, when 22 Fluor did not have direct management control of the 23 craft — but since that time, it's picked up, and I'm 24 more positive on what I'm seeing there in the changes to 25 the processes that they're implementing. We've seen some very positive changes made in the So the changes were a little slow in the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 958 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q Okay. So you think that was more of a transition thing or — 2 3 A [Nodding head.] 4 Q Okay. 5 A Yes, ma'am, I — 6 Q And it shouldn't be a problem now that Fluor has direct control? 7 8 A I think it's going to continue to improve. 9 Q Okay. All right. ORS's direct testimony raises 10 concerns about inadequate support for cost estimates and 11 whether vital productivity improvements and upgraded 12 performance in other areas can be achieved. 13 done to obtain supportive documentation for that? 14 A What can be A lot of this is also included in the settlement 15 agreement. We've asked for specific metrics on 16 productivity to be included, for metrics on staffing to 17 be included. 18 too, but I just can't recall right off the top of my 19 head. 20 metrics requirements that should address this concern. So I think there's some more in there, But we put in the settlement agreement some 21 Q What kind of metrics would that be? 22 A On productivity, it's going to be a productivity report by each type of craft. 23 24 Q Okay. 25 A What they were supposed to accomplish, what they did VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 accomplish. 2 welders. 3 Q So it'll be reporting on rod busters, So more granular documentation is what you think is necessary? 4 5 959 A Yes. 6 COMMISSIONER HALL: 7 Thank you, Mr. Chairman. 8 CHAIRMAN WHITFIELD: Okay, thank you. Thank you, Commissioner Hall. 9 10 Commissioner Fleming. 11 COMMISSIONER FLEMING: Thank you, Mr. Chairman. 12 EXAMINATION 13 14 BY COMMISSIONER FLEMING: 15 Q Based on the relationship you've observed so far with 16 WEC and SCE&G, do you see WEC permitting SCE&G to 17 substantially participate, to ensure satisfactory 18 completion of the project, as you deemed essential in 19 your testimony on page 11? 20 A Yes, ma'am, I have seen improvements in that area, 21 directly. The project management office that I alluded 22 to is one area, but in all the meetings that we attend 23 and that I see meeting notes of, the increased 24 participation and the increased acceptance of that 25 participation is evident. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 960 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q So when did you start — you said through the meetings, 2 so when did you start the meetings where you were more 3 concerned about their relationship? 4 timeframe? What was the 5 A Well — 6 Q Are you saying it's been just since the 1st of September when you filed your testimony? 7 8 A Oh, before that time. Or before that time? It's basically at the same time 9 that Fluor came on the job as construction manager. 10 that timeframe is where the improvements have taken 11 place. In 12 Q So you have observed this since the first of the year? 13 A Yes, ma'am. 14 Q Okay. 15 A Yes, ma'am. So this is over a longer period of time. And it's, again, evolving, and you can see 16 additional participation increasing, if you want to — if 17 you — it has gone up since the first of the year. 18 Started the first of the year, but it has improved since 19 then, also. 20 Q But, apparently, you still have concerns as of the 1st of September. 21 22 A The only concern I have — I'm sorry. 23 Q Well, as you've noted in your testimony. 24 A The only concern I have is that it continue. 25 it's on the right track now. I think I just — I'm concerned VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 961 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 that, if conflicts arise, that there may be some 2 backtracking. 3 Q But I don't see any evidence of that. And I guess to that point, I would like to go back to a 4 question I asked Mr. Byrne about, tying payments to the 5 milestones, reaching the milestones. 6 assurances are in place that would mean that we would 7 not have construction shortcuts that could lead to 8 reworks, which adds to the costs of the project? 9 A And what Well, I think Mr. Kochems also addressed this. Once you 10 get over 600 milestones defined and stipulated, it's 11 pretty hard to deviate. 12 specifically as to what they're supposed to do and how 13 they're supposed to get paid. 14 that, in order for that payment to occur, so it's 15 difficult to deviate from that line and do something 16 different that's not in that construction milestone. 