19901210Vol II Hearing.pdf

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ORIGI~1AL
r DCf\r:I',irt, rv'- ..
BEFORE THE IDAHO PUBLIC UTILITIES CdM~SION EJ
"
90 DEC 10 Pll ~ 1 ~
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR A
CERTIFICATE OF PUBLIC CONVEN-
IENCE AND NECESSITY FOR THE
RATE BASING OF THE MILNER
HYDROELeCTRIC PROJECT, OR IN
THE ALTERNATIVE, A DETERMINATION
OF EXEMPT STATUS FOR THE MILNER
HYDROELECTRIC PROJECT.
)
)
)
)
) CASE NO. IPC-E-90-8
)
)
)
)
)
¡ DAHO PUBLIC
UTILITIES COMMISSION
BEFORE
COMMISSIONER DEAN J. MILLER (Presiding)
COMMISSIONER RALPH NELSON
COMMISSIONER PERRY SWISHER
PLACE:Commission Hearing Room
472 West Washington
Boise, Idaho
DATE:November 27, 1990
VOLUME II - Pages 22 - 170
7+EORICKCOURT REPORTING
537 W. Bannock
Suite 205
P.O Box 578
Boise. Idaho 83701
"[phone] ./
. . . We offer · BaronDaaMicrotranscription™ by ir
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APPEARANCE S
For the Staff:BRAD M. PURDY, Esq.
Deputy Attorney General
472 West Washington
Boise, Idaho 83720
For I daho 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 Industr ial
Customers of Idaho
Power Company:
DAVIS WRIGHT TREMAINE
by GRANT E. TANNER, Esq.
1300 S.W. Fifth Avenue
Suite 2300
Portland, Oregon 92701
-and-
DAVIS WRIGHT TREMAINE
by PETER J. RICHARDSON, Esq.
400 Jefferson Place
350 North Ninth Street
Boise, Idaho 83702
For Idaho ConsumerAffairs, Inc.:HAROLD C. MILES
316 Fifteenth Avenue South
Nampa, Idaho 83651
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
APPEARNCES
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I N D E X
WITNESS PAGEEXAMINATION BY
Jan B. Packwood
(Idaho Power)
Mr. Ripley (Direct)
Prefiled Direct Testimony
Rebuttal Testimony
Mr. Miles (Cross)
Mr. Richardson (Cross)
Mr. Purdy (Cross)
Commissioner Swisher
Commissioner Nelson
Commissioner Miller
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36
52
60
61
71
75
85
90
J. Lamont Keen
(Idaho Power)
Mr. Ripley (Direct)
Pref iled Direct Testimony
Rebuttal Testimony
Mr. Richardson (Cross)
Mr. Purdy ( Cross)
Commissioner Swisher
Commissioner Nelson
Commissioner Miller
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94
98
106
108
112
117
119
James L. Baggs
(Idaho Power)
Mr. Ripley (Direct)
Pref iled Testimony
Mr. Richardson (Cross)
Mr. Purdy (Cross)
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128
135
147
DeWi tt A. Moss
(Public)
Statement
Mr. Mi les (Cross)
Mr. Purdy (Cross)
Commissioner Swisher
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158
162
166
HEDRICK COURT REPORTING
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INDEX
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1 EXHIBITS
4 FOR IDAHO POWER COMPANY:
PAGE
5 1. Order Issuing License for the
Milner Hydroelectric Project from
the Federal Energy Regulatory
Commission (82 pages)
2
3 NUMBER
Premarked
Premarked
Premarked
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7
8
2. Agreement Regarding the Ownership,
Construction, Operation and
Maintenance of the Milner
Hydroelectric Project by and
between Idaho Power Company and
the Canal Companies (70 pages)
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3. Idaho Power Company, Mi lner
Hydroelectric Project, Powerhouses
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EXHIBITS
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BOISE, IDAHO, TUESDAY, NOVEMBER 27, 1990, 9:00 A. M.
COMMISSIONER MILLER: Well, good morning.
Let's take up Idaho Public Utilities Commission
Case IPC-E-90-8. This is the time previously set by the
Commission for evidentiary hearing in this matter, and
let's commence this morning by taking the appearances of
the part ies . Mr. Ripley, for the Appl icant .
MR. RIPLEY: Larry G . Ripley appearing on
behalf of Idaho Power Company.
COMMISSIONER MILLER: And Mr. Miles.
MR. MILES: Harold C. Miles representing
Idaho Consumer Affairs, Inc.
COMMISSIONER MILLER: Sir?
MR. MOSS: I am DeWitt Moss with North Side
Canal Company.
COMMISSIONER MILLER: Thank you, Mr. Moss.
You're not appearing separately as a separate party?
MR. MOSS: I am not. I think I am appear ing
probably with the Idaho Power people.
COMMISSIONER MILLER: All right, thank you.
Now, Mr. Tanner.
MR. TANNER: Thank you. Grant E. Tanner and
Peter J. Richardson representing the Industrial Customers
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1 of Idaho Power.
2 COMMISSIONER MILLER: Mr. Purdy.
MR. PURDY: Brad Purdy, Deputy Attorney
General, on behalf of the Commission Staff.
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5 COMMISSIONER MILLER: Are there any other
intervenors or people who have been granted formal party
status present today? I think we have granted also
intervenor status to Afton Energy, J. R. Simplot Company
and FMC Corporation. Does anybody appear on behalf of any
of those entities?
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11 Well, let's have the record show that they
12 have been granted status, but for some reason unknown to
13 the Commission they are not present this morning.
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COMMISSIONER SWISHER: FMC, Simplot and
who?
COMMISSIONER MILLER: Afton. Mr. Ripley, do
17 you have any knowledge as to those parties' whereabouts?
MR. RIPLEY: No, I don't.
19 COMMISSIONER MILLER: Does anybody know
whether they intend to come or not come? Nobody does, all
21 right.
Let's see, a couple of procedural matters
the Commission would like to take up with you first. The
Commission had indicated that we would allow an
25 opportuni ty for oral argument both in this case and in the
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companion Swan Falls case. I think we're of a mind that
it would probably be more helpful to the Commission to
take that oral argument after we've listened to the
evidentiary presentations with the thought that after
having gone through the evidentiary presentations there
may well be additional questions that the Commissioners
would like to have discussed after those matters have come
into the record as opposed to an abstract legal discussion
at this point; so we will take the oral argument after we
have heard the evidence, which also brings up the question
of having these two cases back to back with each other;
that is, the second case is the Swan Falls case,
IPC-E-90-2.
Presently they are set to occur
sequentially, that is, the Milner case and then the Swan
Falls case. We wonder whether there would be any economy
in essentially consolidating the two cases for the purpose
of the hearing so that we end up essentially with a
complete transcript, one complete transcript, that would
apply to both cases even though both cases would remain
separate for purpose of decision. That would allow the
wi tnesses who appear in both cases to only have to
testify, only have to come up to the stand once and would
spread their testimony in both cases and take questions on
both cases simultaneously.
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We haven't committed ourselves to that, but
have discussed it among ourselves and I'm wondering what
the parties' attitudes are in terms of would you like to
keep these for the purpose of the record and for purpose
of the hearing as totally discrete cases and take them
sequentially or would you like to put them together and do
them at the same time for the purpose of the hearing? I
think the Commission is essentially willing to accomodate
the parties' wishes if there is a consensus in that
regard.
Commissioner Nelson.
COMMISSIONER NELSON: Or a third option
might be to call the parties back for those questions that
are specific to Swan Falls, but you'd have as part of the
record all of the questions asked in the Milner hearing
which would be, oh, qui te a bi t of background, maybe
questions.
COMMISSIONER MILLER: Mr. Ripley, do you
have any suggestions for us? Do you care one way or the
other?
MR. RIPLEY: Well, I certainly have no
problem at all with the record being consolidated as
Commissioner Nelson referred to. I have a problem with
the way that the Commission issued its notices as to
whether it can now combine the two proceedings,
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part icular I y where there is not a complete set of
attorneys representing all parties in this hearing room.
I don't know if Afton is more interested,
for example, in Swan Falls than they are in Milner.
Frankly, I think they would have a legitimate objection if
they came on Day 2 and were told, well, we're sorry, but
the witnesses in Swan Falls have testified in the Milner
proceeding and are gone. I fear, frankly, as
Commissioner Swisher has aptly observed many times,
sometimes it pays to be paranoid, and I guess I would have
to say I think your notices specifically state that the
hearing on Swan Falls is going to be Thursday morning.
I have absolutely no problem with
consolidating these records, the parties to this
proceeding stipulating that the cross-examination in
Case 1 can be used in Case 2, et cetera. I have a problem
with some of Mr. Reading's testimony that at the
appropriate time I will raise prior to the time that he
testifies, but with that exception, I have no objection.
COMMISSIONER MILLER: I think now that I
think about it, Mr. Ripley, I think you're right. When we
had discussed this possibility of consolidating, it was
wi th the assumption that everybody who is interested in
the cases would actually be here and then we get here this
morning and discover they're not, I hadn't thought of that
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as a consideration whether or not we should consolidate;
so I think we will keep them separate. As we go along, if
there are places where parties want to stipulate that part
of the record in one can be made part of the record in the
other, we can deal with those as we go along.
MR. RICHARDSON: Mr. Chairman.
COMMISSIONER MILLER: Mr. Richardson.
MR. RICHARDSON: Is it your intention, then,
to adjourn the Milner proceeding if we finish our
testimony today with the purpose of reconvening tomorrow
morning? It was my understanding that at the prehearing
conference the parties were put on notice that the
Swan Falls proceeding would immediately follow the Milner
proceeding and everyone is apparently on notice that if we
finish early today on Milner we will move into Swan Falls.
COMMISSIONER SWISHER: Is that true of the
notice on Swan Falls?
MR. RIPLEY: No.
COMMISSIONER MILLER: I think what we better
do is take Milner. Dur ing our recess we'll have an
opportuni ty to actually look at our notices and we' II
decide at some later time whether we're going to go
immediately to Swan Falls or whether we think that we're
obligated to take it up at a specific time; so we'll
decide that. What we are going to do is do Milner now and
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see where we get and then we'll decide when we're going to
do Swan Falls.
All right; so that's how we'll proceed.
Wi th that, are there any other preliminary matters anyone
would like to bring to our attention before proceeding to
testimony?
MR. PURDY: Mr. Chairman?
COMMISSIONER MILLER: Mr. Purdy.
MR. PURDY: I have one matter. I've been
approached by Mr. DeWitt Moss who I guess is with the
canal companies and he has indicated that he would i ike
the opportunity, if he could, to give a statement today on
the Milner case and his schedule is such that he can't be
here tomorrow or apparently for the rest of the week.
MR. MOSS: It would be inconvenient is a
nice way to put it.
MR. PURDY: I don't know if the Commission,
how the Commission might wish to work that into today' s
proceedings.
COMMISSIONER SWISHER: Mr. Chairman, we
could just take it as a public statement before the
pretiled testimony is spread.
COMMISSIONER MILLER: I think that Mr. Moss
could certainly testify as a public witness. It might be
more helpful I think to the Commission if we took or if we
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at least started with the prefiled testimony and see how
far we got and we'll get you on some time today.
MR. MOSS: Sounds fair.
COMMISSIONER MILLER: Would that be fair to
you?
MR. MOSS: You bet.
COMMISSIONER MILLER: All right, let's try
and make some progress through the prefiled testimony and
that might give us a better context for taking whatever
comments you have.
All right, anything else? As an order of
wi tnesses, shall we take the Applicant and then the
Industrial Customers and then the Staff, would that be
agreeable?
MR. RIPLEY: Yes.
MR. PURDY: Sounds fine.
COMMISSIONER MILLER: All right, let's do
that. Mr. Ripley.
MR. RIPLEY: We'd call Mr. Packwood.
MR. PURDY: Mr. Chairman, excuse me just for
a moment. Will we proceed with direct and rebuttal
testimony together?
COMMISSIONER MILLER: That's the next
question to raise. My attitude has always been that if
the parties want to do it that way they're entitled to,
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but the decision is primarily up to the applicant in any
particular case; that is, if the applicant wants to
reserve its rebuttal to be true rebuttal and come at the
end of the case, then the applicant should be entitled to
that; so my attitude has always been that it's up to the
applicant.
MR. RIPLEY: In this particular case, I
don't think we have any objection either way,
Mr. Chairman. We would like to reserve the opportunity,
if you will, to recall our three witnesses live in the
event that dur ing cross-examinat ion of the part ies '
witnesses circumstances come up which obviously could not
be anticipated in advance for the rebuttal, and I
recognize we get into rebuttal and surrebuttal and
sursurrebuttal; so we will use any right to recall a
wi tness for live rebuttal very judiciously, but with that
exception, we have no problem if the parties desire to
cross-examine our rebuttal in advance of the cases being
presented, which brings me, however, I think to the need
to raise an issue that I have with Dr. Reading's testimony
now if indeed the parties are going to be cross-examined
on Dr. Reading's test imony .
COMMISSIONER MILLER: You need to raise that
before he gets on the stand?
MR. RIPLEY: We II, if my witnesses are go ing
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to be cross-examined on what Dr. Reading says, then I feel
that I must raise my objection to Dr. Reading's testimony
prior to the time that my witnesses are cross-examined on
Dr. Reading's presentation.
COMMISSIONER MILLER: Why don't we find out
what your objection to Dr. Reading's testimony is so that
we'll at least have it in front of us.
MR. RIPLEY: All right, my objection is that
Dr. Reading in his testimony in Milner testifies as to
what the Commission meant and did insofar as its orders in
Valmy are concerned. He also testifies as to what the
Commission meant and did in the Swan Falls proceeding.
Dr. Reading was an employee of the Idaho
Public Utilities Commission at the time the rate case
involving Valmy 2 was filed and a good deal of the
cross-examination of Valmy took place. Dr. Reading was a
member of the Staff in a policy position during the time
that Swan Falls was at issue and a number of orders were
issued by the Commission, which then Dr. Reading in his
testimony explains.
What I do not want to get involved in is I
then start cross-examining Dr. Reading and he advises me,
no, this is exactly what the Commission meant ,et cetera.
It presents a very unwieldly record. I believe that
Rule 4.7 or 4.8 comes into play and that is that someone
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who is an expert, someone who is a member of the Staff or
an ex-employee of the Staff, is prohibited from testifying
in a proceeding in which he appeared when he was a member
of the Staff.
Now, I don't want to go so far as to say I
object to Dr. Reading's testimony, but I think I'm
entitled to some clarification from counsel and from
Dr. Reading prior to Dr. Reading testifying that what he
is testifying to are his opinions as to what he thought
the Commission was doing, and then, of course, it's fair
game, but I don't want to be placed in the position that
Dr. Reading is somehow expousing exactly what the
Commission meant and, unfortunately, that is how his
test imony reads.
COMMISSIONER MILLER: All right.
Mr. Richardson, in your cross-examination of Mr. Packwood,
would you intend to touch on any of the matters that
Mr. Ripley has raised in connection with Dr. Reading's
testimony?
MR. RICHARDSON: Mr. Chairman, first of all,
before I respond to that, may I respond to Mr. Ripley Is
comments?
COMMISSIONER MILLER: Well, I want to decide
this in the proper sequence. I don't know if right now is
the time to argue Mr. Ripley's objection, if it is an
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1 objection or at least his clarification.
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COMMISSIONER SWISHER: How about
character izat ion.
4 COMMISSIONER MILLER: Characterization. All
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I want to know at this time is in your cross-examination
of Mr. Packwood whether you would touch on any of the
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matters that have been raised by Mr. Ripley.
MR. RICHARDSON: No, Mr. Chairman, I don't
cross-examine Idaho Power witnesses on my witness'
testimony.
COMMISSIONER MILLER: All right, in that
12 case, what I think I would prefer to do is resolve the
characterization or objection or however we're going to
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that Dr. Reading test i f ies . I think it would be more
logical to take that argument up at that point.
17 MR. RICHARDSON: Of course, that assumes
18 that none of the other parties intend to do what
19 Mr. Ripley suggested we might do.
20 MR. PURDY: I have no intentions.
COMMISSIONER MILLER: Mr. Purdy is
indicating that he has no such intentions. All right,
with that, will all the parties be content, then, to
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this question of Dr. Reading's testimony at the time that
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it's offered? All right, let's do that.
JAN B. PACKWOOD,
produced as a witness at the instance of the Idaho Power
Company, having been first duly sworn, was examined and
testif ied as follows:
DIRECT EXAMINATION
BY MR. RIPLEY:
Q Mr. Packwood, did you have cause to be
prepared for this proceeding certain prefiled testimony
which was served upon the parties and consists of 16 pages
of prefiled testimony?
A Yes, I did.
Q And if I asked you the questions that are
set forth in that prefiled testimony, would your answers
be the same today?
A Yes, they would.
Q And also are you sponsoring Exhibits 1, 2
and 3 which are identified in your prefiled testimony?
A Yes, I am.
Q In addition to that, have you caused to be
prepared certain rebuttal testimony in this proceeding?
A Yes, I did.
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PAOKWOOD (Di)
Idaho Power Company
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1 Q And that rebuttal testimony consists of
2 eight pages, does it not?
