19901213Vol III Hearing.pdf

I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
/??~
ORIGINAL
r
BEFORE THE IDAHO PUBLIC UTIL~MEëo~ISSIONFILED 0
IN THE MATTER OF THE APPLICATIef DEC 13 PPl ~ 22
OF IDAHO POWER COMPANY FOR )
AUTHORITY TO RATE BASE THE ) ÐAh~P~p~~. IPC-E-90-2
INVESTMENT REQUIRED FOR THE UP i )IT . u. j \I
REBUILD OF THE SWAN FALLS "1' ¡ IES COMMISSIONHYDROELECTRIC PROJECT )
)
"
BEFORE
COMMISSIONER DEAN J. MILLER (Presiding)
COMMISSIONER PERRY SWISHER
COMMISSIONER RALPH NELSON
PLACE:Commission Hearing Room
472 West Washington
Boise, Idaho
DATE:November 29, 1990
VOLUME III - Pages 69 - 207
7.-EDRICKCOURT REPORTING
537 W. Bannock
Suite 205
P.O. Box 578
Boise, Idaho 83701
[phone] /
. . . We offer .. BaroDaa
Microtranscription™ by
I
I 1
2
I 3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I
19
20
I 21
22
I 23
I 24
25
I
I
APPEARANCES
For the Staff:MICHAEL S. GILMORE, Esq.
Deputy Attorney General
472 West Washington
Boise, Idaho 83720
For Idaho Power
Company:
EVANS, KEANE, KOONTZ, BOYD
SIMKO & RIPLEY
by LARRY D. RIPLEY, Esq.
Idaho First Plaza-Suite 1701
101 South Capitol Boulevard
Boise, Idaho 83702
For the Industrial
Customers of Idaho
Power Company:
DAVIS WRIGHT TREMAINE
by PETER J. RICHARDSON, Esq.
400 Jefferson Place
350 North Ninth Street
Boise, Idaho 83702
-and-
DAVIS WRIGHT TREMAINE
by GRANT E. TANNER, Esq.
1300 S.W. Fifth Avenue
Sui te 2300
Portland, Oregon 92701
(Of Record)
For Idaho ConsumerAffairs, Inc.:HAROLD C. MILES
316 Fifteenth Avenue South
Nampa, Idaho 83651
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
APPEARANCES
I
I 1 I N D E X
2
I 3 WITNESS EXAMINATION BY PAGE
I 4 James L.Baggs Mr.Ripley (Direct)70
(Idaho Power)Prefiled Testimony 72
5 Mr.Miles (Cross)77
I Mr.Richardson (Cross)82
6 Mr.Gilmore (Cross)83
Commissioner Swisher 88
I 7
Don Reading Mr.Richardson (Direct)99
8 (ICIP)Prefiled Testimony 101
I Mr.Miles (Cross)130
9 Mr.Gilmore (Cross)140
Commissioner Swisher 144
I 10 Commissioner Nelson 146
Commissioner Miller 149
11
I Thomas Faull Mr.Gilmore (Direct)152
12 (Staff)Prefiled Testimony 155
Commissioner Swisher 180
I 13 Mr.Miles (Cross)183
14 Bill Eastlake Pref iled Testimony 187
I (Staff)
15
I 16
17
I 18
I
19
20
I 21
22
I 23
I 24
25
I
I HEDRICK COURT REPORTING INDEX
P.O.Box 578,Boise,ID 83701
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
1
2
3 NUMBER PAGE
4
EXHIBITS
FOR IDAHO POWER COMPANY:
5
6
7
8
9
1. - 6.
7.Letter from Thomas G. Nelson
to J. W. Marshall, Re: Water
Rights at the Swan Falls Dam,
dated June 6, 1990 (3 pages)
FOR THE STAFF:
Admi tted
Identified
Admi tted
Premarked
Admitted
Premarked
Admitted
Premarked
Admi tted
17
FOR THE INDUSTRIAL CUSTOMERS OF IDAHO POWER:
203
69
203
203
203
203
203
203
101.
10
11
12
102.
13
14 103.
15
16
Qualifications of Thomas G. Faull,
P.E. of the Idaho Public Utilities
Commission (4 pages)
IPCo Average Hydro Variable Costs
(2 pages)
Three-page exhibit sponsored by
Thomas Faull
201.
18
19 202.
20
21
22
23
24
25
Qualifications of Dr. Don Reading
(7 pages)
Idaho Power Company, Change in
Cost of Equity
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
Premarked
Admi tted
Premarked
Admitted
EXHIBITS
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
10
11
12
14
1 BOISE, IDAHO, THURSDAY, NOVEMBER 29, 1990, 9: 30 A. M.
2
s
4 COMMISSIONER MILLER: Let i s resume our
5 consideration of Case IPC-E-90-2. When we left off
6 yesterday, Mr. Ripley, I think you were prepared to call
7 Mr. Baggs.
8 MR. RIPLEY: Yes. Prior to calling
9 Mr. Baggs, we were asked at the conclusion of the
proceeding yesterday as to whether we could provide
something in regard to the Company i s water rights at
Swan Falls, and we have gone to our files and pulled a
13 letter that we have received from the Company i s water
15
16
rights lawyers relative to Swan Falls and we would ask
that that be marked for identif ication as Exhibit 7.
COMMISSIONER MILLER: All right, Exhibit 7
17 will be marked.
18 (Idaho Power Company Exhibit No. 7 was
19 marked for identification.)
20 MR. RIPLEY: With that, we would call
21 Mr. Baggs.
22
23
24
25
69
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
COLLOQUY
I
I 1
2
I 3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I
22
23
I 24
25
I
I
JAMES L. BAGGS,
produced as a witness at the instan~e of the Idaho Power
Company, having been first duly sworn, was examined and
testified as follows:
DIRECT EXAMINATION
BY MR. RIPLEY:
Q Mr. Baggs, did you have cause to be prepared
for this proceeding certain prefiled testimony?
A Yes, I did.
Q And that testimony consists of five pages of
direct testimony?
A Yes.
Q And if I asked you the questions that are
set forth in that test imony, would your answers be the
same today?
A They would.
Q And you have no rebuttal testimony as I
understand it?
A That i s correct.
MR. RIPLEY: We would ask that Mr. Baggs --
Q BY MR. RIPLEY: You have no exhibits either,
do you, Mr. Baggs?
A That i s also correct.
70
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Di)
Idaho Power Company
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
10
11
12
13
14
17
19
21
23
1 MR. RIPLEY: With that, we would request
2 that Mr. Baggs i direct testimony be spread upon the record
3 and would tender him for cross-examination.
4 COMMISSIONER MILLER: All right, in the
5 absence of objection, his testimony will be spread in the
6 record.
7 (The following pref iled testimony of
8 Mr. James Baggs is spread upon the record.)
9
15
16
18
20
22
24
25
71
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Di)
Idaho Power Company
Q. Please state your name and business address.
A. My names is James L. Baggs, and my business
address is 1220 Idaho street, Boise, Idaho.
Q. By whom are you employed and in what capacity?
A. I am employed by Idaho Power Company as Manager of
Rates.
Q. Please describe your educational background and
professional experience.
A. In May of 1975, I received a Bachelor of Arts
Degree in Economics from the University of
Colorado at Boulder, Colorado. In May, 1977, I
graduated from the University of Arizona at
Tucson, Arizona with a Master of Science Degree in
Agricultural Economics. While studying at
Arizona, I held the positions of Teaching
Assistant and Research Assistant.
After completion of my Masters Degree, I
assumed the position of Research Associate in the
Department of Agricultural Economics at the
University of Arizona. In that capacity, I served
as an Economic Consultant to the Institute of
Government Research and the Pima Association of
Governments in Tucson, Arizona.
From September, 1978, to August, 1979, I
worked toward the Doctor of Philosophy Degree in
Baggs, Di 1
72 Idaho Power Company
.1
I
1
I 2
I 3
4
I 5
6
I 7
I 8
9
I 10
11
I 12
I
13
14
I 15
16
I 17
18
I 19
I 20
21
I 22
23
I 24
I 25
I
I
Agricultural Economics at the University of
California, Davis. At the same time I was
employed as a Teaching Assistant. In August,
1979, I accepted employment as Senior Water
Resource Analyst for the Idaho Department of Water
Resources. My duties included economic analysis
and planning related to complex multi-objective
water and related resource issues.
In August of 1982, I accepted the position of
Rate Analyst with Idaho Power Company. My duties
as Rate Analyst included the preparation of cost
of service information for use in the development
of jurisdictional separation models, class cost-
of-service studies and average system cost
studies. More specifically, I was responsible for
gathering and analyzing data from various sources
and utilizing computer modeling and other
techniques to carry out cost-of-service related
analyses.
In September, 1986, I was promoted to the
position of Supervisor of Rates, and in August,
1989, I was promoted to the position of Manager of
Rates. As a result, I am now responsible for the
overall coordination and direction of the Rate
Department, including the development of
Baggs, Di 2
73 Idaho Power Company
.1
I
I 1
2
I 3
4
I 5
6
I 7
I 8
9
I 10
11
I 12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
jurisdictional revenue requirements, the
preparation of rate design analyses and
recommendations, and the coordination and
preparation of the Company's rate related
regulatory filings in the four regulatory
jurisdictions in which Idaho Power provides
service..
Q. what is the purpose of your testimony in this
proceeding?
A. The purpose of my testimony is to explain the
ramifications of rate basing the investment
required for the rebuild of the Swan Falls
hydroelectric facility.
Q. will the Company's rates be affected while the
Swan Falls project is being constructed?
A. No, The Company's rates will not be affected. The
investment in the Swan Falls project will be
treated as construction work in progress until the
proj ect is completed, and construction work in
progress is not included in the Company's rate
base when Idaho jurisdictional revenue
requirements are determined.
Q. Once the project is completed wiii the rates the
Company charges for electric service change?
A. No. until the Company's revenue requirement is
Baggs, Di 3
74 Idaho Power Company
reviewed by the Commission and the rates of the
Company are changed in a general rate proceeding,
or a "tracker" type rate proceeding, the rates the
Company is authorized to charge will not change.
Q. Is it customary to include investment in the
Company i S rate base without the Commission
reviewing the Company i s revenue requirement and/ or
rates?
A. Literally every day the Company makes additions to
or reductions in its electric plant in service.
Every time there is an addition or removal of any
electric plant investment (i.e., a line extension,
replacement of an old transformer with a new
transformer, etc.), the Company includes that
investment in the appropriate electric plant
account without specif ic Commission review. This
accounting procedure is permissible because it is
assumed that the Commission will allow the
recovery of these costs by the inclusion of the
Company i S electric plant in service in rate base
when determining the Company i s revenue
requirements.
Q. As Manager of Rates of Idaho Power Company, what
is the effect of the Commission i s determination
that it will rate base the investment required for
Baggs, Di 4
75 Idaho Power Company
-I
I
1
1 2
I 3
4
I 5
6
I 7
I
8
9
I 10
11
I 12
I
13
14
I 15
16
I 17
18
I 19
I 20
21
I 22
23
1 24
I 25
I
.1
the rebuild of the Swan Falls hydroelectric
facility?
A. If the Company utilizes reasonable and prudent
construction practices, the Commission i s
authorization is recognition that the investment
is in the public interest and that it will be
included in the Company i s rate base when the
Company i S rates are next adjusted after completion
of construction.
Q. Does this complete your testimony?
A. Yes, it does
Baggs, Di 5
76 Idaho Power Company
I
I 1
2
I 3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I
19
20
I 21
I
22
23
I 24
25
I
I
(The following proceedings were had in
open hear ing. )
COMMISSIONER MILLER: Mr. Miles, do you have
questions for Mr. Baggs?
MR. MILES: Yes.
CROSS-EXAMINATION
BY MR. MILES:
Q Mr. Baggs, turn to Page 2, if you would,
please. Beginning on Line 4 or Line 3, II In August, 1979,
I accepted employment as Senior Water Resource Analyst for
the Idaho Department of Water Resources. II As an analyst
at the Department and -- well, first let me back up and
say have you read Idaho Power Company iS Exhibit NO.7?
MR. RIPLEY: Mr. Chairman.
COMMISSIONER MILLER: Mr. Ripley.
MR. RIPLEY: Perhaps it is anticipatory, for
which I apologize, but Mr. Baggs has not been presented in
this proceeding as a water rights expert and any
cross-examinat ion concerning Mr. Baggs i opinions,
et cetera, on water rights would clearly be outside the
bounds of his direct testimony in this proceeding.
COMMISSIONER MILLER: I think it might be a
Ii ttle anticipatory. Let i s make sure exactly where
77
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
Idaho Power Company
I
I 1
2
I 3
1 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I
22
23
I 24
25
I
I
Mr. Mi les want to go wi th this.
Go ahead, Mr. Mi les .
Q BY MR. MILES: Mr. Baggs, the purpose of my
question is to be ~ure that Idaho Power Company does have
a secured water rights and reading the letter from
Mr. Nelson, who I personally have heard testify many times
and issue opinions on water rights and questions, but
being an employee of the Idaho Department of Water
Resources, you are not totally ignorant of water rights
si tuations.
MR. RIPLEY: I would interpose my objection
again, Mr. Chairman.
COMMISSIONER MILLER: Let · s wait until we
actually get a quest ion.
MR. RIPLEY: Okay.
Q BY MR. MILES: Consequently, to allay my
fears, do you believe Idaho Power Company's water rights
for Swan Falls are secure?
MR. RIPLEY: Mr. Chairman, and I don' t mean
to prevent Mr. Miles from making inquiry into areas that
he is concerned with, but he simply just has the wrong
wi tness . There has to be bounds to the direct test imony
of witnesses at some level. I would object.
COMMISSIONER MILLER: Mr. Baggs
MR. MILES: Mr. Chairman.
78
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
I daho Power Company
I
I 1
2
I 3
I 4
5
I 6
I 1
8
I 9
I 10
11
1 12
I 13
14
I 15
I 16
17
I 18
I
19
20
I 21
1
22
23
I 24
25
I
I
COMMISSIONER MILLER: Just a second, Harold,
wai t a second. Mr. Baggs, based on your exper ience and
knowledge and your present capacity at the Company, do you
feel qualified to express an opinion on the question
tha tIs been asked you?
THE WITNESS: Not really. My past
experience at Water Resources was not directly involved
wi th water rights as such, nor am I directly involved with
those questions in my capacity at Idaho Power Company.
COMMISSIONER SWISHER: You i re the rate
manager.
COMMISSIONER MILLER: Mr. Miles, I think 11m
going to have to rule here that the testimony or the
question in the first place is beyond the scope of
Mr. Baggs I testimony. He doesn I t testify aboqt water
rights at all, and even if it was not, he has indicated
that he is unable to express an opinion on your question
because of his lack of qualification; so I'll have to rule
that he I s not required to answer the question.
MR. MILES: Mr. Chairman, I understand your
posi tion and I didn I t particularly want to embroil myself
wi th our distinguished attorney for the Idaho Power
Company, but, unfortunately, Tom Nelson is in
San Franc isco, I guess, and as I said before yesterday,
reading on Page 36 of the State Water Plan, which is a
79
HEDRICK COURT REPORTING
P.O. Box 518, Boise, ID 83101
BAGGS (X)
Idaho Power Company
1
I 1
2
I 3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
1 18
I
19
20
I 21
I
22
23
I 24
25
I
I
legal document, that I just hope that in case of a low
water year that irrigator water rights would not supersede
the Idaho Power Company i s 3900 cfs at Swan Falls.
COMMISSIONER MILLER: I think we understand
your point. I think what we should do, Mr. Miles, is at
the conclusion of these proceedings we will have
concluding arguments and concluding comments and I think
that would be an appropriate time for you to discuss this
issue, but right now with this witness isn't really the
best time to do it.
Q BY MR. MILES: Well, Mr. Baggs, I apologize
for trying to put you on the spot, if we could turn to
Page 4 of your testimony or at the bottom of Page 3 and
cont inuing on to the top of Page 4, you were asked
beginning at Line 23 at the bottom of Page 3, you were
asked the question, "Once the project is completed, will
the rates the Company charges for electric service
change? II And your response is, "No. Until the Companyls
revenue requirement is reviewed by the Commission and the
rates of the Company are changed in a general rate
proceeding or a tracker-type rate proceeding, the rates
the Company is authorized to charge will not change.
Is it customary to include investment in the
Company i S rate base without the Commission reviewing the
Company i S revenue requirement and/or rates II ; is that still
80
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
Idaho Power Company
I
I 1
2
I 3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
1
16
17
I 18
I
19
20
I 21
I
22
23
I 24
25
I
I
your testimony?
A Well, my testimony hasn't changed. You read
me one question and an answer and a follow-up question
without the answer to that question, but there's no change
in my position.
Q Thank you. Well, my question is, then, will
the Idaho Power Company apply for a tracker rate increase
after Twin Falls and Milner are completed and put in rate
base?
A I would anticipate that the type of rate
filing which the Company will utilize in order to
recognize the inclusion of those plants in rate base would
more likely be a general rate case.
Q It would be a general rate case afterwards
instead of a tracker?
A That i s correct.
MR. MILES: Thank you. I have no further
quest ions of Mr. Baggs, Mr. Chairman.
COMMISSIONER MILLER: Thank you, Mr. Miles.
Mr. Richardson.
MR. RICHARDSON: Thank you, Mr. Chairman.
81
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
Idaho Power Company
I
I 1
2
I 3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
1
16
17
I 18
I 19
20
I 21
I
22
23
I 24
25
I
I
CROSS-EXAINATION
BY MR. RICHARDSON:
Q Mr. Baggs, on Page 3 of your pref iled direct
testimony, Line 17, you talk about how the investment at
Swan Falls will be treated during construction. You use
the phrase there "construction work in progress"; correct?
A Yes, I do.
Q Is that the equivalent to AFUDC, accounting
for funds used during construction?
A Is construction work in progress equivalent
to AFUDC?
Q That i s correct.
A No.
Q How do they differ?