17 Q I mean, you've got them So you have to complete So you don't think there will be a problem with the 18 rework, then, that they'll do it to the quality it 19 should be? 20 A Ma'am, I think that there will always be rework — 21 Q Well, we've — 22 A — on a nuclear project. 23 Q — heard that. 24 A Yes. 25 Q But I was taking that into consideration. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 962 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 A I think, from what I see on the process improvements — 2 and I think this is a very important thing. The process 3 improvements cannot be discounted, that are being made. 4 And as I alluded to, one is the work packages, for 5 example. 6 packages that they used to give to the craft under the 7 CB&I regime were this thick [indicating], so you can 8 imagine providing a guy in the field with a work package 9 that looks like that. Just as a means of illustration, the work It's not a good idea. The work 10 packages since then have been simplified, streamlined, 11 and they're smaller than this binder now [indicating], 12 so it's a lot more understandable to the craft as to 13 what he has to do. 14 One of the reasons for low productivity on the site was 15 that when the craft went to do the job, what they needed 16 to do the job was not there. 17 that they were supposed to install, they didn't have the 18 rebar, they didn't have the piece of pipe they were 19 supposed to install. 20 it's called the 30-60-90 Program. 21 have work packages totally complete, all the materials 22 staged, 90 days before the work package is going to be 23 worked in the field. 24 got to work up to the 90, so they're working first to 25 get it 30 days ahead of construction, which they've Another place is in procurement. They didn't have the part So there's a concerted effort — The objective is to And it's 30-60-90 because they've VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 963 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 pretty well got now. 2 backlog for construction now. 3 the 60, and then they're going to get it to 90. 4 the plan, and it seems to be progressing towards that. 5 Q Okay. They've got around 400 packages in They're going to get to That is And so this is what you're talking about when we 6 talk about the resource totally loaded integrated 7 schedule? 8 9 A Or is that different issue? Well, it's somewhat a different issue, ma'am. A resource-loaded schedule tells you — it identifies each 10 task that you have to do, assigns a time duration to 11 that task, and assigns the craft to that task, but it 12 also takes into account — it's not just a matter of 13 adding people, because there are also restrictions on 14 how many people can work in an area. 15 area at the plant where you have to wait for somebody to 16 pass you before you can go into the area. 17 the areas are restrictive on the number of people that 18 can go in there. 19 loaded schedule also; not only how many people, in 20 total, you need, but how many can actually perform the 21 work in the area that is designated. 22 We just toured an So some of So that has to go into the resource- So the resource-loaded schedule will tell us 23 that: all the tasks, the time it takes to do it, the 24 specific people it takes to do it, and whether they can 25 be accommodated in the area they have to work. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 964 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Q And it's my understanding that that is not completed at this point. 2 3 A That's correct. 4 Q And isn't that essential to the timing of the project, also? 5 6 A Yes, ma'am. We consider that very important, and 7 realize that Fluor has to take some time to do that. 8 We've been very anxious to get that done, and we are 9 assured that they are working diligently to do that, and 10 we expect to see that by the end of this year. 11 meantime, they're working to a more compressed schedule, 12 in that, in specific areas, they may develop this 13 detail, but not for the entire project. 14 Q Okay. In the When you were talking about the 30-60-90, I 15 thought that maybe had moved forward somewhat, too. 16 let me ask you a question that was asked earlier to one 17 of the other witnesses. 18 about the project. 19 will be important for South Carolina. 20 important to have backup plans if things don't move 21 forward with WEC as planned? 22 A So We want to be very positive It's a good project. I think it But is it also My read on this is that I think we should have some 23 contingencies in place. And I think, again, the new 24 amendment, one of the important ones that is in that 25 amendment is the — I forgot the word — stockpiling, but VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 965 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 that's not the right word, I'm sorry, of the design 2 information that's necessary and the computer programs 3 that are necessary in order to proceed on the job 4 without Westinghouse. 