3 A Yes, it does.
4 Q And if I asked you the questions that are
5 set forth in your rebuttal testimony, would your answers
6 be the same today?
7 A Yes, they would.
8 MR. RIPLEY: Wi th that, Mr. Chairman, we
9 would ask that Mr. Packwood's direct testimony and
rebuttal testimony be spread upon the record as if read
11 and Exhibits 1, 2 and 3 be marked for identification as
they are already marked.
13 COMMISSIONER MILLER: All right, in the
absence of objection, it will be so ordered.
15 (The following prefiled direct and
16 rebuttal testimony of Mr. Jan Packwood is spread upon the
17 record. )
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PACKWOOD (Di)
Idaho Power Company
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Q. Please state your name, business address and
present position with Idaho Power Company (Idaho
Power) .
A. My name is Jan B. Packwood and my business address
is 1220 W. Idaho street, Boise, Idaho. I am Vice
President of Power Supply for Idaho Power.
Q. What is your educational background?
A. I graduated in 1966 from the University of Nevada
with a degree in electrical engineering. In
August, 1984, I received the degree of Master of
Business Administration Boise statefrom
University.
Q. Please outline your business experience.
A. I served four years as a commissioned officer in
the United states Army, following graduation. My
military experience included assignments as a
Company Commander in the Federal Republic of
Germany and the Republic of vietnam as well as
eight months of technical engineering with the Army
Material Command.I am registered as a
Professional Engineer in the states of Idaho and
Nevada.
I joined Idaho Power in 1970 as an Associate
Engineer in the company's Central Division in
Boise.My duties included designing electrical
36 Packwood, Di
Idaho Power Company
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transmission and distribution systems to meet
customer and Company needs. In 1973, I advanced to
Division Engineering Supervisor where I oversaw the
design efforts of a 12 employee engineering
department.
In 1975, I was transferred to Twin Falls as
Assistant Electrical Superintendent. A year later,
I became the Electrical Superintendent and was
responsible for all construction, operation and
maintenance within the company's Southern Division.
.I moved back to Boise in 1980 and assumed similar
responsibilities as the Electrical Superintendent
of the Company's Central Division.
I became Manager of Substations in 1983 with
responsibility for the mechanical, electrical,
control,system protection and communication
functions of the Company's generation, transmission
and distribution stations.In 1985, I became
Superintendent of Engineering with responsibility
for all the non-generation engineering functions of
the Company.
In 1986, I assumed the position of Assistant
to the President and Chief Executive Officer with
special projects assigned by the CEO.
I returned to engineering and operations in
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1988 as Senior Manager of Power Supply wi th
responsibili ty for resource planning,system
planning,lines and stations,high voltage
generation engineering, wholesale marketing and
contract development and administration. In 1989,
I was elected to my current position as Vice
President of Power supply with ádded responsibility
for power production, power operations, thermal
generation and environmental affairs.
Q. What is the purpose of your testimony in this
proceeding?
A. My testimony will explain Idaho Power Company's
participation in the Milner Hydroelectric Project.
I will also explain the Company i s request for the
issuance of a certificate of Public Convenience and
Necessi ty for the rate basing of the Milner
Hydroelectric Project, or in the alternative, a
determination of exempt status by the Commission.
Questions concerning the financial arrangements
wi th the Canal Companies should be directed to Mr.
LaMont Keen, Controller, Idaho Power Company.
Questions concerning the effect of rate basing the
Milner Project should be directed to Mr. James L.
Baggs, Manager of Rates for Idaho Power Company.
Q. Please generally describe where the Project is
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located.
A. The Project is located in Idaho on the Snake River
about 130 miles southeast of Boise, between the
cities of Burley and Twin Falls. The Project
facilities extend from the existing Twin Falls Main
Canal Headworks in Milner Reservoir to the
powerhouse site where most of the new facilities
are to be located.
Q. When was the Milner Dam originally constructed?
A. Milner Dam was constructed in 1905 to provide
irrigation storage and diversions.
Q. Who owns the Milner Dam?
A. The Dam is owned jointly by the Twin Falls Canal
Company, the North Side Canal Company and the
American Falls Reservoir District Number Two.
Three canals with their headworks adj acent to the
Dam are fed from Milner Reservoir. The Twin Falls
Main Canal (or South Side Main Canal) constructed
in 1905 will be utilized for the project. Its
headworks is located near the left (south) abutment
of the dam and it flows west near the Snake River
for about 12 miles.
Q. What water flows will be used to produce power?
A. The proposed Milner Project will use Snake River
flows that presently pass through the Milner Dam
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Spillway.Such flows occur during the non-
irrigation season and at times during the
irrigation season when there are flows in excess of
irrigation diversions. The water will be conveyed
in an enlarged Twin Falls Canal and diverted into a
forebay and an intake structure, penstock and
powerhouse.Head will be obtained through
utilization of the difference in elevation between
the Twin Falls Canal and the Snake River.
Q. What facili ties other than a powerhouse are
required for the Project?
A. Other facilities required for the Project include
modifications to the existing headworks, canal and
bridge and a new control structure, tailrace
channel, access road and transmission line.
Q. When was the project originally licensed by the
Federal Energy Regulatory Commission (FERC)?
A. On December 15, 1988, the Canal Companies were
granted a license under Part I of the Federal Power
Act (FPA) to construct, operate, and maintain the
Milner Project to be located at -the existing Milner
Dam and Twin Falls Main Canal on the Snake River.
The Project as licensed consisted of the Milner Dam
and Reservoir, modifications to 6,500 feet of the
Twin Falls Main Canal to increase its capacity, a
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control structure on the canal that would divert
the additional flow into a forebay, a penstock, a
powerhouse located on the Snake River 1. 6 miles
downstream of the dam and containing a single
generating unit rated at 43,650 kilowatts, and a
1.4-mile-long transmission line.
The Canal Companies had informed the Federal
Energy Regulatory Commission (FERC) that there was
a serious concern for the structural integrity of
the 85-year-old Milner Dam and that failure of the
dam during the irrigation season could result in
near total crop failure on the 440,000 acres served
by the dam.Following a meeting wi th Canal
companies and an inspection of Milner Dam, the
FERC i s Division of Dam Safety and Inspections
concluded that there was a high risk of failure at
the Milner Dam in the event of a seismic event
(earthquake). A complete dam failure could lead to
partial or total crop failure, since such a failure
would prevent diversion of water into the
irrigation canal. The Canal Companies intended to
use the revenues from the sale of electr ic power to
be generated by the Project to obtain the funds
necessary to strengthen Milner Dam and upgrade its
spillway.The Canal Companies contended that,
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absent these revenues, funding repair of the dam
would result in severe economic hardship to many of
the 7,500 Canal Companies' shareholders who depend
on irrigation water from Milner Dam for their
livelihood.
Did FERC require further investigation as to the
capacity of the Milner Project, even though a
license was issued?
Yes. Although the FERC issued a license to the
Canal Companies based upon the construction of a
single generating unit rated at 43,650 kilowatts to
be located on the Twin Falls main canal, the FERC
ordered that within one year of issuance of the
license, the Canal Companies were required to
submit a report evaluating the feasibility of also
constructing a power plant at Milner Dam to utilize
the power potential of the flows released to the
bypass reach of the river below the dam and
therefore not usable by the power plant to be
located approximately 1.6 miles downstream. If the
feasibility study showed that also developing a
power plant at the dam would be economically
benef icial, the Canal companies were required to
submit a schedule and plans for also developing a
power plant at the dam.
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Q. When was Idaho Power officially included in the
project by FERC?
A. On May 2, 1989, the FERC issued an order adding
Idaho Power as a co-licensee for the Milner
Project. From and after that date the license for
the Milner Project is now jointly held by Twin
Falls Canal Company, North Side Canal Company,
Ltd., and Idaho Power with all conditions of the
previous license being applicable to the three
licensees. The license is attached as Exhibit 1.
Q. Have Idaho Power and the Canal Companies
investigated the feasibility of increasing the
capacity of the Milner Project?
A. Yes. Idaho Power and the Canal companies prepared
the analysis required to determine the feasibility
of increasing the capacity of the Milner project.
Based upon that analysis, Idaho Power and the Canal
companies have proposed to the FERC that a new
powerhouse be constructed near the north abutment
of Milner Dam and that a second unit be added to
the main powerhouse 1.6 miles downstream of the
dam. The powerhouse at the dam will consist of a
single-propeller turbine which will discharge a
constant 200 CFS when in operation with a net head
of 50 feet.It will be coupled to a 1000 kVA
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induction generator. Maximum output will be about
770 kW.
The turbine will be fed through a steel
penstock coming off of an intake located on the
reservoir. Gates to allow start-up and to unwater
the unit for maintenance will be included.
Provisions for release of the 200 CFStarget flow
when the plant is not being operated will be
provided in the spillway.
Based upon the new analysis, the turbines
located at the Main Powerhouse 1.6 miles downstream
will be vertical shaft Kaplan type directly coupled
to the generators.The large unit will have a
rated output of 46,000 kilowatts (kW) at a net head
of 150 feet, a discharge of 4,000 CFS and a speed
of 200 revolutions per minute (RPM).The small
unit will have a rated output of 11,500 kilowatts
(kW) at a net head of 157 feet, a discharge of
1,000 CFS, and a speed of 400 revolutions per
minute (RPM).
Q. As a result of the revised feasibility analysis,
what action was taken?
A. An Application to amend the license to conform the
license to the feasibility analysis has been
prepared, sent to relevant state and federal
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resource agencies for their review and comment, and
filed with FERC.
Q. When did Idaho Power first become involved in the
Milner Project?
A. Idaho Power and the Canal Companies initially
entered into an agreement to explore the
feasibili ty of power generation at Milner Dam in
1981.The Canal Companies were guaranteed a
royalty with a net present value over the life of
any development equal to approximately $5,638,000.
At that time, the Parties were concerned about the
integrity of the Dam itself and agreed to negotiate
a common solution to the repair issue if necessary
at a later date.
Q. Was the Milner Dam in need of repairs?
A. Yes. As a result of various inspections, it was
determined that immediate repair was required to
insure the structural integrity of the dam. The
cost of necessary repairs to the Milner Dam is
approximately $11,700,000.
Q. What are the financial arrangements between Idaho
Power Company and thee Çanal Companies?
A. Mr. LaMont Keen will address the financial
agreement between Idaho Power Company and the Canal
Companies.
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Q. What is the Milner project ownership arrangement?
A. Idaho Power and the Canal Companies have entered
into an Agreement Regarding the ownership,
Construction, Operation and Maintenance of The
Milner Project. The Canal companies will maintain
the ownership of the dam, and Idaho Power will own
the generation facilities. A copy of the Agreement
is attached as Exhibit 2.
Q. Please discuss the timing of this proj ect.
A. The Canal Companies were required by FERC to
rehabilitate the Milner Dam during the 1989
construction season and .the source of funds
available for that rehabilitation was to be the
revenues derived from power sales.The Canal
Companies had already received a license from FERC.
since the Project had to be constructed, Idaho
Power was presented with a unique opportunity to
participate wi th the Canal companies in the
rehabilitation of the dam, thus securing the hydro
power for the benefit of its customers. The timing
of the Project, however, could not be deferred.
Q. The Commission has requirüd that Idaho Power
Company submit cost estimates on large proj ects .
Please comment on this requirement.
A. Large hydroelectric projects involve design and
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construction which must be customized to the
particular site.As a result, preliminary
estimates contain many unknowns for both the final
project layout and scope. Detailed engineering to
finalize the layout and scope in order to obtain a
more precise estimate would result in extremely
high front end costs on all proj ects , and
significant expenditures would be made even if a
particular project is not built. Changes required
as part of the environmental and regulatory review
process could also result in the need to completely
redesign a project, thus radically changing the
original preliminary estimate.
For most hydroelectric projects, the first
major expenditure of funds, other than for
engineering design,is the purchase of the
hydroelectric turbines and generators. The design
and acceptance of bids for the Milner Project's
turbines and generators has been accomplished and
Idaho Power is now able to make a cost estimate.
This estimate, which has been termed a "Commitment
Estimate", is the best estimate of the Project's
cost after the award of the contracts for the
turbines and generators plus an additional amount
of 5% to establish a cost ceiling for the Project.
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Q. What is the effect of the commitment estimate Qnder
the Company i s proposal?
A. Idaho Power will commit to building the Project for
the Commitment Estimate, as it may be adjusted to
account for documented changes in escalation rates
or scope.If the final costs exceed the
"Commitment Estimate", Idaho Power will absorb the
extra costs, and will include in its Idaho rate
base only the actual construction costs up to the
Commi tment Estimate.
Q. Please explain what you mean when you state the
Commitment Estimate may be adjusted for changes in
escalation rates or scope.
A. If major inflation occurs, resulting in higher cost
indices, the Commitment Estimate would be adjusted
to reflect these inflated cost indices. Examples
of possible scope changes which could affect the
project ceiling are Force Majeure or acts of God
impacting the construction, design optimization for
which increased energy more than offsets the
increase in initial investment, and foundation or
site conditions significantly more expensive than
indicated by exploratory drilling.
Q. What is the current Milner cost projection?
A. The Milner Project's costs are currently projected
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to be $60,333,900 at comp~etion in 1992, with a dam
reconstruction cost of $11,700,000.With an
addi tional 5% , Idaho Power i s Commitment Estimate
for the powerhouse is $63,350,600.The cost
estimates are shown in Exhibit 3. Updated Project
cost estimates will be submitted to the commission
as part of the Company i s Quarterly Report of
Construction Projects and will include any scope or
escalation changes. The final cost report on the
Project will still compare the actual costs to the
Commitment Estimate.
Q. What is the Company i s proposal if the commission
determines it will not issue an Order approving the
Milner Project for rate basing?
A. If the Commission determines that Idaho Power's
investment in the Milner project should not be rate
based for revenue requirement purposes, the
Commission should issue an order determining that
the Milner Project has an exempt status.
Q. Please explain the Company i s proposal.
A. The order determining the exempt status should be
effective for a period of 20 years from the date of
commercial operation to permit Idaho Power to enter
into a long term sale of the energy to another
utility.
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Idaho Power would propose that two years prior
to the expiration of the order determining the
exempt status, Idaho Power would apply for a
redetermination of the status of the exempted
Milner Plant. The commission, after notice, would
determine if the Order of Exemption should be
continued or if a certificate of Public Convenience
and Necessity for the rate basing of the Milner
Project should be issued at that time. The order
determining the status of the generating plant
would be issued by the Commission wi thin one year
of the date the application for redetermination is
filed.
If the Commission determines in the second
proceeding that a certificate of Public Convenience
and Necessity for the rate basing of the Milner
Project should be issued, the Commission should
issue a Valuation Order for revenue requirement
purposes wi thin three months of the order issuing a
Certificate of Public Convenience and Necessity.
The value of the plant for révenue requirement
purposes in the 20th year will be based upon the
then reproduction cost new less depreciation. Mr.
Baggs will explain the rate making effect of this
proposal.
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1 Q.Does this complete your testimony.
2 A.Yes it does.
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Q. Please state your name and business address.
A. My name is Jan B. Packwood and my business address
is 1220 W. Idaho street, Boise, Idaho.
Q. Are you the same Jan B. Packwood that submitted
direct testimony in this proceeding?
A. Yes I am.
Q. Are you in agreement with the analysis performed by
Mr. Thomas Faull concerning the estimated annual
O&M costs for the Milner Projeqt?
A. No. The method used by Mr. Faull was to look at
only 4 years of O&M costs whereas Idaho Power
looked at 11 years of cost data to get a better
average. Also, Mr. Faull based his estimated O&M
cost on a curve of $ /KW for plants by size of plant
and ignored the importance of plant age on
operating costs.This fails to recognize the
manpower required for operation of the plant, which
is a primary cost. New plants such as Milner are
buil t so that the O&M cost is lower because they do
not need to be manned 24 hours per day. For this
reason Idaho Power averaged the costs for the O&M
of the 5 plants which are staffed in a manner
similar to that planned for Milner.The average
cost from these plants was then escalated at 4% to
cover inflation. Even this cost is probably high
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in that less maintenance should be required on this
new plant than on the older plants used in the
analysis.
Q. Do you have any comments on Mr. Faull's use of
186,395 MWfyr for the annual generation rather
than the 194,700 MWfyr used by Idaho Power?
A. Yes, the 186,395 MWfyr used by Mr. Faull was
apparently taken from a preliminary draft of Idaho
Power Company's FERC Amendment application.
Following preparation of the generation analysis
included in that draft document, some changes were
made to the project. The excavation in the canal
connecting Milner Reservoir to the powerhouse
intake was increased to reduce the losses in the
canal. Also, the tailrace excavation was increased
and the penstock sizes were increased to reduce
losses and further optimize the design. The
addi tional excavation costs are included in the
project cost and therefore, it is appropriate that
the 8,300 KWfyr benefit resulting from the lower
hydraulic losses be included also.The updated
generation figures and costs were included in the
FERC License Amendment application and in the
Commitment Estimate filed with the IPUC. The
average annual generation based upon 60 years of
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water is 194,700 as was used in the Idaho Power
analysis.