A Well, I think that -- if I understand your
question correctly, during the time when a project is
being constructed, normally the investment in that project
would be booked in an accounting sense as construction
work in progress. In Idaho, we also at the same time
include an allowance for funds used during construction,
which is booked into the construction work in progress
account.
These amounts stay there, essentially, until
the completion of a project at which time they i re booked
82
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
I daho Power Company
I
I 1
I 2
3
I 4
I 5
6
I 7
I
8
9
I 10
11
I 12
1 13
14
1 15
I 16
17
I 18
1
19
20
I 21
I 22
23
I 24
I 25
I
in electric plant in service; so I guess I don't know, I
may not follow your question completely. An allowance for
funds during construction, yes, is booked and it is
included in the construction work in progress account.
Q On Exhibit 6, youlre familiar with
Exhibi t 6?
A I remember that it was introduced
yesterday. I i ve not seen it.
MR. RICHARDSON: That i s all I have got,
Mr. Chairman.
COMMISSIONER MILLER: Thank you,
Mr. Richardson.
COMMISSIONER MILLER: Mr. Gilmore.
CROSS-EXAINATION
BY MR. GILMORE:
Q Yes, I just have one area, Mr. Baggs, and
wi th the Chair i s indulgence, it will appear that I 1m
talking about Milner at the start, but I hope to steer it
to Swan Falls at the end; so with that, let me begin. As
I understand the Milner application, the Company had two
al ternatives; is that correct? One would be putting the
Milner project in rate base under conventional rate base
rate of return ratemaking, that was one of the
83
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
I daho Power Company
I
I 1
I 2
3
I 4
I 5
6
I 7
8
1 9
I 10
11
1 12
I 13
14
I 15
I 16
17
I 18
1
19
20
I 21
I 22
23
I 24
I 25
I
alternatives, and the second would be to exclude it from
the retail rates altogether and allow Idaho Power to
market it elsewhere; would that be fair?
A Yes, that would.
Q Okay, under the second alternative, would
Idaho Power necessarily be getting a rate base rate of
return from the Milner project if it were to market power
elsewhere, say, in a wholesale contract to another
company?
A I guess I i m not completely sure what you
mean by "rate base rate of return. II It is assumed by the
Company that if the Company i s alternative proposal, and
that is a Certificate of Exemption, be issued that the
Company would have then the opportuni ty to earn a rate of
return on its investment in the Milner project.
Q Well, let me phrase it another way. Say, if
you entered into a contract on the wholesale market, you
might wind up with a greater return than you'd get if it
were put in retail rates, you might wind up with a lesser
return. It wouldn i t necessarily be exactly the same kind
of return you would get if it were included in retail
rates for that project; is that a fair statement?
A Again, 11m not sure exactly what you mean by
II the same kind of return. II I don i t know what that return
would be. I also don i t know what the return would be if
84
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
Idaho Power Company
Milner were ineluded in the Company i s retail rates.
Q Well, if you were to sell Milner on the
wholesale market in some sort of negotiated contract --
A
Q
Milner were
less?
A
Q
Yes.
-- mightn i t you make more than you would if
included in retail rates, mightn i t you make
That i s possible.
The whole idea of a contract is that you
would not, you wouldn i t necessarily come out exactly the
same place you would if Milner were included in retail
rates; that is, the Company would not necessarily be
indifferent to whether you had a wholesale contract on the
open market or if Milner were included in retail rates,
that is, it could come out better or worse.
A Tha tIs true.
Q So would it be fair to say that at least for
the Milner project the Company has contemplated the
possibili ty that its earnings from Milner would not
necessarily be the earnings it would get from traditional
rate base rate of return ratemaking?
A That would be fair.
Q In making the Company i s proposals for
Swan Falls, did the Company ever consider the possibility
that its earnings or its money or whatever phrase we want
85
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
Idaho Power Company
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
to have, its payment from the ratepayers would be
something other than traditional rate base rate of return
ratemaking?
A No, I don i t believe so. In the Swan Falls
application, as you know, there was no alternative
proposal as there was in the Milner application.
Q Do you know if there is any reason why the
Company was willing to take its chances on -- let me
rephrase it. Do you know if there i s any reason why the
Company was willing to contemplate alternatives to the
rate base rate of return ratemaking for Milner but not for
Swan Falls?
A Well, without having been necessarily privy
to all of the discussions that went on in determining the
way in which these applications would be made, I would
venture at least a guess that the Milner project is a new
project, has not been dedicated in any way to any sort of
public use; whereas, the Swan Falls project, while it's a
change in size, I recognize is a project which has been
included in the Company i s rate base and utilized to serve
the Company i s customers for a very long time.
Q Okay, let me try to end this area with one
or two more questions. Would it be a fair statement that
in the way the Company structured its Milner application
it is aware that it may, if one of its alternatives is
86
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
I daho Power Company
1
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
adopted, it is aware that its rate of return for Milner
may not be set by a regulatory Commission but may be set
by market conditions, wholesale market conditions?
A Yes, the Company is aware of that.
Q Would you say that given the presentations
of Dr. Reading and the Staff in this case the Company is
now aware that if Swan Falls is dedicated to retail
service for Idaho Power i s customers that it is on notice
that parties may propose ratemaking methods other than
tradi tional rate base rate of return ratemaking, the
Company i S on notice of that now, aren i t they?
A The Company is on notice that alternative
methods have been proposed in this particular proceeding.
As you i re also aware, though, this is the proceeding with
respect to Swan Falls where the Company has asked that
those determinations be made and this is in the Company i s
view the appropriate time and place to discuss the rate
basing of the Swan Falls facility.
Q Or alternative ratemaking methods to rate
basing.
A Obviously, the parties have proposed some
things other than what the Company has proposed. They
certainly can be discussed.
Q And if the Commission i s decision does not
follow the path the Company has laid out for it, but
87
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (X)
Idaho Power Company
1
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
! I
i
simply says yes, you may proceed with construction, the
Company is on notice that there is more than one
ratemaking way to skin this cat; that is, there is more
than one ratemaking method associated with new generation
plant that the parties in this room have proposed
considering?
A Well, I i m not sure I know exactly what you
mean by lion notice. II Obviously, other parties in this
room have proposed alternatives which differ from the
al ternat i ve proposed by the Company.
MR. GILMORE: I have no further questions.
COMMISSIONER MILLER: Thank you,
Mr. Gilmore. Commissioner Swisher.
EXAMINATION
BY COMMISSIONER SWISHER:
Q Mr. Baggs, youlve read the direct prefiled
testimony of Don Reading?
A Yes, I have.
Q Could I refer you to Pages 19 and 20?
Starting with the question at Line 10, Mr. Reading has a
rather lengthy list of risks that he says would be
shouldered under your proposal by the ratepayers, and then
at Line 3 on Page 20, he says that Idaho Power
88
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
1 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
stockholders would face only the risk that the Company
would not use reasonable and prudent construct ion
pract ices and the risk that some costs of the plant might
not be allowed in the rate base if the Company exceeded
its cap. Of course, those are considerable risks, but
what my question really is, again, in approaching the
Commission at this time, the Company i s posture is a little
unusual.
As I have raised in earlier cross during the
Milner case, there is, there are two streams of action
that seem to be contrary to each other, but they Ire
pushing each other. One is that the Commission in its
orders following on the Valmy controversies and dealing
with the first application with respect to Swan Falls that
we need some hard numbers, we need to know more about what
you i re doing, we need to know the range of possible
expendi ture and the amount of capital outlay, and in
response to that, Mr. Packwood has filed what is Exhibit 6
in both the Milner case and the Swan Falls case, and that
kind of information has not during my tender been
customarily available in advance.
It seems to me that Idaho Power is then
pushing as a quid pro quo for some kind of an advance
commitment that in turn I don't think statutorily this
Commission is able to give. We cannot say at the time of
89
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
1 15
I 16
17
I 18
I 19
20
1 21
I 22
23
I 24
I 25
I
your application that we can bind the Commission as a
Commission to a def ini te number when the plant comes in.
What seems to be needed is we i re reaching,
we i ve got greater candor, we i ve got more informat ion, we
have some hopes of reducing the mutual suspicions that
became routine in the i 70s and i 80s, but the remedy is not
to get this Commission at this time before the project is
buil t and audi ted, as it were, by the S taf f and any
intervenor act ion to commit that the ratepayers must pay
for whatever is expended at Swan Falls.
This morning we have the Nelson letter, a
very important letter in my judgment, which explains why
in the Company i s judgment the Swan Falls site is so
important. Nelson says that if you didn i t build the Swan
Falls plant, to oversimplify, it i S conceivable that under
FERC licensing interpretation your rights would be
confined to the Milner to Bliss stretch of the river and
once youlre past the dams at Bliss, it would all be over,
this stuff would be at risk.
He says that with Swan Falls in place, the
river for all practical purposes is fully appropriated.
You may remember a question yesterday Mr. Miles raised as
to a not so hypothetical possibility of some reach for
irrigation project water on the Oregon side of the river;
so this is very important ~ so in that context, it seems to
90
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
me that the Company can make a persuasive case that
Swan Falls is indispensable to the Company i s strategy and
to the Company's utilization of its qualified victory in
the Swan Falls case to keep from getting those turbines
dried up, okay; so the project from that point of view
could not be abandoned by Idaho Power even though the
costs are high.
In the review language in one of your
exhibits, the material that had to be filed with FERC,
it i s obvious that certain people were able to, let i s say,
take advantage, as it were, in the Power Company because
of the FERC staff attitude. The FERC staff was receptive,
for instance, to historic restoration. There has to be a
semblance of the profile of the old powerhouse as a sort
of an overlook for members of the Idaho Historical Society
to see where all the old houses were and all that jazz and
that i s costing about a million bucks, 880 something as I
recall.
There are other aspects of it. I think
implied, I looked again at that language on the Interior
Department i S portion of the environmental assessment, it
seemed to me at least implied in your design if you Ire
going to live with FERC is that there could be an
eventuality that caused anadromous fish to live again in
the basin of the Brownlee Reservoir, and if that occurred,
91
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
1 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
1
25
I
probably the Power Company would be approached by the
interests involved in that sort of an event, and it would
be an important event, to require fish passage at Swan
Falls; so you i ve been battered around a little, it seems
to me, on what happened at FERC, and what the Staff is
doing in this case, as I read their testimony, what
Dr. Reading is saying very strongly, sounds as if the
atti tude of that group of intervenors, the Industrial
Customers, the attitude of the Staff is yes, Swan Falls
has to be built and the danger to the ratepayers is that
because it has to be built they may be gouged. The
construction overruns, the concessions to other players in
the FERC process were too easily given that the form in
which the Company made this application virtually asked
for pre-commitment as to rate basing and that that puts
the ratepayers at risk; so what I need, I guess, is your
response to that. I have no other witness to ask this
question.
A Well, I suppose that my reaction would be
that the Company i s filing in the Swan Falls proceeding as
we have it today has been made pr imar i I Y in response, I
believe, to some of the things that went on earlier with
respect to resource planning, but in particular the
Swan Falls rebuild earlier in the i 80s and some prior
Commission orders which you alluded to that essentially
92
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
1 4
I 5
6
I 7
8
I 9
I 10
11
1 12
I 13
14
I 15
I 16
17
I 18
1
19
20
I 21
I 22
23
1 24
I 25
I
put the Company on notice that it was not to go ahead
with, again, Swan Falls in particular, but perhaps
resource projects of this nature in general prior to
providing the Commission with some detailed cost
estimates.
Those orders further indicated that the time
that those numbers should be evaluated and looked at and
the prudency of the decisions made would be prior to the
construction of the project rather than after.
Q Right. Now, that's critical, the Company's
interpretation that you just expressed of those orders and
that language. Have not the Staff and the intervenors if
they dis i ike that resul t of the language in our orders as
reflected in your filings, haven't they helped build that,
if they see that as a trap, haven i t they helped to build
that trap by saying the Commission will not give you a
green flag until it sees some numbers? Youlre, in effect,
saying we brought you some numbers, now, what i s your
problem, aren i t you?
A We have brought you some numbers, again, I
believe at least partly, if not completely, as a result of
the prior orders. I think that the Company's application
has been framed in such a way that we are not asking for a
dollar commitment today of X. The cap concept has been
inserted, but it is nothing more than that, a cap, not a
93
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
1 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
1 18
I 19
20
I 21
I 22
23
I 24
I 25
I
fixed dollar amount that the Company is asking to be rate
based. We would hope along with everyone else that these
projects could be completed for less than that.
Q But comes the moment of truth when the
actual rate basing occurs, at least you have an
evidentiary path that says this is what we laid in front
of the Commission, this is what we laid in front of the
Commission Staff, this is what the intervening parties had
a right to review and these were the numbers we laid on
you as compared to what actually happened when the moment
for rate basing occurs, and the Company, I assume, has
done that with some conf idence that they i II look pretty
good when that moment of truth arrives; is that how you
see it?
A Again, I believe that every attempt has been
made to layout all of that information on a table prior
to any substantial commitment of funds on the part of the
Company as --
Q Let me be a little unfair to the Company and
to all utili ties for a moment and say that has cost
escalated for reasons other than purely external or
environmental or new federal regulations? Has cost
escalated simply because of inf lation and f ire in the
financial markets? In the late i 70s and in the early
'80s, it was not the practice for utilities before the
94
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
1 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
1 18
I 19
20
I 21
I 22
23
I 24
I 25
I
fact to layout what their total exposure had been because
it simultaneously scared the regulators and the investment
communi ty, and utili ties were out there about 80 percent
of book and didn i t want to scare anybody, okay; so the
practice then was to, you know, to live as long as you
could and then face the music, I mean get the construction
done and if Cascade came in at a hell of a lot more than
it was supposed to, and it did, as an example, then you
just said, well, that's life out there right now, you
know, 1980 or whenever it was, that's what happened to us,
and then just take your chances.
That i s changed. What you i ve done is brought
numbers forward and the reaction of Staff and intervenors
to those numbers is, well, it i S self-evident, I think it i s
most evident in the Reading testimony; so I just needed
your answer to that and I thank you.
THE WITNESS: Yes.
COMMISSIONER MILLER: Let i s see, I don It
have anything in the nature of a question other than just,
I guess, kind of an observation. Welre getting back now
again to this whole question of what does a Certificate of
Public Convenience really mean and what assurances does it
carry with it, and in the Swan Falls case, the analogous
or identical questions of what would an order approving
construction mean or what assurances would it carry with
95
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
it, and these are matters that I suppose we can wait until
we get to oral argument for, but I think I i m thinking
about this a little differently from Commissioner Swisher,
and it kind of appears to me that the parties have staked
out their posi t10ns in kind of extreme terms, but that
when we actually get down to it, there may not be as much
difference between the parties in their understanding as
reflected by some of the testimony and some of the
comments, and it may well be that we can figure out a way
to give sufficient assurances of cost recovery, which to
some extent the utility should be entitled to, but at the
same time preserve sufficient opportunity for public
review of those costs when they actually do come into
rates; so I guess we i II have to wait and see how things
shape up in oral argument, but the way I i m thinking about
it right now is that there may be some room for optimism
on how we can reconcile what seem to be competing views,
but we III see. That wasn i t a question at all. You don It
have to answer anything.
MR. RIPLEY: But it was a hint.
COMMISSIONER SWISHER: Would you like to
testify, Mr. Ripley?
MR. RIPLEY: I think I'm going to get my
chance.
DR. READING: May I cross-examine?
96
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
13
21
23
1 COMMISSIONER MILLER: Any redirect?
2 MR. RIPLEY: No, sir. I didn't know if
3 Commissioner Nelson had anything.
4 COMMISSIONER NELSON: I don It.
5 COMMISSIONER MILLER: I checked.
6 MR. RIPLEY: No, we have no redirect.
7 COMMISSIONER MILLER: All right, thank you,
8 Mr. Baggs.
9 (The witness left the stand.)
10 COMMISSIONER MILLER: The Company rests?
11 MR. RIPLEY: Yes, sir.
12 COMMISSIONER MILLER: Mr. Richardson.
MR. RICHARDSON: Mr. Chairman, was
14 Mr. Rosholt i s letter an exhibit?
15 COMMISSIONER MILLER: Yes, it i S been marked
16 as Exhibit 7.
17 MR. GILMORE: Wasn It it Mr. Nelson IS?
18 MR. RICHARDSON: Excuse me.
19 COMMISSIONER MILLER: Mr. Nelson's letter.
20 MR. RICHARDSON: Right. The Industr ial
Customers of Idaho Power call Dr. Reading to the stand.
22
24
25
97
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
BAGGS (Com)
Idaho Power Company
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
1 10
11
I 12
I 13
14
I 15
1
16
17
I 18
I 19
20
1 21
I 22
23
1 24
I 25
i.i
DON READING,
produced as a witness at the instance of the Industrial
Customers of Idaho Power, having been first duly sworn,
was examined and test i f ied as fo llows :
MR. RICHARDSON: Mr. Chairman, I believe
yesterday or Tuesday correct ions to Dr. Reading IS
testimony were handed out. Do all the parties have those
corrections and would you like Dr. Reading -- well, I i 11
ask Dr. Reading to just go ahead and identify the
corrections orally to his testimony.
MR. RIPLEY: I believe we have them,
Mr. Chairman.
COMMISSIONER SWISHER: They were handed out
by Mr. Tanner on Tuesday.
MR. RICHARDSON: Right.
COMMISSIONER MILLER: The court reporter
indicates to me, Mr. Richardson, that for the purpose of
the record the errata sheet is adequate for her to make
the corrections in the transcript. Would you attach the
errata sheet to Dr. Reading's testimony in the official
transcript?
98
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING
ICIP
I
I 1
1
2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
DIRECT EXAMINATION
BY MR. RI CHARD SON :
Q And, also, Dr. Reading, you need to make
some changes on the exhibit numbers in addition to what i s
on the errata sheet. Could you do that now?
A Yes, two additional corrections other than
what i S on the errata sheet and they i re exactly parallel to
the changes in the Milner testimony. On Page 2, Line 8,
Appendix 1 should be changed to Exhibit 201. On Page 22,
Line 23, Schedule 1 should be changed to Exhibit 202
and --
MR. MILES: Is that on the same page,
Doctor?