5 identified and addressed. 6 provide that information to SCE&G. So that contingency has been And Westinghouse is to 7 Q So you think that the process is beginning? 8 A Yes, ma'am. 9 Q And will continue to move forward? 10 A I think so. 11 Q I'm talking about a backup plan. 12 A Yes. I think, if, in fact — I think it's going to be — it'll be more important 13 if we don't see improvements. 14 improvements, then you probably need to expand your 15 contingency plan. 16 Q Okay. If you don't see And we will — I'm sure that you will be reporting back to us — 17 18 A Yes, ma'am. 19 Q — on how that is progressing. 20 A Yes, ma'am. 21 COMMISSIONER FLEMING: 22 CHAIRMAN WHITFIELD: Thank you. Thank you, Commissioner Fleming. 23 Commissioner Elam. 24 25 All right. < VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 966 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions EXAMINATION 1 2 BY COMMISSIONER ELAM: 3 Q Good afternoon. Was “escrow” the word you were looking for? 4 5 A Yes, that was it. 6 Q I want to talk about this percentage completion that's Thank you. 7 based on man-hours. I believe it was brought up that 8 they were at 22 percent completion. 9 the back shift or expanding of the back shift, and for With the adding of 10 other reasons, should we expect the rate of increase of 11 those man-hours to increase at a faster pace? 12 A The stated goal, currently, is to get up to 3 percent a month. 13 14 Yes. Q Well, if I could, is it necessarily something that rises 15 at a steady rate throughout the life of a project, or 16 may there be leaps and dips as to man-hours at a 17 particular stage of the project? 18 A There's always a peak area of man-hours. You can think of it as a bell curve — 19 20 Q Right. 21 A — and there's always a period of peak. That period of 22 peak is going to be 2017-2018 on this project. So, yes, 23 you can assume there's going to be more man-hours 24 expended and there should be, consequently, more 25 percentage completions made. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 967 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 COMMISSIONER ELAM: 2 CHAIRMAN WHITFIELD: Okay. Thank you. Thank you, Commissioner Elam. 3 EXAMINATION 4 5 BY CHAIRMAN WHITFIELD: 6 Q Mr. Jones, I have just a few questions for you. We're 7 glad to have you here today. You are, as all of our 8 witnesses, an important witness, and you've got a long 9 and impressive background in nuclear construction, and, 10 of course, we acknowledged your expert witness status 11 today. 12 questions based about this project but also using your 13 knowledge and expertise of years and years in this 14 industry. 15 where Commissioner Fleming was. 16 testimony, you said SCE&G has confidence that revised 17 completion dates will be met, but then you go on to say, 18 in your testimony, ORS does not share this confidence. 19 And then you cite one of the biggest reasons, one of the 20 things she was just asking you about, about Fluor not 21 coming up with the schedule, yet. 22 stated that you would have it fourth quarter of 2016, 23 and Mr. Byrne I believe also stated anytime now. 24 is the latest you — other than between now and December 25 31st, what are you hearing, what are you anticipating And given all that, I want to ask you a few I guess, first, I want to go a little bit You state in your And you just now What VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 968 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 the exact time of when you'll have that, and what do you 2 expect to find? 3 SCE&G also states that this is just a routine update. 4 You say ORS disagrees, and you go on to call this a 5 major, unusual event. 6 be-released schedule comes out, what do you anticipate, 7 based on your expertise and your knowledge, and what's 8 your anticipation and what are your expectations? You also state in your testimony that So, I guess, when this soon-to- 9 A All right. 10 Q And I'm asking you to speculate. That's a multifaceted question. [Laughter] 11 12 First — A I have tried many times to get some read on how the 13 Fluor schedule is going to — what it's really going to 14 impact, and they just aren't ready yet. 15 understand, Fluor will develop the schedule, it will 16 then be reviewed with Westinghouse, then it will be 17 passed to SCE&G. 18 with SCE&G, in the past what has happened is they have 19 done their own review of that before it was passed on to 20 us. 21 give it to us at the same time they get it from 22 Westinghouse. 