Q. Mr. Faull notes that Idaho Power made many
A.
decisions and commitments relative to the Milner
project prior to its application in this case. He
further suggests that "It is only as a result of
chance that the decisions have subsequently turned
out to be marginally prudent (at least as
determined by my analyses) ." His recommendation is
that if his analyses are in error, then Idaho Power
"should be imputed to have known that the proj ect
was not cost effective" and should be penalized.
Do you agree with Mr. Faull's characterization?
No.Considerable planning and commitments are
required to bring a project to the construction
phase.Large hydroelectric projects involve
engineering design which must be customized to the
particular site. Idaho Power has been involved in
planning and analyses related to the development of
the Milner Project for a number of years in order
that this Idaho resource might be developed and
used in Idaho. This has required and continues to
require a firm commi tment to the proj ect. It
remains the responsibility of the Company to
fulfill this role, but there comes a time in the
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planning process, prior to the first major
expendi ture of funds, when the Company must seek a
Commission determination that the decision to
construct the proj ect is reasonable and prudent and
that such construction is in the public interest.
Issuance of a certificate will enable the Company
to remain committed to the project and allow the
Company to proceed with construction knowing that
the reasonable and prudent investment will be
recoverable.It is my understanding that this
procedure is consistent with Commission
requirements.
Q. Mr. Faull has apparently analyzed the Milner
A.
Project agreement in segments. This appears to be
particularly true for the royalty agreements with
the irrigation districts. Do you agree with such
an analysis?
No.The agreement was negotiated as a package.
The base royalty which he calls a "glaring
weakness" and the incentive royalty which he states
is "very beneficial to ratepayers" are parts of the
same agreement and must be evaluated together. As
discussed by Mr. Keen, the entire agreement is one
which is beneficial not only to the Canal Companies
but also to Idaho Power Company and its ratepayers.
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Q. Do you agree with Mr. Faull's conclusion that the
Milner capacity is too large?
A.Mr. Faull i s conclusion that the MilnerNo.
capaci ty is too large is based upon a capaci ty
factor analysis which would be used only in
preliminary feasibility analyses.The designed
capacity factor (194,700 MW/yr for 58.290 KW
capacity = 38.1%) of 38.1% is very reasonable for a
seasonal plant. Note also that the capacity factor
using average annual generation based on 20 years
of water data would be over 52% (well within Mr.
Faull i s guidelines).
Q. How was the Milner plant sized?
A. An economic analysis of possible plant and unit
sizes was done for the FERC License Application
phase of the project, and in the case of Milner a
further optimization was done in compliance with
FERC requirements set forth in License Article 308.
This further optimization of the plant size
concluded that a 200 cfs unit at Milner Dam and an
additional 1000 cfs unit should be added to the
already licensed 4000 cfs plant.This study was
submitted to the FERC, and formed the basis for the
FERC License Amendment Application which is
pending. The Final Environmental Impact statement
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for the Milner reach of the Snake River published
in July of 1990 further documents the FERC' s
finding that the plant is now sized properly. FERC
staff has indicated that Idaho Power should receive
the License Amendment soon.
Q. Is hydro plant sizing subject to FERC requirements?
A. Yes. Under the Electric Consumers Protection Act
(ECPA), FERC i S analysis of whether the resource is
being fully developed is a significant part of the
FERC process of determining whether, and to whom a
License should be issued.The FERC analysis of
plant sizing is a critical part of the licensing
process.
Q. Please comment upon Mr. Faull's analysis concerning
the use of a request for proposals and negotiation
process rather than the standard firm bid process.
A. The "Foremost" reason he gives for his preference
is that the "design engineer is constrained to
'guessing' about the best combinations of size,
arrangement, and timing, with minimal input from
suppliers". Idaho Power experience as well as that
of major consultants in the hydroelectric design
field is not only beyond "guessing" at such
parameters but can make a much more detailed
analysis than could a developer or manufacturer who
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could not even be assured of recovering his bidding
design costs.Idaho Power believes that the
detailed design and bid process has many advantages
over the single negotiated package procedure
including:
1. Proj ect design can be tailored to the
needs of the owner rather than the developer's
contract.
2 . Contingencies to cover development risk
are not required because the purchase and
contracting is phased to the design progress.
3 . Developer markups on equipment purchased
from the manufacturers are eliminated.
4. The owner retains control of the
combination and quality of equipment purchased by
buying major equipment separately and analyzing
each component based on maximizing the benefit to
the project per dollar spent.
5. Changes to the project can be made based
on site conditions without having to renegotiate
the proj ect development package.
6. Proposals received for the development or
any part of the package are competitive proposals
where bidders have eliminated contingency amounts
to cover later negotiation.Negotiations with a
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preferred bidder do not give the bidder the
competi ti ve incenti ve to improve his proposal.
It has been suggested by wi tnesses in this
proceeding that the certificate of Convenience and
Necessi ty that is issued by the Commission be
condi tioned on future events. Do you agree with
this recommendation?
No. The Milner Project must be evaluated on the
basis of today' s conditions, not on those that may
occur in the future.
Does this complete your testimony.
Yes it does.
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(The following proceedings were had in
open hear ing . )
MR. RIPLEY: That completes our direct
examination of Mr. Packwood.
COMMISSIONER MILLER: Thank you,
Mr. Ripley.
Mr. Miles, do you have questions?
MR. MILES: Thank you, Mr. Chairman.
CROSS-EXAMINATION
BY MR. MILES:
Q I have one general quest ion, Mr. Packwood.
Since the water f lows are somewhat of an issue based on
the length of time that the estimates of the cost per Kwh
of generat ion is based on and on Page 11 of your direct
testimony, beginning at Line 5 in the middle you say, "The
canal companies will maintain the ownership of the dam and
Idaho Power will own the generation facilities," my
question is who will own the generation facilities after
the expiration of the license?
A I think our intent at this time would be to
use our best efforts to renew that license and to renew
the agreement as well and continue on if it proved
beneficial to both parties.
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Q Then Idaho Power Company proposes after that
time if your negotiations are successful you would
continue the ownership of the generation facilities; is
that correct?
A Most certainly.
MR. MILES: Yes, thank you. I have no
further quest ions, Mr. Chairman.
COMMISSIONER MILLER: All right, thank you,
Mr. Miles.
Mr. Ri chardson .
MR. RICHARDSON: Thank you, Mr. Chairman.
CROSS-EXAMINATION
BY MR. RICHARDSON:
Q Mr. Packwood, speaking generically here for
a moment, what are the major uncertainties that face
developers of hydroelectric projects when they attempt to
project future construction costs?
A In today' s construction environment, there's
two or three. The first you confront is in the licensing
and siting process when the costs of mitigation are
determined. On hydro projects, the major cost components
are the mechanical and electrical equipment, the turbines
and generators and the site and foundation work, the
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excavation and the replacement of foundation materials.
If you look at a typical est imate , I think
you'll find in those three areas a large percentage of the
cost, I i m not exactly sure what exact percent, but those
are where the major uncertainties lie.
Q Well, speaking strictly of construction
costs, which in my mind would eliminate the things like
licensing questions, you identified site and foundation
work, equipment costs. What are the uncertainties
associated with equipment costs?
A All cost estimates are based on the best
available information you have at the time you make them.
In projects such as Milner, you have no assurance as to
what your costs will be until your bid process is complete
and you're awarding contracts. Estimates, you do your
very level best to find comparable sales and comparable
prices to use, but nonetheless, on your project for your
purposes they're not certain until really the procurement
process run its course.
Q Would you agree that the possibility of
inflation is a major uncertainty in projecting
construction costs?
A It depends almost proportionately to the
length of time the project takes to complete and the
length of time from one estimate to the next as to how big
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a role it will play. In a compressed construction time
frame, you may be dealing with the inflation of one to two
years. If it drags out over 10 to 12, inflation raises a
larger specter.
Q Would you agree that design changes are a
major future uncertainty in projecting construction costs?
A Again, the answer to that question depends
on your point of reference when you ask it. At the
preliminary permit phase, for example, four to five years
prior to the beginning of construction, what you conceive
the project design might be could be considerably
different than what it turns out to be five years hence,
but as you move through that process, your design gets
more and more complete and the uncertainty of design,
major design, change grows less and less. Again, when
you're sitting two years away from completion, there's
probably not a huge uncertainty associated with major
des ign change.
Q Would you agree that acts of God are major
uncertainties?
A Absolutely.
Q And you identified site conditions earlier
as a major uncertainty.
A Si te conditions are a major uncertainty.
Q So of the major uncertainties in
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construction costs, in projecting construction costs, that
we identified, which ones of those are not included in
your escalator potential for your commitment estimate on
Milner?
A We looked at, as I think I out i ined in my
response, three reasons for a scope change. The first was
the force majeure provision you've alluded to. The second
resul ted in any major design change at this stage that
would reduce or increase cost and the third escapes me
right now. I can't recall it.
Q The question, Mr. Packwood, was which ones
of the major uncertainties we've just identified are not
included, not which ones are included?
A I think all of the ones we talked about
could be construed to be included under the three
categories that we generally have framed, but the major
one was escalation, was an inflation fear or actually, as
I stated, a change, a major change, in any of the indices
we used in the estimate and then the site specif ic ones
were as we've discussed.
Q And it is true, isn't it. that in addition
to these escalators, I guess we'd call them, in addition
to the escalators, the Company has already included a
contingency of five percent for the Milner project over
and above the escalation possibilities that we've been
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talking about?
A We included a contingency of five percent
over our best estimate at that point in time of what it
would cost to build the project.
Q And that cont ingency is in addi t ion to the
potential for escalation of the other items; isn't that
correct?
A I don't know exact lyon real i y an
account-by-account basis what the additional contingencies
might be wi thin each of the components we discussed. For
example, on mechanical equipment, since that bid has been
awarded, there's negligible contingency there. We've
removed that uncertainty. On the main powerhouse
construction, a major component of the cost which is out
for proposal right now, there's still some contingency
remaining.
Q Your commitment estimate of X millions of
dollars for Milner, that commitment estimate is subject to
escalation by five percent according to your proposal,
isn't it?
A I'm not sure if we're using the words
correctly. We have an estimate of $60.3 million. That is
what we believe the cost to construct will be. We've
added to that a five percent contingency which raises it
to 63.3. That's what I refer to as the commi tment
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estimate.
Q On Page 13 of your testimony at Line 22, you
use the term "significantly" to explain what conditions
would have to occur for foundation and site changes to
trigger your escalation factor.What do you mean by the
word "significantly" here?"
A As we've defined it, if any of the
categories of change that we've been discussing occur, to
the extent that the then estimated cost to construct the
project exceeds our commitment estimate of $63.3 million,
the cap, if you will, that would be viewed as significant
and we would come before this Commission with the facts
and discuss it at that time.
Q So one dollar over your commitment estimate
is signif icant?
A I guess we could argue at what was
considered significant in excess of, but, yes, since that
figures to three significant figures on a $63 million
figure, I doubt that we'll be in here for $63,300,001, and
I guess I can't answer you this morning whether 25,000
over, 30,000 over or 100,000 over would trigger it. I
guess we'd make that judgment at the time.
Q And who's going to make that judgment
according to your proposal here? If the Commission
accepts your proposal that the granting of a Certificate
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of Convenience and Necessity is equivalent of commitment
to rate base the investment in the project, assume that
your project does significantly exceed your commitment
estimate, is it your view, also, that the Commission will
have n6 review of that significant excess over your
commi tment estimate for ratemaking purposes?
A We voluntarily have offered the cap in an
effort to somehow bound the feeling of uncertainty that
costs can simply go to wherever events take them to
provide or attempt to provide some certainty to the
Commission that in granting the certificate there is a cap
or a point beyond which they will not go without further
review. That's the role the commitment estimate plays.
If we can construct the project as we
believe we can under that using reasonable and prudent
construction practices, we will do so and the issue should
not come up. Again, if we experience significant changes
that would cause our estimates to show that we will exceed
our commitment cap, that requires further review.
Q If you significantly exceed your commitment
estimate, is it your testimony here today that the
Commission is obligated by virtue of having granted a
Certificate of Public Convenience and Necessity to include
that excess over the commi tment est imate in rate base for
ratemaking purposes?
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A Not without additional Commission' review.
Q When you say "additional Commission review,"
are you talking about Commission review today or are you
talking about Commission review five years from now when
you bring in a significant excess, assuming you bring in a
significant excess, over the commitment estimate?
A No, again, the purpose of the cap is to
provide the certainty or the assurance today for the
decision that will be made today. If that cap is
exceeded, then it is our intent, to use the vernacular of
the Company, to eat the overrun unless we can show and it
is accepted by this Commission that the changed events
that fall within the category of what we say significant
have occurred and in fact the cap should be raised. We
can't do that unilaterally. Any cost exposure we have
beyond that figure is ours absent any action on our part.
Q Your commitment estimate includes, doesn't
it, the possibility of exceeding the commitment estimate
in these areas where you've identified potential
escalat ion ~ correct?
A I don't understand the question.
Q You've offered the Commission a commitment
estimate for the construction of the Milner project of
60 some million dollars; correct?
A Which 60 some are you calling the commitment
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estimate?
Q I'm calling the commitment estimate your
60.9 million plus your five percent escalation; is that
your commitment estimate?
A I'm calling the commitment estimate the
$63.3 million cap.
Q All right, and these escalators, are they in
addition to that cap for inflation, force majeure, design
optimization and foundation and site conditions?
A They are not in addi t ion to the cap. They
are in addition to the estimate, the $60.3 million figure
which has then had five percent added to it to total
$63.3 million which is the cap.
Q So if Idaho Power's construction cost for
Milner exceeds $63 million, it is the Company's position
that it will not ask for rate base treatment of any of
that excess?
A We are prepared to eat that cost absent, as
I've tried to point out twice, absent a return to these
Chambers with what we consider to be signif icant changed
events that we would suggest would cause the cap to be
raised. If that was not allowed or if we did not return,
then, again, we are prepared to absorb those costs.
Q And you would bring those additional costs
to a future commission that potentially doesn't even
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consist of the three Commissioners sitting here today;
correct?
A Tha t I don't know.
Q It wouldn't be this Commission today making
that decision, would it?
A I i m embarrassed that I don't know whether
this Commission will be the same Commission that is
sitting here six months to a year from now. I know
Mr. Swisher retires at the end of the year; so the answer
to your question is probably yes, since .the end of the
year is imminent.
Q Have you ever heard of the phrase a
Certificate of Exemption?
A I believe we coined it.
Q On Page 15 of your testimony, generally
around Line 10 and then again at Line 19, you're speaking
of time frames in which the Commission should issue an
order. The first phrase is dealing with an application
for redetermination, and the second spot, around Line 19,
deals with a valuation order, and you state that for the
application for redetermination the order should be issued
wi thin one year and the order on the valuation should be
issued within three months. Where do you get those time
frames?
A I think in trying to articulate a
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methodology that could be implemented under the exemption
concept, we simply took time frames that in the context of
regular proceedings seemed reasonable. I can recall no
precedent we had that something should take three months
or something should take longer.
Q So you're not relying on a Commission rule
or order for saying that an order of exemption must be
issued wi thin one year or anything like that?
A I don't know the answer to that. I'm not
knowledgeable enough on the procedures.
MR. RICHARDSON: Okay. Mr. Chairman, that's
all I have.
COMMISSIONER MILLER: Thank you,
Mr. Richardson.
Mr. Purdy.
MR. PURDY: Thank you.
CROSS-EXAMINATION
BY MR. PURDY:
Q Mr. Packwood, I'd like to direct you to your
rebuttal testimony, Page 4, Lines 2 through 3, I believe
in response to a question beginning on Page 3, you state
essentially that prior to the first major expenditure of
funds, the Company must seek some type of Commission
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determination that the decision to construct the project
is reasonable and prudent. I guess what I'm trying to get
from you now, is it your test imony today that the Company
has not yet committed any major expenditure of funds to
the Milner project?
A Before I can answer that directly, I would
want to feel more comfortable explaining on? of the unique
si tuations that exists at Milner. As you're aware from
the testimony, there is a situation with the Milner Dam, a
safety-related determination by the Federal Energy
Regulatory Commission that under certain seismic
condi tions that dam could fail, and part of the license
directs that that dam be repaired in a time certain.
Because of the pendency or the urgency of
that dam repair, we have commenced and are attempting to
do our level best to comply with the FERC license for dam
repair and those costs have been incurred, and those costs
are signif icant. Our estimate for the total dam repair is
$11,700,000, and those costs under the agreement that
Mr. Keen will speak to are shared in the price we pay the
canal companies = so that explains why we're at the stage
of construction we're at. We're in kind of a dilemma
between a federal and a state jurisdictional issue where
we're trying to comply with both.
Q How much do you estimate you've invested
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thus far in the dam reconstruction?
A The report we submitted to FERC at the end
of October indicated expenditures of $9.2 million.
Q And you've spoken only of the dam. Have you
thus far invested any money in the generation facilities
themselves, the turbine, the generator, et cetera?
A Those contracts have been let and
manufacture of the equipment is in progress and contracts
have been let for the canal enlargement and beginning to
shape of the physical or the civil terrain for the
powerhouse construction.