THE WITNESS: Page 22, Line 23, and in
conjunction with that, the attachment entitled
"Appendix 1" should be changed to Exhibit 202 and the
attachment named "Schedule 1" should be changed to
Exhibi t 202.
Q BY MR. RICHARDSON: With that, are you the
same Dr. Reading who caused prefiled testimony and
exhibi ts marked 201 and 202 to be filed in this
proceeding?
A Yes.
Q If you were asked this morning the same
99
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Di)
ICIP
1
I
I
I
I
I
I
I
1
I
I
I
I
I
I
I
1
I
I
10
12
20
22
1 quest ions that you were asked in your prepared test imony ,
2 would your answers be the same?
3 A Yes.
4 MR. RICHARDSON: With that, Mr. Chairman, I
5 would move that Dr. Reading's testimony be spread upon the
6 record as if it were read in full and Exhibits 201 and 202
7 be marked for identif ication purposes.
8 COMMISSIONER MILLER: In the absence of
9 objection, it will be so ordered.
(The following prefiled testimony of
11 Dr. Don Reading is spread upon the record.)
13
14
15
16
17
18
19
21
23
24
25
100
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Di)
ICIP
Q. WOULD YOU PLEASE STATE YOUR NAM AND ADDRESS?
A. Don Reading, 1311 North 18th street, Boise,
i:daho 83702.
Q. DO YOU HAVE AN APPENDIX THT DESCRIBES YOUR
EDUCATIONAL AND OCCUPATIONAL HISTORY AND YOUR
QUALIFICATIONS IN REGULATORY AND UTILITY
ECONOMICS?
A. Yes. Exhibit 201, attached to my testimony,
was prepared for this purpose.
Q. DO YOU HAVE AN EXHIBIT WHICH SUPPORTS YOUR
TESTIMONY?
A. Yes. I have an exhibit consisting of one
schedule which was prepared under my
supervision.
Q. WHT IS THE PURPOSE OF YOUR TESTIMONY?
A. Our firm was retained by the Industrial
customers of Idaho Power (ICIP) to -examine
the request of Idaho Power Company (Idaho
Power or the Company) for rate basing of the
reconstruction costs associated with the
reconstruction of the Swan Falls powerhouse
and generating facilities. My testimony has
three sections. First, I review the company's
request and my concerns.Second, I present
10l
2.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
the commission with suggestions concerning
assigning a value to the Swan Falls project.
Third, I sumarize my recommendations and
conclusions.
Q. LET'S TU TO THE FIRST SECTION OF YOUR
TESTIMONY. WOULD YOU PLEE DESCRIBE THE
COMPAN'S REQUEST?
A. Certainly. The Company is proposing to expand
its generating facilities at Swan Falls.
Al though this reconstruction does not require
that the Company obtain a Certificate of
Public Convenience and Necessity before
reconstruction begins, it must submit to a
review of the rebuild by the Commission. In
its Application concerning this review the
Company is also requesting that the Commission
approve rate base treatment for the proj ect
before reconstruction begins. In return for
this preapproval, the Company agrees to "cap"
the capital cost of the proj ect at
$80,285,000, barring several uncertainties.
The Company is proposing to retire the
existing 10.4 Mw powerhouse at Swan Falls and
redevelop the project to include a new
102
3.
Reading, Di
Industrial CUstomers
of Idaho Power
IPC-E-90-2
I'
I 1
1
2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
1 23
I 24
I
I
I
powerhouse with two generating units totaling
25 Mw ofcapaei ty, a new swi tchyard, and a new
transmission line, together with certain
existing project works. (Application, p. 2.)
In its Application the Company states
that Swan Falls should be added to rate base
upon completion of reconstruction. The
Company further describes the purported
benefits of the project as follows:
The Project has been, and will
continue to be, integral to
Idaho Power's Snake River
hydroelectric system and will
continue to be used to serve
retail and firm wholesale load.
Reconstruction of the Swan Falls
facilities is also integral to
retention of Idaho's water
resources for the public
interest of the state. The
Project is a non-deferrable
resource in that the physical
state of the plant requires
current, not future,
103
4.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
If
I 1
I 2
3
I 4
5
I 6
I 7
8
I 9
10
I 11
I 12
13
I 14
15
I 16
I
17
18
I 19
20
I 21
22
I 23
I 24
I
I
I
reconstruction and
rehabilitation of the resource
to maintain safety and
operational standards.
(Application, p. 4. i
Similarly, the Company points out that
the water rights associated with Swan Falls
are critical to the ability of the state and
the Company to protect the minimum flows
established by the Swan Falls Agreement and
the Water Plan. Protection of the Company IS
rights at Swan Falls has the effect of
assuring a water supply at its downstream and
upstream plants. (Application, p. 5. i
While I do not dispute the importance
of these water rights, they should not be usèd
as the sole basis for justifying the more than
$80,000,000 in reconstruction expenditures and
a doubling of the size of the Swan Falls
facility. The reasonable costs that
legitimately should be passed on to ratepayers
and the need for the Company to retain its
water rights are in many aspects separate
issues.
l04
5.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I 24
I
I
I
Q. HAS THE COMMISSION ISSUED ANY ORDERS THT GIVE
DIRECTION WITH RESPECT TO THE COMPANY'S
DECISION TO REBUILD SWAN FALLS?
A. Yes, it has. In Order No. 19623, issued in
Case No. U-1006-240 on April 23, 1985, the
Commission warned:
We put Idaho Power on explicit
notice, however, that before it
undertakes any substantial
reconstruction or replacement of
the Swan Falls facility, other
than improvement or
reconstruction of the existing
spillway , it must first
demonstrate to this Commission
in a formal proceeding that the
proj ect is the least-cost method
of acquiring a new resource for
its system. (Idaho Pulic
utilities Commission, Order NO.
19623, p. 1. J
In addressing the above language in a
subsequent Order the Commission noted that it
required Idaho Power "to bring any rebuild of
ios
6.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
IT
I 1
I 2
3
I 4
5
I 6
I
7
8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I 24
I
1
I
the Swan Falls proj ect and increase in its
capacity to the Commission's attention in much
the same manner that it would file a
certificate for a new project." (Idaho Pulic
utilities Commission, Order No. 23380, p. 2.)
The Commission further cautioned Idaho Power:
We put Idaho Power on formal
notice that it acts under its
own peril for costs associated
wi ththe Swan Falls rebuild
until such time as the Company
is prepared to submit its
definitive cost estimate and to
demonstrate that the proj ect
will be cost~effecti ve. As we
stated in the ~197 case, the
year of "hell-or-high~water~
financing" is over. The
ratepayer should not be at risk
if manaqement commences
construction before it receives
a definitive cost estimate, or
before it has an approved water
riqht, or if it fails to study
106
7.Readinq, Di
Industrial Customers
of Idaho Power
IPC-E~90~2
reasonable alternative projects,
or if the project itself is not
cost-effective compared to power
that is readily available from
competitors. (Idaho Pulic
utilities Commission, Order No.
19623, quoting Order No. 19129. i
The Commission has clearly warned the
Company that its decision to rebuild the Swan
Falls proj ect and the costs of that rebuild
will be critically examined.
Q. DO YOU BELIEV THAT THE INFORMTION PROVIDED
BY THE COMPANY IS AN ADEQUATE RESPONSE TO THE
COMMISSION?
A. No, I do not. The Company has provided very
little evidence in its Application concerning
the cost effectiveness of the Swan Falls
proj ect and has not shown that the proj ect is
the least-costly alternative available to
ratepayers. While I do not dispute the many
benefits of hydro projects over other forms of
generation, I do not believe these benefits
should automatically be the basis upon which
one determines the prudence of the project.
107
8.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
IT
I 1
I
2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
1 16
17
I 18
I 19
20
I 21
22
I 23
I
24
I
I
I
Likewise, I understand the importance of the
water rights associated with the Swan Falls
proj ect. This nevertheless should not be used
as the sole basis for determining that the
Company' s decision to rebuild Swan Falls is
reasonable. Instead, water rights should be
one of many factors examined by the Company
and the Commission when assessing the Swan
Falls rebuild decision and its associated
costs.
The Company has not presented evidence
showing that the reconstruction of the Swan
Falls proj ect is less costly than installation
of demand-side management measures. Moreover,
the Company has not presented any evidence
concerning the need for this proj ect.
Numerous other questions concerning the
reconstruction remain unanswered and would
require thorough analysis on the part of Staff
and interveners as well as the Commission
before a final determination of prudence could
be made. For example, the Company has not
explained the rationale behind its 25%
contingency factor--which is considerably
ioa
9.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
17
I 1
2
I 3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I
19
20
I 21
22
1 23
24
I
I
I
I
higher than the 5% contingency factor used for
the Milner project. satisfactory reasons for
these differences may exist, but they have not
been offered by the Company. Similarly, Idaho
Power Company has not explained in sufficient
detail the other components of its "commitment
estimate. " The Company has failed to provide
information concerning the estimated cost per
kwh of this project. Nor has it shown that
the increase in the size of the project is
optimal.
Another factor that I find troubling is
the difference in the cost per kw of Swan
Falls and Milner. The Company's estimated
cost per kw of Swan Falls is $3,244, which is
almost three times as high as Milner at $1,187
per kw, and an alarming amount on its face.
Again, there may be valid reasons for this
difference, but they have not been advanced by
the Company.
Q. DO YOU SEE ANY OTHER PROBLEMS WITH THE
COMPANY'S REQUEST?
A. Yes. There are several serious problems with
the Company's proposal. If the Commission
10.Reading, oi109 Industrial Customers
of Idaho Power
IPC-E-90-2
IT
I 1
I 2
3
1 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
1 16
17
I 18
I 19
20
I 21
22
I 23
I
24
I
I
I
grants the company' s request for preapproval
of the rate base treatment of Swan Falls , it
will effectively foreclose its ability to
examine the prudence of the Company' s
decision-making between the time
reconstruction begins and the time the project
is completed, even though major changes of
circumstances might arise in the interim. For
example, changes in load growth might dictate
changes in the pace of construction of the
proj ect, ei ther to meet increased load or to
avoid installing excess capacity. Or
technological progress might call for
canceling the Swan Falls project and replacing
it with a more cost-effective alternative. Or
heightened environmental restrictions might
impose an intolerable burden of added cost on
the Swan Falls project, destroying its
economic feasibility.
Any of these events, as well as others,
should invite the Company to reevaluate its
initial reconstruction decision and possibly
reverse or modify it. Yet, under the
Company' s proposal, such events would be
iio
11.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
11
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
'12
I 13
I 14
15
I 16
17
I 18
I
19
20
I 21
22
I 23
I 24
I
I
I
irrelevant to the determination of the plant
costs to be included in rate base and paid for
by ratepayers. Instead, that issue would be
judged solely according to whether the Company
had used "prudent and reasonable construction
practices. " If Idaho Power is deemed to have
done so, it wants to be guaranteed that it
will be allowed full recovery of the cost of
the Swan Falls proj ect, regardless of any
economic, financial, technological,
environmental, or regulatory events that might
otherwise argue for alteration of the
Company's initial decision.
Q. DO YOU THINK THE COMMISSION SHOULD PREAPPROVE
THE FUTU RATE BASE TREATMNT OF THE
RECONSTRUCTION COSTS OF SWAN FALLS?
A. Definitely not. I see no reason for the
Commission to pre approve the future rate base
treatment of the reconstruction costs of Swan
Falls. The Company's position in this regard
is similar to the one it has taken concerning
the issuance of a certificate of Pulic
Convenience for the Milner project. The
Company is asking the Commission to guarantee
III
12.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
that the project's costs will b. automatically
included in rate base regardless of the
circumstances, as long as the Company uses
nreasonable and prudent construction
practices. "
This is not a defensible posture. The
Commission's authorization to begin
reconstruction of Swan Falls is not a
requirement that construction begin, nor an
endorsement of the decision to begin
construction. A determination of the rate
base treatment of the Swan Falls project
should be made only after the project is
completed and on line. I don't believe that
it is appropriate or in the public interest
for the Commission to determine today the
future rate base treatment of a proj ect that
has not begun reconstruction much less been
completed.
Q. ARE THERE OTHER UNCERTAINTIES ASSOCIATED WITH
THE SWAN FALLS PROJECT THT WOULD PRECLUDE THE
COMMISSION FROM PREAPPROVING A RATE BASE CAP
FOR THE SWAN FAL REBUILD?
112
13.
Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
1 i3
I i4
15
1 i6
i7
1 18
I 19
20
I 21
22
I 23
I
I
I
I
A. Yes. In its decision concerning Valmy II the
Commission stated that its statutory charge
was to "establish 'just and reasonable'
rates." (Idaho Pulic utilities Commission,
Order No. 20610, p. 105.) That requires the
Commission to know the final just and
reasonable cost of the project. But it is
i.possible for the Commission at this time
even to esti.ate the co.pleted cost of the
Swan Falls proj ect and its associated running
costs. There are at least two reasons for
this inability. First, the "cap" set by the
Company is contingent upon several favorable
predictions. That is, if inflation heats up
or the scope of the proj ect changes, then
under the Company i s proposal, its "commitment
estimate" would no longer hold as the cap for
the proj ect i s capital cost. (I discuss this
in greater detail below.)
Second, while the Company i tsel f can
only estimate the cost per kwh of the project,
it hasn't even provided that information to'
the Commission.
113
14.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I 2
3
I 4
5
1 6
1
7
8
I 9
10
I 11
12
I 13
I 14
15
1 16
17
1 18
I 19
20
I 21
22
I 23
I
I
I
I
For these and other reasons, the
Company cannot accurately estimate the cost
per kwh of the Swan Falls project. Nor can
the Commissiondetermine today that inclusion
of the capital cost of plant in rate base
would produce just and reasonable rates.
Q. WHT is YOUR NEXT CONCER ABOUT TH COMPANY'S
PROPOSAL?
A. The Company has Offered to treat its
"commitment estimate" of the capital cost of
Swan Falls as a cap on the amount to be
preapproved for rate base. While the
Company's proposal has surface appeal, there
are several arguents, in addition to those
already discussed, against the Commission l s
adopting the Company l s quid pro quo.
First, there is no gÙarantee that the
proposed cap will be at or below the
commitment estimate. The Company notes that
it is willing to commit to building the
project for less than the commitment estimate,
"as may be adjusted to account for documented
changes in escalation rates or scope."
114
15.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
I 7
8
I 9
10
I 11
I
12
13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I 24
I
I
I
(Application, p. 8. i The Company elaborated
on what is meant by changes in scope:
1) Force Haj eure or acts of God
impacting the construction i
2) Design optimization for which
increased energy more than offsets the
increase in initial investment i
3) Foundation or site conditions
significantly more expensive than
indicated by exploratory drillinq.
(Ibid. i
The Company i s reservations with respect
to the cap do not guarantee the commitment
estimate will be the upper bound of the amount
of the plant that wiii be included in rate
base. That is, little is left to affect the
price of the plant that the Company has not
already covered in its escalation and scope
disclaimer.
Q. AR THERE OTHER PROBLEMS WITH THE COMPANY i S
CAP PROPOSAL?
A. Yes. First, the Company does not
adequately define what is encompassed in its
escalation disclaimer.Conceivably, any
115
16.
Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I
24
I
I
I
inflation costs above what is included in the
eommi tment estimate would be grounds for the
Company's adjusting its estimate upwards and
including these increased costs in rate base.
Yet, the Company doesn't explain the proj ected
escalation rate included in its commitment
estimate. Hence, the Commission cannot know
whether the Company is workinq from a tight
budget or an ample one.
Second, the Company's expansive scope
qualification can cover a multitude of
factors. Suppose, for example, that the
Company decides to increase the size of the
proj ect. Would it be fair to charge
ratepayers for the additional costs without
examining the Company's decision? But under
the Company's proposal, such a change would
presumably come within its definition of scope
and hence not be subject to further review.
(It is noteworthy that many utilities involved
in the construction of large nuclear power
plants cited changes in scope as the source of
a significant percentage of their cost
overruns. )
116
17.
Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
Third, the Company's cap proposal is
one-sided. The Company wants to increase the
cap if major inflation occurs, but it does not
offer to reduce the cap if inflation subsides
and falls significantly below the escalation
allowance included in the company's commitment
estimate. I see no reason for the Commission
to agree to such an unbalanced arrangement.
Finally, Idaho Power does not explain
how its proposed 25% contingency fits in with
its escalation and scope adj ustors . In
respo.nse to Staff's First Production Request
the Company stated that the 25% contingency
"is not a derived mathematical computation"
but is "based on experience." (Response to
Staff's First Production Request, No. 15, page
7. )
Generally, a contingency of this nature
is included in a cost estimate to cover such
factors as changes in scope and escalation.
Hence the Company has not only covered its
uncertainties with its scope and inflation
disclaimers but has inserted an added
substantial buffer in the form of a
ll7
18.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
I 7
8
I 9
10 Q.
I 11 A.
I
12
13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I
I
I
I
contingency in its commitment estimate. While
I am not opposed to the use of a contingency,
(it is common practice), the Commission needs
to realize how little risk the Company has
assumed with respect to its proposal. (I am
surprised that the Company has not included an
caveat for increases in borrowing costs, but
then again, this might be covered under the
Company's escalation limitation.)
WOULD YOU PLEASE DISCUSS YOUR NEXT CONCERN?
Yes. The Company's proposal assigns most of
the risks of reconstructing Swan Falls to its
ratepayers while eliminating most of the
potential risks to its stockholders.
Ratepayers would shoulder all the following:
the risk of escalation of reconstruction
costs, the risk of increased scope, the risk
of load growth changes, the risk of
technological changes, the risk of poor
management decision-making (other than strict
construction prudence), the risk of
environmental changes, the risk of regulatory
changes, the risk that the project will not be
118
19.
Reading, Di
Industrial customers
of Idaho Power
IPC"'E-90-2
I'
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I
19
20
I 21
22
I 23
I
I
I
I
used and useful, and the risk that the project
will not be economical.