23 finished, Westinghouse has to do their review, then it's 24 going to be passed to SCE&G and we should get it at that 25 time. And so that you Now, we have agreed with them that — This time, the agreement is that they're going to But there is a time. Fluor is not yet And right now, that is still at the end of the VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 969 year, probably December, before we see that. 1 We are concerned that — the current schedule is 2 3 based on tasks taking a certain interval of time. We 4 are concerned that those numbers were not accurate and 5 that they were low, so that, when Fluor goes through 6 their tasks, they will find that the tasks actually take 7 longer and take more man-hours than the current schedule 8 says. That's one of our primary concerns. There are some mitigating things that we have 9 10 recently learned about, that may offset some of this. 11 For example, in the numbers reported to us now on 12 productivity, they don't include subcontractors on the 13 site. 14 some portion of the work is not credited as being 15 completed. 16 expanded somewhat by that. They're going to start doing that, but that means So the 22 percent number also may be 17 Q So you expect some gains that may not be shown on — 18 A Yes, sir. 19 Q — paper now? 20 A Right, because at this point subcontractors were not 21 included, but also — we're not sure where this offset is 22 going to be. 23 than the original estimate said, will require more man- 24 hours, but we're not real sure how this offset occurs. 25 So we're very anxious to get the schedule from Fluor. We expect that the tasks will take longer VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 970 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 In addition, other mitigating things that are 2 happening is changing the sequence of how things are put 3 in. 4 the approach to work. 5 done on Unit 3 is to divide one of the modules into two 6 pieces instead of setting the whole thing. 7 permitted them to accelerate work associated with the 8 auxiliary building in certain areas. 9 mitigation strategies that are also going to be employed 10 by Fluor that may also change the sequence and how these 11 things are done in the schedule. And this can have a fairly significant impact on For example, one of the things This So there are 12 So I do expect the time intervals associated with 13 any — with an individual task to increase, but I'm not 14 sure what the impact of these other mitigations are 15 going to be. 16 happen when we get the schedule, the resource-loaded 17 schedule, from Fluor. 18 Q I don't — I'm not sure what's going to Well, thank you for that. You've cited some positives 19 and some negatives, potential negative unknowns, that 20 once they are both factored in, you're saying you don't 21 really know exactly what the balance or how those two 22 will offset each other — I think “offset” was the word 23 you used. 24 A Yes, sir, that's correct. 25 Q Without getting too much into your personal business, I VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 971 1 know you're on as a consultant with ORS. 2 be the person — once this is released, will you still be 3 in an ongoing relationship with ORS to still go through 4 this information as it comes in? 5 continue being involved so that — you obviously are 6 right in tune with where the project is right now, but 7 when this report comes out, will you be the one that'll 8 still be here kind of analyzing that? 9 A Are you going to Well, all I can say is I serve at the discretion of Mr. Dukes Scott. 10 11 Will you still Q Okay, enough said. 12 [Laughter] 13 CHAIRMAN WHITFIELD: 14 Fleming has a question. 15 more, but — I think Commissioner And I've got one or two 16 COMMISSIONER FLEMING: 17 CHAIRMAN WHITFIELD: Well, you go ahead. — you go ahead and 18 interject right now, and I'll — my two are 19 unrelated, so go ahead. EXAMINATION 20 21 BY COMMISSIONER FLEMING: 22 Q I just forgot one question I had intended to ask. 23 Wanted to while I had the opportunity. The last 24 paragraph on page 33 and 34, that last sentence, “To the 25 extent that SCE&G guarantees the option,” could you VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 972 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 explain what that means, because we've heard a lot about 2 guarantees and maybe not guarantees. 3 A Yes, ma'am. 4 Q Are you saying — what does that mean? to guarantee? 5 6 Is SCE&G agreeing A The terms of the settlement agreement do address that. 7 And I believe, although — as Mr. Guild pointed out — 8 the term “guarantee” is not in there, the actual 9 definition of “guarantee” is in there, in that SCE&G has 10 provided assurance that they will stand behind it, in 11 the case of — 12 Q SCE&G will stand behind it. 13 A Yes, ma'am. 14 Q Not the ratepayer. 