Q Forgive my ignorance, but you say contracts
have been let. Does that equate to an investment of funds
by Idaho Power?
A The amount invested is included in the
$9.2 million expenditure. I mean, all work in progress,
dam-related or otherwise, as of the 30th of October is
included in that figure, and I'm not capable from the
stand to tell you how that breaks down among the seven
contracts that are currently in force.
Q On Page 5 of your rebuttal testimony, you
speak of, well, in response to a question, you talk about,
I guess, the capacity factor or the sizing of the Milner
project.
A Yes, sir.
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Q And you state that the capac i ty factor that
you used apparently was based on 20 years of water data.
My quest ion to you is what 20 years did Idaho Power
Company use to make that determination?
A First of all, the capacity factor was not
based on 20 years of water. We simply noted at Line 9
that if 20 years of water were used, there would be a very
high capacity factor. The 38.1 percent that we said is
reasonable is based on the 60 years of water. It's
actually 62 years, but it's the standard since 1928
U. S. Geodet ic Survey f lows from the Idaho Department of
Water Resources that are used regularly in these
hearings. The 20-year comment is an exemplar to indicate
that at higher flows the capacity factor is higher.
Q But yet you're still making some type of
analysis saying that based on 20 years of water data, the
capacity factor would be 52 percent and my question to you
is what 20 years of water data?
A 11m not exactly certain whether 1989 is
included or not, but it's my belief that we used the most
recent available, which would include 1989, but I would
have to get a clarification on that terminal year for you
if it i S important.
MR. PURDY: I have nothing further,
Mr. Chairman.
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COMMISSIONER MILLER: Thank you, Mr. Purdy.
Commissioner Swisher.
EXAMINATION
BY COMMISSIONER SWISHER:
Q Well, for one thing, Mr. Packwood, I
wondered if you've had any conversation with Mr. Faull,
these things tend to get formalized, your rebuttal is
filed af ter he filed his cr i t ique and now you're
testifying on both direct and rebuttal, meanwhile, have
you and Mr. Faull talked about those modifications to the
enlarging of the penstocks, the reduction of the water
loss on the canal portion of the construction?
A I've not had any direct conversation with
Mr. Faull; however, he and the engineering staff and other
members of your Staff have been in our offices and I think
we've made available all of our thinking and material.
Q So I could assume that when Mr. Faull gets
on the stand and I ask him questions about what he has
seen subsequent to the filing of his testimony that I will
be asking him in that context?
A I would hope so. I can't say with
certainty.
Q Okay. Now, about this term of the art that
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Idaho Power has invented, suppose the Commission simply
said at this time no to a Certificate of Convenience and
Necessi ty because you've coupled it with this cap
proposal, and it's quite uncommon for this Commission to
pretend, even though Mr. Faull and others in the
engineering Staff are quite competent, it's not our
practice to pretend that we know what the hell we're doing
in advance just because our Staff tells us or you do; so
we say no, we say no, we can't accept that coupling and,
then we don't issue a Certificate of Exemption. You have
your FERC license and all of the environmental questions
have been handled, the quest ion of a minimum f low now
that's been added in the canyon below the dam, that's been
resolved; so there is a market out there for the power,
for hydro
A Yes, sir.
Q -- and we fail to give you a certificate.
What would you call the status of that plant? Let's say
the Company dec ides the market is good, they look at the
new draft plan that's already public of the Northwest
Power Council, which even has such incredible crap in it
as building Satsop and Hanford Nuclear plants; so you look
at that market and you look at the Northwest market, you
look at the transactional market between the regions, you
look at your Company's own plan to sell juice in the
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Southwest and to make exchanges and to carry power for
third parties, and you say, well, who needs the PUC on
this particular project.
Aren't you better off as a free agent?
Aren't your incentives even better with respect to cost
containment if you put together the market conditions in
the Northwest, the imminence of the Southwest intertie and
your FERC license and your agreement with the canal
companies and say who needs the PUC? Can't you as an
independent power project go forward with the marketing of
that electricity?
A You describe a scenario that I concur is
distinctly possible; however, I guess sitting in my
posi tion today, I'd have to say that is not the preferred
course we'd like to travel. We face a, at least I feel we
face a, dilemma in the State of Idaho about the
development of what remains in the way of a hydro
resource. The hydro resources are unique little critters
that are very specific to a reach of the river. As we
learned kind of to our chagr in at Lucky Peak, there are
others who will readily step in and take them; so what we
tr ied to do is find a way to preserve for the benef i t of
the State of Idaho, short term and long term, the
remaining resources that are out there, and the rationale
that we've tried to bring to you here is that if based on
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our load forecast and the whole process that you're very
familiar with through the research management report
there's need for the resources, then they'd be buil t and
used in the traditional manner under the certificate as
one alternative here; however, absent that need, I guess
in the post-exemption (sic) days, before we coined the
word, we didn't have choices. We walked away, City of
Tacoma, whoever wanted, became the developer of the
si tes. As you know, through the i 80s we had licenses, we
surrendered them on the basis of need.
Q Wiley Dam.
A Others, certainly, virtually everything on
the river. Well, 10 years have passed. The surplus is
going away and the issue of need is coming back; so on
plants like Milner, I mean here sits an existing dam with
existing diversions with no generation capability on it,
that seems to be the perfect plan to capture for the
benef it of the people of Idaho and we're willing and
trying to do that, but you really hold the key to that.
If you say no, we don't want it, then the
unregulated scenario that we're all talking about in the
industry, you try to make that play out. I heard a guy
speaking at one of the conferences about independent power
production, he says, "They're like unicorns. We all know
what they look like, but who here has seen one yet."
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That's an emerging industry that it sounds good, but we
certainly aren't far enough along to know whether we can
do all those things and still make a buck at it.
Q Given the way the investment community looks
at all of your investments, rate based and others, you're
also saying, you haven't said it yet, but I'm asking you,
you're also saying, aren't you, that if the plant were
buil t independent of any commitment on the part of the
regulators, almost certainly in order to assure a cash
flow to pay for the debt and obligations incurred by the
project, there would be a sale like the sale of the Lucky
Peak power to Seattle, there would be a sale?
A Yes, sir, there would.
Q And you're saying that it's in the public
interest given this opportunity on the rebuild at Milner
for the Commission to make the commitment with respect to
issuance of a Certificate of Public Convenience and
Necessity.
A I certainly prefer it.
Q Yes, the sticker is, of course, the cap, and
what I'm about to say is not to draw parallel between the
two wor lds because they're very di f ferent . There is some
excitement currently in the regulatory community over the
use of the cap method, not with respect to capital costs,
but with respect to returns in the telecommunications
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industry. In the telecommunications industry, some
enormous economies of scale are flowing from fiber optics
and from digital switching, et cetera, and so the
motivation wi thin that industry is to get price caps in
place of traditional rate of return. Okay, that's what's
going on over there. This is a very different deal.
We're not talking about operating costs. We're basically
talking about your capital costs in this proceeding.
A Yes, sir.
Q Why do you think it's necessary, espec iall y
since I'll be retiring at the end of the year, why do you
think it's necessary to get an advance commi tment as to
those costs, and in fact, how do you think a sitting
commission could bind a commission convened by any of the
var ious processes we have for opening new cases, how could
today's Commission be bound against a finding in the
future that Idaho Power -- let me put it in the worst
possible terms. You got your Certificate of Convenience
and Necessity, you got your contingency provisions, you
let a contract, M-K doesn't do that any more so we'll use
M-K, you gave a contract to M-K and they just use the old
rate base shovel and run it as a cost-plus project and
then the costs get out of hand.
A We, first of all, recognize that we can't
allow that to happen on the costs and we have a full-time
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and dedicated staff doing their damnest to do what's
reasonable and prudent, however they're going to be
judged. What we've tr ied to do wi th the cap is
recognizing, and I know from reading the legal briefs that
the real bone of contention here is about what a
certificate really does or does not require you to do, but
the real bone of contention, at least from Idaho Power
Company's perspective, is now is the time to make the
decision as to whether to proceed with Milner,
construction is reasonable and prudent and that investment
is going to be made for dedication of the public use. The
lawyers say this better than I could ever hope to.
Q Never give them that concession. No, they
cannot say it better than you can. You can say it better
than they can.
A But the cap came out of another desire and
that was a best efforts attempt to provide some certainty
and assurances that barr ing the types of things
Mr. Richardson raised, the real horrible force majeures
and changed circumstances, barr ing those which would cause
you to go above the cap in which we fully plan to resolve
here if that did occur, but barring that, you should take
comfort that that cap, even if the costs got there and
we're saying we think with prudent and reasonable
construction management we'll build it for five percent
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less than that, but like all engineers insist on doing,
there's a safety margin in there, we're trying to offer
that as a way to feel more comfortable that you haven't
bound anyone in the future to an infinite escalation in
construction costs. It's finite and it's based on the
very best informat ion we have today.
It just seems like now is the time relative
to Milner to decide if we're all seeing things the same
way, and yes, this is a good project and in the public
interest and wi thin these parameters, by all means, go
forward because it's one of the few remaining projects
that we found in the state that really fits what everyone
is telling us through least cost planning and the regional
plan and everything else, this is what should be developed
now; so again, it's a dilemma of trying to meet as many
public expectations and policy expectations as we know how
to meet and to do the right thing, and while it may not be
perfect, it i s the best we're able to do at this point to
try to give you that comfort level to go forward with the
project.
Q Do you see that, too, I'm trying to fit it
into the signals we get from the management of Idaho Power
Company in some other contexts, do you see the submission
of that cap figure to the Commission as also a form of, a
way of internalizing cost controls at the Company?
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A Well, I'm not sure how you use internalize.
It i S an effort --
Q Well, I mean that at the Company r your
people, you're the vice president of power supply, the
people who work for you would know that the commitment
here as framed in this submittal is that you cannot
exceed --
A Absolutely, it's an effort to impose on
ourselves a discipline that we're always accused of
lacking.
Q Not always, but often.
A Often.
Q Sure.
A I mean, it's not a good old boy cost-plus,
run it as far as it will run, approach to building.
Q So part of what has induced some paranoia on
the part of the people responding to your filed testimony
is in reality, you're representing to me now in reality is
a move on the part of management at Idaho Power to say
this is a form of cost containment. This is our 1990s way
of presenting to the Commission cost control. After all,
the last time we were talking about new base load plant in
any important way, there was runaway inflation, there were
all kinds of horrible things happening.
A Long, prolonged construction periods.
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Q Prolonged construction periods and great
battles over the effect of price elasticity, et cetera,
the movement from an almost wholly hydro company plus Jim
Bridger to what you are today; so you're saying, as I read
your test imony and as you respond to me this morning,
you're saying that what causes the Staff reaction and the
Industrial Customers i reaction is really a quantum change
at Idaho Power in the way cost controls are posited to
this Commission. I'm saying that very badly.
A Well, I generally concur that what you've
said is a fair characterization of how we're trying to
approach business. It is a new management team there. I
don't believe the old ones just wantonly ran the meter,
but I don't personally, I don l t know. Your perspective is
certainly more valid than mine having sat and watched them
across that time frame, but I know what we're trying to do
and what we are doing today and it is the very thing
you're describing is to try to impose cost discipiine on
ourselves, that if we are to build and develop and capture
these projects, it has to be in the most competitive,
eff icient manner possible; otherwise, we don't deserve the
opportunity to build them; so we have tried to impose that
discipline on ourselves and we hope it's perceived that
way and we hope we can stand five, ten years hence and
point back at a record that demonstrated that's what we
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did. We've got to deliver before we get to rest on any
laurels.
COMMISSIONER SWISHER:Well,I thank you.
That's all I had,Mr.Chairman.
COMMISSIONER MILLER:Thank you,
Commissioner Swisher.Commissioner Nelson.
COMMISSIONER NELSON:Thank you.
EXAINATION
BY COMMISSIONER NELSON:
Q Mr. Packwood, I would like to ask you a
couple of questions about the generating capacity of this
uni t . I got the impression from your test imony that
during the irrigation season there would be a lot of times
when there wouldn't be water available to generate
electricity; is that correct?
A Yes, it is.
Q And the problem to me with that is that
we're talking about Idaho Power's peak period during the
irrigation season would be exactly the period when this
uni t wouldn't be available for Idaho Power. Does that
mean, then, that this unit might have more value to
another utility if you were going to build it and sell the
power?
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A As you well know, sir, in the Northwest we
are the only summer peaker, but our winter peak is not far
behind our summer in terms of absolute nameplate peak, but
it is still significantly behind in energy. The rest of
the North~est peaks in the winter. There's no question
that winter energy is attractive to every other utility in
the region as it is to us. The value to us is one, we
have winter loads to meet, and two, we can exchange winter
energy for summer energy as we do routinely in a trading
arrangement, but if I understand your question, are there
those who would be attracted to a winter energy producer,
and you're right, basically Milner produces once
irrigation ends through the winter through the spring
runoff period and stops probably rather abruptly in the
mid-June time frame on a normal year, yes, there are ample
folks that would think that would be just an ideal
resource.
Q Well, I guess my question, then, for Idaho
Power, is this the best resource for Idaho Power to be
developing if it's a resource that isn't going to help
meet your peaks?
A It's not a peaker, first of all. It's an
energy producer, run-of-the-river type of operation. That
energy is needed and used to meet loads year-round for our
purposes and again, to the degree that we are net surplus
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or should become net surplus in one season over the other,
our practice has always been to exchange with other
Northwest utili ties so that, in essence, the winter energy
is converted to summer energy for ourselves; so I guess I
don't see the seasonality of it being any kind of
disincentive to be involved with that particular project.
Q So you feel you'll get full value for the
juice that's produced whether it produces during your peak
or someone else's peak?
A Absolutely, the nature of seasonal exchanges
have been one for one.
Q I guess that's my question. That seasonal
exchange, is that worth as much as your own unit that will
produce
A They're really indistinguishable in a
resource plan and those who work closely with our resource
plan know how we construe those exchanges and what their
impact is on load/resource balance; so it simply allows
you to shift.
Q Somebody's testimony indicated that the
irrigation that Milner served was about 440,000 acres.
A Yes, sir.
Q And I'm not questioning the deal you cut,
but I want to ask a couple of questions on it because I
got the impression that what you were doing in the rebuild
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of this dam was alleviating a hardship on the irrigation
districts, and yet if I look at the cost of that dam
compared to $11.6 million, I got a cost of around 25- to
$30.00 an acre that that rebuild was going cost. It
looked to me like if the irrigation district wanted to put
that over a 10-year period, it was about a
dollar-and-a-quarter an acre, they could have covered that
pretty easily themselves.
I guess when I look at the total cost of the
,project and say would somebody, would an independent,
would a Bonneville Pacif ic be willing to go in and build
this and sell it back to you for the avoided cost rate,
would they have given the same deal to the irrigators.
A Mr. Keen will discuss that at some length
and has personal involvement with the actual negotiation
of that contract; whereas, I do not. What you say, I
don't know what those figures are having not done the
arithmetic on the cost per acre. That was certainly an
option the canal companies knew they faced was to have
their spaceholders pay for the dam repair.
Q I'm really asking you the questions so that
other people can take a shot at it once it's their turn.
A Sure. From contracts that I have seen
involving independent developers or cogenerators or PURPA
developers, I guess I don i t accept the assertion in some
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of the testimony that they would have somehow got a better
deal. There are a number of contracts out there that in
hindsight you can look at and say those guys didn't get
much of a deal at all, and Bonneville Pacif ic, not to beat
up on them, hasn't had an impress i ve fall and so it's
hard, you know, it's hard to sit here and conjecture that
they could have done better or we could have done better.
I'm not really convinced that that was a
project that was readily available to the independent
communi ty anyway because the immediate need was for
interim financing to get the dam repair going and that
really was, I think, the entree we had.
You've got to understand that the
relationship on Milner really went back to 1981, it's hard
to believe, it's almost ten years old of trying to figure
out what can be done there, how to do it, who pays, what's
the deal, and the thing that really got it moving, of
course, was the FERC license came out in December of '88
and then the concern about safety, and the resulting
inspection from the compliance and safety section of FERC
says you've got a problem, now get it fixed, and all of a
sudden here you're faced with accelerated schedules, the
need for capital and we think we did an arms-length,
hard-nosed negotiation and got value for us and our
ratepayers and that they did all right, also. Whether
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someone else could have done better, I don't know.
COMMISSIONER NELSON: We had an opportunity
to tour the Milner Dam site about two years ago and I 1m
not surprised that it needed some repair. That was all I
had. Thank you, Mr. Chairman.
EXAMINATION
BY COMMISSIONER MILLER:
Q Just one topic for me. As you indicated in
response to Commissioner Swisher's questions, a central
issue in this case is the question of to what degree does
a Certificate of Public Convenience and Necessity
constitute an assurance of cost recovery in the future,
and your proposal it seems to me essentially asks the
Commission to determine that the certificate constitutes a
very large assurance of cost recovery.
On the other hand, the Commission Staff and
the Industrial Customers suggest to the Commission that we
should take the view that the certificate means only that
the initial decision to commence construction was prudent
and that any other questions will have to wait until some
other either rate case or evaluation proceeding. That's
essentially how I see that big issue.