Idaho Power's stockholders, on the
other hand, would face only the risk that the
Company would not use reasonable and prudent
construction practices and the risk that some
costs of the plant might not be allowed in
rate base if the Company exceeded its cap.
The latter risk is practically eliminated by
the broadly defined escalation and scope
reservations that accompany the Company's
proposal. clearly, while ratepayers would
bear a great deal of risk, the stockholders
would incur very little.
Even though the Company's request
shifts most of the risks associated with the
Swan Falls proj ect to ratepayers, the Company
has not offered to simultaneously reduce its
cost of equity. In my opinion, if the
Commission adopts the Company's proposal,
which I strongly recommend against , it should
also at a minimum reduce the company's cost of
equi ty below the Commission's last authorized
119
20.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I
24
I
I
I
return of 12.25%. (Idaho Pu 1 ic Utilities
Commission, Order No. 20924, p. 62. J
Q. WHY WOULD ADOPTION OF THE COMPANY'S PROPOSAL
CALL FOR A REDUCTION IN IDAHO POWER'S COST OF
EQUITY?
A. It is a basic financial principle that the
greater a security's risk, the higher the
investor's required return, and vice versa.
If the Commission significantly reduces
stockholder risk by adopting the Company's
proposal, then it should reduce the Company's
cost of equity. In Idaho Power's last rate
proceeding, the Company's witness Mr. Bowers
acknowledged this principle, testifying that
"the greater a security's risk the higher the
required return for that risk." (Bowers
Direct Testimony, Case No. U-I006-265, p. 31.)
Mr. Bowers also testified that a risk-free
rate of return can be approximated by using
the interest rate on long-term government
bonds. (Ibid., p. 30.) Recently, long-term
(30-year) U.S. Treasury Bonds have been
carrying an interest rate of about 9.0%, which
is significantly below the Company's
l20
21.Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I
2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I
24
I
I
I
authorized return on equity. Under the
Company's proposal, the equity risk supporting
the Company's investment in the Swan Falls
project would more closely approximate that of
a governent bond than of a security yielding
12.25%, the Commission's last authorized
return.
Q. CA. YOU ILLUSTRATE THE IMPACT OF EQUITABLE
RATEPAYER TRETMNT, ASSUMING ACCEPTANCE OF
THE COMPANY'S PROPOSAL?
A. Yes. Let us assume that the Company's
investment in Swan Falls (and in the Milner
project) is financed in the same proportion as
the Company's capital structure, and that the
investor's return requirement on the equity
portion of this investment is approximately
10% (one percentage point above the measure of
a risk-free rate), this would indicate that
the Company's cost of equity should be reduced
by about a quarter of one percent (0.25%) to
12.0%, using the Commission's last authorized
return. I have depicted these calculations .on
my Exhibit 202. The Company earned 13.86% on
average equity during 1989. I therefore
121
22.
Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
I'
I 1
I
2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I
I
I
I
recommend that the Comission, if it accepts
Idaho Power i sproposals in this case , it also
investigate the Company i s earnings situation
and authorize a rate decrease ,if one Is seen
to be warranted. Indeed, it appears that
absent any such decrease, an earning
investigation is called for.
O. LET i S TU TO TH SECOND SECTION OF YOUR
TESTIMONY. WOULD YOU BRIEFLY DISCUSS WHT THE
COMMISSION SHOULD CONSIDER WHN DETERMINING
THE VALUE OF TH SWAN FALL PROJECT ONCE IT IS
COMPLETED AND ON LINE?
A. Certainly. Let me emphasize that the
following suggestions apply only to a
completed proj ect that is ready for
consideration for inclusion in rate base. I
do not believe it is appropriate or in the
public interest to predetermine the investment
value of the Milner proj ect at this time.
Numerous events could intervene before the
proj ect enters commercial operation- -events
that could render unnecessary or erroneous any
such determination made today.
122
23.Reading, oi
Industrial Customers
of Idaho PowerIPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
I
7
8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I
24
I
I
I
In evaluating a plant to enter rate
base, the Commission should study a variety of
factors of two kinds: those related to the
prudence of management's decision-making, and
those related to the economics of the
situation. The former includes such things as
the reasonableness of the Company' s decision
to begin construction of the proj ect, the
reasonableness of the construction practices,
the reasonableness of feasibility studies
undertaken, etc. The latter includes the
used-and-useful issue and the economic value
of the plant.
In determining a plant' s economic
value, the Commission should of course
consider an assortment of factors, but one
particularly useful method of validating total
cost is to compare the cost per kwh of the
proj ect to the Company' s avoided cost rate.
The latter should provide a upper limit on the
economic value of the project. In this
particular instance, however, there are
reasons for the Swan Falls proj ect 's coming in
below avoided cost: the dam exists, permits
123
24.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
I
7
8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I 24
I
I
I
have already been obtained, original
engineering completed, and site preparation
accomplished.
When evaluating the cost per kwh of
Swan Falls versus avoided costs the commission
needs to ensure that the basis of the
measurement is consistent. Only then can a
appropriate evaluation be made as to the
least-cost path of resource acquisition for
the Company. For example, since avoided costs
are determined over just a 20-year period,
they are not consistent with the cost per kwh
of Swan Falls, which is determined over a
50-year period. All else being equai, a
2o-year avoided cost rate would be
significantly less than a 50-year avoided cost
rate. In addition, for comparison purposes, a
20-year amortization of Swan Falls will
produce a significantly more expensive 'plant
than Idaho Power's current estimate for Swan
Falls.
Other methods can also be used to
determine the economic value of the plant.
They include the amount of plant costs
124
25.Reading, Di
Industrial customers
of Idaho PowerIPC-E-90-2
I'
I 1
I 2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
20
I 21
22
I 23
I 24
I
I
I
reasonably incurred during the reconstruction
of Swan Falls, the fair market value of the
plant, and the cost of al ternati ve forms of
reliable power.
Regardless of what method is used, now
is not the time to make this decision.
Determining whether the plant should be
included in rate base (and, if so, to what
extent) can only be done after the proj ect is
completed and on line.
Q. WOULD YOU PLEASE SUMIZE YOUR
RECOMMNDATIONS AND CONCLUSIONS?
A. Certainly. I believe the commission should
rej ect the company's proposal for preapproval
of the rate basing of the Swan Falls project.
i do not believe it would be appropriate or in
the public interest for the Commission now to
determine the rate base treatment or
regulatory status of a proj ect on which
reconstruction has not yet even begun. The
Company's request has several serious flaws.
First, the Company's proposal should be
rej ected because it would require the
Commission to ignore many relevant
l25
26.Reading, oi
Industrial Customers
of Idaho PowerIPC-E-90-2
I'
I 1
2
I 3
I 4
5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I
I
I
I
circumstances that would otherwise force the
Company to al ter its initial course of action.
The Commission would be barred from addressing
the prudence of the Company's management
decision-making process during the
reconstruction period.
If the Commission adopts the company's
proposal for preapproval of the rate base
treatment of Swan Falls, then it should rej ect
the Company's application on the grounds that
it is deficient. Many points relevant toa
decision of this magnitude remain unaddressed
by the Company. Idaho Power has not shown
that the project is economical, nor that it is
the least-cost alternative, nor that its
enlargement is even needed. The Company has
been previously warned about these factors,
yet it has failed to provide information that
would allow the Commission to evaluate the
reasonableness of its decision.
Second, the Commission should not be
lulled into thinking the Company's offer to
cap the cost of the proj ect is an adequate
consideration for preapproval for the rate
126
27.
Reading, Di
Industrial Customers
of Idaho Power
IPC-E-90-2
II
I 1
I
2
3
I 4
5
I 6
7
I 8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I
19
20
I 21
22
I 23
I
I
I
I
base treatment of Swan Falls. The escalation
and scope reservations attached to the
Company's cap provide no quarantee that the
final cost of the proj ect will not exceed the
commitment estimate. Rather, the escalation
and scope give the Company considerable leeway
in justifying increases in cost beyond the
"commitment estimate." Moreover, the-
Company's cap proposal is one-sided. While
the Company wants the commission to agree to
cost increases if the scope of the project
enlarges or if escalation occurs, it has not
proposed that the cap be adjusted downward
under the converse circumstances.
Third, the Company's proposal saddles
ratepayers with most of the risks of
reconstruction, while eliminating most of the
risks to shareholders. Despite this, the
Company has not offered to lower its cost of
equity. In my opinion, if the Commission
adopts the Company's proposal to preapprove
the rate base treatment of the Swan Falls
project, it should adjust the Company's cost
l27
28.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
I l
I i
I 2
3
I 4
5
I 6
I
7
8
I 9
10
I 11
12
I 13
I 14
15
I 16
17
I 18
I 19
I
I
I
I
I
,i
of equity to be consistent with its reduced
risk.
Finally, I have offered some
suggestions concerning the factors the
Commis.sion should consider once the Swan Falls
reconstruction is completed and its costs are
considered for rate base treatment. Among
them is a comparison of the cost per kwh of
the proj ect with the Company's avoided cost,
establishing a reasonable upper limit on the
economic value of the project. Other relevant
data are the amount of plant costs reasonably
incurred in the Swan Falls reconstruction, the
fair market value of the plant and the energy
it produces, and the cost of alternative forms
of reliable power.
Q. DOES THIS COMPLETE YOUR TESTIMONY PREFILED ON
NOVEMBER 9, 1990?
A. Yes, it does.
128
29.Reading, Di
Industrial Customers
of Idaho PowerIPC-E-90-2
~I~.;~'':".,~
~Ii
Ii
~
~I~
~
~';I
;~~
;~,
t'j~~
~Ii~!
i~~:~
if I~~'1-.'"
Page
6
15
15
16
16
24
24
~
;.;.1
t':~
~
';:11"'
:'~
.~I
y'
t~
,.;
:-',~,.,:i
"7""'1;;~
;;;
':;I.t
t;/f.
,~JI"'?'.,~
J
i~i
,.,'~j:
:::'1
f~
r~
5~
-!~
.J;,~"
,~ I,"~".,
'i
':~'.'I
'"?"
~"
.;:1
'i
ERRTA SHEET OF
DON READING, Ph. D .
BEFORE THE IDAHO PUBLIC SERVICE
Case No. IPC-E-90-2
TESTIMONY
Line Change From
5
9
17
8
22
6
11
April 24, 1985
treat what its
there nocondition
does not defineincludeinclude
'-
l29
COMMISSION
Change To
April 23, 1985treat its
there is noconditions
does notincludesincludes
t.,
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
(The following proceedings were had in
open hearing.)
MR. RICHARDSON: Mr. Chairman, Dr. Reading
is now available for cross-examination.
COMMISSIONER MILLER: Thank you,
Mr. Richardson. Mr. Miles.
CROSS-EXAMINATION
BY MR. MILES:
Q Dr. Reading, if we could turn to Page 8 of
your direct testimony, please, beginning on Line 20 you
say, "While I do not dispute the many benefits of hydro
projects over other forms of generation, I do not believe
these benef its should automatically be the basis upon
which one determines the prudence of the project. II Would
you please explain just what you mean by that and also
what other benef i ts than hydropower should be considered?
A Specifically to the Swan Falls case, the
benef its of hydro would include the letter that just got
entered, Exhibit 1. Certainly the retention of water
rights is an important criteria for hydro projects, the
relicensing, the water rights Idaho Power has to upstream
dams affect the generation at downstream dams. Certainly
the environmental, hydropower doesn i t have acid rain. I
130
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
could go through a whole list. I think rather than doing
that, I would refer to Mr. Eastlake i s testimony. He
certainly, I concur with all of those halos he puts over
the head of hydro in his testimony.
Q Okay.
A Historically, it i S proved to be a real
winner.
Q Turning to Page 9 -- have you read the Idaho
Power Company iS Exhibit NO.7?
A That i s the letter from Tom Nelson?
Q Yes.
A I did just this morning.
Q You haven i thad time to thoroughly read and
digest it, have you?
A No, I read it quickly af ter the hear ing
opened, read with one eye and watched the witness with the
other.
Q Well, at the risk of incurring the wrath of
all concerned, in your opinion, are Idaho Power Company's
water rights for Swan Falls secure?
A I have no idea.
Q Thank you. You say beginning at about
Line 11, liThe Company has not presented evidence showing
that the reconstruction of the Swan Falls project is less
costly than installation of demand-side management
131
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
measures. Moreover, the Company has not presented any
evidence concerning the need for this project."
Dr. Reading, in what time frame does Idaho Power Company
have to determine this need?
A I i m not sure what you mean in what time
frame do they have to determine the need.
Q Well, would you accept the fact that
generally it takes quite a while after an application is
made and the need is anticipated for a plant to be built
and be on line?
A Yes.
Q Well, then how much longer, then, from the
actual need that Idaho Power Company projects in their
load management plan would you think that a hydro station
such as Swan Falls or Milner would have to be constructed?
A That i s one of the fundamental problems I
have with the presentation of the Company in this case is'
they haven i t presented that information. Nowhere in my
testimony do I say that the Company doesn i t need the
facility or that it shouldn't be built. What 11m
saying -- let me back up.
Wi th the indulgence of the court reporter
and others, let me put in context i think where you Ire
going and the way i see the parties debating here. The
Staff with, I'm in agreement with Staff of a certain.
132
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
definition of what a certificate is. The Company has a
different def ini tion of what a certificate is. In my
mind, this application, more for the Milner because
they're asking for a certificate, but the application
isn i t complete enough in my mind to make that
determina t ion.
Well, if if it i S not complete enough to make
the determination the way I view the def ini tion of a
certificate, it surely in no stretch of the imagination
would be in the Company's definition. What my problem is
is that in this application the Company hasn i t gone
through and shown need, value of alternative resources and
all of those kinds of things. The Company's position, as
near as I can determine, is we don i t need to do that
because this is non-avoidable, both of the projects,
non-deferrable. We i ve got to build them. We i ve got to
build them for all kinds of what I think are legitimate
good reasons, retention of water rights, having the power
go somewhere else, all of those kinds of things. I am not
disagreeing with those and the fact that those are
valuable. What I don i t see in their application is that
there is an amount attached to that.
According to Mr. Faull i s testimony, these
projects, I get mixed up which numbers, but one comes in
five percent over avoided cost and the other 2.2 percent,
133
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I ~
10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
which implicitly sort of says you add them all up, that
all of these extra things out there, like water rights and
retention of hydro for Idaho, are 5- or $6 million over an
al ternative kind of power.
Well, that may in the Commissioners i minds
say to retain Idaho Power i s water rights and keep hydro
there, 5- or 6 million is a hell of a good buy for
customers. What i s not in their application, what I don It
see, is that that kind of information is provided to them
so that they can assess what the value of these projects,
what ratepayers should be paying for all of these things
that I think are important, too. I i m not debating that.
What it seems to me the application has
done, and this is the feeling I get from it, is that it
sort of painted the Commissioners in a corner and it said
in Milner take the 63 million or be the bad guys that took
this good project away from Idaho ratepayers; otherwise,
it i S sort of in my mind given the Commissioners a binomial
kind of choice and it i S painted them in a corner.
What I i ve heard in questions from the
Commissioners and others is that, and this was
Chairman Miller iS, I think, comments just before I came on
the stand, that it doesn i t have to be that binomial.
Mr. Ripley said it pays to be, it pays to have paranoia.
I think sometimes it pays not to have paranoia, and what I
134
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
would have liked to have seen in this application is look,
these projects are more costly, welve done our damest,
and I believe that, to make the best estimates of what
they i re going to cost are, here it is, this is cheap extra
and it fits and it i s good and it i S wonderful and all those
kinds of things that hydro are, that i s what I haven i t seen
in this application. It i S sort of a take it or leave it,
be a gad guy or be a good guy.
A corollary and following are
Commissioner Swisher IS, all his quest ions and that is that
because of that there i s a fear that there i s going to be
runup in costs; so 11m sorry to go on, but i wanted to put
in context what i was saying.
Q Well, in light of that explanation, Doctor,
would you believe that the better course for Idaho Power
Company would be just to go on ahead and rebui ld the Swan
Falls Dam with, say, a twelve or twelve-and-a-half
megawatt capacity and not try to upgrade it?
A I cannot tell you what the proper sizing of
the plant is.
Q Well, they would have to to retain the
license and comply with the FERC requirements, they would
have to stabilize the dam and keep it, you know, risk
free, wouldn I t they?
A Yeah, I I m not saying that they shouldn I t do
135
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
what they need to do to retain the license. What I 1m
saying is I do not know whether 12.5 megawatts or
25 megawatts or, I can i t remember Mr. Faull' s number,
35 megawatts or 40 is the best one, I don i t know that.
Q Well, you recognize that they have about
12 megawatts of installed generating capacity there now.
A Now, right, and beyond that I have no
opinion on the proper sizing.
Q i see. Well, would you recognize, then,
that the upgrading of the dam really falls in the context
of future energy policy of the state? I have it here
someplace. Anyway, that the plan that came out about 1982
or something like it was mentioned by the Staff that
upgrading of the hydro stations in Idaho was the state
policy and would you believe that would still be a good
idea?
A I don i t disagree with that. The problem is
at what cost to ratepayers.
Q Yes.
A That i s the issue.
Q And the upgrading in your opinion
consti tutes a cost that is not properly identified and
quantif iable at this time; is that your objection?
A I think to not misrepresent and be unfair to
the Company, I think they have in their application the
136
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1 best costs, the best of their ability what the costs are
2 of what they sized. My problem is how do those costs
3 stack up against all the other kinds of things.
4 Q Well, let me get on to another aspect,
5 then. Would you consider the not upgrading of the Swan
6 Falls project a lost opportunity?
7 A Yes.
8 Q If you would turn to Page 10 of your
9 testimony, you say at Line 7, liThe Company has failed to
provide information concerning the estimated cost per kW
of this project. Nor has it shown that the increase in
the size of the project is optimal. ii
A That fits. I have nothing to add to what
I i ve already said.