15 A Yes, ma'am. 16 Q And that is your understanding. 17 A Yes, ma'am. And that pertains to the scope of the EPC contract. 18 COMMISSIONER FLEMING: 19 Okay. Thank you. I'm sorry. 20 CHAIRMAN WHITFIELD: 21 That's all right. Thank you. 22 EXAMINATION 23 24 BY CHAIRMAN WHITFIELD: 25 Q I've got a couple more questions, and they are also in VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 973 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 the spirit of your years of experience in this industry. 2 You mentioned to Commissioner Hamilton a minute ago — 3 you were talking about the craft, and I guess the non- 4 craft workers on the site that are working for Fluor. 5 And you used the word “anecdotal” about them smiling and 6 being happy with their work. 7 you, in your years of experience when you've gone on 8 these type sites and you've seen a turnaround like that, 9 particularly with the craft labor, has that translated And I would like to ask 10 into much higher productivity levels and much better 11 improvements? 12 years in the industry? 13 A Yes, sir. Or what has been your experience in your I guess I wouldn't characterize it as “much” 14 but, yes, it does — the kind of attitude that I'm seeing 15 usually results in increases in productivity. 16 workers are more involved, they understand the processes 17 better, and they can get through their work on a much 18 more productive basis. 19 will be some productivity increases from the changes 20 that have been made. 21 Q The So, yes, I expect that there Well that's encouraging to hear, Mr. Jones. Next, on 22 page 10 of your direct testimony — and I'll give you a 23 minute to get there. 24 direct quote, but you mentioned on page 10 that the 25 contract for the Vogtle units is similar to that for the I'm not necessarily looking at a VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 974 1 V.C. Summer units. 2 you briefly compare and contrast the contract provisions 3 with respect to the issues being discussed in this 4 docket, to the extent you can? 5 not be privy to all their provisions. 6 briefly summarize — compare and contrast — those 7 provisions with ours? 8 A And without being too long, could And I realize you may But could you Well, as far as the contract itself, I'm not going to be able to say a lot about it, because I don't — I know 9 10 it's a fixed-price contract and I only know what's been 11 in the popular press relative to that. 12 the contract, I'm not — I can't speak too much to that. 13 But one of the things that is in place is they actually 14 call it a four-by-one approach, and Westinghouse and 15 Fluor are looking at the management and the procurement 16 activities and many of the process improvements, those 17 kind of things. 18 be the same. 19 four-by-one concept, so four units, all working under 20 one group of processes. 21 of. 22 on what those are. 23 Q So, relative to They're looking to have all four units And they specifically designate it as a So that aspect of it, I'm aware The details of the contract, I'm sorry, I'm not up And I guess, lastly, in your expert opinion, with you 24 being in this industry and the experience you have, and 25 knowing the status of this project, where it is today, VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 975 1 what is your — and, again, I'm asking you to speculate, 2 but what — and I know you don't have a crystal ball, but 3 what is your prediction? 4 to unfold? 5 A How do you think this is going Well, I'll be perfectly candid. I don't think that the 6 project is going to hit their specific completion dates. 7 However, I believe they will be, in both cases, 8 completed within the 18-month time limits set by the 9 ruling by the Commission in previous hearings, the 10 18-month window that's set there. So I think my biggest 11 concern is Unit 3 meeting the deadline for production 12 tax credits. 13 Q Do you feel like Unit 2 is safely going to make it? 14 A Yes, sir. 15 Q It's Unit 3 that you're concerned with. 16 A Yes, sir. That's my concern, yes. And I think the 17 efforts to get that production tax credit extended will 18 be very beneficial. 19 20 21 22 CHAIRMAN WHITFIELD: Jones. Well, thank you, Mr. That's all I have. Any other Commissioner questions? [No response] 23 If not, Mr. Nelson, do you have any redirect? 24 MR. NELSON: 25 CHAIRMAN WHITFIELD: No redirect. Okay. Mr. Jones, you may VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 976 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 2 step down. And are there any other matters from any of 3 the parties after Mr. Jones steps down? 4 Mr. Guild? 