What would be the Company's response if
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instead of doing either of those things the Commission
said, the Commission in its order issued a certif icate and
said, here is your certificate, we'll figure out what it
means if it ever becomes an issue later; that is, if we
simply gave you a Certificate of Public Convenience and
Necessi ty to construct this project but did not approve
the cap proposal that goes along with it, if we just went
that far, then what position would that put the Company
in?
A Same position that any order does, you
either live with it or you attempt to change it through
procedural
Q Appeals and so on.
A -- whatever avenues are avai lable to you.
I've read the statements of position, the testimonies and
the br iefs the same as you did, it's pretty c lear where
the line is drawn and, of course, we've asserted in all of
ours how we interpret it and your Staff has ably done so
on the other side. We, obviously, disagree. It,
obviously, will rest in your hands and when the order is
rendered, we will have to take that order and figure out
whether that is something we can and should live with or
something we should ask for addi t ional opportuni ty to
express ourselves and I'm just not capable today of saying
what we could or should do.
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COMMISSIONER MILLER: Redirect?
MR. RIPLEY: We have none.
COMMISSIONER MILLER: Let's take a
ten-minute recess. Thank you, Mr. Packwood.
THE WITNESS: Appreciate it.
(The witness left. the stand.)
(Recess. )
COMMISSIONER MILLER: Call your next
witness.
MR. RIPLEY: Mr. Keen.
J. LAMONT KEEN,
produced as a witness at the instance of the Idaho Power
Company, having been first duly sworn, was examined and
testif ied as follows:
DIRECT EXAMINATION
BY MR. RIPLEY:
Q Mr. Keen, did you have cause to be prepared
for this proceeding certain pref iled testimony?
A Yes, I did.
Q And does that prefiled testimony consist of
four pages?
A Yes, it does.
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Idaho Power Company
Q And if I asked you the questions that are
set forth in that pref iled testimony, would your answers
be the same today?
A Yes, they would.
Q Also, Mr. Keen, did you have cause to be
prepared for this proceeding certain rebuttal testimony
which is comprised of eight pages?
A Yes, I did.
Q And if I asked you the questions that are
set forth in your rebuttal testimony, would your answers
be the same today?
A Yes, they would.
MR. RIPLEY: Mr. Chairman, Mr. Keen refers
to Exhibit 2, but it's already been marked and identified
through Mr. Packwood; so with that, I believe Mr. Keen is
available for cross-examination.
COMMISSIONER MILLER: In the absence of
objection, we'll order that Mr. Keen's direct and rebuttal
testimony be spread on the record as if read.
MR. RIPLEY: Thank you.
(The following prefiled direct and
rebuttal testimony of Mr. J. Lamont Keen is spread upon
the record.)
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Q. Please state your name, business address and
present occupation.
A. My name is J. LaMont Keen. My business address is
1220 Idaho street, Boise, Idaho. I am employed as
Controller at Idaho Power Company.
Q. What is your educational background.
A. I graduated in 1974 from the College of Idaho in
Caldwell, Idaho receiving a Bachelor of Business
Administration Degree in Accounting.I have also
attended many utility management training programs,
including the stone & Webster utility Management
Development program and the University of Idaho
Public utilities Executive i s Course where I now
serve on the Advisory Committee.
Q. Please outline your business experience.
A. In 1974, I was employed by Idaho Power Company and
assigned to the Property Accounting Department. In
1975, I transferred to the Corporate Accounting and
Budgets Department where I worked in the Operating
Budgets section. In 1976, I transferred into the
Financial Services section.In 1980, I was
promo';to Supervisor of Financial Services and in
February, 1983, I was promoted to Manager of
Financial Services. In March, 1984, I was promoted
to Manager of Financial and Reporting Services. In
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July, 1988, I was promoted to my present position
as Controller.
Q. What are your duties as Controller at Idaho Power
Company?
A. I am responsible for the corporate books and
records,regulatory and financial reporting,
budgeting and financial forecasting, and financial
analyses as requested by management.
Q. What is the purpose of your testimony in this
proceeding?
A. The purpose of my testimony is to explain the
Milner financial agreement between Idaho Power and
the Canal Companies and to provide the Commission
with a range for the projected 50 year levelized
cost per kWh for the Milner Project.
Q. Please state what the financial arrangements are
between Idaho Power and the Canal companies.
A. The financial agreements between Idaho Power and
the Canal Companies are set forth in Exhibit 2.
Idaho Power has agreed to provide interim financing
for the rehabilitation of the Canal companies' dam
and the Canal companies have agreed to repay this
initial loan including interest from funds obtained
elsewhere at or near the time that the Project and
the dam are completed. Idaho Power has agreed to
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guaranty the payment of complete debt service on
the permanent loan for the Dam to facilitate the
long term financing.Idaho Power will also make
annual royalty payments to the Canal Companies, the
present value of which equals the sum of $5,638,000
plus 1/2 of the total cost of repairing the dam,
over the term of the FERCLicense. Additionally,
the Canal Companies will receive an incentive
royalty whenever the annual Project generation is
in excess of an agreed upon base of 142,000 MWh.
The royalty and incenti ve royalty payments are in
consideration of water made available by the Canal
Companies to the Power Plant.
The Canal Companies are obligated to pay the
debt service on the permanent loan as well as a
portion of the capitalized mitigation costs, annual
mitigation expenses and mitigation water costs and
to repay certain prelicense advances made by Idaho
Power. The royalty and incentive royalty payments,
to the Canal Companies will first be applied to
payment of these costs.Any royal ty amount
remaining after payment of these costs is available
to the Canal Companies and any costs in excess of
the royalty payments wiii be paid by the Canal
Companies to Idaho Power.
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If Idaho Power's investment in the Project is
not recognized for revenue requirement purposes by
the Idaho Public utilities Commission, the Canal
Companies may exchange the set royal ty option
described above for 50% of the net benefits derived
from the off system sale of the power after all
costs, including a return on Idaho Power's equity
investment in the Proj ect, are deducted.
The agreement which includes the financial
arrangements between Idaho Power and the Canal
Companies is subj ect to the approval of the Idaho
Public utilities Commission.
Q. What is the projected cost per kWh for the Milner
Project?
A. Depending upon the number of water years utilized
in the computation, the estimated cost per kWh
would range from a maximum of 52.93 mills/kWh based
upon a cost for the powerhouse of $63,350,600, 60
years of water data and a 50 year levelized cost;
to 37.80 mills/kWh based upon a powerhouse cost of
$60,333,900, 20 years of water data and a 50 year
levelized cost (or less if the Proj ect is built for
less than Idaho Power's present Project estimate).
Q. Does this complete your testimony?
A. Yes, it does.
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Q. Please state your name and business address.
A. My name is J. LaMont Keen and my business
address is 1220 W. Idaho Street, Boise, Idaho.
Q. Are you the same J. LaMont Keen that submitted
direct testimony in this proceeding?
A. Yes I am.
Q. Mr Faull states that he estimates the 46 year
levelized cost to ratepayers for the Milner
Project to be 62.73 mills/kwh.This estimate
exceeds the maximum in your range of 37.80
mills/kwh to 52.93 mills/kwh. Do you agree with
his project specific calculations?
A. No, Mr Faull in making his estimate has
recommended using the capital costs set forth in
Order No 23357. It is my understanding that the
capital used therein representcosts
hypothetical financing costs for the
construction of a hypothetical coal fired power
plant.The capital structure I utilized is
based upon estimated capital costs at the time
the Milner Project is completed, understanding
that the return on common equity used to
establish the Company's revenue requirement will
fluctuate over the life of the project. Mr
Faull's capital cost assumptions have increased
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the project costs by approximately 2.6
mills/kwh.
Second, Mr Faull has stated that annual
Operation and Maintenance (O&M) cost should be
increased from Idaho Power's estimate of
$272,217 to $815,780.While Mr Pack\'lOod will
address Mr Faull's computations and describe the
methodology used by Idaho Power, using Mr
Faull's O&M estimate adds 4.1 mills/kwh to
Milner's project cost.
Third, Mr Faull states that an annual
average generation of 186,395 Mwh should be used
rather than the 194,700 Mwh I have used in my
analysis. Again, while Mr Packwood will explain
why the Company has used 194,700 Mwh, using
Mr Faull's generation assumptions adds 2.6
mills/kwh to Milner's project cost.
Q. Mr Faull also states that the use of 20 years of
water data is inappropriate for a long-term
analysis even though 20 years was adopted by the
Commission for determining the Company's revenue
requirement in Order No 20924. Whv did you show
a calculation for both 20 years and 60 years of
water data?
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A. In my testimony I did not advocate which of the
two sets of "iater data was more correct but
rather calculated a range of values using both
assumptions. When the Commission adopts a given
assumption regarding the water data to be used
for requirement thatrevenuepurposes,
assumption directly impacts the forcost
production from hydroelectric resources until
that assumption is modified in a subsequent
proceeding.To use one set of water data to
determine the cost of a project for resource
planning and another set to determine the
revenue requirement inconsistent andis
improper.My testimony was intended to provide
the Commission with a range of Milner Project
costs based the requirementuponrevenue
assumptions that may be in effect during the
project's operation.
Q. Mr Faull, at page 14 of his direct testimony
states, "the final royalty agreement not only
assures the Canal Companies that they will
recover all of their costs of implementing dam
repair, it also assures them of a substantial
profi t on their investment."Is this a proper
characterization of this agreement?
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A.
Q.
A.
Q.
No, it is not.
Would you please explain the royal ties to be
paid the Canal Companies?
The Canal Companies are to receive two roya 1 ty
streams, a base royalty and an incenti ve
royal ty. The base royalty is to equal a present
value of $5,638,000 plus one half of the cost of
dam repair. The $5,638,000 is a present value
amount representing the royalty payment the
Canal Companies would have received prior to the
determination that major reconstruction was
required oi¡ the dam. The dam reconstruction was
a changed condition from the original agreement
among the parties and after intensive
negotiations it was determined that Idaho Power
Company and the Canal Companies would split the
cost of dam reconstruction. The Canal Companies
will also receive a smaller incentive royalty
(based upon project generation) designed to
provide the Canal Companies with an economic
incentive to run all available water through the
power plant thereby increasing its cost
effectiveness.
What are the obligations of the Canal Companies?
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A. The Canal Companies are obligated to pay the
total debt service on the dam reconstruction
financing, all operation and maintenance costs
on the dam, a portion of the capitalized
mi tigation annual mitigation andcosts,
mitigation water costs and to repay certain
prelicense advances made by Idaho Power Company.
Q. Based upon the royalty payments you have
described and the obligations of the Canal
Companies, does the agreement assure them that
they will recover all of the costs of dam repair
and also assure a substantial profit on their
investment?
A.No, it does not.The base royalty will amount
to $5,638,000 plus one-half of the cost of the
dam ($5,861,000 based on the estimated dam cost
of $11,722,000).The sum of the base royalty
payments is therefore insufficient to recover
the cost of dam repair based upon the current
estimate by $223,000 ($5,638,000 plus $5,861,000
equals $11,499,000).Further, based upon 60
years of water data, the incentive royalty is
estimated to approximate $859,000 on a present
value basis over the first 46 years of project
operation while the payments by the Canal
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Companies for prelicense advances and mitigation
costs (capitalized, annual and water bank) are
estimated to aggregate to $1,282,000 on a
present value basis.Addi tional1y, the Canal
Companies are obligated to pay all operation and
maintenance expenses on the dam.Therefore,
based current estimates,the Canalupon
companies are not assured they will recover
their costs or make any return on their
investment.
Q. How do you respond to the general implication by
Mr Faull that the overall royalty agreement
between Idaho Power and the Canal Companies was
somehow less advantageous than a QF developer
would have obtained.
A. First, in my opinion, the royalty agreement
reached between Idaho Power Company and the
Canal Companies represents the lowest cost Idaho
Power Company could have paid to participate in
the pro j ect .The negotiations were intensive
and extensive.
Second, I do not believe that QF developers were
the likely successor to an agreement with the
Canal Companies had Idaho Power not been
successful.This was a renewable resource with
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costs far below the regional avoided cost which
would have attracted regional interests. Had
Idaho Power not participated, I do not believe
energy from the project would have been retained
for Idaho consumers.
Third, it is my understanding that existing
agreements between the Canal Companies and QF
developers involve large royalty payments and in
some cases include transfer of ownership of
projects to the Canal Companies. Therefore, any
assertion that a QF developer could have
obtained a more favorable royalty in this
instance is conjecture.
Finally, the entire agreement between Idaho
Power and the Canal Companies represents a
balancing of interests brought about by
arms-length negotiations and is intended to
foster a long-term cooperative relationship
between the parties for the duration of the
license period and beyond.Only through an
agreement that both sides believe to be fair can
long-term working relationships be forged and
sustained.This was accomplished in the final
agreement for this project.Both sides are
committed to jointly addressing all issues that
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1 arise as well as to the efficient,coordinated
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I 3 Q.Does this complete your testimony?
4 A.Yes it does.
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(The following proceedings were had in
open hear ing . )
COMMISSIONER MILLER: Mr. Richardson.
MR. RICHARDSON: Thank you, Mr. Chairman.
CROSS-EXAMINATION
BY MR. RICHARDSON:
Q Mr. Keen, did Idaho Power compete wi th any
other entities to be the developer of the Milner project?
A As Mr. Packwood stated earlier, our
relationship with the canal companies went back, probably
began in the late '70s. There was an agreement, initial
agreement, signed in 1981. During the 1980s, the project
was delayed for a number of reasons. At the point in time
I became involved in the process was about December of
1988. At that point in time, it was our intent and the
canal companies' intent that the project be developed by
Idaho Power Company; so to say that we directly competed,
I don't know that. There was some inference that if we
were not interested in the project that others may be.
Q On Page 2 of your direct testimony you state
that Idaho Power, at the very bottom of Page 2 going to
Page 3, you state that Idaho Power has agreed to guarantee
the payment of complete debt service on the permanent loan
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for the dam to facilitate the long-term financing, and
that's to facilitate long-term financing on behalf of the
canal companies; correct?
A That's correct.
Q Is the reason for the guarantee of payment
because of a perception that the canal companies wouldn't
otherwise be able to obtain f inanc ing?
A At least it was a perception they would not
be able to obtain it under as favorable of terms as if
they had a guarantee from Idaho Power Company.
Q So wi th Idaho Power as the guarantor of the
debt,the canal companies are able to obtain that debt at
less cost than they otherwise would be able to do so?
A That's the intention,yes.
Q So doesn't Idaho Power,then,assume some of
that risk that the canal companies otherwise would have
had to assume in obtaining that debt?
A The only risk that we assume would be in the
event that the royalty payments that we have committed to
make, the canal companies would not equal the amount of
the debt service and we would then have to collect the
balance from the canal companies and they would not pay.
We perceive that to be a pretty small risk.
MR. RIPLEY: I'm sorry, is Mr. Keen's
microphone on?
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COMMISSIONER SWISHER: I wonder, too. I
think he just wasn't talking into it.
THE WITNESS: I'll pull it closer.
MR. RIPLEY: Thanks.
COMMISSIONER SWISHER: The younger witnesses
tend to croon.
MR. RICHARDSON: Mr. Chairman, that's all I
have for this witness.
COMMISSIONER MILLER: Thank you,
Mr. Richardson.
Mr. Purdy.
MR. PURDY: Thank you.
CROSS- EXAMINATION
BY MR. PURDY:
Q Mr. Keen, in its application, the Company
has presented the Commission with an alternative to
essentially granting a certificate and rate basing this
project and that alternative is what the Company has
termed a Certificate of Exemption to exempt the Milner
project from regulation essentially. Assuming that the
Commission did accept this alternative, my question to you
is who in that event would own and operate the Milner
plant? Would it be Idaho Power Company or a subsidiary or
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could you explain to us the arrangement that you would
envision would be structured?
A We have not made the final decision of how
we would structure the deregulated sale of power out of
the Milner project, and I guess you're assuming in this
case they grant us the Certificate of Exemption and the
project is subject to recall after 20 years; is that an
assumption you want me to make?
Q Correct.
A In that event, the Company would really have
at least two options. One would be to move it for some
period of time into a subsidiary operation and treat it as
basically an unregulated independent power project; would
also have the option to treat it as a regulated project
but not by the Idaho Commission, by the Federal Energy
Regulatory Commission, perhaps the Oregon Commission.
There's nothing that says or prevents us because we have a
FERC license from making FERC regulated sales out of that
project subject to their jurisdiction.
Q Again, in the event that the Commission
granted some type of exemption to the Milner project, how
would it be financed? Would it be through debt issuance
of equi ty or how?
A We II, there again, it would depend upon how
we ultimately decided to structure this deregulated sale
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of the project. If we move it into a subsidiary company,
I would expect we would have a project specific financing
for the Milner project and it would be financed with debt
and equity. I would expect we would try to leverage it to
the extent possible and to maximize the cost of the
project for comparison with whatever the wholesale price
we can sell the energy for. If it's treated as a FERC
regulated project, then it may be our conventional capital
structure.
Q Do you suspect that under this scenar io, in
other words, under the scenario that the power from Milner
is being sold out on the open market, that the project
would be profitable wi thin the first year of operations?
A You know, that's conjecture for me to say.
I'd have to defer to Mr. Packwood as far as what the price
we could obtain for that energy. I would think that
typically in transactions of this type it may be that
there's some period of time at the outset of that contract
before the revenues from the contract exceed the cost.
Q And you don't have any idea what year that
might first occur?
A No, because, to my knowledge, I have not
seen anything that specifically estimates the price that
we can sell energy out of the project to another entity
for.
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Q Mr. Keen, would the Company oppose an
arrangement, assuming the Commission approved it, whereby
Milner would be essentially put into rate base under a
20-year contract with an outside buyer; in other words,
the project itself would be included in the Company's rate
base, but yet it would be under contract and so either the
benefits or the detriments of that contract would accrue
to the ratepayers?
A I don't know that I'm the one to make the
policy statement for the Company, but I guess from my
perspective as controller, I would not see any problem
wi th that transaction. What you're essentially saying is
if the Commission determines that there's not the need
wi thin our service terri tory by our customers for that
project that we make a sale and treat the sale as an
offset to the cost of the project, I see nothing wrong
with that.
MR. PURDY: Thank you. I have nothing
further.
COMMISSIONER MILLER: Commissioner Swisher.
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EXAMINATION
BY COMMISSIONER SWISHER:
Q Well, Mr. Keen, the estimated costs appear
in your testimony at the bottom of Page 4 and Mr. Purdy
asked you a similar question, but I'd like to get more
specific. Suppose this Commission did not certificate, in
other words, suppose this Commission wi thin its
jurisdiction chose not to certificate for whatever reason,
it would be possible, for instance, given the size of your
load in eastern Oregon to go to the Oregon Commission and
say those, you know, the idiots we have to live with don't
see the value of this, but here are our numbers and we
want to reallocate the power plant and this is what we can
show you over 50 years as being the cost.
You could take that resource to that
jurisdiction, remembering your FERC license is intact, and
they could say that's fine, we're left out of the Clean
Air costs of your Wyoming equities, we're left out of the
Clean Air costs of your Nevada equities, except for
whatever it takes to allocate to meet that period of
non-f low through your turbines, you could do that,
couldn't you?
A It's my understanding that if the Idaho
Commission issues no certificate, we are not prevented
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from proceeding either before the FERC or the Oregon
Commission.
Q And if that were the reallocation, the Idaho
Commission couldn't go through it's usual, you wouldn't be
that familiar with reallocation, but we couldn't go
through the usual allocation dance with the other
jurisdictions. We would have rejected the resource,
Oregon would have accepted it and it would be the
equivalent of Seattle's Lucky Peak supply, it would be the
equivalent for the Oregon jurisdiction of the Idaho Power
service area, it would be a resource for their use for a
time certain.
A That would be my understanding. Mr. Baggs
would be more knowledgeable of the allocation process.
Q And this is a slight abuse of the process,
but that happens when Commissioners are headed out the
door, but I'm curious in the context of across our desks
we see analyses where Idaho Power is at from the
investment community by the likes of Merrill Lynch, by the
likes of Standard and Poor and it is rare to read one that
is written in the context of 1990.
Tradi tionally, at least I was told when I
went to Wall Street to find out how those rascals
function, I was told by the likes of Standard and Poor,
Merrill Lynch and others, well, they always talk to the
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controller of the company even if they don't talk to the
CEO. Do these people who see this Company in such a
curious light, do they talk to you, do they call you?
A Certainly with regard to the rating
agencies, yes, we have numerous conversations throughout
any given year. The analysts call, always want
information, we speak to them, but, obviously, provide far
less information because typically they are probing for
non-public information that we can't provide.
Q Sure, and for three-quarters of 1990 I've
seen Idaho Power's performance not only in the market but
wi th respect to your quarterly earnings all positive
compared to the national indices, all positive compared to
other indices, like the Dow Jones non-utility indices, and
there seems to be no attempt on the part of the community
of financial analysts at the Wall Street level to rhyme
performance with analysis. I mean, years go by, quarters
go by, years go by a quarter at a time and there's no
attempt to adjust performance to analysis. I'm not saying
that very well, but what happens when these jerks call you
up? I don't mean jerks. I just mean do they hear you?
A Yes, I believe they do. They don't always
do what we would have them do, but I think if you look at
our market price performance in 1990, for example, versus
our earnings performance, the market price has held pretty
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firm despite the earnings are tailing away from us, and I
think that represents the Company convincing the rating
agencies and the investment community to try.to look at us
on a normal year knowing that droughts are going to come
and go and to discount the impact of the drought on our
bottom line somewhat when they price the Company's common
stock.
I still believe that our price would be
somewhat higher today absent the drought, but I think
communicating with those people and letting them know that
we have another drought, that it is going to impact our
earnings. particularly the rating agencies, causes them to
stay with us through some bad times.
Q You are the only dominantly-hydro,
privately-held utility whose resource is in, is not at the
mercy of the big federal dams, there is no other utility
like Idaho Power in that regard. You are going through a
relicensing cycle at the moment in a very favorable mode
and the Hell's Canyon questions are still many years away;
so I'm unable to understand, I repeat I don't know why
your success at FERC, your progress on the upgrade and
relicensing of Swan Falls, Milner, et cetera, is not
perceived -- I'm not talking about the investment
communi ty. I think the investment community, probably
your market position reflects reality, but I continue to
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be mystified by those who read the tea leaves what --
A Are you referring to some of the negative
reports on the Company?
Q Standard and Poor being the latest, Merrill
Lynch earlier this year. You can't enlighten me?
A Well, I think it partially is in 1990 the
drought. I think they also see that the Company is going
into somewhat of a construction phase, which if you're a
rating agency gives you some concern because you know the
Company will be doing financing which it has not done for
the last few years, but I think primarily the rating
agencies, Standard and Poor's and Moody's, have tightened
up their requirements for electric utilities. We're
simply perceived to be riskier today than we were five
years ago or ten years ago.
Q Electric utili ties in general.
A Electric utili ties in general.
Q But you're cross-contaminated by everything
from Shorem to --
A That's correct, and that's why the Company
communicates with them is to try to sell them our story,
and while we were listed by S &: P for possible downgrade,
they stayed with us and I think if next year is a normal
year and we can come back from the earnings in 1990, they
probably will maintain our rating, but they look at
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coverage, they look at equity and debt as percent of
capitalization and if you don't fit their standards,
eventually you're going to be placed in the appropriate
category.
COMMISSIONER SWISHER: After a long record
of being wrong, I'm just using this opportunity to
downgrade as best I can both Standard and Poor and Merrill
Lynch. That's all I had, Mr. Chairman.
COMMISSIONER MILLER: Commissioner Nelson.
COMMISSIONER NELSON: Thank you,
Mr. Chairman.
EXAMINATION
BY COMMISSIONER NELSON:
Q Mr. Keen, would you turn to Mr. Packwood's
Exhibi t 3 for a second? This is also your exhibit, isn't
it, or maybe more your exhibit than his?
A You're referring to the contract?
Q The estimate of expenses on the project.
It's just one page.
A Yes, I have that.
Q I was wondering if you would tell me what's
involved in the procurement contracts which seem like
about 75 percent of the construction contracts and are
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they all the same thing or what's the differentiation
there and maybe what is involved in those procurement
contracts?
A I don't know the answer to that.
Q Oh, I thought maybe this was pretty much
your exhibit.
A No, the cost calculat ions that I prepared I
assumed the estimate of the project cost as a given. It
would either have to be Mr. Packwood or if you asked
specific questions, we could certainly provide whatever
level of detail that you would like to have.
Q Well, I just looked at this and it wasn't
very detailed and I thought maybe you could give me a
Ii ttle, but we'll save that for later.
A I believe some of that has been provided in
the responses to data requests from the Staff.
MR. RIPLEY: They don't see those, Lamont.
COMMISSIONER SWISHER: We don i t see those,
the turbines, et cetera, those details.
COMMISSIONER NELSON: I'll go look at some
data requests. Thank you, that's all I had.
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EXAMINATION
BY COMMISSIONER MILLER:
Q Just to follow up on that point, Mr. Keen,
on Page 4 you have your testimony regarding the project
costs, which, as I read it, is merely a restatement of
basically the exact language contained in the application
at Page 9; that is, it looks to me like you've basically
taken the text of the application and turned it into a
question and answer format, and as Commissioner Nelson's
question indicates, the Company has not given us an
exhibit that frankly helps the Commission at all in trying
to do any meaningful analysis of these cost questions; so
for my part, I would have preferred in the filing a little
more detail on costs, because at this point without
relying on the Staff and without production requests which
we, of course, don't see, the Commission is really unable
to make any meaningful judgment or it makes it much more
difficult for the Commission; so for my own part, I guess
in future similar-type proceedings it would be helpful for
me to have a little more detail included in the filings so
that the Commission can make its own analysis of these
types of things.
Wi th that comment, let me, though, turn to
another topic and that has to do with the alternative
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proposal and the idea that at the end of the deregulated
period the plant would come back into or be offered anyway
to come back into rates or into the regulated side of the
utili ty, presumably in rate base, and as the application
is put to us, it would come back in at reproduction cost,
less depreciation as I understand it; is that your
understanding?
A That's correct.
Q Have you read Stephanie Miller's testimony
wi th respect to problems that may be associated with a
reproduction method of valuation?
A I've read her test imony, yes.
Q Let me tell you that in addition to the
observat ions that she makes, it's my understanding from
the general history of public utility regulation that for
many years the reproduction method was the, at least
nationally, the preferred method of utility valuation and
at one point the United States Supreme Court seemed to say
that it was a constitutionally required method, and that
was at about the turn of the century, and then over the
next 40 years almost, there was a debate in the court and
other places on the appropriate method, but that the
experience over those 40 years essentially was that the
reproduction method of valuation was found to be
essentially an impossible standard to apply to any
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particular fact situation, it led to inconsistent results,
all sorts of litigation, and eventually the problems
associated with that method were so great that the Supreme
Court abandoned its prior decision in the Hope Natural Gas
case, and as a consequence, the court shifted its focus
from looking at specif ic valuation methods to overall end
results for fairness.
That's a very br ief history of what I
understand the rather tortured history of the reproduction
method of valuation has been, which leads me, I guess, to
two questions. First, it does appear to me that history
seems to teach us that the method has generally been
discredited, and secondly, that it may be unwise for
ei ther a commission or a court or a legislature to commit
itself to any particular method of utility plant
valuation, which I think leads back to Stephanie Miller's
recommendation that the Commission if it accepts this
proposal simply say that the plant will be valued by some
method at the time that it's offered back into the
regulated utility.
That's more of a -- somewhere in there I'm
sure there's a question, Commissioner Swisher-type
question. I guess to put a question on it, though, in
light of this history, in light of the Staff's
recommendat ion, what is there to be said for the
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Commission committing itself now to a valuation method
that apparently has not withstood the test of time?
A I can give you the -- Company witness Baggs
testif ies somewhat to the methodology that you're talking
about here, but I can give you a little background and
certainly my perspective on how we came up with what we
did and why something similar to that needs to be done.
The concept was that if the Commission
decided that the ratepayer did not want the benefit of the
Milner project for the first 20 years of its life that the
Company in some fashion would step up and operate that
facility, be it regulated by FERC or ona deregulated
basis, for that purpose preserving a finite site for the
future benefits of its customers, retail customers, in the
State of Idaho and otherwise.
There needs to be some balanc ing, then, when
that project comes back into usage by those customers
between what the stockholder deserves for carrying the
cost of that project for the first 20 years of its life,
and I think it's almost intuit i ve that the first 20 years
is the point where the costs are the highest and maybe the
value of the project is the lowest.
Now, circumstances could happen to change
that, but if history repeats itself, that's certainly what
would be said is over the last 30 years, the project is
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less costly and the benef its higher; so there needs to be,
then, some sharing at the point in time that that project
would go back into regulation between the interests of the
stockholder who has carried that investment through its
expensive period and those of the ratepayer that again are
to get the benefit of this finite site at a future point
in time; therefore, reproduct ion cost new seemed to be a
good balancing between original cost and the fair market
value of the project at that time and that it looked to
the fact that if we did preserve the site for the benefit
of the customer, not necessarily its original cost, but we
preserve that site and that's an opportunity that once it
goes may never come back, if it's developed by the City of
Seattle or the City of the Tacoma, that option never comes
again, but if Idaho Power does that, then that site is at
least preserved so the option is given to the ratepayer at
some point in time to get the benef it of the Milner
project.
Now, if that is something that is so
imprecise that you don't feel you can determine that
today, I think that whatever you decide should recognize
the balance between the risk that the stockholder takes
for that 20-year period and the resultant benefit to the
ratepayer for the final 30 years or 26 years of that
license life. That's the rationale as I know it to the
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Company's proposal. Now, whether there are other
alternatives, I don't know that we seriously explored
those because that one seemed to be a good blending of the
two.
Q Mr. Baggs has some additional thoughts on
this topic do you think?
A Mr. Baggs is the Company witness that has
sponsored our proposal and he may have addi t ional
thoughts, but that's certainly my perspective on the
subject.
COMMISSIONER MILLER: We'll find out from
him and see if your explanation is persuasive to
Ms. Miller or what she thinks of that explanation.
Redirect.
MR. RIPLEY: We have none of Mr. Keen. We
would be happy to recall Mr. Packwood if there are
questions relative to Exhibit 3 that the Commissioners
might have.
COMMISSIONER MILLER: We'll see if we need
to do that.
MR. RIPLEY: All right.
COMMISSIONER MILLER: All right, thank you,
Mr. Keen.
(The witness left the stand.)
MR. RIPLEY: We call Mr. Baggs. Before
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Mr. Baggs testifies, you made some comments, Mr. Chairman,
relative to the depth of the exhibits. Again, for future
reference, do I understand that the Commission desires the
backup data for numbers such as shown on Exhibit 3 to be
actually filed in an evidentiary format as opposed to
making that type of information available to the parties
and Staff?
COMMISSIONER MILLER: Mr. Ripley, I think I
was simply expressing a personal observation.
COMMISSIONER SWISHER: It's shared,
Mr. Chairman.
COMMISSIONER MILLER: The Commission has not
discussed that formally.
COMMISSIONER SWISHER: We haven't discussed
it, but I share that concern; that is to say, just the
category of procurement contracts, Mr. Packwood, you know,
that doesn't even give a rough idea what turbines cost,
it's just procurement as opposed to forms and concrete and
re-bar. The Staff and parties have seen it and it's not
your fault, you've been responding to production requests,
but that's material that never reaches the record that the
Commissioners never see.
COMMISSIONER MILLER: I recognize that it's
a diff icul t judgment calIon your part of how much do you
clutter up the official record with volumes and volumes
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and volumes of material and I'm sure you have; so I guess
that's one end of the problem or the spectrum. On the
other hand, I think the Commissioners do like to be able
to sometimes actually get their hands on stuff and work
through it themselves; so I don't know if that helps you
or not.
MR. RIPLEY: No, it does. Thank you.
JAMES L. BAGGS,
produced as a wi tness at the instance of the Idaho Power
Company, having been first duly sworn, was examined and
test i f ied as fo llows :
DIRECT EXAMINATION
BY MR. RIPLEY:
Q Mr. Baggs, did you have cause to be prepared
for this proceeding certain direct testimony?
A I did.
Q And does that consist of seven pages?
A Yes, it does.
Q And if I asked you the questions that are
set forth in your direct testimony, would your answers be
the same today?
A Yes, they would.
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Q And you have no rebuttal testimony; is that
correct?
A That is correct.
COMMISSIONER SWISHER: It's six pages and
the word "yes."
MR. RIPLEY: "Yes, it does." With that, we
would make Mr. Baggs available for cross-examination and
have his testimony spread upon the record as if read.
COMMISSIONER MILLER: It will be so
ordered.
(The following prefiled testimony of
Mr. James Baggs is spread upon the record.)
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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
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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
jurisdictional revenue requirements,the
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preparation design analyses andofrate
recommendations,coordination andandthe
preparation company's rate relatedofthe
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 rate
making ramifications of the company's proposal for
the Milner Project.
Q. If the Commission determines that it will authorize
the rate basing of the Milner hydroelectric
generation facilities, what will be the effect on
the Company's rates while the project is being
constructed?
A. The Company's rates will not be affected.
Investment in the Milner 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 will the rates the
Company charges for electric service change?
A.Until the Company' s revenue requirement isNo.
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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's rate base without the Commission
reviewing the Company's revenue requirement and/ or
rates?
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 wi th a new
transformer, etc.) , the Company includes that
investment in the appropriate electric plant
account without specific Commission review. This
accounting procedure is permissible becaus~ it is
assumed that the Commission will allow the recovery
of these costs by the inclusion of the Company's
electric plant in service in rate base when
determining the Company's revenue requirements.
As Manager of Rates of Idaho Power Company, what is
the effect of the Commission's determination that
it will issue a certificate of Public Convenience
and Necessity for a new generation project?
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A. The issuance of a certificate of Public Convenience
and Necessity is a determination by the commission
that the decision to construct the project is
reasonable and prudent, and that such construction
is in the public interest. If the Company utilizes
reasonable and prudent construction practices, the
issuance of the certif icate is recognition that the
investment, upon completion of construction, is in
the public interest and will be rate based for
revenue requirement purposes.
Q. What will be the rate impact if the Commission
determines that it will not rate base the Milner
Hydroelectric Generation Project, but instead will
issue a certificate of Exemption?
A.None.If the Commission determines that the
Milner Project should not be rate based, the
Commission l S order issuing a certificate of
Exemption should declare that the investment,
expenses, current or accrued tax benef its and
revenues incident to the Milner project will not be
considered for regulatory purposes in the state of
Idaho including, but not limited to, revenue
requirement and power supply purposes. The Company
is then free to sell the energy to another utility.
The Company would earn a reasonable return on its
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investment by establishing a contract price high
enough to assure such a return.
Q. Mr. Packwood, in his testimony, has referred to the
concept of reproduction cost new, less depreciation
as a plant valuation method for revenue requirement
purposes if the commission issues a Certificate of
Exemption.Please define what is meant by
reproduction cost new, less depreciation.
A. Reproduction cost new, less depreciation, is the
total investment that would be required by Idaho
Power to duplicate the Milner project at a point in
time, at the then current costs for all materials,
supplies,rights,and landlabor,land
transportation,and miscellaneous direct and
indirect expenses (including overhead, engineering
and supervision are normallythatcosts
capi talized) i as well as the costs that would be
required to obtain all necessary approvals and
permi ts i and any other costs that would be
appropriately applicable to the reproduction cost
of the Milner Project.From that total would be
deducted an amount representing the straight line
depreciation of any Reproduction Costs that are
depreciable.
Q. Does this complete your testimony?
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1 (The following proceedings were had in
2 open hear ing. )
3 COMMISSIONER MILLER: Mr. Miles, do you have
4 . questions for Mr. Baggs?
5 MR. MILES: I have no quest ions of
6 Mr. Baggs, Mr. Commissioner.
7 COMMISSIONER MILLER: Mr. Richardson.
8 MR. RICHARDSON: Thank you, Mr. Chairman.
9
10 CROSS-EXAMINATION
BY MR. RICHARDSON:
13 Q Mr. Baggs, did you coin the phrase
14 Certif icate of Exemption?
15 A No.
Q Who did?
A I don't kn"ow.
Q Do you know where it's def ined?
A I do not know of a specific definition in
the sense of a dictionary or a statutory sense,no.
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21 Q In your exper ience at Idaho Power and
22 specifically as rates manager, has the Idaho Commission
23 ever issued Idaho Power or any other utility as far as you
24 know a Certificate of Exemption?
25 A Not to my knowledge.
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Q You speak of reasonable and prudent
construction practices as one of the conditions to rate
basing the Company i s investment in Milner; correct?
A Yes.
Q Could you give us some examples of what are
reasonable and prudent construction practices?
A I can't give you specific examples of the
actual practices that would constitute reasonable and
prudent practices; however, I can tell you that when I
discuss conceptually reasonable and prudent construction
pract ices, what I'm talking about is the pract ices which
the Company or any other contractors and so forth would
undertake in a project such as this to attempt to build a
project in as cost-effective a manner as possible.
Q What incentive does Idaho Power have to
bring the Milner project on line at less than its
commi tment estimate?
A Well, Idaho Power has the incentive at all
times to bring projects such as Milner to do whatever
construction practices it does for as Iowa cost as
possible, that Milner is no different in this respect. In
addi tion to that incentive that already exists, I believe
Mr. Packwood has discussed an additional incentive which
the Company has proposed, that being the cap on the
construction costs in the Milner project.
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Q You were here when Mr. Packwood testified?
A I was.
Q And you just referenced his test imony
wherein he referenced the cap on construction costs as
being an incentive to the Company to keep costs down; is
that a fair characterization?
A I guess so, yes.
Q And I asked you what incentives Idaho Power
has to bring the project on line at less than the
commi tment estimate and you stated that Idaho Power always
has an incentive to keep costs down. Can you specifically
identify what incentives you're referring to?
A I don't know exactly what you mean by
"incentives. II
Q To bring Milner on line at less than
comm1 tment estimate. What incentives are you referring to
when you say Idaho Power always has incentives to keep
costs down?
A As I say, I don't know exact i y what you're
getting at. What form of incentives are you asking me
about?
Q Well, I guess we're working at cross
purposes here. The question is what incentive does Idaho
Power have to bring Milner on line at less than the
commi tment estimate?
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A Okay, and my response to that is that it is
the Company i s position that it will attempt to build
projects like Milner and any of its construction that it
undertakes in as cost-effective a manner as is possible.
That is the way in which the Company does business.
Q When, speaking temporal i y, does one know
whether the Company has in fact used reasonable and
prudent construction practices?
A It is the position of Idaho Power Company
that it uses reasonable and prudent construction practices
from the very beginning of a project until the end of that
project; so at any point in time, certainly unless
demonstrated otherwise, it's the assumption of the Company
that we do build projects in that fashion.
Q But isn't it true that one can't know or
make a judgment if reasonable and prudent construction
practices have been employed until after the project has
been constructed?
A I think the question can be asked at any
point in time during the construction process.
Q Even before the construction has begun?
A No. Certainl y when nothing has happened
yet, it's a little bit diff icul t to determine if nothing
was prudent or not.
Q So those decisions have to be made in
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hindsight; correct?
A The prudency decisions have to be made
certainly along the way or as they occur, yes.
Q Assume for a moment that your suggested
costs of construct ion are reasonable today. Would you
agree that they would still be reasonable if, for example,
loads, Idaho Power Company loads, have dropped off such
that the resource represented by Milner is no longer
needed?
A You're asking about my suggested costs for
Milner?
Q Assume for a moment that the loads that
Idaho Power Company is apparently expecting to meet with
the Milner resource do not materialize.
A Okay.
Q Would it still be your position that the
construction costs to build Milner are reasonable and
prudent?
A Yes.
Q Assume for a moment that technology changes
making the construction plan obsolete, would it still be
your position that your proposed construction costs for
Milner are reasonable and prudent?
A I suppose if you could imagine a scenario
where such a thing occurs during the next short time
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period of construction, two years or so, certainly they
could make the prudency of completion of a project, say,
once it was under way, subject to question.
Q Assume for a moment that considerations, for
example, for salmon fisheries make the project uneconomic
through altered water flows, would it still be your
posi tion that proposed construction costs for Milner are
reasonable and prudent?
A I think that any changes of the nature that
you're descr i bing here, be they salmon flows,
technologies, whatever, are examined throughout the
construction process in a project like Milner, and if
times have changed along the way, what the Company will do
is to look at those changed times and make an evaluation
itself of the prudency or perhaps change in direction
that's dictated by the changed circumstances.
Q What would you envision the Idaho Public
Utili ties Commission's role in making those evaluations?
A I would think that they'd have a strong
role.
Q In both your Swan and your Milner
testimonies you discuss the lack of an immediate rate
impact of an order of the Commission rate basing the
construction costs for these two projects; is that
correct?
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1 A Yes.
2 Q In fact, at Line 17 to 25 of Page 4, excuse
3 me, of Page 3, Line 17, you state that the Company's rates
4 will not be affected by the Commission's order in this
5 case; is that correct?
6 A In response to the quest ion of whether there
7 will be an impact on the Company's rates while the project
8 is being constructed, yes.
9 Q You state that the only time the Company's
rates will be affected is in the event of a general rate
11 case or a tracker proceeding; correct?
A Yes.
13 Q What is a tracker proceeding?
A Tracker proceedings are proceedings which
15 have occurred historically, at least for Idaho Power
Company as far as I know, only to include cogeneration and
small power production expenses that have not previously
been included during a general rate case.
Q What's the distinction between a tracker
case and a general rate case?
A Normally a tracker rate case holds most of
the conditions constant that already exist in the rates
that the Company is charging at that time and addresses
only the modification of a small f ini te number of
cpndi tions.
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Q Would it be Idaho Power Company's intention
to bring these plants into rate base for revenue
requirement purposes as soon as possible?
A Certainly it would be to the stockholders'
benef it of Idaho Power Company to have them in rate base
and included in the Company's revenue requirement as soon
as possible after completion of the project.
Q And I suppose that would be one of your
incentives for suggesting that a tracker case might be an
appropriate proceeding to bring these in rate base?
A I don't believe that I suggested that a
tracker would be appropriate.
Q Are you suggesting a tracker case would in
your mind be an appropriate vehicle to bring these plants
on line for ratemaking purposes?
A I believe my reference to a tracker-type
rate proceeding, which occurs at the top of Page 4 of my
testimony, was merely an indication on my part that the
goings on here with respect to Milner during the
construction process and thereafter do not affect the
Company i S rates. The things that do affect the Company's
rates are the determinations by the Commission in either a
general rate proceeding or tracker~type proceeding that
the Company's rates should be changed.
Q And is it your position that a tracker-type
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proceeding would be an appropr iate proceeding in which to
bring the Company's rates into conformance with including
these plants in rate base?
A I don't believe so. I would envision that
Milner would be included for revenue requirement purposes
in a general rate proceeding after the completion of the
Milner project.
Q What percentage increase over existing
Company rates would the Company experience in order to
recover the revenue requirement impact of rate basing both
Milner and Swan Falls?
A I don't know.
Q Have you done no back-of-the-envelope
calculations of that?
A I haven't made that computation. That
depends to a great degree upon the ultimate costs of those
projects. That depends to a great degree upon how those
projects are operated, how they're dispatched, how they
enter into the secondary transactions modeling that goes
into the determination of the Company i s revenue
requirement.
Q So those increased costs would have to be
filtered through your power cost model? The inclusion of
Milner in rate base in the Company's rates, would you have
to run those costs associated with that through your power
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cost model?
A Well, certainly any change in the resources
available on the Idaho Power Company's system affects the
way in which the Company operates its system and in turn
ref lects the way in which that system is modeled and the
costs, power supply-related costs, are included in the
Company's rates.
Q Do you know whether the Mi lner and Swan
Falls projects are considered as existing resources in the
Company's least cost planning efforts?
A I don't know that.
Q Do you know how the costs of these two
projects compare with the Company's cost of conservation?
A In what sense do you mean cost? The cost of
the Milner project has been capped at, I believe, about
$63 million. I believe that's more than the Company is
spending currently on conservation.
Q I'm not speaking in terms of absolute
dollars but in terms of kilowatt hours.
A No , I don It.
Q Do you know how the costs of the two
projects compare to the Company's cost for demand side
managemen t?
A I do not.
Q And have you compared the costs of these two
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projects with potential off-system purchases?
A Have I made such a comparison? No, I have
not.
Q Do you know how the costs of these two
projects compare with potential off-system purchases?
A I have not made such a comparison.
Q Do you know whether the Commission is
charged with when it makes decisions on whether or not to
grant a Certificate of Public Convenience and Necessity
whether it's charged with predicting the future needs of
Idaho Power Company's ratepayers?
A Could you ask that again, please?
Q Certainly. Doesn't the Certificate of
Public Convenience and Necessity assume that the
Commission is making a find of both present or future
public convenience and necessity?
A I believe that the statute regarding the
certif icate references both present and future.
Q Has Idaho Power Company in any of its
filings in this proceeding provided the Commission with
any projections of its estimated need for power at the
time Milner comes on line?
A Not wi thin the context of this proceeding,
no.
Q So are you then asking the Commission to
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make an assumption that these projects will be needed in
terms of meeting Company load growth?
A I don't believe we're asking the Commission
to make really any assumption here. The Commission is
certainl y aware and through our least cost planning
process as well as our resource management reporting
process as well as their determinations in other cases
involving the Company has a feel for what the resource
posi tion of Idaho Power Company is at this point in time
and what it's likely to be in the future. No additional
evidence has been presented in these proceedings, but
based upon that knowledge, it's the position of Idaho
Power Company that to undertake this project is a
reasonable one and it br ings this appl icat ion before the
Commission in hopes of getting their concurrence that1
proceeding in this direction will be a good thing to do
for Idaho Power Company and its ratepayers.
Q You state that no additional evidence is
necessary or has been brought forward in this proceeding,
but the fact is, isn't it, that there's been no evidence
in this proceeding of projected loads for Idaho Power
Company?
A I certainly haven't presented any and I
don't recall that any of our other witnesses have either.
MR.RICHARDSON:Mr.Chairman,that
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concludes my cross-examination.
COMMISSIONER MILLER: Thank you,
Mr. Richardson.
Mr. Purdy, how much do you contemplate?
MR. PURDY: Five minutes, perhaps.
COMMISSIONER MILLER: Why don't you go
ahead.
CROSS-EXAMINATION
BY MR. PURDY:
Q Mr. Baggs, most of my quest ions have been
covered by Mr. Richardson, but as a point of
clarification, I believe on Page 5 of your testimony you
state that the effect of an issuance of a Certificate of
Public Convenience and Necessity essentially that so long
as the Company utilizes reasonable and prudent
construction practices its investment will be rate based;
is that correct? Do you see that testimony there on
Page 5?
A Yes, I see it, that's correct.
Q And yet in response to quest ioning by
Mr. Richardson, I glean from that that you're saying that
if circumstances change during the course of construction,
perhaps depending on the type of circumstances, there
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might be at least an argument that the Company should
perhaps take a look and reassess whether the project is
reasonable as a whole; is that correct?
A I believe my response to Mr. Richardson was
that from a business standpoint Idaho Power Company should
along the way take a look at all kinds of changed
circumstances, large or small, and continue the project's
construction in what is felt to be the appropriate
direction based upon the circumstances as they exist along
the way.
Q All right. Well, Mr. Richardson gave you, I
think, three scenar ios . One was a change in perhaps load
demand, another was a change in technology and the third
was a change, as an example, in streamflows, and I believe
that you testified that at least with respect to the
changes in technology and streamf lows, you could conceive,
of a situation where the changes would warrant perhaps the
Company not completing the project or at least
implementing some type of mitigation to take those changes
into account; is that correct?
A Again, my response to that question, I
believe, was that yes, it would be good practice for Idaho
Power Company to evaluate those things along the way.
That does not change my testimony on Page 5 and my belief
that the issuance of a certificate is recognition that the
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investment upon completion of construction will be rate
based for revenue requirement purposes.
Q We II, are you saying, then, that the Company
might take those changes into account or into
consideration and might recognize them, but they don't
necessarily have to do anything in response to those
changes? So long as they use reasonable construction
practices, you're going to get your plant rate based and
you don't necessarily have to react to those changes?
A Obviously, any of these parties as well as
the Commission along the way has the ability if
circumstances change to cause a reevaluation of the
advisabili ty of, say, finishing a plant, but I believe
that once a certificate has been issued that it is
recogni tion that that plant will be included in rate base
for revenue requirement purposes upon completion as long
as reasonable and prudent construction practices have been
followed.
Q Right, and I don't want to beat this to
death, but maybe we're just going in circles here. You
said that the parties here and the Commission has the
opportuni ty to during the course of construction bring
that to the Company's attention, these changed
circumstances. Are you saying that the Company doesn't
have any such obligation?
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A As I said before, and I believe that was the
thrust of my response to Mr. Richardson's question, I
believe that it is appropriate for the Company to make
evaluations along the way during the construction of a
fac iIi ty such as this of the circumstances that exist each
day along the way. That, as I said before, doesn't change
my interpretation of what is meant by the issuance of a
Certificate of Public Convenience and Necessity, and that
is the authorization for the Company to proceed with the
plant with the understanding that if reasonable and
prudent construction practices have been followed that it
will be rate based upon completion of construction.
Q Do you agree that the Company has the
obligation to exercise good business judgment in making
its investments in Milner?
A Certainly.
Q Let's present a rather extreme scenario just
for purposes of illustration. Let's assume the river
dried up. Based on what you said on Page 5 of your
testimony at the top of the page there, under that
scenario would the Company, could the Company reasonably
continue to construct the Milner project?
A Well, I don't really foresee that. It's a
Ii ttle tough to accept your hypothesis there.
Q Could you answer my question?
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A It seems to me that if the river dried up
prudent business decision making would indicate that
perhaps hydro projects, Milner and any others, would not
be quite as great a value to Idaho Power Company's
ratepayers any more.
Q All right, welL, I' 11 leave that alone.
Mr. Baggs, on Page 4 of your test imony you indicate that
the Company on a routine basis includes investment in its
rate base, reductions or additions to plant in service.
Are you really saying that the Company makes changes to
its rate base without Commission approval or are you
talking about the plant in service account?
A Well, I believe what my testimony says on
Page 4 is that the Company routinely makes investments in
various types of plant which upon the making of that
investment routinely are booked into plant in service,
which then means that those investments in the absence of
some feeling that they shouldn't be are included in the
Company's rate base for revenue requirement purposes.
Q How likely is it that Idaho Power would make
a $60 million entry into its plant in servièe account
wi thout either seeking Commission approval as well as
seeking some type of rate relief?
A Not likely, and that's precisely why we're
here today.
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Q We spoke briefly of incentives for Idaho
Power to keep its construction costs at a minimum. Can
you think of a better incentive for the Company to keep
costs at a minimum than to reduce or limi t rate base
recovery to the avoided cost rates?
A That doesn't seem to me to be an appropr iate
incentive.
Q And why not?
A I'm not sure how one would even compute
something like that.
Q Well, let's assume that, let's just assume
that we could, we could compute a comparable avoided cost
rate. Wouldn't you agree that it's perhaps, it would be a
good incentive for the Company in order to keep its costs
down to limit its rate base recovery to whatever that
hypothetical avoided cost rate might be?
A I don't believe that that sort of an
incentive has any more appeal than any other arbitrary
incentive that could be chosen.
Q On Page 6, Mr. Baggs, you speak of
reproduction cost. In the event that some type of
Certif icate of Exemption is issued for the Milner project,
the Company would like to see it valued or rate based at a
reproduction cost. Could you give us a general idea of
how you would go about calculating reproduction cost for
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A Well, I believe on Page 6 it describes what
the reproduction cost would include and at that point the
various components of reproduction cost.
Q Well, how did you determine that? I mean,
did you utilize some type of index? Would you take labor
rates, hours of labor rate times, an increase in hours of
labor times the increase in labor rates?
A It has not obviously been computed at this
point in time; however, I suspect that one way in which
you could make such a computation would be to take all of
the var ious components of the Milner plant as constructed
and booked originally and increase those on an
i tem-by-i tem basis using various indices, perhaps the
construction indices, like Candy Whitman, et cetera, to
br ing those costs forward to the time, whenever, 20 or so
years forward, when you're trying to determine what they
are.
Q Obviously, the plant hasn't been
constructed, I assume you haven't made those calculations
yet, but are you saying in your mind that's how you
envision calculating a reproduction cost on the basis of
indices?
A That's certainly one way in which you could
do it.
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Q Is that how you would propose to do it in
this proceeding?
A I really haven't made a proposal of how it
would be calculated.
MR. PURDY: I have nothing further.
COMMISSIONER MILLER: All right, thank you.
Mr. Ripley, would it be all right with you
if we excused Mr. Baggs before the Commissioners'
cross-examination so we could take the testimony of our
public witness so that we could get to him before noon and
then we would finish Mr. Baggs after lunch?
MR. RIPLEY: Sure.
COMMISSIONER MILLER: Mr. Baggs, let's
excuse you for a few moments and we'll get back to you
later.
THE WITNESS: Okay.
(The wi tness left the stand.)
COMMISSIONER MILLER: Is it Mr. Moss?
MR. MOSS: That's correct.
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BAGGS (X)
Idaho Power Company
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DeWITT A. MOSS,
appearing as a public witness, having been 'f irst duly
sworn, testified as follows:
COMMISSIONER MILLER: For purposes of
getting you started, would you start your testimony by
stating your full name, spelling your last name and
stating what your interest in this matter is?
THE WITNESS: My name is DeWitt A. Moss,
M-o-s-s. I reside in Jerome County. I am a director on
the North Side Canal Company and assisted in the
negotiation wi th the Idaho Power Company of the Milner
project contract between Idaho Power and the Twin
Falls/North Side canal companies. In addition, my family
and I operate a greenhouse business in Jerome and I also
farm. I am here to recommend to the Idaho PUC to rate
base the Milner project.
In 1977, the Idaho Water Resource Board
identif ied the Milner Dam site as a feasible hydropower
si te. The Twin Falls Canal Company and the North Side
Canal Company jointly filed for water rights for the
Milner project site in March of 1977. Early in the 1980s,
the existing Milner Dam was judged by the State of Idaho
to need rehabi I i tat ion to meet current earthquake cr iter ia
as mandated by the Dam Safety Act.
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Subsequently, a contract was negotiated
between North Side and Twin Palls canal companies and the
Idaho Power Company to build power facilities at the
Milner site. The revenues to the Twin Falls and North
Side canal companies from the Milner project power sales
will allow rehabilitation of the SO-year old Milner
diversion structure to meet current dam safety
requirements. A new Milner diversion structure will allow
the reliable continuation of irrigation diversions to
approximately 15,000 farms with 500,000 acres of prime
farm land and to benefit 100,000 residents in six south
central Idaho counties. The economy of the six counties
is dependent, almost solely, on the agriculture base of
cropping and livestock as noted in the EIS on the Milner
project.
The people in the six counties will benefit
from the project, obtaining a 100-year dam worth
$10 million. The people of Idaho will obtain renewable,
clean, low-cost hydropower for a long period of time.
Based on the Northwest Power Planning Council 1989 study,
such energy may be needed as early as 1992 and most
probably by the year 2000.
If fishery needs demand change in the
operating modes of the BPA Columbia River power
facilities, power deficits could occur easily by the
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mid-1990s and power rates could escalate. Power sites
such as Milner, which produces 50 megawatts electrical,
could help alleviate such power deficits and should be
fostered.
The FERC required mi t igat ion f lows for
recreation, fish and wildlife enhancement. These flows
will benefit all Idaho residents and tourists who take
advantage of these resources. Low hydroelectric
generating rates will allow and promote continued
spr inkIer convers ions, thus improving water quali ty and
river flows to the Snake River. The Milner project
represents the last site on the Snake River to install a
signif icant new power plant without building a new dam on
the river.
In summary, power from the Milner project
will benefit Idaho residents, farmers and our local power
utili ty, Idaho Power Company. The water and power are
better put to use in Idaho. The Milner project is worthy
and is timely and as such should be rate based.
I thank you for considering my view.
COMMISSIONER MILLER: Mr. Moss, let me see
if any of the parties have any questions or anything they
would like you to elaborate on for us.
THE WITNESS: I would be happy to if I can.
COMMISSIONER MILLER: We'll find out.
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MR. RIPLEY: We have no quest ions.
COMMISSIONER MILLER: Mr. Miles.
CROSS-EXAMINATION
BY MR. MILES:
Q Mr. Moss, regarding the f low to be released,
which I think is 200 cfs, for fish protection and
enhancement, I read in the paper that some of the members
of the Twin Falls Canal Company and other canal companies
are objecting to the release of this 200 cfs due to the
fact that their ancient water rights give them the right
to dry up the Milner Dam during the summertime; in other
words, there wouldn't be any release. Is this the
posi tion that you state that you're agreeable to the
release of the water, does that coincide with the official
posi tion of the Twin Falls Canal Company and the North
S ide Canal Company?
COMMISSIONER SWISHER: He's North Side.
THE WITNESS: I am on the North Side, but I
believe in this case I can speak to that issue
represent ing both canal companies. You're right, the
200 cfs was mandated as a FERC requirement for mitigation
to put in summer flows which was normally our normal
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irrigation period from approximately May 1st to the end of
October. Okay, they were not called minimum flows, they
were called target flows. We only had to provide those if
in fact the water from the water bank was available to
lease.
As you know, we're leasing water today or
the last few years at $2.50 a square foot. I think as one
being on the negotiating committee, I felt that the price
of water was unrealistically low. I do the calculations
on the back of the envelope and I says what happens when
it's $10.00 a foot and then all of a sudden that's a very
expensive proposition when in fact the Idaho State Water
Plan says we are allowed zero at that point.
There had been a few instances of 50 and
8 cfs, but that was due to the dam leakage and that's what
we basically set about to correct with replacing the dam.
Q BY MR. MILES: Then if I understand you,
then, you wouldn't be willing, that is, the canal
companies wouldn't be willing, to incorporate a target
f low into a minimum flow?
A I think the people, if I understand what
you're saying, of course, that was not my decision, that
was FERC's decision, I think they had a problem with their
Federal Power Act that says you cannot alter and mingle
with the Idaho State Water Plan, they acknowledged that we
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had a water plan and the water plan says zero at Milner;
so in my judgment, sir, they changed the terms. Instead
of minimum flows, they said, hey, we can't get away with
that, these people won't allow it and let's go to "target
flows" based then on a qualification of availability of
water in the water bank.
Q In other words, in a real low water year if
the water bank couldn't supply the 200 cfs, then there
wouldn't be any 200 cfs release at Milner?
A I believe that is partially correct and you
may need to readdress your Idaho Power people. I believe
that they have some storage in one of the reservoirs
upstream that they have basically agreed to send down if
that water is there during the summer months and we have
agreed to join them to the extent that we can rent water.
Q Well, Mr. Moss, using a hypothetical, if BPA
or the Northwest Power Planning Councilor some other
entity purchases that water to flush (unintelligible) to
the Pacific Ocean in the early part of the irrigation
season, then there wouldn't be any water in the water
bank, would there, for later releases during the summer?
A Sir, absolutely correct, and it's a very
hypothetical but a probable situation. On the other hand,
they could purchase it for one year or two years and then
basically our reservoirs upstream would be near empty, I
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mean close to zero, nothing left for fish, wildlife,
recreat ion and the like; so there's got to be some sort of
semblance of sanity in this issue to in fact protect what
lies upstream and then what we practically send down
either for mi t iga t ion for Milner for the salmon summi t or
other streamf lows that need to be addressed. You could
rent the water in the last two years, we're going into a
four-year drought, but you could rent the water for the
last couple of years, but there may not be any up there.
Q Mr. Moss, to your knowledge, do you know of
any irrigators in these tracts that are apt to release the
water for the water bank and put their lan~, say, in this
set-aside program; is that a possibility?
COMMISSIONER MILLER: Mr. Miles, I think
we're kind of drifting away from the issue that Mr. Moss
came to share his thoughts on and I think we've had some
exploration of these water right questions, but they're
not directly relevant, in my opinion, to the question at
hand; so why don't we try and steer away from discussion
of water rights if we could.
MR. MILES: Well, since this has been a
valid part of the license requirement, I just want to be
assured that there will be a 200 cfs flow on a minimum
streamf low basis, that's my point in asking these
questions.
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COMMISSIONER MILLER: And I think the
wi tness has told us about as much as we can prof it from in
that regard.
MR. MILES: Well, with that objection,
Mr. Commissioner, then I have no further questions.
COMMISSIONER MILLER: All right, thank you,
that was helpful to us, though. I think we get the
point.
Mr. Richardson, do you have anything?
MR. RICHARDSON: No questions for Mr. Moss,
Mr. Chairman.
COMMISSIONER MILLER: Mr. Purdy.
CROSS-EXAMINATION
BY MR. PURDY:
Q Yes, while you're on the stand, Mr. Moss, I
just have one. It's my understanding that at least the
Company's application in this case indicates that the
canal companies will receive a royalty equal to
approximately $5,600,000 plus, one-half of the total cost
of repairing the dam. I'm interested if you could share
with us how you arrived at that $5 million plus figure.
A Actually i' m not the best one to share wi th
you. There's no question we needed help on helping
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finance the construction of that dam. One of the
questions that came from the Commissioners over here is we
were advised that the dam needed to be replaced. Late in
the 1970s, and by the way, I'm speaking of things before
my time, I've really been involved for about five years,
late in the 1970s, there was a 2- to $3 million correction
talked about on the dam. The Dam Safety Act and the
earthquake criteria came into play. Because Idaho Power
had some engineering experience, we engaged them to help
us determine what needed to be done on the dam.
Okay, subsequent to that time we began
negotiations with if we put a power plant there could we
use the power revenues to help provide the dam. The
question asked earlier by Commissioner Nelson was why
didn't the irrigators do this. Okay, if you would recall
back in the early 1980s, in that period of time, our
budget at the North Side Canal Company was less than a
million bucks. We knew we were talking someplace between
5- and $10 million dollars to replace the dam. We had the
difficulty of obtaining credible low-cost financing. The
dollar-and-a-quarter, dollar-and-a-half number per acre
really didn't come out that way from our finance people.
They came out much more signif icant in the depths of the
farm depression. We were losing farmers left and right.
Just another added burden in those days of around a
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costs would possibly have fostered the demise of many
more.
The main criteria was without going into
partnership with a very credible organization, such as
Idaho Power, we could not get financing without putting a
lien on our lands, and I may not be using the exact legal
terms, but it would have required some sort of lien on
these lands and we as canal company directors on the North
Side, I can speak very def ini tely, refused to address that
to put a lien on the land of these farmers who many of
them paid for the land years and years ago. Did I answer
your question, sir?
Q Yes, you've given us some he lpful
background; so I guess the royalty was essentially a means
of assisting the canal companies in obtaining financing?
A Very def ini tely. We owed Idaho Power some
pre-construction costs, some engineering, that they helped
us to get the license. This negotiation took place from
1981. I really became involved about in 1987. We met
continually and basically hammered out an agreement. We
would have liked to have had it all. Okay, that was my
starting position, the price of the dam and then let's
negotiate, Idaho Power, we ultimately end up with
one-half.
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Q Thank you. In your opinion will the
incentive royalty that's built into this arrangement
essentially provide an incentive for the irrigators to use
less water, thereby resul t ing in increased f lows be low
Milner Dam?
A The incentives built into those royalties
are really two-fold. One, as I see them, is to make sure
that we honor the already written contract that we have
with Idaho Power that we will prefer all other power
plants to Milner; in other words, we won't run late, we
won't start early, because both Twin Falls and North Side
have power plants on their canal systems; so basically
there is every incentive because of the 150/46 foot drop
and now the capability with a 200 cfs, a 1,000 cfs and a
400 cfs generator there to in fact obtain the energy that
comes out of a 150 drop versus the maximum we get on our
other lines, sir, are 50 feet, maybe 70 or 80; so we have
every incentive to go that direction.
MR. PURDY: Fine. I have nothing further.
Thank you.
COMMISSIONER MILLER: Commissioner Swisher.
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EXAINATION
BY COMMISSIONER SWISHER:
Q Well, one provision in your agreement is
that if the Public Utili ties Commission does not combine
the commitment to rate basing with a certification that
you then proceed on a royalty basis to share in the return
from the sale off system of the electricity. Any comment
on that as to your preference?
A No, basically I think that my testimony,
Mr. Swisher, would support strongly that we feel that, and
if you rationally look at the energy load requirements of
what has happened in this country, there is going to be,
there may not be a need today, but there will be. We're
only talking two more years. If the economy turns around,
energy grows at the rate of seven percent per year, I
mean, it's historic, it's done it for years and years.
Q Whoa. It stopped in about 1980.
A I was going to say if you look before 1980,
basically we've taken advantage now of lots of the
conservation techniques that were easily available,
cheaply available, but energy will grow. That is our
opinion. We feel that the energy benef its the State of
Idaho, the residents, and as preference should be rate
based. On the chance that it was not rate based, then we
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have a clause in our contract that we're simply going to
have to count on Idaho Power to help us go off site and
try and find a home for this.
Q Sure. Is it the feeling on the board at the
North Side that there's something teleological that says
that energy growth from now until the end of creation
moves at seven percent per year exponentially, did you
really buy into that?
A No. Mr. Commissioner, before I came back
and operated a greenhouse and operated a farm for about 15
to 16 years, I was in the nuclear energy business.
Q That's where you got that.
A Yeah. Basically we looked at those numbers,
you know, so many different times and so many different
directions and how you could supply the energy, whether
it's nuc lear, hydro, sun, tides, you name it.
Q Cost was not even a factor, was it?
A Right.
Q Okay. When I first saw the North Side Canal
as a young man, I think almost 80 percent of the water
diverted at Milner went into the subsoil because it ran
over lavas, this was a long time ago.
A Right.
Q And I know the North Side has done a world
of work on that, but what's the percolation factor these
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days?
A I would say that we are energetically trying
to riprap canals, smooth out, fill in the crevices in it,
but, Mr. Swisher, also, probably one of the main things
has been conservation. The North Side Canal is now
approximately 50 percent sprinkler.
Q It makes a big difference.
A It makes a big difference. You're talking
five or six acre feet delivered if you do it by gravity
irrigation versus you i re talking about two-and-a-half acre
feet if you put it on by sprinkler. As a cautionary
reminder, evidently about 20 years, 10 years, ago, they
had a request to line the canals looked at on the north
side. If I'm not mistaken, like I say, 10, 15 years ago,
the request was somewhere between 150- and $180 million to
line the canals, which obviously would have saved some
water, but then, Mr. Swisher, I really -- well, the cost,
you forget that, I don't know how we would have got that
funded -- I think that we would subject ourselves to all
of the residents down there on the north side in the
Hagerman Valley and the fish farms because we would no
longer be supplying enough percolated water to allow them
to continue. It's a problem, our attorneys have said
you've got to be careful, you may be on the end of a
lawsuit.
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for the Hagerman Valley.
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Q No question.
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COMMISSIONER SWISHER: That's all I had,
7 Mr. Chairman, appreciate your coming.
8 COMMISSIONER MILLER: Mr. Moss, thank you
9 very much for your help. I know it i S a burden for you to
travel over here from Jerome and it's always an unnerving
project to testify in public hearings; so we very much
appreciate your help.
THE WITNESS: I thank you and it was not
very unnerving for me. It would have been if I had stayed
15 three days.
MR. RIPLEY: We have no objection if he's
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COMMISSIONER MILLER: You're free to go or
stay.
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THE WITNESS: I thank you kindly.
(The witness left the stand.)
COMMISSIONER MILLER: All right, in addition22
23 to providing interesting testimony, Mr. Moss has brought
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2 (Noon recess.)
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