Q Okay. Another factor, you state on Line 12,
"Another factor that I find troubling is the difference in
the cost per kW of Swan Falls and Milner. The Company's
estimated cost per kW of Swan Falls is $3,244, which is
almost three times as high as Milner at $1,181 per kW, and
an alarming amount on its face. Again, there may be valid
reasons for this difference, but they have not been
advanced by the Company. ii
A Same answer as before.
Q What would be the kW cost of a coal-f ired
plant to be built by the year 2000 by Idaho Power Company
131
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
F'i'
I
I 1
I
2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
if it would need the power and does not build Milner or
Swan Falls?
A I i II defer to Mr. Faull on that.
Q Okay. I f you i d turn to Page 13, Doctor.
A Yes.
Q Then if I read that correctly, "A
determination of the rate base treatment of the Swan Falls
project should be made only after the project is completed
and on line"; in other words, does that mean that you
don i t believe that the plant should be put in rate base
until it i S used and useful?
A Yes.
MR. RIPLEY: When is Harold i s oral argument
going to be completed?
COMMISSIONER MILLER: We i re conf ident that
Harold is getting close to the end of his line of
quest ioning .
Q BY MR. MILES: On Page 15, Doctor, you say
on Line 3, "Nor can the Commission determine today that
inclusion of the capital cost of plant in rate base would
produce just and reasonable rates." My question is if the
Commission puts Swan Falls in rate base, how much do you
estimate it will increase Idaho Power Company's customers i
rates if the estimate cost to rebuild it is $64,228, OOO?
A I have not done that application. I would
138
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
10
12
14
1 have liked to have seen it in the Company's application.
2 I see. If you i d turn to Page 19, Doctor, inQ
3 this well, I III skip this because Commissioner Swisher
4 discussed these nine points of risks to the ratepayers and
5 no risk to the stockholders which you itemize; so I won It
6 go ahead with that.
1 A Thank you, Mr. Mi les .
8 MR. MILES: Well, I find I have no more
9 questions to ask Dr. Reading, Mr. Commissioner.
COMMISSIONER MILLER: All right, thank you,
11 Mr. Miles.
Mr. Ripley, as you did with Dr. Reading in
13 the other case, would you prefer to have your
cross-examination after the Staff or does it make any
15 difference to you?
16 MR. RIPLEY: Yes, but let me just state that
17 it is my understanding for purposes of the record that the
18 questions that were asked of Dr. Reading and answered by
19 Dr. Reading in the Milner proceeding are also applicable
20 in this proceeding.
21 COMMISSIONER MILLER: That i s the
22 Commission's understanding; that is, we will have the
23 record in that case before us in this case as well.
24 MR. RIPLEY: With that, we have no
25 addi tional cross-examination of Dr. Reading other than the
139
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
questions that have been asked and answered in the other
proceeding.
COMMISSIONER MILLER: All ~ight, thank you.
Mr. Gilmore.
CROSS-EXAMINATION
BY MR. GILMORE:
Q Just one line, Dr. Reading. Would it be
fair to say that under traditional electric utility
ratemaking that the price at which customers purchase
electrici ty is determined by only one factor, the cost of
supply of the monopoly provider?
A Under traditional ratemaking, yes.
Q Wi th regard to generation or new generating
projects, do you believe that i s the only possibility, only
ratemaking possibility, now under current conditions?
A No.
Q And what are some other possibilities?
MR. RIPLEY: Mr. Chairman, I i m going to
object. This is outside the direct case of Dr. Reading
and is obviously friendly cross-examination and it is an
attempt to simply insert into the record additional
testimony through the device of pretending it i s
cross-examinat ion.
140
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I 5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
COMMISSIONER MILLER: 11m sorry, i was
ignoring my duties as Chairman and I don I t have a clear
perception of the question. Would you repeat the question
for me, Mr. Gilmore?
MR. GILMORE: I was essentially, and I was
asking Dr. Reading a friendly question, my question was
are there alternatives under current conditions to
tradi tional rate base rate of return ratemaking for new
generating projects.
COMMISSIONER MILLER: And is that a topic
that you believe Dr. Reading discusses in his direct
examination?
MR. GILMORE: Not as such. I believe
Dr. Reading discusses why we should not be signing on to a
rate base cap at this point; so i guess I I m asking him are
there other methods of doing that as a means of
establishing for the record that we should not with
blinders assume that traditional rate base rate of return
ratemaking is the only method of approaching the recovery
of costs for new generating plant. I guess having said
that, I donlt know if thereis any point in continuing with
my question.
COMMISSIONER MILLER: I think we will let
Dr. Reading answer with the understanding that this is
probably the last question along those lines. It is
141
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
tangentially, I guess, raised by Dr. Reading's direct
testimony and by his response to Mr. Miles i questions when
he discusses his criticism of the Company for providing
only a binomial choice and that there may be other
al ternatives; so we i II let you answer that one question.
THE WITNESS: I i m losing track. I think I
understand. You i re asking are there other methods than
tradi tional ratemaking where it becomes used and useful
and the single guidepost to be rolled on to ratepayers is
the cost that the Company incurred in bringing that
resource on.
Q BY MR. GILMORE: Yes, the provider's cost of
supply.
A Yes, I think there are other methods. One
that Staff discussed and that I discussed a little is that
the Commission look at what the value of power is worth,
and one of the methods of doing that is looking at avoided
cost. There i s a multitude of other ways to do it. In
testimony that I did as a consultant for the staff in
Washington State on WNP-3, I attempted to use a value of
power argument in that testimony rather than the
expendi tures that the company had incurred in WNP-3.
There i S been a variety of possibilities
brought up in the questioning here, particularly with
Milner, as an alternative to the Certificate of Exemption
142
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
or what the Company calls Certificate of Exemption and
that is the phasing in of the power, a sharing or
whatever. I think the Company should be complimented in
this case for struggling with some new kind of ratemaking
issues given what's going on. I guess in a normal tension
between the Company and intervenors and Staff, they should
be compl imented for taking the first step. I would have
liked to have seen them take more steps.
Q And I guess for completeness to show that
this is a two-edged sword, if the Company were to urge
that the value of power from Swan Falls is not incremental
power of additional generation but protection from
decremental power losses, then mightn i t the value of power
be quite high?
A Oh, absolutely, yes, and I think to be
clear, nowhere in my testimony this -- Swan Falls may be
at what price it is a super deal for the ratepayers
because of the potential that was brought up in Exhibit 7
and all other kinds of things. I i m not arguing that. A
comfort level for the Commissioners I would feel would be
what are those differences, how does it fit into the
overall scheme of things, not you i ve got to do it or
you i re bad guys.
MR. GILMORE: I have no further questions.
COMMISSIONER MILLER: Commissioner Swisher.
143
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (X)
ICIP
I
I 1
I
2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
EXAMINATION
BY COMMISSIONER SWISHER:
Q Because you have testified in other
jurisdictions, you i re the best witness I have to ask this
question and it i S been on my mind ever since the Swan
Falls application came in. 11m not a lawyer and youlre
not a lawyer; so in a sense i that gives us a special kind
of license, a layman i s license, to ask what the hell is in
front of us.
I read the application when it was filed,
the initial application, I read the supplemental and I
read the exhibits when they were filed and I looked at
Mr. Packwood's material yesterday. Do you know what Idaho
Power is asking the Commission to do?
A Mr. Ripley says I'm confused. I'Ii give you
my version.
Q All right.
A What they i re asking the Commission to do in
my mind is say take these two projects at the cap.
Q I i m just talking about Swan Falls, don i t mix
up the two. I have no problem with Milner, I understand
every word of it, I think, but this I do not understand.
What does this application ask us to do?
A To give approval for rate base at this point
144
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Com)
ICIP
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
11
13
15
17
19
20
21
22
23
24
25
1 in time for up to 83 million asterisk those outs
2 immediately.
3 Q Would the effect of that if we were to grant
4 what the Company wants, keep in mind the last filing you
saw that came in in November, would the effect of that be5
6 actually to bQok construction work in progress?
7 A Okay, and this was some of Mr. Richardson IS
8 cross, my view, even though Mr. Baggs uses construction
9 work in progress, what I got out of it was they would book
10 the equivalent of AFUDC, keep track of that.
Q Did you read the language in the last filing
12 of the Company that came in in November where the
reference was to construct ion work in progress?
14 A No, I did not.
Q That i s my question, and it i S one I l d like in
16 posthearing briefs to be addressed, Mr. Chairman, by the
parties would be if a commitment with respect to rate
18 basing by the Commission would trigger actual construction
work in progress booking.
A And that means currently; so ratepayers
would start paying for those portions now?
Q Yes.
A That was not my understanding of what the
Company was asking for.
Q It i S one thing I have not been able to sort
145
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Com)
ICIP l .
I
I 1
I 2
3
I 4
I 5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
out in the case; so I do need some enlightenment on that.
COMMISSIONER MILLER: I suspect Mr. Ripley
could probably touch on that in his closing comments.
COMMISSIONER SWISHER: All right. That's
all I had, Mr. Chairman.
COMMISSIONER MILLER: Commissioner Nelson.
COMMISSIONER NELSON: Thank you,
Mr. Chairman.
EXAMINATION
BY COMMI SS I ONER NELSON:
Q Before I start, just to follow, isn It CWIP
barred by statute, Dr. Reading, construction work in
progress, from being rolled into the rate base?
A My non-legal understanding, yes.
COMMISSIONER SWISHER: Well, it is, except
the Commission has exigency powers. We have the ability
to do it.
COMMISSIONER MILLER: You have to find an
emergency, though.
COMMISSIONER SWISHER: You have to find an
emergency.
Q BY COMMISSIONER NELSON: Dr. Reading, on
Page 5, you make a statement that you don i t follow up on
146
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Com)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
at all; so I was going to ask you about it before we got
Tom Nelson i s letter. You say, "The reasonable costs that
legi timately should be passed on to ratepayers and the
need for the Company to retain its water rights are in
many aspects separate issues," which I thought was
interesting, but you then just leave that subject and go
on to something else and don i t develop that at all. Do
you want to?
A Certainly. The point that I was trying to
make
Q And if you could do that maybe in context
wi th Judge Nelson i s letter.
A Yes. What I i m saying is that there may be
all kinds of reasons, and water rights for the Swan Falls
pops right up to the top of the list, that the Company
should go ahead and build this project even though it
doesn' t fit into the blinders kind of tracking of least
cost planning, and I i m not sure how much Mr. Faull meant
what I sat in the audience and heard him say and that was
that the best way for a utility to proceed is to stack its
least cost resources and then put blinders on and then
march right on down that stack. I think there i s all kinds
of reasons for reaching down and pulling out higher cost
resources and doing them and that i s the context that I
have here.
147
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Com)
ICIP
I
I 1
I 2
3
I 4
I 5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
Q What I got out of this at the first reading
was that maybe you thought that water rights was maybe
more of a stockholder issue or a separate issue.
A Stockholders and ratepayers, there i s a real
symbiosis there and that i s tempered, what I just said is
tempered with the fear that especially
Commissioner Swisher has discussed with the witnesses,
several of them, and that is, to keep using the paranoia
example, the paranoia that because of the value of the
water rights and because it i s so important that this
project be relicensed and reconstructed and PERC
requirements and all of those things that it not be used
as a method of running costs up and saying, well, welve
got to do it anyway.
Q But you agree with the Company that this
project, Swan Falls, needs to continue to be there in
order to protect their water rights.
A Yes.
COMMISSIONER NELSON: Okay, that i s all I
had, thank you.
148
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83101
READING ( Com)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
EXAMINATION
BY COMMISSIONER MILLER:
Q Just to follow up, I guess, briefly on
that. Accepting as you seem to do that the idea that
particularly Swan Falls and perhaps Milner are both
non-avoidable/non-deferrable in the least cost planning
sense, it appears to your, you appear to accept that idea,
but then to have as your criticism the idea that there is
no effort to assign values to the, I guess, non-economic
or intangible values of a non-deferrable facility.
A Yes, and to follow up Commissioner Nelson's
question, I agree with the Company that the point is at
what cos't, and so what I i m asking in the least cost kind
of planning scenario that Mr. Faull talked about, what i s
the difference between this project and what you Ire
reaching down in the stack and pulling out.
Q So what you i re really suggesting, as I get
it, is there ought to be some effort at valuating what you
would call I guess in your language the external benefits?
A Buzz word, external i ties.
Q Right, which brings me to my question which
is do you think that the art or the science of valuing
external! ties has progressed to the point that your desire
for quantification is really feasible; that is, would we
149
HEDRICK COURT REPORTING
P.O. Box 578, Boise, 10 83701
READING ( Com)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
spend a lot of time debating the dollar value of avoided
acid rain, or, to state it differently, would this
valuation process that you would like to see, in your
opinion, provide useful information to those who have to
make this decision or would it be more in the nature of an
academic debate?
A At the risk of my boss reading the record
and saying what am I paying you for, what I think the
Commission should view the kind of exercise -- I i II give
context and then get directly to it. What I guess my
throw-away is don i t believe economists. At the same time,
do not ignore our information.
I think it would be a real sandbox for
consul tants and engineers and economists to go on forever
in attempting to quantify this. That i s not what I 1m
asking for, but I think some efforts to quantify it is
valuable in giving the Commission a feel, a magni tudinal
feel, for what i s going on. I i m not asking that it be
studied to death, but just because one economist says this
and another economist says that, we could fight and
ni t pick forever, I would think the Commission would say
that i S another input into my decision process that IS added
information. That doesn i t mean that you should buy off on
what we say.
COMMISSIONER MILLER: Okay, redirect.
150
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING ( Com)
ICIP
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
MR. RICHARDSON: No redirect, Mr. Chairman.
COMMISSIONER MILLER: Doctor, once again
thanks for your he lp .
THE WITNESS: Thank you.
(The witness left the stand.)
COMMISSIONER MILLER: The Industrial
Customers rest?
MR. RICHARDSON: We do, Mr. Chairman.
COMMISSIONER MILLER: Let i s see, what do we
contemplate in terms of cross-examination for the Staff
witnesses?
MR. RIPLEY: We are going to ask for the
same clarif ication with Mr. Faull and if given that
clarification, we have no additional cross-examination.
COMMISSIONER MILLER: And none for
Dr. Eastlake?
MR. RIPLEY: No, we have none for
Dr. Eastlake.
COMMISSIONER MILLER: Mr. Richardson, what
are your plans?
MR. RICHARDSON: We are not planning any
cross-examination of Staff with the understanding, of
course, that the Milner record will be considered in the
Swan Falls proceeding.
COMMISSIONER MILLER: Why don i t we put the
151
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
COLLOQUY
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
Staff witnesses on, get their testimony in the record and
then we i II take our break.
MR. GILMORE: Mr. Faull.
THOMAS FAULL,
produced as a witness at the instance of the Staff, having
been first duly sworn, was examined and testified as
follows:
DIRECT EXAMINATION
BY MR. GILMORE:
Q Mr. Faull, did you prepare direct testimony
for this proceeding?
A Yes, I did.
Q Do you have any changes or corrections to
that test imony?
A
Q
103?
A
Q
them?
A
Q
No, I don It.
And did you prepare Exhibits 101 through
Yes.
Do you have any changes or correct ions to
No.
If I were to ask you the questions contained
152
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (Di)Staff
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
in your prepared direct test imony today, would the answers
be the same as shown in there?
A Yes.
Q And one brief bit of clarification, in your
testimony both in this case and in Miller, you referred to
a certain bit of uncertainty over the avoided cost rates
that had been produced by petitions for reconsideration
and you weren i t quite certain how the rates would change.
Could you just for the record state where those
proceedings are right now?
A At this time reconsideration has been
granted for the issue of whether or not until ted rates
should be given for projects exceeding or with 35-year
physical lives. Some mathematical changes, the
mathematical change that I alluded to in my testimony has
been granted and it did amount to a less than two percent
reduction in avoided cost rates.
Q Would it be a fair statement that the
conclusions in your testimony, then, will not change as a
resul t of this intervening granting of petitions for
reconsideration in the avoided cost case?
A That is correct.
MR. GILMORE: I have no further questions.
Mr. Faull is available for cross-examination.
COMMISSIONER MILLER: All right, weIll order
153
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (Di)Staff
I
I 1 that his test imony be spread on the record as if read and
I 2 his exhibits marked.
3 (The following prefiled testimony of
I 4 Mr. Thomas Faull is spread upon the record.)
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
154
I HEDRICK COURT REPORTING FAULL (Di)
P.O. Box 578,Boise, ID 83701 Staff
I.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
11
I 12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
Q. Please state your name and business
address for the record.
A. My name is Thomas Faull and my business
address is 472 West Washington Street, Boise, Idaho.
Q. By whom are you employed and in what
capaci ty?
A. I am employed by the Idaho Public
Utilities Commission as a Public utilities Engineer.
Q. Have you included a statement of your
qualifications in this testimony?
A. Yes. Exhibit No. 101 is a statement of
my qualifications.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to
discuss the cost effectiveness of Idaho Power Company's
(IPCo' s) proposed project, to provide an engineering
opinion as to the appropriateness of the project, and
to recommend Commission action relative to the project.
Q. What is your understanding of the
purpose of this case?
A. I believe the purpose of this Case is to
determine whether the project concept is sound enough
to authorize IPCo to proceed with project development.
The purpose is not to determine whether to grant at
this time rate base treatment of unknown future costs
IPC-E-90-211/9/90 FAULL (Di)Staff 1155
I
4
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
of the Swan Falls Power Plant upgrade.lQ. Why is it important to know the cost
effecti veness of a project when determining whether or
not to authorize continued project development?
A. It is important to know the relative
cost effectiveness of a specific project to judge the
potential value of the project to ratepayers.
Q. Are there other criteria that should
guide the Commission in accepting or rejecting the Swan
Falls Plant concept for future rate making analyses?
A. Yes. As discussed by Staff witness
Eastlake, there may be features (intrinsic, extrinsic,
or both) other than project costs that should be
considered. However, I believe the primary guideline
ought to be cost effectiveness, with consideration of
other factors being supplementary.
Q. What is the starting point for analyzing
the cost effectiveness of this project?
A. First, one must attempt to quantify the
construction cost of the project, then translate that
cost into a unit cost of generating energy.
Q. What do you estimate the cost of this
project will be?
A. Rather than estimating the construction
cost of the project, I have accepted IPCo' s proposed
IPC-E-90-2
11/9/90 FAULL (Di)Staff 2156
I
~
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
cap on capital costs of $80,285,000 as a maximum (or
worst-case) cost. Then, from that I estimate the
50-year levelized cost to ratepayers for this project
wi 11 be $73. 05/MWh.
Q. Why did you use a 50-year life rather
than some longer or shorter period?
A. Fifty years is an arbitrary but common
life over which to analyze the value of hydro electric
projects. I looked at, but rejected three other
project life lengths: I.) The 17 years that will be
left to the FERC license at the time the plant comes on
line in 1993 ($84. 72/MWh), 2.) a longer arbi trary but
also commonly used life of 60 years ($72.57 /MWh), and
3.) a shorter arbitrary but also commonly used life of
40 years ($73. 88/MWh). As these numbers show, there is
little difference among the 40-, 50-, and GO-year
estimates.
Although the 17-year life corresponds to
IPCo' s maximum assured right to operate a plant at the
project site, I believe it is reasonable to use longer
lives for economic comparisons because if IPCo is
unable to obtain a renewal of the license as a result
of losing the site to a competitive applicant, it would
be entitled to receive any unrecovered value remaining
in the plant f rom the new licensee. Of the three
IPC-E-90-2IL/9/90
FAULL (Di)Staff 3157
I
~
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
potential arbitrary life lengths I considered, I chose
50 years because it is, I believe, the most commonly
accepted hydro project life used for analyzing and rate
basing IPCo projects. Using 60 years, 40 years, or any
of a wide range of arbitrary project life lengths would
be equally as reasonable as using the 50 year life that
I chose, provided the analytic life does not exceed the
reasonably expected physical life of the plant.
However, if project costs are approved for rate making
purposes based on an economic analysis, the
depreciation period for rate making purposes should
correspond to the economic life used in the economic
analysis -- in this case 50 years.
Q. How did you determine the uni t costs you
cite?
A. I used a "net present value" computer
model similar to the one IPCo used to evaluate its
Milner Plant. In addition to the Swan Falls capital
cost cap, I input the following key data as variables.
. The average annual generation from
the plant as included in ¡PCo' s
second amended FERC 1 i cense
application, using 60 years of
historic water data (166,102
MWh/yr) ;
IPC-E-90-2
11/9/90
FAULL (Oi)Staff 4158
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
. the capital structure and rates
required by Order No. 23357 for
determining avoided cost rates
(11.447%) ;
. tax variables used by IPCo in itsevaluation of the Milner plant,
operating and maintenance (O&M)
costs of $450,000 ($18. OO/kW) ;
. an escalation rate of 4.5% peryear;
. a property tax rate of 0.7381% of
capital costs;
. insurance costs of 0.06854% ofcapi ta 1 costs;
. FERC licensing costs of $60,743
(the reported cost of IPCo' s
licensing activities relative to
the Milner Plant, which is
probably lower than that of the
Swan Falls Plant);
. a ki lowatt-hour tax rate of 0.5mi I Is/kWh; and
. values of 25.00/58.27 times the
amount recommended by IPCo for its
Mi lner Plant to estimate the
expenses associ ated wi th headwater
benefit payments, environmental
mitigation, and water bankpayments.
Q. Can you further explain the analysis by
which you estimated annual O&M costs?
A. Yes. Using pp. 406-A through 407-8 of
IPCo's FERC Form 1, I determined the rated capaci ty,
net generation, and variable operating cost for each
year from 1985 through 1989, inclusive, for each of
l
IPC-E-90-211/9/90 FAULL (Di)Staffl59 5
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
IPCo' s 14 major existing hydro electric plants. Using
Consumer Price Index (CPI) data and the escalation
rates required in Order No. 23357 for future years, I
adjusted the cost data to 1992 dollars. I then
computed the cost per kW of rated capaci ty for each
year for each plant. After a subjective determination
that the variation from year to year of the costs per
kW of capaci ty was acceptable, I averaged the 5 years
of data for each plant. I then graphed the cost per
kW relative to the rated capacity. The resulting
graph is included as Exhibi t No. 102, and the data
from which Exhibi t No. 102 were derived are included
as Exhibi t No. 103.
As can be seen from Exhibit No. 102, the
data yield a relatively smooth curve, except for one
significant hydro plant, so it is reasonable to
interpolate between data points provided there is a
reasonable explanation for the aberrant plant. The
aberrant plant is Swan Falls, which is substantially
more expensive to operate than would be expected in
comparison to IPCo' s other plants. Although I didn' t
confirm it, I assumed that the excessive cost of Swan
Falls is due to its remote location and antiquated
I
i
I
i
control system. Thus, it is apparent from the graph
(Exhibit No. 102) and the data from which it was
IPC-E-90-2
11/9/90 FAULL (Di)Staff 6l60
I.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
developed (Exhibi t No. 103) that one should expect
IPCo to experience O&M costs of about $18/kW for a 25
MW hydro plant. This is the rate I used in my
ana 1ys is of the Swan Fa lIs Plant.
Q. According to Order No. 23357, the
maximum avoided cost rate available to Qualifying
Facilities (QFs) in Idaho (as defined under the Public
Utility Regulatory Policies Act of 1978 (PURPA))
coming on line in 1993 is $61. 44/MWh. In light of
this, do you consider your estimated cost of
$73.05/MWh to represent a cost effective project for
IPCo's ratepayers, at least as compared to avoided
cost rates?
A. Yes, I do. For at least three reasons,
the published avoided cost rates are not appropriate
for direct comparison to a cost estimate of a specific
project. First, the computer model that computes the
published avoided cost rate assumes a "first deficit
year" (i. e. year of new resource need) of 1993 for
IPCo. I currently believe that, as clearly explained
in IPCo' s petition for reconsideration in Case No.
IPC-E-89-11, the correct first deficit year should
have been 1994. Based on the assumption that the
Con~ission will authorize this change, I have
IPC-E-90-2
11/9/90
FAULL (Di)Staff 7l61
I.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
determined that the comparable avoided cost rate
(without "tilting") would be $59.17/MWh.
Second, the published rates include an
adjustable portion of $8. 78/MWh that wi 11 be adj listed
in the future based on actual operating costs of the
Colstrip coal fired generating plant. For direct
comparison to an actual project the adjustable portion
should be assumed to escalate at the same rate as
comparable costs associated wi th the actual project.
When this adjustment is made the comparable 20 year
avoided cost rate (without "tilting") is $64.77/MWh.
Third, even as adjusted above, the
published avoided cost rates apply only to projects
with a 20 year availability to IPCo. Although there
have been numerous arguments made about the unfairness
of limiting OF contracts and their rates to 20 years,
nonetheless, from a ratepayer viewpoint, IPCo' s
50-year project should be compared to 50 years of
avoidable costs. That is, when IPCo bui Ids a resource
with a 50 year life ratepayers can reasonably expect
that they wi 1 1 have access to the energy f rom that
resource for the full 50 years, so other resource
costs can be avoided for the full 50 years.
Using the Sur rogate Avoidable Resource
(SAR) methodology specified by the Commission,
IPC-E-90-211/9/90
FAULL (Di)Staff , 8l62
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
l
I
i
assuming a new SAR wi 11 be bui It at the end of the
35-year life of the first SAR, assuming a first
deficit year of 1994, assuming that the adjustable
portion will escalate, and assuming an on-line year of
1993 yields a 50-year avoided cost of $70. 54/MWh.
Taking into account the seasonality weighting of
avoided costs relative to the availability of the Swan
Falls Plant reduces the value of the avoided costs
applicable at Swan Falls to $69.48/MWh. I believe
this is the appropriate avoided cost rate to use for
determining the cost effectiveness of the Swan Falls
Plant.
Thus, the Swan Fa 1 Is Plant, wi th an
estimated cost of $73. 05/MWh, is approximately as cost
effective as the comparable avoided cost rate, wi thin
the reasonable 1 imi ts of accuracy for the
methodologies used to determine the costs and rates.
(73.05/69.47 - 105.2\)
Q. You indicate that there has been a
Petition for Reconsideration of Order No. 23357 fi led
that could affect the "first deficit year" of the
avoided cost computation. Are there any other issues
pertinent to that petition that might affect the
avoided cost rate comparable to the Swan Falls Plant?
IPC-E-90-211/9/90 FAULL (Di)Staff 9163
I.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
A. There is a potential that a mathematical
error made in Case No. WWP-E-89-6 wi 1 1 cause a change
in the estimated cost of transmission construction in
that case and that the WWP transmission cost change
wi 1 1 f low through to Case No. IPC-E-89-11, thus
sightly reducing the avoided cost rates comparable to
the Swan Fa 1 Is Plant. I would expect that change to
be less than 3% of avoided costs. Otherwise, I
believe that none of the issues pertinent to the
Petition for Reconsideration of Order No. 23357 will
affect the avoided cost rate that is comparable to the
Swan Falls Plant.
Q. You discuss the Swan Falls Plant as
though IPCo could avoid all the costs of the project
by simply walking away from it. Isn't it true that
IPCo must incur costs at the Swan Falls site no matter
what course of action it chooses?
A. Yes. Even if IPCo were to decide to
abandon the Swan Falls site, it would be required to
return the site and reservoi r a rea to a condi t ion
approximating natura I condi t ions. This wou ld be an
expensive undertaking, making the abandonment option
totally impractical. However, if this was the only
option to the proposed Swan Falls upgrade, these costs
would have to be subtracted from the upgrade
IPC-E-90-211/9/90 FAULL (Di)Staff 10164
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
construction costs for avoided cost analysis because
they would be non-avoidable costs. Nonetheless, these
costs could be avoided by selecting some different,
more practical alternative to IPCo's proposed Swan
Falls upgrade.
The most practical alternatives to the
proposed project are either an up-(down-)sizing of the
proposed plant or an alternative stabilization method
for the powerhouse that permits using the existing
turbine bays for new or modified turbines. The
up-(down-)sizing option is just a matter of project
optimization and wi 11 be discussed later. But the
option of using the existing turbine bays presents a
more complex situation. In that case, powerhouse
stabilization can be expected to be more expensive and
net annual generation can be expected to be less. It
is difficult to guess whether this option would have
presented a more cost effective solution to the Swan
Falls problem, but the comparison could only be made
by comparing the projected uni t costs of the most
optimal arrangement of the options.
In any event, with that in mind it could
easily be argued that, regardless of which option is
being considered, historic preservation costs and
dam/powerhouse stabi lization costs are unavoidable.
IPC-E-90-211/9/90 FAULL (Di)Staff 11l65
I
.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
l
Had I used this approach, I would have reduced Swan
Fa lIs capi ta 1 cos ts by about $4,000,000 (5%), thus
improving the cost effectiveness of the project.
Q. Suppose for a moment that, as a result
of this (or some future) proceeding, the estimated
cost of the Swan Falls Project is found to be
substantially greater than your estimate or the
comparable avoidable costs are found to be
substantially less than your estimate. For example,
assume that the Commission determines that the Swan
Falls costs should be compared to the interim 20-year
avoided cost rates in effect prior to Order No.
23357. Under those conditions, would you still
consider the Swan Falls Project to be cost effective?
A. No. Under those circumstances I believe
IPCo should be limited in its recovery to the
Commission determined comparable avoided cost rate.
Q. Other than using pre-Order No. 23357
avoided cost assumptions, are there any obvious
conditions that might be found appropriate for
reducing the comparable avoided cost rate for
evaluating the Swan Falls Plant?
A. Yes. The computation of avoided cost
rates for purpose of eva luating capaci ty and energy to
be purchased under PURPA specifically excludes the use
IPC-E-90-211/9/90
FAULL (Di)Staff 12
166
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
l
of projected future purchases of QF power and demand
side resources (conservation) for estimating the first
year of power need for each utility. Although this is
appropriate for PURPA applications (as explained
elsewhere, including in Order No. 22636), it could
easily be argued that it is not appropriate for
evaluating the utilities' proposed resources.
This is especially true in the case of
conservation resources. The Con~ission has been
encouraging Idaho utilities to acquire cost effective
conservation resources for years, but with little
avail. Now, when it appears that new resources are
needed, the utilities have little conservation
"on-line", and are essentially unprepared to
aggressi vely bring such resources on line. Therefore,
it appears inequitable to ascribe a benefit to IPCo in
evaluating its supply side resources by ignoring the
utility's apparent negligence in acquiring demand side
resources. I believe the Commission should consider
imputing prior and future demand side resource
acquisi tion to IPCo' s avoided cost computation for the
purpose of eva luat ing proposed ut i 1 i ty owned supp ly
side resources, including the Swan Falls Plant.
IPC-E-90-211/9/90 FAULL (Di)Staff 13167
~
Q. Wouldn't limitations such as described
in your two prior answers unfairly deny ¡PCo from
recovering prudently incurred investment costs?
A. No. ¡PCo made its decisions,
commitments, and contracts relative to this project
while fully aware of the interim avoided cost rates,
whi Ie arguing for future avoided cost rates
substantially less than those included in Order No.
233571 while fully aware of the Commission's position
on cost effective conservation resources, and while
fully aware of the SAR methodology ordered by the
Commission. Therefore, based on the knowledge and
assumptions that IPCo was publicly espousing at the
time it made those decisions, commitments, and
contracts relative to this Project, they appear, on
their faces, to have been imprudent. It is only as a
resul t of chance that it now appears that those
decisions may have turned out to be marginally prudent
(at least as determined by my analyses). Therefore,
if it is determined that my analyses are in error and
that the Swan Falls Project costs are not competitive
with avoided costs, ¡PCo should be imputed to have
known that the project was not cost effect i ve, at
least to the extent that Swan Falls costs exceed
avoided costs using the assumptions included in IPCo' s
IPC-E-90-211/9/90 168 FAULL (Di)Staff 14
I,
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
recommended avoided costs in Case No. IPC-E-89-11 and,
perhaps, iinputed conservation resource acquisi tions.
Q. In your statement of purpose you said
that you would "... provide an engineering opinion as
to the appropriateness of the project...". What did
you mean by that?
A. I meant that in addition to providing an
analysis of the cost effectiveness of the project as
proposed by IPCo i I would provide an engineering
opinion relative to the IPCo proposal being the most
cost effective development from the family of
reasonably potential developments at the si te that
is i an opinion as to whether I believe IPCo has
provided the most cost effective development
practicable for thi s resource.
Q. What is your opinion in this regard?
A. Before answering that question, I should
make two important qualifying points. First, it is
much easier to second-guess the quality of a project
after someone else has spent the money and labor to
develop it than it is to actually do the development.
Second, it appears that IPCo has made a substantially
greater effort to control costs on this project than
on many of its prior power supply developments.
IPC-E-90-2ll/9/90 FAULL (Oi)Staff 15169
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
Nonetheless, bearing those two caveats
in mind, it does not appear to me that IPCo has made
the same level of project optimization effort that one
would find in a QF development. The most glaring
weakness that I find in the proj ect is that the Swan
Falls Plant appears to have been under-sized for the
flows at the site. The overall average capacity
factor of the project is more than 72%. The standard
in the industry is typically for overall capacity
factors of between 45% and 65%.
Although I cannot say with certainty
that a higher capaci ty plant (yielding a lower
capacity factor) would be more cost effective, I
believe it would. Most of the civil costs of this
project are fixed, regardless of the mechanical and
electrical capacities of the turbine-generators.
Therefore, it is very likely that the increased costs
of up-sizing the plant to yield about a 50% plant
factor would be more than recovered over the life of
the project.
Note that the average generation
estimated by IPCo in its license application (and
accepted by me for economic ana lyses) resu i ts from
analysis of historic river flows, ignoring the
possibility that future flows may be reduced due to
IPC-E-90-211/9/90 FAULL (Oi)Staff 16170
I
I
I
1
2
I 3
4
I 5
6
I 7
I 8
9
I 10
11
I 12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
consumptive uses upstream of Swan Falls. Although
this may be the reason IPCo sized the proposed plant
at 25 MW rather than something larger, it ignores the
possibility that Swan Falls flows may increase (rather
than decrease) in the future due to increased
irrigation efficiencies on upstream farms.
Furthermore, IPCo' s sizing of the Swan Falls Plant is
contradicted by its sizing of the proposed Mi lner
Plant, which has a capacity factor under 35%. If IPCo
expects future f low reductions in the Snake River due
to consumptive use developments, surely it must expect
at least a few of those developments to be upstream of
the Milner site.
Another criticism I have of the Swan
Falls project costs as now estimated is the type of
mechanical technology selected. IPCo has specified a
system known as a modified bulb turbine for this
project. Bulb turbines and modified bulb turbines
have been around for years and are advertised as very
cost effective for low head sites such as Swan Falls.
Although there are good physical reasons why bulb-type
systems should be the most cost effective technology
available for low head sites, my experience has been
that vertical shaft kaplan turbines and S-type
turbines are always more economical than bulb
IPC-E-90-2
11/9/90
FAULL (Di)Staff 17
171
I
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
11
I 12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
turbines, even though they requi re more draft tube
excavation. Although I have no evidence that modified
bulb turbines are not the most cost effective
technology for the Swan Falls Plant, it is my
understanding that IPCo did not make a rigorous
comparison to assure that they are.
A third criticism I have of the Swan
Falls project costs as now estimated is that IPCo
appears to be using the standard firm bid process to
procure equipment and construction services, rather
than the more cost effective request for proposals
(RFP) and negotiation process. Although the bidding
method is immune to administrative challenge because
it appears to result in supplier competition, my
experience has been that it actually stifles
competition and results in higher costs; especially on
large, complex projects such as the Swan Falls Plant.
There are several reasons for this.
Foremost among them is that in preparing requests for
bids the design engineer is constrained to "guessing"
about the best combinations of size, arrangement, and
timing, with minimal input from suppliers; whereas in
competitively negotiated contracts based on RFPs the
suppliers are cha 1 lenged to provide thei r most
innovati ve combinations wi th frui tful give-and-take
IPC-E-90-2
11/9/90 172
FAULL (Di)Staff 18
I
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
discussions between supplier (s), the owner, and the
engineer. In my experience, this method almost always
results in better projects at lower cost.
Furthermore, it reduces the probabi Ii ty of supp i iers
receiving cost over-run payments for extra work,
unexpected condi t ions, and ambiguous cont ract language
being construed against the owner (the risk of
over-run payments is reduced in this case because the
contr act is drafted joint 1y by a i i pa rties, not just
the owner).
An example of the limitations inherent
in the firm bid system can be seen in IPCo's
acquisi tion of the Swan Falls Plant. s speed
increaser. I understand that, based on subjective
considerations, IPCo speci fied a concentric shaft
speed increaser with helical gear teeth~ using a
specific manufacturer' s design (perhaps the only
supplier of that technology) as the standard to meet
for determining bid responsiveness . The specification
presumes, by definition, that this technology is the
most cost effective for the application. Although
that presumption .ay be true, there is no way to be
assured that it is. Under an RFP procurement method,
suppliers would have proposed competing technologies
as well as competing prices. Then IPCo could have
IPC-E-90-211/9/90 FAULL (Di)Staff 19173
I
.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
negotiated the trade-offs between their preconceived
preferred technology and the simpler, less expensive
technologies to assure that the purchased equipment
was, in fact, the most cost effective.
Another example shows up in the limited
number of suppliers asked by IPCo to bid on the
turbine-generator package for the Swan Falls Plant.
It is probably reasonable under the firm bid
methodology that IPCo limited the list of potential
bidders to the four known suppliers of the type of
equipment speci f ied. However, under the RFP method
there would have been a much larger number of
potential suppliers. Competition between other
suppliers and other technologies would have encouraged
manufacturers of modified bulb turbines to propose
their very best combination of technologies and
prices. Under the firm bid method actually used by
IPCo, all four bidders knew thei r competi tion t s
approximate costs, present work loads, and the
approximate extent of interest in the project. (The
results of this particular bid process currently
appear to be three "courtesy" bids and one serious,
but not flhungry", bid.)
IPC-E-90-2
11/9/90
FAULL (Di)Staff 20174
I
.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
I
11
12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
Q. Do you propose that project costs should
be disallowed for ratemaking purposes because you
believe IPCo has not optimized its Swan Falls resource?
A. No, at least not at this time. My
speculative criticisms do not provide evidence of
imprudent management. I merely include this part of
my testimony to provide support for the posi tion that
IPCo should be held to a standard of avoided cost to
cap the ratemaking allowability of new resource costs,
and should have a heavy burden of proof to ful ly
justify its design and construction decisions prior to
such costs being allowed for rate making purposes.
Clearly the Swan Falls Plant could not be developed as
proposed by IPCo if its costs had to be recovered
under a QF contract, even under the rates included in
Order No. 23357 (which IPCo claims are too high).
Furthermore, it is my professional opinion that the
Swan Falls site may have been developable under the
23357 rates by a QF developer, albeit only after
hard-nosed negotiations and extensive design
modifications.
However, because it wou ld be nea r ly
impossible to provide evidence to prove that ipeo had
not provided the optimum development for the resource,
the Commission is limi ted to using avoided cost as the
IPC-E-90-2
11/9/90
FAULL (Di)Staff 21175
I
,
I
I
1
2
I 3
4
I 5
6
I 7
I 8
9
I 10
11
I 12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
imputed surrogate for identifying prudent decision
making. The utility is perfectly able to determine
how its proposed projects stack up against comparable
avoided costs and it is perfect ly capable of
estimating the risks that its cost estimates may be
low, so it should be held accountable for keeping its
costs below those comparable avoided costs.
Ratepayers should not be held at risk for utility
executives' poor decision making beyond what has
clearly been established as achievable costs -- in
fact costs the utility claims are excessive (i.e.,
avoided cost). It's bad enough that it is impossible
to identify and reject sub-optimal features that cause
excess costs that are below avoided costs.
Q. What are your recommendations in this
case?
A. I recornmend that, based on the estimate
tha t the Swan Fa i Is Proj ect (as proposed by IPCo)
could possibly provide energy at less than avoided
costs, the Commission find that the Swan Falls Hydro
Electric Plant concept is competitive enough for costs
incurred in developing the project to be potentially
reasonable for future rate making consideration, with
the specific caveat that costs in excess of the
appropriate comparable avoided cost rate (to be
IPC-E-90-211/9/90 FAULL (Di)Staff 22176
I
.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
determined in future proceedings) are, by definition,
imprudently incurred. I further recommend that the
Commission advise IPCo that this Certificate in no way
implies that all costs incurred in developing the
project are necessarily prudent, but that the
Commission will review all costs so incurred at a
later date and will determine at that time whether
IPCo's execution of the project was prudent in light
of the generally accepted standards of the hydro
electric construction industry. In determining the
comparable avoided cost rate the Commission should
consider and estimate all non-quantifiable risks.
Q. What kinds of non-quantifiable relative
risks should be considered, and how?
A. A few of the "relative risks" that come
to mind immediately are, for the Swan Falls Project,
the risk that future Snake River flows at the site may
be more (less) than the historic flows, that the Swan
Falls water rights playa pivotal role in IPCo's
system-wide hydro electric operations and their loss
could severely reduce generation at other Snake River
power plants, and that the environmental impacts of
the project may be more (less) than expected. For
potential thermal projects that could compete
economically with the Swan Falls Project, a couple of
IPC-E-90-2
11/9/90
FAUI,L (Di)Staff 23
177
I
.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
the "relative risks" that come to mind immediately are
the risk that future fuel will be unavailable,
undeliverable, or more (less) expensive than expected,
and that the environmental impacts of such a project
may be more (less) than expected.
Because such risks are unquantifiable,
decision makers must make their own best estimate of
the level and impact of each of the potential
occurrences actually happening and then decide how to
factor that risk into granting or denying
Certification and/or rate making application of
project costs. With adequate evidence, the Commission
could convert its estimates into approximate costs for
compar ison purposes.
For example, it is currently taken as an
historic axiom that hydro plants have "always" been
more cost effective than thermal plants, so we should
expect them to be more cost effective in the future.
However, on careful reflection, it becomes apparent
that the reason hydro has been more cost effective
than thermal is that fuel costs have escalated much
more rapidly than expected. Thus, the critical
question when comparing a specific hydro plant to
potential thermal plants is "How does the probability
that we have over (under) estimated water flows
IPC-E-90-2
11/9/90 FAULL (Di)Staff 24l78
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
compare to the probability that we have over
I(under) I
I
estimated fuel costs?".The answer to this question
could be assigned an estimated cost value for
comparing potential projects.
Q. Doesn't the consideration of relatively
unquantifiable risks invalidate the concept of using
avoided cost as the only implied surrogate for
estimating prudent project selection and management?
A. Yes, slightly. Rather than using
avoided cost as the only measure of prudence, the
Commission should use avoided cost as the presumed
measure of prudence. Thus, as part of its application
for rate making treatment of any project, a utility
should be expected to justify projected generation
costs that exceed avoided cost. That justification
would be in addition to justification for other
factors and conditions such as project size, contract
over-runs, type(s) of technology selected, method of
project management, etc. Whether the Commission
should attempt to quantify its judgments on these
issues should be determined after accumulation of the
appropriate evidence impacting those judgments.
Q. Does this conclude your testimony?
A. Yes, it does.
IPC-E-90-2
11/9/90
FAULL (Di)Staff 25179
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
(The following proceedings were had in
open hear ing. )
COMMISSIONER MILLER: Mr. Ripley, I
understand you have no quest ions.
MR. RIPLEY: No, sir.
COMMISSIONER MILLER: Same with you,
Mr. Richardson?
MR. RICHARDSON: No questions, Mr. Chairman.
COMMISSIONER MILLER: From the Commission?
COMMISSIONER SWISHER: I have one.
EXAMINATION
BY COMMISSIONER SWISHER:
Q I repeat, it's specific to the Swan Falls
case and from the initial filing forward, I had hoped by
this morning to know what it is the Company is asking us
to do. Do you know what they i re asking us to do? I can It
tell.
A I don i t know what they i re asking us to do.
I have an idea. I think I know what they' re trying to
do. At the time I filed my testimony, I thought that this
was an attempt for, to respond to the order, I forget the
number, but out of the 197/200 case, to provide ongoing
information to the Commission about the progress and the
180
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (Com)Staff
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
estimates of costs understanding that a final certificate
would not be granted until all the final numbers were in,
which is essentially upon completion of the plant. It now
appears to me that the Company is asking for a rolling
prudency rev iew .
Q A certificate would be issued, you said a
certif icate wouldn i t be issued until the plant was
actually completed. You didn't mean that, did you?
A Well, in the reading of the order, yes, it
talks about a preliminary certificate, a certificate given
prior to construction will be accepted as a preliminary
certificate and the final certificate will not be granted
until all the costs are known; so to that extent,
referencing that particular order
Q Do you think these numbers are meant to be
in response to that earlier order and that these are the
known numbers that would resul t in the final
certification?
A I think the cap is an attempt to, if not to
identify the final numbers, at least to identify, to give
a much firmer upper limit, and it does that with the
contingencies that are put into the development of the cap
and the exceptions that are included with the cap that
there is some increased satisfaction that that cap is
likely to be higher than the final number, but it i S not, I
181
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (Com)Staff
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
10
12
14
16
20
21
22
24
1 think, the kind of a submittal that would give what was
2 referred to in the pr ior order as a final cert i f icate or
3 would justify the granting of that.
4 Q Was the concept of a preliminary certificate
5 and a final certificate innovative in the same sense that
6 the application in the Milner case for a Certif icate of
7 Exemption was an innovation? Has the Commission in the
8 past issued preliminary certif icates and then final
9 certificates?
A Not that I i m aware of. Yeah, I would
11 characterize the two things as being similar, yes.
COMMISSIONER SWISHER: That's all I had,
13 Mr. Chairman.
COMMISSIONER MILLER: Redirect.
15 MR. GILMORE: No.
COMMISSIONER MILLER: Thank you, Mr. Faull.
17 (The witness left the stand.)
18 MR. MILES: Mr. Chairman, did you calIon
19 me?
COMMISSIONER MILLER: Oh, 11m sorry,
Mr. Miles, I forgot you. Did you have a question? I
suspect you must.
23
25
182
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (Com)Staff
I
I 1
I 2
3
I 4
I 5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
CROSS-EXAINATION
BY MR. MILES:
Q Mr. Faull, most of the criticism of this
project or the comments of this project or a big part of
them at least you have addressed in your Milner testimony;
is that right?
A Much of my Milner testimony and my Swan
Falls testimony are identical.
Q Well, I just have one question. If you
would turn to Page 16 at Line 4, you say in the middle of
the line, liThe most glaring weakness that I find in the
project is that the Swan Falls plant appears to be
under-sized for the flows at the site. ii Do you care to
elucidate a little more on that statement?
A Well, I did in my direct testimony expand on
that statement and subsequent to that Mr. Packwood and I
have both described somewhat how you optimize a
hydroelectric project, and Mr. Packwood i s rebuttal
testimony describes or indicates that the Company did do
an optimization sizing of the project.
About the only thing I can say to expand on
that is that the optimization curve that Mr. Packwood
described is driven to a certain extent about the
Company i S estimate of costs per kilowatt of increasing the
183
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (X)Staff
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
dam and those estimates are relative soft numbers so that
my optimization curve might look different than his
optimization curve, but in the Milner case, I also talked
about back-of-envelope computations as compared to
detailed analyses and the levels of sophistications of
analysis and so my statement here is less, is based on a
less detailed analysis than the analysis that the Company
describes they did. That doesnl t mean that if I did that
level of work I would come up with the same number, but
while I still have some questions about whether this is
the most optimum project, 11m more satisfied now than I
was at the time i wrote this.
Q Mr. Faull, would you consider, then, your
previous statement, and i forgot just on what line it is
or which page, that the cost per kW of installed
generating capacity in the new rebuilt plant is in excess
of $3,000, do you believe that is excessively high or do
you have a suggestion how to reduce that?
A I made some suggestions on some things that
I would do if I were the project manager from the
beginning that might or might not reduce that. I think
they probab i y would, but excess i ve I y high, no, for a
project of this magnitude with a 22-foot net head, $3,000
per kilowatt is wi thin the range that one would expect.
Whether or not it I S prudent to go ahead and
184
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (X)Staff
I
I 1
I 2
3
I 4
I 5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
build a plant at that cost depends on a number of things
that welve been discussing, including the importance of
water rights and how those affect generation from Hell' s
Canyon upstream, at least to the Hagerman Valley and maybe
all the way to American Falls; so $3,000 a kilowatt is not
an excessive number for a project of this design.
Q Mr. Faull, do you believe that part of the
costs of this plant which makes it appear so high are due
to some requirements by FERC on the rebuild of the plant
which are not ordinarily included in a new plant; that is,
such as preserving the historical significance of the
plant and so on?
A Certainly that i s clear in the application.
Q Thank you, and that doesn i t ordinarily apply
to other plants; is that right?
A New construction, that does not apply. I
think any reconstruction in the future of an existing dam
will be jeopardized by the possibility that those sorts of
requirements will be included.
MR. MILES: Thank you. I have no further
questions of Mr. Faull, Mr. Chairman.
COMMISSIONER MILLER: Mr. Faull, thanks once
again for your help.
(The witness left the stand.)
MR. RIPLEY: Mr. Chairman, we would be
185
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
FAULL (X)Staff
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
11
12
14
20
1 willing to stipulate that Dr. Eastlake i s testimony be
2 spread upon the record as if read.
3 COMMISSIONER MILLER: Any objection?
4 Dr. Eastlake; is that all right with you?
5 COMMISSIONER SWISHER: Have you been duly
6 sworn so you can be deposed?
7 MR. GILMORE: I believe Dr. Eastlake gave
8
9
corrections to his testimony in Milner that are identical
to his corrections in Swan Falls.
10 MR. RIPLEY: WeIll revise our stipulation to
that effect.
COMMISSIONER MILLER: We will stipulate that
13 we have received his testimony into the record as if it
had been read and as if he had been sworn to give it;
15 agreeable?
16 MR. RICHARDSON: No objection, Mr. Chairman.
17 COMMISSIONER MILLER: All right.
18 (The following prefiled testimony of
19 Dr. Bill Eastlake is spread upon the record.)
21
22
23
24
25
186
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
COLLOQUY
I..
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
Q.Please state your name and bUSine~
address for the record.
A. My name is Bill Eastlake. My business
address is 472 W. Washington St reet, Boi se, Idaho.
Q. By whom are you employed and in what
capaci ty?
A. I am employed by the Idaho Public
uti Ii ties Commission as an Economist.
Q. Please describe your educationa 1
backg round and work experience.
A. I received an H.A.B. (Honors Bachelor of
Arts) with emphasis in classics and economics from
Xavier University in 1965 and completed graduate
course work and general examinations in the Ph. D.
program in economics at Ohio State University in 1969.
I taught undergraduate economics
full-time at Boise state University from 1969 through
1976, with two years on leave as a Fulbright Exchange
Professor at Cuttington College, Liberia, West Africa.
I have also taught part-time at Boise State Uni versi ty,
College of Idaho, and Ohio State University.
I was a part-time Taxpayer Service
Representative for the Internal Revenue Service during
1977 and 1978. In 1978, I took a position with the
Idaho Office of Energy as an energy economist, with
IPC-E-90-2
11-9-90
EASTLAKE, D iStaff 1l87
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I
16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
responsibi Ii ty for energy conservation planning aii~l
then for economic feasibi lity ana lysis of geotherma i
and other alternative energy proposals. When the
office became a division of the Idaho Department of
Water Resources in 1981, I became responsible for the
Idaho Water Resource Board's financial programs, loans
and grants as well as industrial revenue bonds for
water proj ects. wi th the demise of the bond program,
I assumed responsibility for the design and imple-
mentation of a statewide energy conservation loan
program. In addition, I provided economic analysis in
support of policy decisions concerning water rights,
water planning, and agricultural water uses.
Q. What is the purpose of your testiinony?
A. To suggest policy considerations relating
to the use of hydroelectric power from an existing dam
like Swan Falls for the Commission to use in reaching
a decision in this case.
Q. What is the importance of these policy
issues?
A. They provide a broader environment in
which decisions are made about how much hydroelectric
generation is to be procured and at what cost. The
main point is that the decision to provide even pre-
liminary approval for construction (or a certificate
IPC-E-90-211-9-90
EASTLAKE, D iStaff 2
188
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
of convenience and necessity) for the Swan Falls
project is not as simple as merely asking whether its
projected cost is greater or less than the published
avoided cost.
Q. Why do you say that?
A. Ratepayers are not buying a simple undif-
ferentiated product (electrical generation), the sort
of purchase where the product is so standard, the only
important factor in the purchase decision is price.
There are subsidiary considerations that
are important to the decision as to whether the
resources available from the Swan Falls project are
preferable to other possible resources. How the
projected cost of power from these resources compares
to the cost of other potential resources is indeed
important, but is not the sole decision factor. Some
discretion must be allowed the Commission to consider
other factors in making its decision, except in the
case where the cost of the proposed resource is radi-
cally different from that of competing resources.
Q. Are projected costs from these plants
significantly different from avoided cost rates?
A. No, they appear to be approximately the
same.
IPC-E-90-211-9-90
EASTLAKE, OiStaff 3189
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
Even when adjustments are made to put
avoided costs in the same 50 year time frame, the Swan
Falls project actually comes in slightly above avoided
cost. Mr. Faull's testimony provides more insight
into the specific relationship between the projected
cost of electricity from this plant and the newly
published avoided cost rates. When the difference is
sma 1 1, as it is here, there are other factors tha t
should enter into the decision process.
Q. What are some of these other factors
which should allow the Commission some discretion.
A. There are several. Historical experience
wi th prior hydroelectric installations has some rele-
vance. The probable future course of environmental
constraints through federal legislation is important.
The policy stance of the State of Idaho as evidenced
in prior energy and water matters is also important.
Q. Is hydroelectric power the state's most
important native energy resource?
A. In the past Idaho relied solely on hydro-
electric power for its electric energy needs. As the
state has grown there has been the need to supplement
hydro with some thermal generation located outside the
state. But it remains the fact that Idaho's hydro-
electric base is what has allowed power rates to
IPC-E-90-2
11-9-90
EASTLAKE, D iStaff 4190
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
remain at or near the lowest in the country. Making
optimum use of that hydro, which is essentially
Idaho's only significant energy resource, remains a
sensible policy to protect the legacy of past low
rates.
Where possible it makes sense to keep
loca 1 cont ro 1 of that resource, so that the rea 1 bene-
fits of low cost hydropower are reaped by utilities
and ratepayers in Idaho rather than out-of-state.
Q. What has been the relevant policy stance
of the State with respect to the sort of hydro projects
proposed here?
A. The most comprehensive policy statement
in this regard comes from the Idaho State Energy Plan,
a study commissioned by the Governor in 1980. The
Idaho Energy Resource Policy Board, a diverse group of
fifteen persons representing a cross-section of inter-
ests within the state, heard testimony from various
energy experts and held public hearings over an
eighteen month period. The Energy Plan, which came
out in February of 1982, was an outline of how the
state could assist in supplying adequate energy for
the future.
Q. What sorts of policy direction were
contained in this plan?
IPC-E-90-2
11-9-90
EASTLAKE, DiStaff 5191
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
A. The plan stated generally tliat there was
to be a high priority placed on conservation and
renewables, with an emphasis on improving existing
resources.
Wi th respect to renewables, it stated
that "the state should give a high priority to hydro-
electric projects, in particular the upgrading of
current facilities within the state."
In its formal policy implementation
guidelines, the plan stated that "priority should be
given to the review of sites and approval of projects
related to hydroelectric generation and existing
hydroelectric upgrades."
In the sect ion on hydro, the plan notes
the presence of many non-power dams with the capa-
bi Ii ty to accept generation equipment and some
existing power projects which can provide increased
capacity through upgrading of generation facilities.
The plan even has a range of anticipated costs, from
50 mills in 1985 to 75-100 mills in 2000, which seems
commensurate wi th the projected costs contained in the
company's applications.
Q. Does this Plan have force of law?
A. No. The only purpose of ci t ing it here
is to indicate that the upgrades proposed by the
IPC-E-90-2
11-9-90
EASTLAKE, D iStaff 6192
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
company seem quite consistent with the policy guidance
provided on this issue by a formal board convened to
look to Idaho's energy future.
Simply put, the Resource Policy Board
recognized that hydro has been very good for the state
and recommended continuing to exploi t that known
resource where possible.
While it recognized the potential for
some new small hydro development (and, in retrospect,
understated the difficulty of getting new projects
permi tted) the Board rather clearly indicated a pre-
ference for getting more of the hydropower potential
available at existing dams.
The proposed proj ect, since it makes use
of an existing dam with generation facilities, is
a i igned wi th that preference.
Q. What was the reason the Board seemed to
prefer hydro from existing structures?
A. From my recollection of staff work (as
an employee of the Energy Bureau of the Idaho
Department of Water Resources) for the Board, there
was reason to bel ieve that power from exi st ing dams
would be less costly than that from new dams. These
were large old infrastructure projects that would have
been inordinately expensive to replicate in current
IPC-E-90-211-9-90
EASTLAKE, DiStaff 7
193
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
dollars. With the water diversion works already in
place the only cost was the additional cost of adùing
generation.
Q. Does the same reason to prefer old hydro
still hold today?
A. I believe the rationale for preferring
existing sites would be somewhat different, but the
preference would remain.
Q. Why would the rationale be different?
A. The rationale would still emphasize the
lower cost to be expected from upgrading of existing
faci lities, but it would not be based so much on an
expected difference in the physical cost of construc-
tion and equipment. The lower cost expectations would
today probably focus more on the lack of institutional
barriers that face an already existing dam. New dams
and diversions face extraordinary obstacles in the way
of permitting requirements, especially environmental
considerations.
The Board's initial deliberations took
place in an era when it appeared that there were lots
of viable small hydro projects available. As time has
passed there has been an increase in the number of
regulations and in the stringency with which they are
enforced. What looked like a flood of easily available
IPC-E-90-2
11-9-90
EASTLAKE, DiStaff 8194
small hydro has become more of a trickle as one after
another has failed to clear the institiitional obstacles
associated with permitting.
Q. Does the current legislative climate
seem likely to become less restrictive?
A. Just the opposi te. Growing concern for
endangered species, recreational, and fish and wi ldlife
values associated with the use of the water resource
by hydroelectric projects makes it ever more difficult
for a new project to be approved. Though in some cases
mitigation is now being required of older projects
permitted in an era when there was less concern for
these values, in any case the environmental obstacles
facing upgrade of existing facilities are substantially
less than that facing a new project. These trends
translate into lower projected costs for pre-existing
projects, or the absolute inability to even get a new
project permitted.
Q. How is hydropower considered in the
state Water Plan?
A. The State Water Plan was created in 1976
to help formulate and implement the optimum develop-
ment of water resources in the public interest.
Adopted by the Idaho Water Resource Board, it is
periodically updated and reviewed by the Legislature.
j
IPC-E-90-2
11-9-90 195 EASTLAKE, DiStaff 9
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
The fi rst State Water Plan was in 1976, wi th ..~revisions
in 1982 and 1986. The Plan was altered in its most
recent revision to account for changes needed to
reconci Ie it wi th the agreement entered into between
the State and Idaho Power Company concerning water
rights at Swan Falls Dam.
Policy 1C of the Water Plan lists various
non-consumptive uses of water considered to be "bene-
ficial uses" of water recognized under Idaho law.
More specifically, Policy 5E recognizes hydro genera-
tion as beneficial and acknowledges a public interest
in maintaining minimum river f lows at Swan Fa i Is.
This is a striking change from the earlier narrow
conception of "beneficial use" which emphasized
removal of water from the river, usually for
irrigation.
Policy 5A actually raised the minimum
flows to 3900 cfs (April-October) and 5600 cfs
(November-March) at the Murphy gauge in recogni t ion
of the importance of those f lows to hydrogeneration.
Amounts between those flows and the 8400 cfs originally
claimed by Idaho Power are now held in trust by the
state for allocation according to the more extensive
set of public interest criteria set out by revision to
the Idaho Code, partly in recognition of the fact that
IPC-E-90-2
, 11-9-90
EASTLAKE, DiStaff 10
196
I.
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
hydrogeneration was a valuable use of water, foregone
by its withdrawal from the river for other purposes.
Q. Is there anything about the existing
structure of water rights that appears to favor the
use of pre-existing facilities for hydrogeneration?
A. The whole Swan Falls controversy arose
because a group of individuals sued Idaho Power to
force the company to assert its water right for power
generation vis-a-vis the claims of irrigators. Though
this is neither the time nor the place to revisit that
controversy, with existing dams there is already a
water right in place, with particular rights and
responsibilities. New hydropower facilities face a
more stringent set of requirements and a general
climate in which most of the available water is
already allocated.
New facilities bear the burden Of proof
that their use of water, in this case for the purpose
of hydroelectric generation, will create no adverse
impact on prior appropriators of water. That burden,
of proving that new uses of water are in the public
interest, of adhering to the expanded set of cri teria
established in Idaho Code Section 42-203C to implement
the Swan Falls Agreement, creates a formidable and
costly process for new hydro developers.
IPC-E-90-211-9-90
EASTLAKE, D iStaff 11
197
I.
I
I 1
2
I 3
I
4
5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
Q. Has the Idaho Legis lature recognized the
value of protecting existing hydropower generation
through its resolution of the Swan Falls controversy?
A. Yes, and there are a variety of sources
from which to quote their obvious desire to protect a
valuable hydro resource in existing dams. In the
formal Framework Agreement signed before negotiations
resulted in the final agreement, there is a statement
that non-irrigation season flows are of critical
importance to prevent the loss of Idaho's low cost
hydropower base. In light of this statement the
agreement called for a seasonally-differentiated
minimum flow, with 5600 cfs in this critical non-
irrigation season and 3900 cfs during the irrigation
season. And as part of the new public interest
criteria specified in the agreement, there is obvious
intent to prevent significant reduction of water
available to holders of water rights used for power
product ion.
Q. Idaho Power has asserted that part of
the reason to accept its planned Swan Falls Project is
the need to protect an existing water right. Do you
find that contention persuasive?
A. Yes, I do. The Swan Falls controversy
resulted in recognition of the fact that water in
IPC-E-90-211-9-90
EASTLAKE, D iStaff 12198
Il
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I 21
22
I 23
24
I 25
I
I
Idaho is valuable for power production, not just for
irrigated agriculture.
Q. In general terms, is there a way to put
a value on that water right, to provide an indication
of the value of hydropower which would be lost if
Idaho Power did not rebui ld and forfei ted its existing
water right at Swan Falls through non-use?
A. Arriving at a specific valuation is a
somewhat contentious issue due to disagreements over
exactly how to quantify the right in cfs and over the
conversion of this cfs figure to kwh and then to value
in dollars.
However, I believe a rough estimate can
be arrived at by taking the 5600 cfs mentioned above
as "critical" to preserving our hydro base. Published
data done by agricultural economists at the University
of Idaho and Washington state University contains an
acceptable figure of 520 kwh/acre foot as the loss of
generation at Swan Falls and downstream through Hells
Canyon if an acre foot of water is removed above Swan
Falls Dam.
Converting the 5600 cfs to acre feet and
mul tiplying to get the loss of generation gives a
figure of just over 2 million kwh. Valuing those kwh
J
IPC-E-90-2
11-9-90
EASTLAKE, DiStaff 13199
I.
I
I 1
2
I 3
4
I 5
I
6
7
I 8
9
I 10
11
I 12
I 13
14
I 15
16
I 17
I 18
19
I 20
21
I 22
I 23
24
I 25
I
I
at a current avoided cost figure of roughly 5 cents/
kwh yields about $105 mi I I ion do I la rs annua I ly.
Even valuing this lost generation at a
much lower variable cost of 1.5 cents/kwh yields about
$31 million annually. That number is of course just
the first year' sloss. Losing that water permanently
generates losses whose value would rise with the
increasing cost of alternative power generation.
Q. What has been the stance of prior Com-
missions in their deliberations concerning certificates
of public convenience and necessity for other hydro-
electric projects contemplated by the Company?
A. Several cases seem to give evidence of a
general leaning toward hydroelectric projects as being
in the public interest.
In U-I006-70, a request for a rate in-
crease in anticipation of the Company's participation
in the Jim Bridger Plant, in Order No. 10049, there is
notation that "... it is evident that the power gen-
erated by hydropower projects will become increasingly
more valuable." The quotation is vis-a-vis the
proposed steam generation plant but nevertheless
indicates a belief that hydropower seems to improve
with age.
IPC-E-90-211-9-90
EASTLAKE, DiStaff 14
200
I
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
In U-1006-107, requesting a certificate
of convenience for a new powerhouse at American Fa 1 Is
in connection with rebuild of the dam, the Commission
used Order No. 12631 to summarily approve this pro-
posed plant that "will permit greater utilization of
waters being released" to meet existing and future
loads.
In U-1006-154, issuing a preliminary
certif icate for the addi tion of generation to the
existing Cascade Dam, the Commission noted in Order
No. 15296 that after installation the economics of
hydroelectricity generally improve significantly in
comparison with thermal and that the environmental
impact will likely be very slight since the proposed
development wi 1 1 merely replace an existing structure.
Q. Was the decision to grant or refuse a
certificate to any of these proposed facilities a
simple one of comparing the proposed cost to the cost
of alternative resources?
A. No. The Commission is charged with
considering the need for additional power to serve the
utility's load and with the cost of alternative means
of serving such need.
In U-1006-136, requesting a certificate
for South Fork of the Payette projects which were
IPC-E-90,.2
11-9-90
EASTLAKE, DiStaff 15
201
I
\
I
I 1
2
I 3
4
I 5
I 6
7
I 8
9
I 10
I 11
12
I 13
14
I 15
I 16
17
I 18
19
I 20
I
21
22
I 23
24
I 25
I
I
ultimately turned down, in Order No. 15580 the Commis-
sion noted the "process necessarily required the
weighing and balancing of numerous (and often com-
peting) considerations, many of which cannot be
quantified." In other words, it took judgment~ not
mere following of a rule.
In U-1006-154, the order ci ted above,
there was explicit recognition that thermal generation
would cost approximately the same per installed KW as
the proposed hydro project, but that consideration of
issues beyond first cost of construction were more
important in determining what was the best resource
decision.
Q. Does this conclude your testimony?
A. Yes, it does.
IPC-E-90-2
11-9-90
EASTLAKE, D iStaff 16202
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
(The following proceedings were had in
open hear ing. )
COMMISSIONER MILLER: And that brings us to
the end of the evidentiary presentations, no rebuttal;
correct?
MR. RIPLEY: No rebuttal.
COMMISSIONER MILLER: Let i stake, then, a
brief recess.
MR. RIPLEY: We would offer Exhibits 1
through 7, then.
COMMISSIONER MILLER: We i II at this point
admit into evidence all exhibits that have been marked in
the absence of objection.
(All exhibits previously marked for
identification were admitted into evidence.)
MR. GILMORE: Mr. Chairman, before the
recess, I think it would help us if there i s any particular
issue that you would like us to be addressing we can be
thinking about it in preparing our remarks or any of the
other Commissioners.
COMMISSIONER MILLER: It certainly sounds to
me as if the Company should in response to
Commissioner Swisher i s questions clarify the nature of the
relief sought by the Company in the Swan Falls case and
should comment on the construct ion work in progress
203
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
COLLOQUY
I
I 1
I 2
3
I 4
I
5
6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I 25
I
question that Commissioner Swisher raised.
Commissioner Nelson, do you have any
specif ic topics you i d like to see addressed?
COMMISSIONER NELSON: I don i t think any new
ones outside of what i s been covered by
Commissioner Swisher.
COMMISSIONER SWISHER: I raise that in the
context of the exigency language in the statute, if you
were responding to our concerns and you were responding to
the concerns expressed in the Nelson letter as to the
utter absolute essentiality of the Swan Falls project.
MR. RIPLEY: Yes, weIll address that, but
let me state that Mr. Nelson I s letter was not offered on
the basis that we were requesting emergency rate base
treatment of the Swan Falls investment.
COMMISSIONER MILLER: As for myself, I think
the matters that are of interest to me have probably been
made obvious and Ilm sure everyone intends to address
those questions. The only matter of, I guess, tone or
direction or characterization is to the extent that the
parties could identify the areas of commonality, the areas
of agreement that they have with respect to what a
certif icate means, what is the nature of the assurances
carried with it. I think if we at least had some comment
along those lines as opposed to highlighting the
204
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
COLLOQUY
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
9
10
11
12
13
15
16
17
18
1 differences between the parties that that might give us a
2
3
better understanding of how much really divides the
part ies; so how much time did you contemplate,
4 Mr. Ripley?
5 MR. RIPLEY: I would suspect that our, I
assume that we will open and then close and I will pledge
to the parties that I will not address anything in my
6
7
8 closing that has not been raised by other parties; so I
would think probably a half an hour of probably direct or
opening oral argument would cover it.
COMMISSIONER MILLER: Okay, what I kind of
had in mind is that we could take the opening arguments of
14
all the parties, the Commissioners if any questions occur
to us as a resul t of those could ask those and get the
comments of parties and then concluding comments with
Mr. Ripley concluding last.
MR. RIPLEY: Would the Commission prefer
19
20
just for continuity to commence, say, at 1: 15 or something
so that we i re not breaking over the noon hour?
21
COMMISSIONER MILLER: I was just wondering
if that would be agreeable to the parties.
COMMISSIONER SWISHER: I had no idea this22
23 was going to turn into a major road show.
24 MR. RIPLEY: In response to
25 Chairman Miller i s earlier research, there is a PUC
205
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
COLLOQUY
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
9
10
11
12
13
14
15
16
18
19
20
21
22
23
1 decision which we inferentially refer. to in the brief that
2
3
we filed and that was the Boardman discussion of what a
Certif icate of Public Convenience and Necessity means,
4 et cetera. I have copies of those decisions. I would
5 like to pass them out now so that if counsel --
6 COMMISSIONER NELSON: Can we go off the
7 record a second?
8 COMMISSIONER MILLER: Let i s go off the
record for a second.
(Off the record discussion.)
COMMISSIONER MILLER: Let i s recess our
hear ing now and reconvene at 3: 00 p. m.
(The Hearing adjourned at 11 :05 p.m.)
17
24
25
206
HEDRICK COURT REPORTING
P.O. Box 578, Boise, in 83701
COLLOQUY
I
I 1
I
2
3
I 4
5
I 6
I 7
8
I 9
I 10
11
I 12
I 13
14
I 15
I 16
17
I 18
I 19
20
I 21
I 22
23
I 24
I
25
I
AUTHENTICATION
This is to certify that the foregoing
proceedings held in the matter of the application of Idaho
Power Company for authority to rate base the investment
required for the rebuild of the Swan Falls Hydroelectric
Project, commencing at 4:05 p.m., on Wednesday,
November 28, and continuing through November 29, 1990, at
the Commission Hearing Room, 472 West Washington, Boise,
Idaho, is a true and correct transcr ipt of said
proceedings and the original thereof for the file of the
Commission.
Accuracy of all pref iled testimony as
originally submitted to the Reporter and incorporated
herein at the direction of the Commission is the sole
responsibili ty of the submitting parties.
S. BUCY
Shorthand Reporter
207
HEDRICK COURT REPORTING
P.O. Box 578, Boise, in 83701
AUTHENTICATION