5 MR. GUILD: If not — Mr. Chairman, just briefly, 6 perhaps off the record, if the parties and maybe 7 Mr. Butler could discuss post-hearing proposed 8 orders, I saw — 9 CHAIRMAN WHITFIELD: I'm going to go over that 10 after — he's going to do a little housekeeping and 11 read the exhibits for us, and I will go over 12 proposed order dates. 13 MR. GUILD: Well, could we discuss it off the 14 record briefly, Mr. Chairman, before you do that? 15 I wanted to have some input into that question. 16 CHAIRMAN WHITFIELD: We originally were 17 looking at November 3rd, and I realize we've been 18 delayed because of the hurricane. 19 me discuss that with my attorney, because we do 20 have some deadlines. [Brief pause] 21 22 One second, let Okay. We're going to do that in just a 23 second, but I'm going to let Mr. Butler read the 24 exhibits, and then we'll take a brief recess for 25 just a couple of minutes, and we'll come back in. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 977 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 2 3 So at this time, I'm going to turn it over to — and, Mr. Jones, you may — WITNESS: [WHEREUPON, the witness stood aside.] 4 5 6 7 Thank you, sir. CHAIRMAN WHITFIELD: I'm going to turn it over to Mr. Butler to go over our exhibits. MR. BUTLER: Yes, sir, Mr. Chairman. We had 8 14 exhibits, as I have recorded them. Exhibit No. 9 1 is the settlement agreement and the exhibits 10 attached to that agreement. Exhibit No. 2 is Dr. 11 Wilder's statement, from the public hearing. 12 Exhibit 3 would be Ms. Arnold's comments. 13 4 is the certificate from the Supreme Court on pro 14 hac vice for Ms. Thompson. 15 certain cross-examination exhibits used for the 16 cross-examination of Mr. Marsh. 17 direct exhibits of Mr. Kissam. Exhibit 7, Ms. 18 Napoleon's prefiled exhibits. Exhibit No. 8 was 19 Mr. Joe's statement given during the public 20 hearing. 21 for people participating in the night hearing, 22 itself. 23 Exhibit 11, Ms. Powell's prefiled exhibits. 24 Exhibit 12 is Dr. Lynch's prefiled exhibits. 25 Exhibit 13, Mr. Kochems's prefiled exhibits. Exhibit Exhibit 5, we have Exhibit 6, the Exhibit 9 was the actual sign-in sheet Exhibit 10, Mr. Byrne's prefiled exhibits. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA 978 Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 Exhibit 14, Mr. Jones' prefiled exhibits. And that 2 does complete the exhibit list that I have, Mr. 3 Chairman. 4 CHAIRMAN WHITFIELD: 5 We're going to recess for about five minutes, 6 and we'll come back and then we will meet for just 7 a second and then adjourn the hearing. 8 back in five minutes. 9 10 11 Thank you, Mr. Butler. So see you [WHEREUPON, a recess was taken from 2:15 to 2:20 p.m.] CHAIRMAN WHITFIELD: We're going to come back 12 in from our break, and I understand we're going to 13 make proposed orders due by the close of business 14 on Friday, November 4th. 15 seems to be agreeable to all parties? 16 MR. GUILD: And I understand that Mr. Chairman, it is certainly 17 agreeable, and I appreciate that extra day from 18 what the staff had proposed earlier. 19 represent that that's based on the assumption that 20 our diligent court reporter has the transcript 21 available the 24th, the Monday, and that gives me 22 seven, eight business days to get a proposed order 23 to you, since I'm a nonsettling party. 24 appreciated, every one of those days, so, thank 25 you, Mr. Chairman. I just would And it's VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 1 CHAIRMAN WHITFIELD: 979 Thank you, Mr. Guild. I 2 think she is aware, and she will be working hard to 3 do that. 4 the close of business on Friday, November 4th. 5 Thanks to everyone for participating, and hearing 6 adjourned. So we will have proposed orders due by 7 [Witness(es) excused.] 8 [WHEREUPON, at 2:20 p.m., the hearing in 9 the above-entitled matter was adjourned.] 10 ____________________________________________ 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA Docket 2016-223-E South Carolina Electric & Gas Co. Nuclear Construction Updates and Revisions 980 C E R T I F I C A T E I, Jo Elizabeth M. Wheat, CVR-CM-GNSC, Notary Public in and for the State of South Carolina, do hereby certify that the foregoing is, to the best of my skill and ability, a true and correct transcript of proceedings had and testimony adduced in a hearing held in the above-captioned matter before the PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA; That the witnesses appearing during said hearing were affirmed by me to state the truth, the whole truth, and nothing but the truth; IN WITNESS WHEREOF, I have hereunto set my hand and seal, on this the 21st day of October , 2016. VOL 4 OF 4 – 10/13/16 PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA