19901210Vol III Hearing.pdf

BEFORE THE IDAHO PUBLIC
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ORIGINAL
RECEIVED fl
UTILITIES F¿b~ISSiQ '"
90 DEC 10 Pll tt 15
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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.
iDAHO PUBLIC
UTILITIES COMMISSION
CASE NO. IPC-E-90-8
BEFORE
COMMISSIONER DEANJ. MILLER (Presiding)
COMMISSIONER RALPH NELSON
COMMISSIONER PERRY SWISHER
PLACE:Commission Hearing Room
472 West Washington
Boise, Idaho
DATE:November 27, 1990
VOLUME III - Pages 171 - 295
7WEDRICKCOURT REPORTING
537 W. Bannock
Suite 205
P.O. Box 578
Boise, Idaho 83701
[phone] ./
. . . We offer .. BaroDaa
Microtranscription™ by
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APPEARANCES
For the Staff:BRAD M. PURDY, Esq.
Deputy Attorney General
472 West Washington
Boise, Idaho 83720
For Idaho Power
Company:
EVANS, KEANE, KOONTZ, BOYD
SIMKO & RIPLEY
by LARRY D. RI PLEY, Esq.
Idaho First Plaza-Suite 1701
101 South Capitol Boulevard
Boise, Idaho 83702
For the Industr ia1
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 3. RICHARDSON, Esq.
400 3efferson 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
APPEARANCES
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1 I N D E X
PAGE
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176
182
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277
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288
PAGE
2
3 WITNESS EXAINATION BY
4 Commissioner Swisher
Commissioner MillerMr. Ripley (Redirect)
3ames L. Baggs
( I daho Power)
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6 Don Reading
(ICIP)
Mr. Richardson (Direct)
Pref i1ed Testimony
Mr. Purdy ( Cross)Mr. Ripley (Cross)
Commissioner Swisher
Commissioner Nelson
Commissioner Swisher
Commissioner MillerMr. Richardson (Redirect)
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17 E X H I BITS
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19 NUMBER
20 FOR THE INDUSTRIAL CUSTOMERS OF IDAHO POWER:
21 Qualifications of Dr. Don Reading
(7 pages)
Premarked201.
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202.Idaho Power Company, Change in
Cost of Equi ty
Premarked
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INDEX/
EXHIBITS
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BOISE. IDAHO, TUESDAY, NOVEMBER 27, 1990, 1:30 P. M.
COMMISSIONER MILLER: All right, let l s
resume our consideration of IPC-E-90-8. Let's see,
Mr. Ripley, I think Mr. Baggs is on the stand still.
MR. RIPLEY: Yes, sir.
3AMES L. BAGGS,
produced as a witness at the instance of the Idaho Power
Company, having been previously duly sworn, resumed the
stand and was further examined and testif ied as follows:
COMMISSIONER MILLER: That brings us to
Commissioner Swisher.
EXAMINATION
BY COMMISSIONER SWISHER:
Q Well, Commissioner Swisher was interested in
the test imony of Mr. Keen on recouping these costs. When
you and Mr. Keen and others were talking about this, did
you give any thought to some such approach as that now
used at the Commission for leve1izing PURPA rates in
dealing with one of the contingencies in your application:
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BAGGS (Com)
Idaho Power Company
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that is, the possibility of not rate basing at this time
and coming into rate base at a later time?
As Mr. Keen testified and that you did, I
think, in response to cross, of course, the front end
costs are the greatest and the benef its are the least on
any base load plant or on any plant of this kind. Is
there the possibility of working out a mechanism that
would perhaps make, change this whole approach to rate
basing?
Suppose, let me hypothesize, suppose that
the Commission were to issue an order that granted the
application for a certificate and in that order said that
the development of the project is in the public interest,
that the need on the system will not occur soon enough to
capture those front end costs; in other words, they i re not
letting you bring it into the rate base immediately. My
colleagues would do that, I l m not a bad guy like that, but
there's always the possibility; so if that happened, then
what about a levelizing mechanism that says that the
Company l S investors and indirect 1 y the customers for that
power in the front interval aren't going to get stuck with
all those costs. that the ratepayers are going to share
equi tably in those costs so that the plant could be phased
in.
Think of it as a continuum over which at the
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BAGGS (Com)
Idaho Power Company
start when the penstocks first spill with water the power
is being sold other than to your own ratepayers, and then
as time goes by over a fixed course, it starts coming into
the rate base and the booking of the sales as well as the
cost starts to involve the ratepayer so that you have,
you're gradually backing out of whatever market you'd be
selling it in at startup and it would gradually be coming
into the rate base.
A I suppose that certainly some sort of a
mechanism like that could possibly be derived.
Q The exempt ion thing gave me problems,
frankly, and that's why I wondered about that.
A Ini tia1ly. we have not looked at in any
great detail how something like that might conceivably
work. It raises some questions in my mind. It seems to
me that while in its theoretical sense may have some
appeal, practically speaking, when one is faced with how
would one derive such a rate, if you will, and how would
it work in conjunction with the other components that go
into making up the Company i s rate base and the other
expenses that determine ultimately what the rates of the
Company are that it could be, I think, a complicated
problematic sort of thing. That's not to say that
something couldn't be devised.
Q No, you're just telling me that you're
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getting old, that innovation is difficult. You're now in
your 40' s; isn't that what you're telling me?
A I'm not that old.
Q Well, it's just a thought and I throw it out
there for what it's worth, but it is worth consideration
in the sense that early on that power, if you were to try
to sell power in the marketplace that you acquired in that
fashion, there would not be a market for it as such, but
again when you look at your dispatch pattern on this
Company and when you look at the shape of your own load
and then you look at the seasonality of the generation at
Milner, then the availability of that power for you in a
marketing mode, you know, looking at what your dispatchers
do, it might have some value to the Company that would be
greater than your rate of return on a fully rate based
plant. I don't know.
A And that's possible and part of the request
in the alternative for an exemption certificate, as you
know, requested a 20-year time period.
Q It's the flash cut that bothers me, it's in
and out, you i re totally out and then you i re totally in and
meanwhile, we would have had a depreciation mode, we would
have had an amortization mode and it would have been in
the very time when it's most important to the Company in
terms of cost recovery.
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A And its value in terms of the availability
or the ability of the Company to sell it off system to
some other purchaser depends to some degree upon the
length of time for which we could commi t to do that.
Obviously, a firm contract of some duration is of more
value to a potential purchaser than certainly the spot
market.
Q There's some real changes coming and
occurr ing, not just coming, occurr ing , in the small
increments of power that are just showing up here and
there. For instance, Mr. Baggs, I watched, I don't like
to watch movies or overhead projectors very much, but I
did watch at a recent meeting of the national regulators a
piece of film from a guy in Southern California who
because of a deadline of Southern Cal Ed and a tax
deadline in the state tax law put together and delivered,
this is just symptomatic, I'm not talking about the source
of power, he put together and delivered something
approaching a 50 megawatt solar mirror system in the
Southern California desert, seven-and-a-ha1f months from
contract to on line.
Now, that's pretty exotic, okay, but that i s
not to say that the way in which resources are acquired
these days, what I'm saying is the way in which resources
are acquired today are very different from the old days of
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bringing on 600 megs at a wack, and so your dispatch
pattern seems to mirror that change as well. Things
become very important that your people who sell power on
what the gas people would call the spot market be able to
do things much more flexibly than they did 10 years ago.
A Yes.
Q And always your price is often one in which
the purchasing utility, if it's a utility, is in some
displacement mode where they know they can schedule some
off time on some high-priced thermal and take your stuff
or your mix of stuff at a good price.
A Yes.
COMMISSIONER SWISHER: Well, that's all I
had, Mr. Chairman. I thank you.
COMMISSIONER MILLER: Thank you,
Commissioner Swisher.
EXAMINATION
BY COMMISSIONER MILLER:
Q I just had a couple of areas that both
Mr. Richardson and Mr. Purdy discussed with you and I
wasn i t at the end of those discussions sure I understood,
I guess, the Company point of view. Both of them
discussed with you the possibility of events which are now
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unforeseen occurr ing dur ing the construct ion process which
would be of such a nature or magnitude that termination of
the construction would be considered an option, and as I
recall it, you indicated that the Company in the event of
such occurrences would carefully evaluate the
circumstances at the time and so on, and the question,
though, came up of what would be the Commission role in
such decisions.
On the one hand, your proposal seems to say
that a finding now of prudence in the issuance of a
certif icate limits the Commission to only being able to
consider in the future whether construction methods were
prudent, but then in your answers to those questions, you
seemed to somehow indicate that the decision to proceed or
not proceed in the event of dramatic unforeseen
circumstances would be reviewable by the Commission; so I
was basically unclear on what the Company's point of view
is; so let me just ask, in the event that unforeseen
circumstances of this nature did occur and the Company
proceeded with construction and did not make the decision
to terminate, in the Company's proposal would or would not
the Commission have the ability to review that decision in
some subsequent proceeding? Do you get it?
A Yes, I think I did do. I believe that I
would fairly state the Company's position that certainly
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during the construction process the Commission, and any of
the parties for that matter, have the ability to examine
si tuations which might change along the way and recommend
perhaps that construction, in your example if there's a
radical change that indicated a need or a lack of need for
the project all of a sudden, the construction perhaps
should be terminated.
I suppose that could carry forward or on
into a later proceeding after the fact as well, but I
believe I can faiF1y say that the Company's position is
that in questions such as these, other than the
construction prudence issues which I would distinguish,
that the burden of proof that the Company acted
imprudently would have shifted from the Company to that
party that's alleging that the Company somehow was
imprudent in proceeding with constructton.
Q So would it be the Company's position that
those issues, those types of questions, are still
reviewable by the Commission, but that the burden of proof
changes around?
A Yes, those issues are always subject to
review by the Commission in our view.
Q Well, if in the Company's view those
decisions are reviewable, and putting aside the burden of
proof quest ion, how does your proposal or how does your
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understanding of what a Certificate of Public Convenience
and Necessity is differ from what you've seen in the
arguments of the Industrial Customers and the Staff?
A Well, again, my interpretation, I believe
the Company's interpretation, of what a certificate means
is ¡different from that which I've seen in my reading of
the other part ies' test imony in the sense that the other
parties appear to be arguing that a certificate is nothing
more than the authority today to construct the plant
period and I hope I'm being fair to their positions.
Q We'll find out in a minute.
A But the Company's position, as I believe
I've stated in my testimony, is that the issuance of a
certificate is a finding at this point in time that the
construction of the Milner project is in the public
interest and that certain construction can proceed, and in
addition, I would add that if assuming that the Company
fol lows, again, we're talking reasonable and prudent,
construction practices along the way that the Company
could reasonably expect that that investment if prudently
made upon completion will be included in the Company's
rate base for determining its revenue requirement: so I
don't know if that adequately answers the question.
Q Then another area that frankly I don't think
you discussed, but perhaps Mr. Packwood did, but it is
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related, has to do with the question of costs in excess of
the construction commitment, and the Company's point of
view, as I understand it, is that at some level above
those costs the Company would simply absorb them, but that
at some greater level if the costs became significant, in
your Company's words, then the Company may apply to the
Commission for the recovery of those costs as well: is
that basically what your proposal is?
A Yes, as long as those signif icant costs
again fall into the categories that I believe Mr. Packwood
laid out for changes in scope I believe they were referred
to as.
Q But it's the, it would be the Company's
point of view that at the time of that application the
Commission would have full ability to determine the
prudence of those additional costs or is it the Company's
posi tion that the Commission is somehow by granting the
certificate now making any finding with respect to
addi tional costs?
A I believe that at the time that those
addi tional costs occurred, an application was made to the
Commission to discuss the appropriateness of including
them or not, that would be the time at which the
Commission would make a finding relative to their
appropr iateness.
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Q So that you're not viewing the issuance of a
certificate today as having any implication for costs over
and above, significant costs above, the commitment amount?
A That's correct.
Q Then one other area, assuming that the
Commission goes the other way and does not grant a
certif icate, but says that this can be operated in some
manner as an unregulated or exempt facility, that brings
us to the topic that everyone loves to discuss which is
transactions with affiliated companies. What if the
Commission concluded that in order to ensure that
ratepayers of the regulated side were not in some manner
supporting or subsidizing the unregulated project that the
unregulated project should be structurally separated from
the regulated company and conducted in a separate
subsidiary, would that be acceptable to the Company?
MR. RIPLEY: Mr. Chairman, I'd be happy to
call Mr. Packwood. In all candor, I believe Mr. Packwood
is the policy witness: so you've gone over the edge with
Mr. Baggs.
COMMISSIONER MILLER: All right, we'll maybe
have a chance to discuss that with Mr. Packwood.
MR. RIPLEY: I'll recall Mr. Packwood.
COMMISSIONER MILLER: Okay. Redirect.
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REDIRECT EXAMINATION
BY MR. RIPLEY:
Q Mr. Baggs, let's assume that the Certificate
of Convenience and Necessity has been issued, the Company
has expended for purposes of my hypothetical $30 million
towards the construction of the Milner facility and at
that time the Commission or the Company recognizes that we
are in triple digit inf lation and so that it knows at that
time that its original projection of 63 million is now,
just using a number, 90 million. Do you have those
hypothet icals in minds?
A I think so.
Q Do I understand that the Company would apply
to the Commission for authority to continue the
construction with a new limit of 90 million?
A Yes, there's no need -- let me back up. If
a certificate is issued now and there is a significant
change in scope, such as you've descr ibed, along the way,
certainly that would be the time at which the Company
would bring that change in scope before this Commission in
order for a determination of the, a revisit, I guess, if
you will, of the cost of the project.
Q And again, I assume that the Commission
could say no, we now want to deny any further construction
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on this project because the costs have risen too high?
A Certainly.
Q But the Company would have $30 million of
sunk costs prior to the time that the determination that
inflation had taken off had occurred; correct?
A That's correct.
Q What would the Company's position be as to
the $30 million of costs that the Company had already
expended in the project?
A Those would be costs that would be, would
have been expended as a result of the Company having
obtained a Certificate of Convenience and Necessity and
would be proper ratemaking costs.
Q So you would include the amortization of the
$30 million in the Company's revenue requirement?
A Yes.
Q Now, you were asked a ser ies of quest ions by
counsel for the Industrial Customers as to what the
Company had done as far as making cost comparisons,
analysis of need, et cetera; do you recall those
questions?
A Yes.
Q And you answered that you had not done any
of those things if I recall your testimony.
A Yes.
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Q Would you have been the individual at Idaho
Power Company that would have performed such analyses?
A No, I wouldn't.
Q Would that have been done under
Mr. Packwood's department?
A It would.
Q I direct your attention to Page 11 of
Mr. Packwood's testimony, Mr. Baggs.
A Okay.
Q At Line 9, Mr. Packwood is asked the
question, "Please discuss the timing of this project"; do
you see that?
A Yes..
Q Isn't there then a discussion by
Mr. Packwood as to the Company's position in reference to
need and the type of quest ions that Mr. Richardson was
asking you?
A Yes, as Mr. Packwood testifies here that for
various reasons the timing of the Milner project was
something that's not deferral, that if Idaho Power Company
was to avail itself of the opportunity to participate in
this project at all that essentially now is the time that
that would have to occur.
Q So in short. Mr. Baggs, if someone were to
read this record cold and come across your testimony that
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you were asked a ser ies of quest ions did the Company do
this or did the Company do that, I couldn't draw the
conclusion from that testimony that the Company had or had
not performed those tasks, simply that you hadn't
performed them?
A Absolutely.
Q And is it your testimony --
MR. RICHARDSON: Mr. Chairman.
COMMISSIONER MILLER: Mr. Richardson.
MR. RICHARDSON: Mr. Ripley is questioning
Mr. Baggs on Mr. Packwood's test imony . My reading of the
phrase in Mr. Packwood's test imony doesn't show the word
"need" anywhere in the answer. Maybe we should have
Mr. Packwood answer these quest ions.
COMMISSIONER MILLER: I'm going to overrule
the objection. If would you like to have Mr. Packwood
recalled, I think we could do that, but I think this is an
appropriate line of questioning.
Q BY MR. RIPLEY: Do you recall my last
question?
A Maybe I better hear it again, if I could.
(The last two questions and answer were
read back by the Notary Public.)
Q BY MR. RIPLEY:that Mr. Packwood is the
appropriate witness that should have been asked those
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questions?
A Yes.
Q Now, one other area and Chairman Miller
touched upon it and you stated that the difference
between, one of the differences between, the Industrial
Customers and Staff and Idaho Power Company's position
seemed to be a burden of proof question on who had the
burden of showing something or not: do you recall those
questions?
A Yes, I do.
Q Mr. Baggs, let me ask you what your
understanding of the Industrial Customers' testimony is if
that would be permissible, I don't know how else to get to
the issue, do you understand that the Industrial
Customers' position and testimony in this proceeding is
that whether Idaho Power Company is prudent in
constructing Milner can be totally deferred until the
construction of the project?
MR. RICHARDSON: Mr. Chairman, this is well
beyond the scope of redirect. If he would like to
cross-examine Dr. Reading on Dr. Reading's testimony, I
think that would be certainly appropriate.
Cross-examining Mr. Baggs on Dr. Reading's testimony is
beyond the scope of the redirect questions.
COMMISSIONER MILLER: Mr. Ripley, what do
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P.O. Box 578, Boise, ID 83701
BAGGS (Di)
Idaho Power Company
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you think?
MR. RIPLEY: Well, I think that you opened
the can of worms and I'll abide by your ruling.
MR. RICHARDSON: The Chair didn't ask
Mr. Baggs any questions about Dr. Reading's testimony.
MR. RIPLEY: Well, I think he did, but we'll
leave that to the Chair.
COMMISSIONER MILLER: I want to be fair to
everyone and be sure that everybody has the opportunity to
explore these issues. I think what ! would prefer to do
now, Mr. Ripley, is let you have your cross-examinat ion of
Dr. Reading and if at the time that is concluded you still
feel that the differences between the parties haven't been
adequately highlighted, we could recall Mr. Baggs. That's
a peculiar procedure, but I think it might be better.
MR. RIPLEY: That's certainly fair,
Mr. Chairman. I guess I would simply add that a lot of
what this proceeding is evolving into are policy questions
and legal questions, and whatever Mr. Baggs does or does
not think or whatever Mr. Reading does or does not think
doesn't really lend itself to cross-examination of what
they think as opposed to simply getting out the philosophy
and then arguing legally, I guess, for lack of a better
explanation: so with that, I have no more questions of
Mr. Baggs, but I would like to recall Mr. Packwood.
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P.O. Box 578, Boise, !D 83701
BAGGS (Di)
I daho Power Company
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COMMISSIONER MILLER: All right, Mr. Baggs,
you're excused. Thank you for your help.
(The witness left the stand.)
COMMISSIONER MILLER: Mr. Ripley,
Commissioner Nelson has suggested to me that perhaps we
could take Mr. Packwood in rebuttaL. Perhaps at that
point you will have more things you want to ask him.
MR. RIPLEY: That's fine. Let me say at
this time that the two things that Mr. Packwood would be
prepared to testify, if it will help any of the parties,
the Chair asked for a more detailed list of the costs that
made up the $63 million projection or the $60 million
projection and Mr. Packwood is prepared to submit that.
What that is is a document which was available for the
Staff and the intervenor parties' perusal in the working
papers that were made available; so I don't think it's
anything that comes as a surprise to anyone, but it is
something that the Commissioners expressed an interest
in.
Secondly, indeed we are concerned with this
idea that Idaho Power Company performed no studies of any
kind and I was ready to call Mr. Packwood to have him
explain what the Company did do.
COMMISSIONER MILLER: Would it be agreeable
wi th the parties if we deferred that testimony to the
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P.O. Box 578, Boise, ID 83701
COLLOQUY
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1 appropriate rebuttal time in case there are other things
2 that you'd want to cover?
3 MR. RIPLEY: That's certainly up to the
4 parties, Mr. Chairman. I have no problem either way.
5 COMMISSIONER MILLER: Let's do that and then
6 move on to the direct testimony of the other parties.
7 MR. RIPLEY: All right.
8 COMMISSIONER MILLER: Which I think,
9 Mr. Richardson, would be you. You rest, Mr. Ripley?
MR. RIPLEY: Yes, sir.
COMMISSIONER MILLER: That would be you,
Mr. Richardson.
MR. RICHARDSON: Thank you, Mr. Chairman.
14 The Industr ial Customers of Idaho Power call Dr. Don
Reading to the stand.
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P.O. Box 578, Boise, ID 83701
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DON READING,
produced as a witness at the instance of the Industrial
Customers of Idaho Power, having been first duly sworn,
was examined and testified as follows:
DIRECT EXAMINATION
BY MR. RICHARDSON:
Q Dr. Reading, before I get into the formality
of spreading your testimony on the record, do you have any
corrections or changes to make to that testimony or to
your exhibits?
A Yes, I do.
Q Why don't you make those changes and
corrections now.
MR. RIPLEY: I wonder if we could have just
a moment while I switch gears here.
COMMISSIONER MILLER: Certainly.
(Off the record.)
MR. RIPLEY: Thank you.
Q BY MR. RICHARDSON: Dr. Reading, would you
make those changes and corrections now, please?
A Yes, Mr. Tanner has passed out an errata
sheet. Do you want me to work through that or will that
suffice?
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P.O. Box 578, Boise, ID 83701
READING (Di)
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1 MR. RICHARDSON: With the acquiescence of
2 the Chair, I think that would suffice.
3 COMMISSIONER SWISHER: Well, I've turned to
4 the first correct ion and it doesn't parse.
5 Q BY MR. RICHARDSON: Dr. Reading, maybe you
6 better go through them.
7 A All of these corrections deal with the -2
8 testimony.
9 COMMISSIONER SWISHER: Well, that's what we
10 don't have in front of us.
MR. RICHARDSON: That's the other case: so
12 we jumped the gun a bi t .
Q BY MR. RICHARDSON: You do have a correction
14 on the exhibit numbering that you need to make.
15 A In the -8 test imony, I have two correct ions,
16 four corrections, I'm sorry. Formally the Appendix No. 1
17 should read Exhibit 201. The Exhibit 1 should read
18 Exhibi t 202. In the testimony, in the -8 testimony,
19 reference is made to these so that it follows on Page 2,
20 Line 8, Appendix 1 should be changed to Exhibit 201.
21 MR. RIPLEY: I'm sorry, where are we now?
22 THE WITNESS: In the -8 test imony, Page 2,
23 Line 8.
24 MR. RIPLEY: Oh, I see. What's that?
25 THE WITNESS: It should say Exhibit 201.
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READING (Dl)
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MR. RIPLEY: Okay.
THE WITNESS: On Page 22, Line 5, it says
Schedule 1. It should be changed to say Exhibit 202.
COMMISSIONER SWISHER: Hold it just a
second. What was that last reference? Page
THE WITNESS: -- 22 ,Line 5, Schedule 1
should be changed to Exhibit 202.
MR. MILES: What page was that, Doctor?
THE WITNESS: 22, Harold, Line 5. That is
the extent.
Q BY MR. RICHARDSON: Wi th that, are you the
same Dr. Reading who pref iled testimony and exhibits
marked 201 and 202 in this proceeding?
A Yes.
Q Dr. Reading, if you were asked the same
questions that you were asked in your prefiled testimony
today, would your answers be the same?
A Yes.
MR. RICHARDSON: What that, Mr. Chairman, I
move that Dr. Reading's test imony be spread upon the
record as if it were read in full and Exhibit Nos. 201 and
202 be marked for identif ication purposes.
COMMISSIONER MILLER: In the absence of
objection, it will be so ordered.
(The following prefiled testimony of
Dr. Don Reading is spread upon the record.)
192
HEDRICK COURT REPORTING
P.O. Box 578, Boise, ID 83701
READING (Di)
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Q. WOULD YOU PLESE STATE YOUR NAM AND ADDRESS?
A. Don Reading, 1311 North 18th Street, Boise,
Idaho 83702.
Q. DO YOU HA VEAN APPENDIX THAT DESCRIBES YOUR
EDUCATIONAL AND OCCUPATIONAL HISTORY AND YOUR
QUALIFICATIONS IN REGULATORY AND UTILITY
ECONOMICS?
A. Yes. Exhibit 201, attached to my testimony,
was prepared for this purpose.
Q. DO YOU HAVE AN EXHIBIT WHICH SUPPORTS YOUR
TESTIMONY?
A. Yes. I have an exhibit consisting of one
schedule which was prepared under my
supervision.
Q. WHT IS THE PUPOSE OF YOUR TESTIMONY?
A. Our firm,Berl JohrsottAssocia.tés, t,asretained by the
Industrial CUstomers of Idaho Power (ICIP) to -examine
the request of Idaho Power Company (the
Company) for a Certificate of Pulic
Convenience and Necessity (CPCN) concerning
tb. Milner hydroelectric project. My
testimony has five sections. First, I briefly
describe my understanding of the Company's
request. Second, I discuss the problems with
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the request and with the rate basing of the
Milner project. Third, I address the
Company's al ternati ve proposal. Fourth, I
suggest some methods of evaluating the project
once it is completed and on line. Fifth, I
state my recommendations and conclusions.
Q. LET'S TU TO THE FIRST SECTION OF YOUR
TESTIMONY. WOULD YOU PLEASE DESCRIBE THE
COMPANY'S REQUEST?
A. Certainly. The Company's CPCN Application
sets forth its rather unique request.
Specifically, it asks to ... be issued a
Certificate of Pulic Convenience and
Necessity for the Rate Basing of the Milner
Hydroelectric Generation Facilities ... and
for recognition of the Milner royalty and debt
service payments made to the Twin Falls Canal
Company and the North Side Canal Company, Ltd.
. .. as revenue requirement expenses.
(Application, p. 2.)
Q. is THAT THE EXTENT OF THE COMPANY'S REQUEST?
A. No. In case the Commission denies the initial
request, Idaho Power Company has an
alternative proposal: that it be granted
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exempt status for the Milner project for a
period of 20 years from the date of commercial
operation to allow the Company to enter into a
lonq-term sale of energy to another utility.
Q. LET'S TU TO THE SECOND SECTION OF YOUR
TESTIMONY. WHT IS UNSUAL ABOUT THE
COMPANY'S PROPOSAL CONCERNING THE CPCN AND
RATE BASING OF MILNER?
A. The Company's proposal departs from usual
practice in askinq for approval of rate base
treatment at the time the CPCN is issued,
rather than when the project has been
completed or is nearinq completion. It wants
rate base approval for the Milner proj ect
prior to the start of construction. In
return, the Company will aqree to "cap" the
capital cost of the project at $63,350,600,
barrinq several uncertainties.
The key to Idaho Power's approach is
its interpretation of the meaninq of a CPCN,
as described by Company witness Mr. Baqqs:
The issuance of a Certificate of Pulic
Convenience and Necessity is a determination
by the Commission that the decision to
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construct the proj ect 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 certificate is recognition
that the investment, upon completion of
construction, is in the public interest and
will be rate based for revenue requirement
purposes. (Baggs Direct Testimony, p. 5 . )
Q. DO YOU SEE ANY PROBLEMS WITH TH COMPANY'S
PROPOSAL AND ITS UNDERSTANDING OF WHT IS
IMPLIED BY THE ISSUANCE OF A CPCN?
A. Yes. I see several serious problems. First,
Mr. Baggs' interpretation of the CPCN' s
purposes runs counter to established usage.
Second, the Company's quid pro quo of a "cap"
of the construction expenditures is one-sided
and has little value in determining the
prudent cost of the plant or the amount that
should be included in rate base. Third, the
Coapany's proposal, if adopted, would shift
.ost of the risks of construction onto
ratepayers. Risk shifting, without some
compensating factors, would be unfair to Idaho
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Power's customers and is therefore not in the
publ ic interest.
Q. LET'S DISCUSS EACH OF THESE PROBLES
SEPARTELY. WOULD YOU BEGIN BY ADDRESSING MR.
BAGGS' INTERPRETATION OF THE MEING AND
PURPOSE OF A CPCN?
A. Yes. Mr. Baggs claims that issuanoe of a CPCN
for construction of the Milner proj ect will
document the Commission's determination that
construction is reasonable and prudent and in
the public interest. He further claims that
if a CPCN is issued and the Company uses
reasonable and prudent construction practices,
the project itself will be in the public
interest and upon completion should be rate
based for revenue requirement purposes.
Q. DO YOU AGREE WITH MR. BAGGS' ASSERTIONS?
A. No. Mr. Baggs' view of the implications of a
Certificate is overly broad. First, as its
decision concerning the Valmy plant makes
clear, the Commission does not interpret the
issuance of a CPNC as a requirement to prooeed
with construction and/or a guarantee that the
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completed proj ect i s costs will be included in
rate base, regardless of the circumstances.
In the Valmy case the Company argued
that because the Commission had granted Idaho
Power a certificate for Valmy I and II, the
Company was compelled to build both units.
Idaho Power argued that even though the
plant i S power production was excess capacity,
this fact was irrelevant, because a
Certificate had been issued. (Idaho Pulic
utilities Commission, Order No. 20610, p. 94. J
Al though the Commission did not speak directly
to the issue of the Company i s understanding of
the meaning of a CPNC, it rej ected Idaho
Power i s arguent. The Commission found that
"Idaho Power i s share of the Valmy II
generating plant is not used and useful in the
service to Idaho ratepayers." (Ibid., p. 103. J
Q. WHT DID TH COMMISSION CONCLUDE?
A. In determining the amount of Valmy II i s costs
to be recovered from ratepayers, the
Comission concluded that a portion of those
costs--specifically the equity return on the
investment--should be absorbed by
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stockholders, not ratepayers, until the plant
became used and useful. (Ibid., p. 107.)
Clearly, if the Commission had viewed the
issuance of a CPNC as a guarantee that a
plant i s construction costs would be included
in rate base, assuming "reasonable and prudent
construction practices," it would not have
ordered the disallowance concerning Valmy,
where the question of prudent construction
practices was not at issue.
Q. WHT IS YOUR NEXT CONCERN ABOUT MR. BAGGS i
UNDERSTANDING OF TH MEING OF ISSUANCE OF A
CPNC?
A. Acceptance of Mr. Baggs i notion of a CPNC as a
sweeping mandate would effectively free the
Company from accountability to the Commission
during construction, even though much could
happen after the CPNC was issued and before
the proj ect was completed--events that would
warrant that management alter its course of
action. For example, changes in load growth
might dictate slow-up, speed-up, or complete
abandonment of construction, either to meet
increased load or to avoid installing excess
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capacity. Or technological progress might
call for canceling the Milner project and
replacing it with a more cost-effective
alternative. Or heightened environmental
restrictions might impose an intolerable
burden of added cost on the Milner project,
destroying its economic feasibility.
Any of these events, as well as others,
should invite the Company to reevaluate its
ini tial construction decision and possibly
reverse or modify it. Yet, under the
Company's definition of a CPNC, such events
would be ir~elevant to the determination of
the plant costs to be included in rate base
and paid for by ratepayers. Instead, that
issue would be judged solely according to
whether or not the Company had used "prudent
and reasonable construction practices." If
Idaho Power was deemed to have done so, by its
argent it would be allowed full recovery of
the cost of the Milner proj ect, regardless of
any economic, financial, technological,
environmental, or regulatory events that might
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otherwise call for alteration of the Company's
ini tial decision.
Therefore, I rej ect Kr. Bag9s'
interpretation of the meaning of a CPNC.
Instead, I agree with Staff's interpretation
in case U-1006-265 that the issuance of a CPNC
is an authorization by the Commission for the
Company to begin construction, not a
requirement that construction commence, nor a
certification that the decision to start
construction was prudent. (Ibid., p. 101.)
Q. WHO DECIDES THE MEING OF A CERTIFICATE OF
CONVNIENCE. AND NECESSITY, AND WHT FACTRS
AR SALIEN FOR DETERMINING TH RATE BAING OF
A GENERATING FACILITY?
A. Ultimately it is the Commission that must
determine the precise meaning of the issuance
of a CPNC. If it follows Staff's
interpretation in Case U-1006-265, then no
decision on rate basing is called for at this
time. If it construes the issuance of a
Certificate as an endorsement of the prudence
ot the decision to begin construction, then I
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believe that the Commission should reject the
Company's application.
The Company has not provided evidence
in its filing that would allow the Commission
to determine the reasonableness or prudence of
the Company decision to build Milner. For
that the Commission would need a substantial
amount of additional information concerning
this plant and al ternati ve forms of
generation. For example, the Company should
have provided information showing the Milner
proj ect to be the least costly al ternati ve
available to ratepayers. While I do not
dispute the many advantages of hydro proj ects
over other forms of generation, those benefits
should not be the sole basis upon which the
determination is made. The Company has
presented no evidence that the construction of
Milner is less costly than installation of
demand-side management measures, nor has it
presented any evidence concerning the need for
this proj ect .
Numerous other questions concerning the
construction of this project remain unanswered
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that demand a thorough analysis on the part of
Staff and intervenors as well as the
Commission and should precede any
determination of prudence. For example, the
Company has not explained the rationale behind
its 5% contingency factor, nor has it
explained in any detail the other components
of its "commitment estimate." The Company is
equally uncommunicative as to how it
determined that the estimated cost of this
project is between 37.80 and 52.93 mills per
kwh.
Q. AR THRE OTR UNCERTAINTIES ASSOCIATED WITH
THE MILNR PROJECT THAT WOULD PRECLUDE THE
COMMISSION FROM PREPROVING A RATE BAE CAP
FOR MILNER?
A. Yes. In its decision concerning Valmy II the
Commission stated that its statutory charge
was to "establish 'just and reasonable'
rates. " (Ibid., p. 105.) For at least two
reasons, the Commission will be unable to
determine that adding this proj ect to the
Company's cost of service will produce just
and reasonable rates. First, the "cap" set by
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the Company is contingent upon several
favorable predictions. If inflation heats up
or the scope of the project changes, then,
under the Company's proposal, its "commitment
estimate" would no longer hold as the cap for
the capital cost of the project. (I discuss
this in greater detail below.)
second, the Company has estimated the
project cost at between 37. SO 'and 52.93 mills
per kwh. While it is unclear what costs and
assumptions this estimate includes, presumably
one of them is the Company's best estimate of
the operating costs of the plant.
Nevertheless, several of the latter are
uncertain and could change, making the plant
uneconomical.
For example, the Company has agreed to
pay for one-half of the cost of reconstructing
the Milner dam over the life of the FERC
license. While it appears that $11,700,000 is
the best estimate for the total cost to
rehabilitate the dam, the estimate is
uncertain. Indeed, the estimate has already
apparently increased from an earlier estimate
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of $9,000,000. (Packwood Direct Testimony, p.
10; and Agreement Regarding the Ownership,
Construction, Operation and Maintenance of the
Milner Hydroelectric Project, p. 60. J The
Company is also responsible for a portion of
the annual mitigation expenses, which are
likewise uncertain.
For these and other reasons, the
Company cannot accurately estimate the cost
per kwh of the Milner project. Thus, neither
can the Commission. Nor can the Commission
determine today that just and reasonable rates
will result from inclusion of the future
capi tal costs of the plant in a future rate
base and preapproval of the royalty and debt
service payments to be made to the canal
companies for revenue requirement purposes.
Q. WOULD YOU PLESE DISCUSS THE "CAP" ON THE
CAITAL COST OF MILNER THT THE COMPAN HA
PROPOSED?
A. Certainly. The Company has offered to treat
its "commitment estimate" of the capital cost
of Milner as a cap on the amount to be
pre approved for rate base. While the
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Company's proposal has surface appeal, there
are several arguents, in addition to those
discussed above, against the Commission's
adopting the Company's quid pro quo. First,
the commitment estimate does not offer a
guarantee that the proposed cap will in fact
be the amount that the Company proposes for
inclusion in rate base. Mr. Packwood notes
that Idaho Power will commit to building the
project for $63,350,600, "as it may be
adjusted to account for documented changes in
escalation rates or scope." (Packwood Direct
Testimony, p. 13.) He goes on to explain what
is meant by "documented changes":
If major inflation occurs,resul ting 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
Maj eure 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. (Ibid.)
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The Company t s reservations with respect
to the cap do not guarantee the commitment
estimate will be the rate based amount. That
is, little is left to affect the price of the
plant that the Company has not already covered
in its escalation and scope disclaimer.
Q. WHT PROBLES DO YOU SEE WITH THE COMPAN t S
CAP PROPOSAL?
A. There are several. First, the Company does
not define "major" inflation. Conceivably,
any inflation above what is included in the
commi tment estimate would be qrounds for the
Company adjustinq its estimate and inc1udinq
these increased costs in rate base. Yet, the
Company doesn t t explain the proj ected
escalation rate included in its commitment
estimate. Hence, the Commission cannot know
whether the Company is workinq from a tiqht
budqet or an ample one.
Second, the Company t s expansive scope
qualification can cover a multitude of
factors. Suppose, for example, that the
Company decides to increase the size of the
proj ect. Would it be fair to charqe
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ratepayers for the additional costs without
examining the Company's decision? But under
the Company's proposal, such a change would
presumably come within its definition of scope
and hence not be subj ect to further review.
(It is noteworthy that many utilities involved
in the construction of large nuclear power
plants cited changes in scope as the source of
a significant percentage of their cost
overruns. )
Third, the Company's cap proposal is
one-sided. The Company wants to increase the
cap if maj or inflation occurs, but it does not
offer to reduce the cap if inflation subsides
and falls significantly below the escalation
allowance included in the Company's commitment
estimate. I see no reason for the Commission
to agree to such an unbalanced arrangement.
Finally, Idaho Power does not explain
how its proposed 5% contingency fits in with
its escalation and scope adjustors.
Generally, a contingency of this nature is
included in a cost estimate to cover precisely
such factors as changes in scope and
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escalation. Hence the Company has not only
covered its uncertainties with its disclaimers
but added a substantial buffer by inclusion of
a contingency in the commitment estimate.
While I am not opposed to the use of a
contingency, (it is common practice), I
believe it is important for the Commission to
realize how little risk the Company is
proposing to take on. (I am surprised that
the Company has not included a provision for
increases in borrowing costs; but then again,
this might be covered under the Company IS
escalation limitation.)
Q. YOUR NEXT CONCERN DEALT WITH THE RISRS
INHERENT IN THE COMPAN i S PROPOSAL AND THE
PROPOSAL i S IMPACT ON THE COMPANY i S RATEPAYERS.
WOULD YOU PLEASE EXPLAIN?
A. Yes. The Company i s proposal assigns most of
the risks of constructing Milner to its
ratepayers while eliminating most of the
potential risks to its stockholders.
Ratepayers would shoulder all the following:
the risk of escalation of construction costs,
the risk of increased scope, the risk of load
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qrowth chanqes ,the risk of technoloqical
chanqes, the risk of poor manaqement
decision-makinq (other than strict
construction prudence), the risk of
environmental chanqes, the risk of regulatory
chanqes, the risk that the project will not be
used and useful, and the risk that the proj ect
will not be economical.
Idaho Power's stockholders, on the
other hand, would face only the risk that the
Company would not use reasonable and prudent
construction practices and the risk that some
costs of the plant miqht not be allowed in
rate base if the Company exceeded its cap.
The latter risk is practically eliminated by
the broadly defined escalation and scope
reservations that accompany the Company's
proposal.
Clearly,while ratepayers would bear a
qreat deal of risk,the stockholders would
incur very little.
Even thouqh the Company's request
shifts most of the risks associated with
construction of the Milner proj ect to
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ratepayers, the Company has not offered to
simultaneous reduce its cost of equity. In my
opinion if the Commission adopts the Company's
proposal, which I strongly recommend against,
it should also at a minimum reduce the
Company's cost of equity below the
Commission's last authorized return of 12.25%.
(Idaho Pulic utilities Commission, Order No.
20924, p. 62.)
Q. WH WOULD ADOPTION OF THE COMPANY'S PROPOSAL
CALL FOR A REDUCTION IN IDAHO POWER'S COST OF
EQUITY?
A. It is a basic financial principle that the
greater a security's risk, the higher the
investor's required return, and vise versa.
If the Commission significantly reduces
stockholder risk by adopting the Company's
proposal, then it should reduce the Company's
cost of equity. In Idaho Power's last rate
proceeding, the Company's witness Mr. Bowers
acknowledged this principle, testifying that
"the greater a security's risk the higher the
required return for that risk." (Bowers Oi,
Case No. U-1006-265, p. 31.) Mr. Bowers also
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testified that a risk-free rate of return can
be approximated by usinq the interest rate on
lonq-term qovernment bonds. (Ibid., p. 30.)
Recently, lonq-term (3 O-year) U. S. Treasury
Bonds have been carryinq an interest rate of
about 9.0%, which is siqnificantly below the
Company's authorized return on equity. Under
the Company's proposal, the equity risk
supportinq the Company's investment in the
Milner proj ect would more closely approximate
that of a qovernment bond than of a security
yieldinq 12.25%, the Commission's last
authorized return.
Q. WOULD YOU ILLSTRTE THE IMPACT OF EQUITABLE
RATEPAYER TRETMNT, ASSUMING ACCEPTANCE OF
THE COMPANY'S PROPOSAL?
A. Certainly. Let us assume that the Company's
investment in Milner (and in the Swan Falls
project) is financed in the same proportion as
the Company's capital structure, and that the
investor's return requirement on the equity
portion of this investment is approximately
10% (one percentaqe point above the measure of
a risk-free rate), this would indicate that
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the Company's cost of equity should be reduced
by about a quarter of one percent (0.25%) to
12.0%, using the Commission's last authorized
return. I have depicted these calculations on
my Exhibit 202.. The Company earned 13.86% on
average equity during 1989. I would therefore
recommend that if the Commission accepts Idaho
Power's recommendations in this case, it
investigate the Company's earnings situation
and authorize a rate decrease, if one is seen
to be warranted. Indeed, it appears that,
absent such a decrease, an earnings
investigation is currently warranted.
Q. LET'S TU TO THE THIRD SECTION OF YOUR
TESTIMONY. WOULD YOU ADDRESS THE COMPANY'S
ALTERNATIVE PROPOSAL AND ANY PROBLEMS WITH IT?
A. Yes. In the case that the Commission does not
grant the Company's request for a Certificate
of Pulic Convenience and Necessity and the
rate basing of the Milner proj ect, Idaho Power
wants the Commission to deregulate the Milner
facility for a period of 20 years. I find the
Company's alternative proposal troublesome.
Q. PLEASE EXPLAIN.
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I question the integrity of the Company's
proposal, especially when one examines the
cost of this project relative to Swan Falls,
which the Company is not proposing be
deregulated.
The estimated cost per kw of the Milner
project is $1,086. Adding in the Company's
share of the cost of repairing the dam
increases this figure to $1, lS7. Compared to
Swan Falls at $3,244 per kw, Milner may be a
bargain, and much more profitable. It is easy
to see why the Company has framed its proposal
in this way. Idaho Power and its stockholders
would benefit from the economies associated
with the deregulated Milner, while ratepayers
would defray the relatively high costs of the
regulated Swan Falls. That may be good
private business, but it's not good public
policy.
HAVE YOU IDENTIFIED ANY OTHR PROBLES WITH
TH COMPAN'S ALTERNATIVE PROPOSAL?
Yes. The proposed deregulation could place an
additional future burden on ratepayers.
According to the Company's plan, after 20
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years either the plant would continue to
operate under its exempt status, or the
Commission would issue the Company a CPNC and
allow it to rate base the plant at that time.
In the latter case, the Company proposes, the
value of the plant for revenue requirement
purposes would be based upon the then current
cost of replication (reproduction cost less
depreciation). Once again the benefits of the
Company i s proposal would be retained by
stockholders. Adoption by the Commission of
the Company i s proposal would be tantamount to
guaranteeing the Company i s shareholders a
substantial gain on the proj ect at the expense
of ratepayers, due to the replication
provision. The Commission should reject the
Company iS al ternati ve request as proposed.
However, if the Commission is inclined to
adopt the Company i s proposal, it should set
the buy-back rate at the lesser of the
original cost less depreciation and the fair
market value.
LET i S TU TO THE FOURTH SECTION OF YOUR
TESTIMONY. WOULD YOU BRIEFLY DISCUSS WHT THE
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COMMISSION MIGHT WANT TO CONSIDER WHEN
DETERMINING THE VALUE OF THE MILNER PROJECT
ONCE IT IS COMPLETED AND IN SERVICE?
A. Certainly. Let me emphasize that the
following suggestions apply only to a
completed proj ect that is ready for
consideration for inclusion in rate base. I
do not believe it is appropriate or in the
public interest to predetermine the investment
value of the Milner proj ect at this time.
Numerous events could intervene before the
proj ect enters commercial operation- -events
that could render any such determination today
erroneous or unnecessary.
In evaluating a plant to enter rate
base, the Commission should study a variety of
factors of two kinds: those related to the
prudence of management's decision-making, and
those related to the economics of the
situation. The former include such things as
the reasonableness of the Company's decision
to begin construction of the proj ect, the
reasonableness of the construction practices,
the reasonableness of feasibility studies
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undertaken, etc. The latter include the
used-and-useful issue and the economic value
of the plant.
In determining a plant i s economic
value, the Commission should of course
consider an assortment of factors, but one
particularly useful method of validating total
cost is to compare the cost per kwh of the
proj ect to the Company i s avoided cost rate.
The latter should provide a upper limit on the
economic value of the project.
When evaluating the cost per kwh of
Milner versus avoided costs, the Commission
needs to ensure that the basis of the
measurement is consistent. Only then can an
appropriate evaluation be made as to the
least-cost path of resource acquisition for
the Company. For example, since avoided costs
are determined over just a 20-year period,
they are not consistent with the cost per kwh
of Milner, which is determined over a period
of approximately 50-years. All else being
equal, a 20-year avoided cost rate would be
significantly less than a 50-year avoided cost
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rate. In addition, for comparison purposes, a
20-year amortization of Milner will produce a
significantly more expensive plant than Idaho
Power's current estimate for Milner.
other methods might also be used.
These would include the amount of plant costs
reasonably incurred during construction of
Milner, the fair market value, and the cost of
alternative forms of reliable power.
Regardless of what method will
eventually be used, now is not the time to
make this decision. Determining whether the
plant should be included in rate base, and the
portion so included, can be done only after
the project is completed and on line.
Q. WOULD YOU PLEE SUMIZE YOUR
RECOMMDATIONS AND CONCLUSIONS?
A. Certainly. I believe the Commission should
rej ect the Company's proposal for simultaneous
issuance of a CPNC and approval of rate basing
of the Milner project. In addition, I believe
the Commission should reject the Company's
alternative proposal to deregulate the Milner
proj ect for a minimum period of 20 years.
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More particularly, I do not believe it would
be appropriate or in the public interest for
the Commission now to determine the rate base
treatment or regulatory status of a proj ect on
which construction has not yet even begun.
The Company's request has several serious
flaws.
First, I reject the Company's
interpretation of the import of a Certificate
of Pulic Convenience and Necessity. Unlike
Mr. Baggs, I don't consider that the
Commission's issuance to Idaho Power of a CPNC
for Milner means that the Company's decision
to construct the proj ect is reasonable and
prudent and in the public interest. Nor do I
presume that the Company's mere use of
"reasonable and prudent construction
practices," once granted a CPNC, then
guarantees inclusion of the project in the
Company's rate base. The Company f s overly
broad assessment should not be endorsed by the
Commission. It is inconsistent with the
Commission f S decision concerning Valmy II. In
the Valmy case, although Idaho Power had been
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issued a CPNC, the Commission disallowed
recovery of a portion of the cost, because the
plant was not used and useful.
Similarly, the Company's interpretation
should be rej ected because it would require
the Commission to ignore many relevant
circumstances that would otherwise force the
Company to al ter its initial course of action.
The Commission would be barred from addressing
the prudence of the Company's management
decision-making process during the
construction period.
If the Commission does adopt the
Company's definition of a CPNC, then it should
reject the Company's application on the
grounds that it is deficient. Many factors
relevant to a decision of this magnitude
remain unaddressed by the Company, which has
not shown that the proj ect is economical, nor
that it is the least-cost alternative, nor
that it is even needed.
Second, the Commission should not be
lulled into thinking the Company's offer to
cap the cost of the proj ect is an adequate
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consideration for preapproval for rate base.
The escalation and scope reservations attached
to the Company's cap do not guarantee the
final cost of the proj ect will be at or below
the commitment estimate. Rather, they give
the Company considerable leeway in justifying
cost increases beyond that estimate.
Moreover i the Company's cap proposal is
one-sided. While the Company wants the
Commission to agree to cost increases if the
scope of the project enlarges or if escalation
occurs, it has not proposed that the cap be
adjusted downward under the converse
circumstances.
Third, the Company's proposal saddles
ratepayers with most of the risks of
construction while eliminating most of the
risks to shareholders . Despite this, the
Company has not offered to lower its cost of
equity. In my opinion, if the Commission
adopts the Company's proposal to preapprove
the rate base treatment of the Milner project,
it should adjust the Company's cost of equity
to be consistent with its reduced risk.
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I also believe that the Commission
should rej ect the Company's al ternati ve
deregulation proposal, which the Company has
not shown to be the public interest, since the
capital cost of the Company's companion Swan
Falls project (not included in the
deregulation request) is almost three times
higher. Furthermore, the Company's unfair
buy-back proposal almost guarantees
stockholders a windfall gain at the expense of
ratepayers. If the Commission is inclined to
adopt the Company's proposal, then it should
set the buy-back rate at the lesser of
original cost less depreciation or fair market
value.
Finally, I have offered some
suggestions concerning the factors the
Commission should consider once the Milner
rebuild is completed and its costs are
considered for rate base treatment. Among
them is a comparison of the cost per kwh of
the project with the Company's avoided cost,
establishing a reasonable upper limit on the
economic value of the project. other relevant
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data are the amount of plant costs reasonably
incurred in the construction of the Milner
project, the fair market value of the plant
and the energy it produces, and the cost of
alternative forms of reliable power.
Q. DOES THIS COMPLETE YOUR TESTIMONY PREFILED ON
NOVEER 9, 1990?
A. Yes, it does.
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(The following proceedings were had in
open hearing.)
MR. RICHARDSON: Mr. Chairman, Dr. Reading
is now available for cross-examination.
COMMISSIONER MILLER: Thank you.
Mr. Miles.
MR. RIPLEY: Excuse me, Mr. Chairman, I
st i LL have my concern as to Dr. Reading's test imony
insofar as I read it, and I'll be happy to be the first
one to apologize to Dr. Reading if I'm reading it
incorrectly, but as I read his testimony, he is stating as
facts what the Commission did in certain proceedings.
Before I cross-examine him, I want to be sure that he is
presenting his testimony as to what his opinion is as to
what those orders state, not that he is testifying as some
factual matter that that is indeed what the opinions state
because he was at the Commission at the time that those
orders were issued.
MR. RICHARDSON: Mr. Chairman, is this in
the form of an objection to Dr. Reading's testimony?
MR. RIPLEY: First, it is an attempt to
avoid having to object by requesting a clarification. If
there's no clarification to this issue, then, yes, I feel
compelled to object because I can't cross-examine someone
who is going to say no, that's exactly what the Commission
224
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meant because I was there. I think that's what the rule
was intended to prevent.
COMMISSIONER MILLER: Mr. Richardson, can
you help us here?
MR. RICHARDSON: I certainly will,
Mr. Chairman. First of all, the testimony has been spread
upon the record without objection. Second of all, the
rule Mr. Ripley refers to, Rule 4.9, refers to former
Staff members of the Commission testifying in the same
proceeding on which they participated. This is clearly
not the same proceeding as the former proceedings we're
talking about in the testimony, and finally, just an
on-the-face reading of Dr. Reading's testimony makes it
explicit that he is talking about interpretations of
published Commission orders period. I have no
understanding of where Mr. Ripley's problem is coming from
wi th this matter. Perhaps he can point out to us in
Dr. Reading's test imony where he has a problem.
COMMISSIONER MILLER: Mr. Ripley, should we
go through and identify those areas simply that are
problematic to you or is Mr. Richardson's characterization
of his testimony, that is, that it's an attempt at
interpretation of prior orders and an expression of
Dr. Reading i s opinion as to their signif icance, adequate
for you?
225
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MR. RIPLEY: It's adequate. Obviously, he
has the right to make any interpretations that he desires
of those orders and I can cross-examine him as to the
correctness or incorrectness of those interpretations; so
with that, I have had my concerns clarified.
COMMISSIONER SWISHER: Mr. Ripley,
Mr. Chairman, before you go on, on Page 1 of the Reading
testimony, I don't think the record is adequate in Line 16
in response to the quest ion "What is the purpose of your
testimony," he says, "Our firm was retained by the
Industr ial Customers of Idaho Power," and I see no
identification of any firm; so if I were trying to find
out who the hell you are, I wouldn't how to do it.
THE WITNESS: "Our firm, Ben 30hnson
Associates. "
MR. MILES: Mr. Chairman, may we be supplied
a copy of Page 1 of Dr. Reading's testimony? It isn't in
mine.
COMMISSIONER SWISHER: Well, it's Page 2
actually. It just happens to be the first page of his
testimony. He gave a number to the cover which is
offensive to any publisher I know.
MR. RICHARDSON: Commissioner Swisher.
Exhibit 201 identifies the firm and the relationship of
Dr. Reading to that firm. It is a part of his testimony.
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COMMISSIONER SWISHER: If there were no
objection, if there is no objection, Mr. Chairman, do you
have any objection for the narrative reader of the God
damn transcript to know on Page 2 at Line 16 that this guy
works for Ben 30hnson Associates?
THE WITNESS: I have no objection.
COMMISSIONER MILLER: I assume that that's a
relatively uncontroversial suggestion: so in the absence
of controversy, we'll have the transcript amended to read
that.
COMMISSIONER SWISHER: Okay, thank you.
COMMISSIONER MILLER: And as to Mr. Ripley's
point, let's have the record also ref 1ect at this point so
that there's no doubt about it that the Commission is the
thing or the body or the entity that interprets,
officially interprets, its prior orders to the extent
their interpretation is necessary and the testimony of
wi tnesses as it may appear in the transcript is only
advisory to the Commission.
All right, now, Mr. Miles, did you have
questions?
MR. MILES: I have no quest ions of
Dr. Reading, Mr. Chairman.
COMMISSIONER MILLER: Mr. Ripley.
MR. RIPLEY: Yes, due to the nature of the
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position of the parties, I would ask that we be permitted
to cross-examine after Staff.
COMMISSIONER MILLER: That's reasonable.
Mr. Purdy.
MR. PURDY: Thank you.
CROSS-EXAMINATION
BY MR. PURDY:
Q Mr. Reading, is it your opinion that the
proposed or the application in this proceeding should be
rejected on the whole: in other words, is it your opinion
that there's not even enough information that's been
presented to the Commission at this point to even grant a
certif icate regardless of the issue of pre-approval of
rate base?
A Yes.
Q It's your opinion that
A I do not feel that the record is sufficient
as presented in the -8 case that would allow the
Commission to have enough information before it, the kind
of information that I think it needs, to be able to issue
a certificate.
I might add, that's very different than
saying that this project may be a good project and this
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project maybe should go forward. My dispute is with the
lack of information that would allow the Commission to
evaluate the project.
Q Thank you. In your opinion, is it possible
for a regulatory commission to require ratepayers to pay
for new generating plant placed in service by methods
other than conventional rate base rate of return
regulation?
A I'm not sure, you may be treading on legal
grounds that, back to some of the comments that Mr. Ripley
made on what this case is about. Could you clarify your
question a little bit more?
Q Certainly, and if I am going beyond the
scope of your ability to testify, that's fine, but my
question to you is, is it your opinion that the Commission
has the authority to in determining, assuming the
Commission wishes to determine whether to rate base the
project at this time, does the Commission have the
authori ty to look at methods other than the conventional
rate base rate of return method: in other words, an
example might be utilizing avoided costs as a cap?
A With the caveat that I am not qualified in a
legal sense to make an opinion on whether the Commission
has the legal authority to rate base at this time, I think
that assuming that authority at this time or any time, the
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Commission has the ability to look at a variety of methods
of determining what the value of a particular generating
facili ty is and what amount should be passed on to
ratepayers. One of those certainly is avoided cost. It's
not the only one, but given the extent of effort that has
gone forward in Idaho as well as around the country in
determining avoided costs, I would think that it would be
remiss not to have that as at least one of the important
aspects to look at in valuing what should be paid for by
ratepayers.
MR. PURDY: Okay, I really don't have
anything further.
COMMISSIONER MILLER: Now, Mr. Ripley.
MR. RIPLEY: Yes, sir.
CROSS-EXAMINATION
BY MR. RIPLEY:
Q Following up where Mr. Purdy left off,
Doctor, what is the purpose of the Commission's
determination of avoided costs? How is it used?
A Specifically it is used to set a tariff rate
that is posted so that independent power producers have a
target or a pr ice which they have a certain degree of
certainty, and certainly with negotiations and special
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1 things and uniquenesses in large projects it could vary,
2 but basically it is the price that the utility pays for
3 independently produced power.
4 My comments to Mr. Purdy and also my
5 statements in the testimony are based not only on that
6 specific, but also the more generic and broader aspect of
7 the theory behind why avoided costs were ever developed or
8 put into the PURPA laws, and that is that at the margin
9 ratepayers should not have to pay for any more than the
10 cheapest next resource or what the utility could produce.
If avoided cost rates are set correctly, they're set at
12 what it costs the utility to buy the next resource.
Q Isn't it true that when you use the term
14 avoided cost, the full definition is the Commission is
determining avoided cost rates?
16 A Sure.
Q And those avoided cost rates are used to
18 set, as you have testified, what the utility will pay for
purchased power from cogenerators and small power
20 producers?
A Yes.
22 Q It is not the rate that the utility will
purchase power from other utilities regulated by FERC:
24 correct?
A It's not specifically, no.
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1 Q Not specif ically,it's not,is it?
A Well, no.
Q All right,can't you say yes or no to that?
A I can't.I'm confused on which I said,but
I'm agreeing with you.
Q The answer is no,it is not used to set the
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7 rates that utili ties purchase power from other utili ties?
8 A Correct.
9 Q All right. Now, next, it is also true that
10 you do not set the revenue requirement and thus the rates
of a utility on the same basis that you determine the
12 avoided cost rates for a utility: true?
A Narrowly, that is true.
14 Q Narrowly, come on, Doctor, you don't set a
utili ty' s revenue requirement based on an avoided cost
16 determination, do you?
17 A No, you set it on a whole variety of costs
18 and revenues and all the things a major rate case looks
19 at.
Q Let i s take a look at a generation unit. If
21 Idaho Power Company has a generation unit it desires to
rate base, the Commission does not use a hypothetical
23 coa1-f ired plant to rate base a hydro plant, does it?
A No.
25 Q So you look at the specific investment that
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the utility has made to determine the rate base and thus
the revenue requirement of the utility for that plant?
A Certainly, and it views whether the impact
of rate basing that plant are, and I can't remember all
the terms, fair, equitable, reasonable, those kinds of
things, and for the Commission to be able to determine to
do that, they need to look at a wide variety of other
aspects, one of those would be alternative purchases.
If the Company built a plant and came in and
said we spent $ .10 per Kwh and we want you to do that and
they could show the Commission that that's exactly what
they spent and you could buy it from an independent power
producer for $.05, I think the Commission would be remiss
in saying well, gosh, guys, that's what you spent to do
it, I guess that's what ratepayers have to pay for it.
Q When do you make that determination,
Doctor? Do you make the determination that the utility is
going to construct a facility and it is going to cost so
many dollars at the time the utility applies for the
Certif icate of Convenience and Necessity or do you make
that determination at the time the utility says all right,
you let me build it, I built it, here's the investment
that I have in it and I now want to put that into rate
base: is that when you would make your determination?
A You make, in essence, if I understand your
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question correctly, two determinations. You make one
determination when the certif icate is issued.
Q And what do you do there, what determination
do you make?
A You look at what the Company's estimates
are. You look at what the loads are. You look at what
the alternatives are and you say, well, it looks okay from
this point in time that it's all right for the Company to
go ahead and proceed. Onl y after it has been constructed
and expenditures have been made and the plant is
operat ing, you then look at whether or not those are
reasonable expenses that should be passed on to
ratepayers.
Q But how do you determine if they're
reasonable expenditures to be passed on to the ratepayers?
A In a rate case proceeding.
Q But what factors do you take into
consideration?
A We could spend all day.
Q Let's spend all day, I think it's important
enough.
A All of the factors that go into a regular
rate case.
Q Well, list some of them for me.
A Well, certainly one would be -- I'm focusing
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now on the construction of a generating plant, okay?
Q Yes.
A You would look at what that plant actually
cost.
Q Haven't you made that determination in the
certificate proceeding if the utility has committed to a
cost?
A No.
Q Why not?
A Because the utility says we think this plant
is going to cost us $100 million. After they build it, it
mayor may not be 100 million.
Q But let i s assume that the utility has said
if there is an overrun of over $100 million, we will
absorb it. Don't you then know at the time the
certificate is issued what the cost of the plant is going
to be?
A If the utility makes a commitment that it's
going to be $100 million period, that would be true. For
this particular case, I have not seen the Company make
that commitment.
Q But except for your confusion, let's assume,
Doctor, that the utility has said we will construct this
facili ty and it will cost $100 million.
A Okay.
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1 Q All right?
2 A Except for my observations I don't feel I'm
3 confused, Mr. Ripley.
4 Q Okay; so we've now built it so we know what
5 it costs, it's $100 million. Now, what other factors
6 would you take into account?
7 A And that's what the cost is. I would take
8 into account what had happened during the construction
9 process, and the things that I would look at are the ones
10 that I have in my testimony and those that have been
11 discussed here.
12 Q What are those?
13 A Such as what would happen to loads. What
14 would happen to technology. What would happen to
al ternative purchases. What would happen to the secondary15
16 market. What would happen to changes in avoided cost for
17 these particular projects. What would happen to f lows in
18 the river. What would happen to any things that had been
19 discovered that would impact the costs during
20 construction. What would happen to inf látion, interest
21 rates.
22 Q And how do you use all of those?
23 A I don't understand your quest ion.
24 Q You've looked at them, okay, what are you
25 going to do with it?
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A Example, okay, I'LL answer it directly and
then we'll see how long we dance here. I would evalue
whether or not any of those changes potentially, whether
or not the Company reacted in a prudent, rational fashion
to any of those changes.
Q Now, who would have the burden of
determining whether or not Idaho Power Company acted
imprudently or acted prudently? Would it be the utility's
burden to show that it had acted prudently during this
period of time?
A Yes.
Q And if it fails to sustain its burden of
proof, then what would you do?
A Who am I?
Q You're the Commission.
A Oh, I'm the Commission. I would allow into
rates those expenditures that in my best judgment and
based on the record were "prudently or rationally or
fairly or equitably incurred" so that I could make rates
on that.
Q What guidelines would you use to determine
if the utility had been prudent or imprudent or would you
make those up at the time the Company requested the
revenue requirement?
A I think that ratemaking in general,
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precedent, tradition go a long way in saying what is fair
and prudent and reasonable. Ultimately the Commission
needs to make its decision based on the record. That's
what a rate case is about to me, Mr. Ripley.
Q It's just based upon whatever comes to mind
of the parties at the time the utility is requesting the
rate base?
A You are trying to get me to say that. what
the Commission does is make judgments by hindsight, Monday
morning quarterbacking, those kinds of things. That is
not the position that I'm taking. That is not what I
consider reasonable ratemaking. Certainly the Commission
needs to look at what has happened and how the Company has
reacted to what has happened and it's their policy
judgment on whether that is fair, reasonable, prudent and
all those things that are in the statutes.
Q Let's assume that there is an event which
has occurred at the time, it's happening today, let's
assume that.
A Okay.
Q And the Commission issues a Certificate of
Convenience and Necessity, it's now two years later, we're
now rate basing Milner, can a party argue that Idaho Power
Company had conducted itself imprudently prior to the time
the certif icate was issued?
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1 A If it didn't knqw -- I feel like the
Watergate hearings. What did the Company know and when2
3 did it know it. I think that that is what the decision
4 is. Let me use just a little example. One of the things
5 that is happening is saving the f ish and what i s going to
6 happen to water flows. At this point I think it i S fair to
7 say that we don't know what that's going to be. Let's
8 assume that this project, the Commission issued a
9 certificate, the project went ahead. In six months or
10 eight months, the Company i s only got one-third the water
at Mi lner it thought it was go ing to get.
If the Company at that point would go ahead
and build the whole project and say gosh, we brought it
under the cap, but they were only able, and I'm doing
proportionali ty here just for the hypothetical, that it
only produces a third as much electricity and it would
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17 have been a much better thing to change the size or stop
production or delay it or do something and the Company
19 didn't do that, it just went ahead and continued to
construct saying gosh, we've got a certificate and we've
got a commitment in there and we're going to get it, then
in my mind that isn't prudent. It's when did the utility
know and what should it have done to change during that
interim.
Q But would you impute to the utility
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knowledge that it does not have?
A We're talking past each other. I didn't say
that.
Q I didn't say you did.
A No, I would not impute well, I was going
to say, I may back off that. There may be cases where the
Company, one could show the Company should have known and
didn't, but in general, I would say no.
Q Who would have the burden of demonstrating
that the utility was imprudent as far as acts were
concerned prior to the time that the certificate was
issued?
A Who would have that burden?
Q Yes.
MR. RICHARDSON: Mr. Chairman, these
questions are calling for legal conclusions. I don't mind
if Dr. Reading feels comfortable answering them, but the
Commission should be aware that Dr. Reading is not an
attorney and is not testifying here as to legal burdens of
proof or who has the burden or when the burden shifts or
anything of that nature.
COMMISSIONER MILLER: I think we understand
that. I think this is being explored more in the nature
of what would be the proper policy for the Commission to
have in terms of those types of procedures.
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MR. RICHARDSON: I would feel more
comfortable, then, Mr. Chairman, if Mr. Ripley would
rephrase his quest ions along pol icy line quest ions rather
than along legal line questions.
COMMISSIONER MILLER: Well, why don't you go
ahead and proceed Mr. Ripley.
MR. RIPLEY: All right.
Q BY MR. RIPLEY: Dr. Reading, at Pages 6 and
7 you quote from an order of the Commission relating to
the last general rate proceeding wherein Valmy 2 was a, to
put it mildly, hotly contested issue; is that correct?
A Yes.
Q Now, was Order 20610 modified by the
Commission?
A I'm probably going to look for some legal
help. The order was modified and there was a rehearing
order. I'm not sure what the numbers are. There was a
rehear ing order and then there was, and it was when I
wasn't at the Commission, there was a negotiation or
whatever over a Supreme Court decision. Help me through
the thinking.
Q Let me ask you this, perhaps we can get to
it quicker. The Industr ial Customers, al though you were
not representing them, was a party to that proceeding and
also a party to the settlement proceedings that went on
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1 before the Commission.
2 A Right, settlement, that's the term I should
3 use.
4 Q Okay, and the settlement proceeding involved
5 , rate basing Valmy 2.
6 A Yes.
7 Q And the Industrial Customers of Idaho
8 accepted and urged that the settlement should be granted
9 by the Commission and in so doing urged that Valmy 2
should be rate based.
MR. RICHARDSON: Mr. Chairman.
COMMISSIONER MILLER: Mr. Richardson.
13 MR. RICHARDSON: This witness has testified
that he was not involved in those proceedings. If
15 Mr. Ripley is reading from a document, perhaps this
wi tness ought to have a chance to look at what it is he is
17 reading from. I don't think Dr. Reading is competent to
testify on what position the Industrial Customers of Idaho
19 Power took in cases he was not involved in.
COMMISSIONER MILLER: I do think that up to
21 this point Dr. Reading's answers indicate that he does not
have personal knowledge of the matters that you're
23 inquiring about: so I think you will need to help him
acquire that knowledge if you want to pursue that further.
25 MR. RIPLEY: Okay, and I think I can
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probably get to it by this way.
Q BYMR . RIPLEY: Doctor, then, I take it you
have no knowledge as to what occurred after the issuance
of Order No. 20610 insofar as the rate basing of Valmy was
concerned?
A I only have a very general knowledge.
Q So you are citing an order, but you do not
know if that order has been modified or if other factors
came into play in reference to the Commission's position
in that order?
A What I am using is an order that is making a
specific point about my interpretation of what the
Commission has to say about what a certificate is. I have
no specif ic knowledge that subsequent orders changed that
particular aspect. The fact that a settlement occurred
and my understanding of what a settlement is and how
settlements are and how things are traded around
MR. RIPLEY: Mr. Chairman --
MR. RICHARDSON: Let Dr. Reading finish his
answer.
MR. RIPLEY: -- I don't believe that --
COMMISSIONER MILLER: Let i s proceed orderly
here. Mr. Ripley was first.
MR. RIPLEY: I don't believe that
Mr. Reading is now being responsive to my question. I
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asked him if he was aware of any other orders that may
have changed that order, which, as I understand it, would
be yes or no and it would have completed it. Now, if
we're going to go on and Dr. Reading is going to keep
throwing in a bunch of extemporaneous statements, then
I'll feel compelled to cross-examine; so I'm objecting
that he's not being responsive to my questions.
COMMISSIONER MILLER: I am reluctant to
constrain witnesses simply to yes or no answers unless
it's my impression that the witness is being evasive and
refusing to be pinned down and I don't have that
impression of Dr. Reading, b~t, Dr. Reading, the longer
your answers are, the longer your testimony is going to
be.
THE WITNESS: I understand that. Thank you,
Mr. Chairman.
COMMISSIONER SWISHER: He's possibly paid by
the hour.
THE WITNESS: To add to Mr. Swisher's
comment, my company is paid by the hour. I'm a salaried
employee.
COMMISSIONER SWISHER: Could we take a
recess on Ben 30hnson for about ten minutes or are you
c lose to the end, Mr. Ripley?
MR. RIPLEY: I'm not too far from the end.
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MR. RICHARDSON: Did you finish your answer,
Dr. Reading?
THE WITNESS: I'm confused. Let me try to,
since Mr. Ripley is assuming I'm non-responsive, I'm aware
that there was an order issued that dealt with the
stipulation or the settlement, yes, I'm aware that there
is an order that deals with the settlement.
Q BY MR. RIPLEY: And, obviously, those orders
have to be read in their entirety to obtain the complete
reading of what the Commission was discussing in those
orders and the record would have to be read. You've
quoted from three pages of an order that was over 120
pages long.
A Yes.
Q All right. Now, at Page 20 you refer to the
Commission's last authorized return.
A Yes.
Q And then as I read your testimony, you are
then saying that you computed the rate of return in your
Exhibi t 202 for the Company using a 1989 test year?
A If you read where I wrote that, it says as
an illustration. I used a generalized or thumbnail or
whatever method of calculation rate of return. I did not
mean to imply that this was a full blown rate case test
year rate of return I calculated.
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Q What's the purpose, then, of Exhibit 202 if
it's not computed on the same basis as the Commission
would determine the last authorized rate of return of a
utili ty?
A As you stated, to get the full meaning of
something you need to read the whole thing. In the
context of my testimony, I was indicating that my view of
what the Company is proposing that they are asking that
risks be reduced signif icantly. My recommendation was
that the quid pro quo for that is a reduction in the rate
of return to the Company. I was trying to indicate in
general what the last, that I could find and again, it's
wrapped up in that settlement order, the last rate of
return that this Commission had said something about in
relation to the Company and what the Company was currently
earning.
Q What the Company is currently earning for
revenue requirement purposes is, as I understand your
testimony now, not depicted on Exhibit 202?
A What they're currently earning?
Q As far as --
A I think that's a reasonable estimate of the
range that it's currently earning. Pardon me, that's on
1989, yeah.
Q When you say it's a reasonable range --
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1 A For 1989.
2 Q -- you made no normalization adjustments?
3 A No.
4 Q And you contend that's a reasonable range
5 for revenue requirement purposes?
6 A For illustrative purposes for this
7 testimony, yes. I am not depicting it as a rate of return
8 expert. The point of my testimony is what the Company is
9 proposing is to reduce risks and they are asking for no
quid pro quo.
Q All right. Now, at the bottom of Page 26
12 you're discussing evaluating the costs per kilowatt hour
of Milner versus avoided costs and you state, "All else
14 being equal, a 20-year avoided cost rate would be
significantly less than a 50-year avoided cost rate."
16 A Yes.
Q Could you explain that?
18 A The context of my testimony in this place is
that we should do apples to apples and oranges to oranges,
20 okay, and that a comparison of the posted avoided cost
rates at 20 years and looking at what the cost per Kwh is
22 for Milner at 50 years is not a proper comparison.
Q What's that got to do with "All else being
24 equal, a 20-year avoided cost rate would be signif icant1y
less than a 50-year avoided cost rate,," how do you arrive
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1 at that conclusion?
A The calculation of the numbers.
Q How did you calculate it?
A Let me get some papers.The confusion may
be coming from what I'm meaning by avoided cost.
Q What do you mean by avoided cost?
A What I meant in the context here was what
the cost of the project would be.
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9 Q Are you talking about avoided costs that the
10 Commission has determined for the purchases that a utility
will make from cogenerators/small power producers; i. e. ,
12 the avoided cost rates?
A Rephrase that.
14 Q Okay, are you talking about, when you say
15 avoided cost rate, do you mean that this is the method by
16 which the Commission has computed avoided cost rates for
17 cogenerators/small power producers?
18 A Yes.
19 Q And are you using the term 20-year avoided
20 cost rate and the term 50-year avoided cost rate to mean
21 the same thing?
22 A What I'm saying is that if the Commission
23 calculated avoided cost rates on a 50-year time frame,
24 that is, if a cogenerator could come in and get a 50-year
25 contract, okay, they would get, I'm trying to think, my
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dyslexia is taking over, they would get more than they do
on a 20-year on a present value levelized Kwh basis,
that's what I'm trying to say.
Q That's backwards from what you're saying
here, isn't it?
A I will yield if it is.
Q i don't want any confessions, Doctor, I want
to what know what your testimony is.
A The point I was trying to make and I would
change my less to more or my more to less is that what is
offered by the Commission here is that you go in with, a
small power producer has a chance at a 20-year rate.
Unless it's negotiated, they don't have a chance for a
bigger rate. If we're talking about Milner at 46 years,
as I remember, then if we're doing apples to apples, an
independent producer should be able to get a 46-year
contract and that would be more on a levelized mills per
Kwh basis. Now, I will go back and reread my statement
and see whether I've got that garbled or not.
Q Okay.
A The calculation of the 20-year avoided cost
rate would be less than the amount for the 50-year avoided
cost rate. Have I got it, are we on the same wavelength?
MR. RICHARDSON: So you're not amending your
testimony at all, are you?
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THE WITNESS: No. I may have clarif ied it,
but that's what I was trying to say.
Q BY MR. RIPLEY: Then a 50-year project is
worth more than a 20-year?
A Oh, yeah.
Q Okay. Now, Doctor, do you think there's any
difference from a policy standpoint in how the Commission
should look at Certif icates of Convenience and Necessity
for hydro facilities that are required to obtain a license
from the Federal Energy Regulatory Commission and thermal
facilities which are not?
A As I remember the way you phrased the
quest ion, I would say yes. I would say that any
certif icate that a commission looks at has certain
uniquenesses in the dimensions, be they hydro, thermal,
wind, mirrors, whatever.
Q Weii, a utility when it desires to construct
a hydroelectric facility must obtain a license from the
Federal Energy Regulatory Commission: isn't that true?
A Sure.
Q A thermal facility, on the other hand, is
not subject to the jurisdiction or regulation of the
Federal Energy Regulatory Commission as far as siting or
the construction of that facility: is that true?
A That i s my understanding, yes.
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Q So taking into account the fact that one is
regulated by the Federal Energy Regulatory Commission and
one is not, do you think from a policy standpoint the
Commission should view the Certificates of Convenience and
Necessi ty any differently?
MR. RICHARDSON: Mr . Chairman , Mr. Ripley is
mixing up his terms here. He asked initially Dr. Reading
whether or not obtaining a license from Federal Energy
Regulatory Commission and now he's talking about being
regulated by the Federal Energy Regulatory Commission.
I'd like him to explain what he means.
Q BY MR. RIPLEY: I t means the same thing to
me, Doctor. All I'm asking you is if you have to obtain a
license from the Federal Energy Regulatory Commission,
then that must mean, doesn't it, that the Federal Energy
Regulatory Commission has some jurisdiction in the matter?
A Yes.
Q All right. Now, when we get to a thermal
facili ty, the Federal Energy Regulatory Commission does
not have any jurisdiction to require the siting or the
obtaining of authority to construct a thermal unit:
correct?
A That's my understanding.
Q So we've got one where the Federal Energy
Regulatory Commission has some jurisdiction, i.e., the
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licenses over hydroelectric facilities, and one which is a
thermal facility where they do not; do you understand my
hypothesis?
A I think so.
Q All right. My question to you is from a
policy standpoint as you are testifying here today, do you
believe the Commission should look at its requirements and
what it should do insofar as issuing Certif icates of
Convenience and Necessity differently when it is looking
at a hydro facility as opposed to a thermal facility?
A I thought I already answered that.
Q What did you say?
A Yes.
Q What would the differences be?
A What the Company needed to do to FERC, what
informa t ion there was, what FERC came up with, and the
implication of your question is, therefore, the Commission
should say gosh, the folks back in the beltway decided it
was groovy, we must. That's not what I'm trying to say
here.
Q And I didn't suggest that's what you were
trying to say.
A Okay.
Q I'm trying to get you to tell me what the
differences are.
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MR. RICHARDSON: Mr. Chairman, I think
that's what Dr. Reading is doing.
COMMISSIONER MILLER: Is that an objection?
It would be helpful if you would to try and object rather
than comment.
MR. RICHARDSON: Mr. Ripley is being
argumentative here with the witness, cutting him off and
not allowing him to finish his answers. I'd appreciate an
admoni tion from the Chair that that cease.
COMMISSIONER MILLER: Let's try not to be
argumentative with the witness to the extent that
MR. RIPLEY: I'll try not to be
argumentative. Could you instruct the witness to answer
my questions and not anticipate some ulterior motive to my
questions?
COMMISSIONER MILLER: Let's take a br ief
recess and allow everyone to reflect on their conduct here
and then we willl come back at five minutes after 3: 00 and
get a fresh start on this.
(Recess. )
COMMISSIONER MILLER: All right, let's go
back on the record in Case IPC-E-90-8. For the balance of
Dr. Reading's testimony, Doctor, if ,you would make every
effort to respond to the question that's asked you, that
would be appreciated and, Mr. Ripley, if you believe that
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1 an answer is not responsive, rather than calling that to
2 the attention of the witness, call it to my attention,
3 and, Mr. Richardson, if you believe that the conduct of
4 Mr. Ripley is in some manner improper, you call that to my
5 attention, not to Mr. Ripley's attention.
6 THE WITNESS: Thank you, Mr. Chairman.
COMMISSIONER MILLER: All right, let's7
8 proceed.
9 Q BY MR. RIPLEY: Doctor, as I understand your
10 testimony, you are recommending that some type of
Certif icate of Exemption or the Company's alternate
12 proposal be rejected by the Commission?
A Yes.
14 Q And you're also recommending that the
Certif icate of Convenience and Necessity the Company is
16 requesting be denied?
17 A At this point, yes.
18 Q Now, when you say "at this poiht," Doctor,
19 wha t do you mean?
20 A To reiterate what I'd stated earlier to
21 Mr. Purdy that I'm not making a value judgment on that
22 that this is a bad project, just that there isn't enough
23 information in the record to determine whether or not it
24 is a good project.
25 Q What is your recommendation that the Company
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should do if the Commission rejects the alternate proposal
and denies the certificate?
A I i 1 i answer that in two parts. My quick
answer would be that the Company should do whatever the
Commission directs or whatever indications it gets in the
order rejecting it. I'm assuming by your question that
there's a second part to it and that is what am I
recommending would be in the Commission order. I don't
want to presuppose where you're going.
Q No, it's not. I'm not asking you for your
recommendations as to the second part right now.
A Okay.
Q Now, I assume that you at least reviewed
Mr. Packwood's testimony where he testified that this
project was non-deferral to the extent that it was being
constructed now and agreements were entered into with the
canal companies for the construction of this project.
A Yes.
Q What is your understanding as to what occurs
if the Commission denies this certificate as far as those
contractual agreements are concerned?
A I would imagine they would still be in
force.
Q And if those contractual agreements that are
still in force permit the canal companies to insist that
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this project be sold off system, if you will, what's your
posi tion there?
A I don't know what you mean what's my
position. It's sold off system.
Q Then, as I understand it, you would have
taken that into account and say I guess that's too bad,
Idaho has lost that resource to the extent that the
Commission did not issue a cert i f icate .
A In coming to my position that there was not
enough information on the record at this time to make a
reasonable decision, one potential outcome of that is that
the Company doesn't necessarily have to "keep that" for
Idaho. That's always been an opt ion the Company has. I
don't know how else to respond.
Q Isn't it an option to the Company only if
the Commission gives it that option?
A By refusing it?
Q Yes.
A I guess I can't answer that.
Q Do you believe that the Company was not
required to apply for a Certificate of Convenience and
Necessi ty as a policy matter?
A I f the resource was for use not on the
system, no. Now, I would yield to a legal interpretation.
Q All right, let me ask you one final area,
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Doctor, and let me phrase this so that we don't become
embroiled. Although your Swan Falls testimony is not in
this proceeding, Doctor, in that testimony you refer to a
series of orders by this Commission which criticized the
Company and stated that the Commission was not pleased
wi th the fact that they were receiving Certificates of
Convenience and Necessity and the numbers showing what the
costs of the projects for those Certificates of
Convenience and Necessity were preliminary numbers that
were originally filed with FERC to receive preliminary
licenses. Have I paraphrased correctly what one of the
disputes in the past has been?
A My understanding of reading the orders, you
perhaps read a little bit more into it on, 'like, receiving
the FERC license, but the general paraphrasing of what I
read in those orders and your interpretation is correct.
Q Okay, and the Commission stated at the time
you apply for Certificates of Convenience and Necessity,
we want firm commitments, firm cost estimates, from the
utili ty when we are determining whether to issue a
Certif icate of Convenience and Necessity; is that correct?
A Yes.
Q All right. How else would the Company in
your opinion comply with those prior orders unless it came
forward wi th commi tment est imates as it has done in this
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proceeding?
A Also in those orders that were cited that
you discussed was not only that it should be a as firm as
reasonably possible amount but also should look at the
whole least cost planning of the utility.
Q Yes, but confining ourselves for the moment
to the Commission's requirement that they had ordered
Idaho Power Company in particular that they wanted firm
cost estimates, how else could Idaho Power Company comply
as to that portion of the order unless they came forward
wi th the commitment estimate that they have come forward
with in this proceeding, just confining ourselves first to
that narrow issue?
A I'll answer that in two ways. One,
certainly a way to do that is to come forward with a
commitment estimate. Second, as described, as I remember,
in both -8 and -2 testimonies, I think the exceptions to
that are relatively broad.
Q Now, when you say II the except ions, II I don't
know for sure what you mean.
A Scope and escalation, those things that were
discussed by Mr. Packwood this morning.
Q Okay. Now, if what the Company intended
from a policy standpoint was that it would come forward
with this firm commitment, but that it recognized that
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there were certain contingencies which they simply could
not forecast with the degree of accuracy and they excepted
those out and left the Commission with the ability to say
if one of those three things occur, all bets are off, you
don't have a certif icate that can't be stopped at that
point in time, what's wrong with that?
A I guess I don't understand your question.
You seem to be implying in your question a different
interpretation of what those escalation and scope things
are than I have..
Q I understand that and perhaps that may be
your confusion with what the Company has proposed. Let me
ask it this way: Doctor, assume that the Company has
proposed a commitment estimate where there would be a
maximum amount that could be rate based, all right?
A Okay.
Q That, as I understand it, you and I are in
partial agreement, is what the Commission wanted in the
earlier Swan Falls 197/200 investigations.
A My understanding is they wanted a firm
estimate. You mentioned to be rate based as I remember in
the question and that's not what I interpret what the
Commission was asking in those orders. I think one of the
things they were asking was a firmer commitment.
MR. RICHARDSON: Mr. Chairman.
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COMMISSIONER MILLER: Mr. Richardson.
MR. RICHARDSON: I'm going to object here on
the relevancy of Mr. Ripley's line of questions.
Mr. Ripley is inquiring relative to Swan Falls orders and
the requirement of the Commission for Idaho Power to come
in with firm commitment estimates on Swan Falls and is
trying to apply those to the Milner case which is very
distinct and that's one of the few areas where it's very
distinct in terms of a Certificate of Public Convenience
and Necessity.
COMMISSIONER MILLER: Mr. Ripley?
MR. RIPLEY: We have taken the position from
Day One, and if we are in error, we humbly request an
order from the Commission, we thought that the Commission
orders in Swan Falls in the 197/200 proceeding stated that
no more would the Commission issue Certificates of
Convenience and Necessity to Idaho Power Company without
firm cost commitments. When I refer to the Swan Falls
orders, it has been and is the position of Idaho Power
Company that those orders apply to every Certificate of
Convenience and Necessity that the Company is to come
before the Commission and request.
COMMISSIONER MILLER: Without expressing an
opinion on the significance or meaning of Commission prior
orders, I think I'll al low this line of quest ioning to
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proceed and we will address the significance of those
orders when we dec ide the case and we' 1 1 v iew the
Swan Falls questions as predicates for your questions in
the Milner case, not that we're deciding Swan Falls here.
MR. RIPLEY: Yes, sir, Mr. Chairman.
Q BY MR. RIPLEY: And perhaps I can speed this
up, Doctor, by saying assume that the Commission orders
require that before a Certif icate of Convenience and
Necessi ty would be issued the Company was required to
submi t a firm cost estimate and assume that, or as I think
you and I have agreed, that that is the purpose of the
cost commitment that the Company has submitted in the
Milner proceeding, all right?
A Okay.
Q Now, as I understand it, you have taken
exception to what the Commission, to what the Company has
proposed because you believe it has excepted out all of
the risk.
A Yes.
Q All right.
A I'm not sure I'd say completely all, but
certainly a big part.
Q As to some of the -- let's take inf lat ion,
for example, you observe that the Company has stated if
there is rampant inf lation its cost commitment is not
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1 binding: correct?
2 A Correct.
3 Okay. Now, what is your interpretation asQ
4 to what the Company means when it says that commitment is
5 not binding in the sense that it can come back to the
6 Commission and request something else?
7 A That if due to rampant inflation, as you
phrase it, the cost of the plant is greater than the cap,8
9 then the cap no longer applies and the Company will come
10 in and apply for treatment over and above the cap.
11 Q What's wrong with that procedure?
12 A In the narrow perspect i ve , there i s nothing
13 wrong with that procedure, but the meaning of my testimony
14 was if you say we've got a cap and we guarantee we're
going to come in at X dollars and then you take a whole
16 bunch of the risks and except them, then the cap to me has
17 no meaning.
18 Q But you have not excepted the risks in the
19 sense that you say if I have rampant inflation I am
20 enti tled to construct the project. All that you have done
21 is stated that if rampant inflation occurs, you'll go back
22 to the Commission, have another proceeding and the
23 Commission at that time will decide if the project should
24 proceed or not.
25 A Sure, and if you except it out, the cap is
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not a cap.
Q All right, and you think that's unreasonable
for the Company to suggest that as the procedure?
A I'm uncertain on what you're gaining. My
direction in my testimony was to point out to the
Commission those things that would change the cap, because
the flavor of the filing was this cap was firmer than when
I looked at it in more detail than it ended up being in my
opinion.
Q Let's assume, Doctor, that there is rampant
inflation and the Company does not apply to the
Commission.
A Okay.
Q Are you assuming that the Company is
protected because it has said that rampant inflation is
not part of its cost commitment?
A I don't know what you mean by protected.
Q That it has excepted it out and, therefore,
the Commission is required, I think as you look at it, to
double the rate base investment that the Company would
make in Mi lner, do you think that's what occurs under the
Company's proposal?
A If the Company doesn't come in and apply for
any more, then I don't think as a practical matter the
Commission would say gosh, you guys are getting ripped
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off, I want to give you more money than you asked for.
Q So the Company in that circumstance has thus
absorbed that cost: correct?
A It's their choice, sure.
Q Well, it's their choice, Doctor, only in the
sense that they can apply to the Commission.
A Sure.
Q But the Commission then makes the
determination as to whether to proceed with the project or
to abandon the project and every party has a right to make
its recommendation at that time to the Commission, what's
wrong with that?
A You threw a caveat in, my pausing is because
you threw a caveat in there. I thought we were talking
about in the context that the project had been completed
and it had cost more than the commitment estimate due to
inf lation and so the utility was going to apply at that
time.
Q No, it couldn't, could it?
A My understanding of what the Company has
proposed it could.
Q Then perhaps that is where we are
differing.
A Okay.
Q Assume for me that what the Company is
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proposing is that if it does not apply and there is a cost
overrun due to inflation it absorbs that cost.
A
Q
A
Q
A
Q
in their
If it doesn't apply.
If it does not apply to the Commission.
Right.
Okay, it would absorb that cost.
That I understand, no problem.
Okay. Now, all that the Company is saying
presentation is no one can forecast with the
degree of accuracy that is necessary inflation.
A Sure.
Q You can't, I can't, the Commissioners can't:
so, therefore, any cost commitment that is firm has to
have some mechanism to take care of the possibility of
inf lation, would you agree with that, that that's fair?
A That's one way to handle it. I would have
to think more about fairness.
Q Okay. Now, let i s assume that what the
Company is proposing is that it has presented a firm cost
commi tment.
A Okay.
Q That if it exceeds that without an order
from the Commission it absorbs those costs.
A Yes.
Q However, it can't forecast inflation as the
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Commission cannot: therefore, if inflation begins to occur
and the Company sees that it is going to exceed its cost
commitment because of inflation, it would at that time
apply to the Commission for authority to lift the cap and,
obviously, the other parties at that time could urge don't
lift the cap, deny the project at that time.
A Okay, this is where my confusion comes.
You're talking about at any point during the construction
process, not once the construction process is ended.
Q Yes, sir.
A And you get one year down the road and
you've got, I think you used the phrase before, tr iple
digit inflation.
Q Yes.
A And so you say gosh, we're going to go over
our cap and so then you come into the Commission.
Q Yes.
A Okay, so?
Q And the Commission then at that time would
have another hearing and would receive evidence from Idaho
Power Company as to what its costs were going to be
because of inflation, you and other individuals would have
an opportunity to testify as to whether that was
reasonable or not reasonable and the Commission at that
time would then have the ability to make a determination
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as to whether the project should proceed or not proceed.
Now, what's wrong with that procedure?
A I'll answer -- let me think a minute.
Q Okay.
A I'll answer that in two ways. One, I don't
have the legal understanding of a certificate and the
degree that once the Commission issues it what the legal
constraints are in saying gosh, we want to unissue it and
I will leave that to the lawyers.
Q Okay.
A On a policy sense, one of the things that I
know Idaho Power as well as other utili ties complain about
is that the Commission gets in the middle of its stuff and
tells it how to manage and that is generally by
investor-owned utilities considered a bad. Traditional
ratemaking says that the utility goes out and does from
its point of view its best. When it does it, it comes in
and it says, it has the burden of proof to go to the
Commission and say this is what we did and this is why
it i S fair and this is why ratepayers should pay for it.
It would seem to me that if the Company is
bui lding a resource and every time there i s a bump in the
road or an owie of some kind it comes shooting back into
the Commission and says gosh, Commission, do we get to
take the next step, that would seem in a public policy
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sense to be a burdensome process.
Q Why?
A Because it would be asking, potentially it
would be asking, the Commission to micro-manage the
Company and that in my view is not a proper role for the
Commission to take.
Q Doesn't it micro-manage the Company if it
wai ts and makes the decision after the fact that the
Company was imprudent?
A Not in my mind.
MR. RIPLEY: That's all the questions I
have. Thank you.
COMMISSIONER MILLER: Thank you,
Mr. Ripley.
Commissioner Swisher.
EXAMINATION
BY COMMISSIONER SWISHER:
Q Well, Dr. Reading, you went through an
exchange with counsel for the Company that passed up, at
least on your side, the public interest question, the lost
opportunity question.
MR. MILES: Mr. Commissioner, will you pull
your mike over, please?
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COMMISSIONER SWISHER: I will.
Q BY COMMISSIONER SWISHER: You didn i t discuss
wi th Mr. Ripley what time it is with respect to Milner.
For instance, did you find it curious that the canal
companies made a deal with Idaho Power rather than just
doing this on their own?
A Yes.
Q Why do you think they went with Idaho Power?
A I honest 1 y don't know. One would assume
from their perceived interest it was an easier or more
prudent way to go. Certainly in reading the application
that occurred to me that they could have hired a private
developer and looked at avoided cost rates or off-system
rates or whatever.
Q So that's how you view their decision
process?
A Yeah, and maybe it's heroic. I assume they
were rational, I'LL put my economist's hat on.
Q Take it off.
A Okay.
Q Let's discuss what this board comprised of
farmers plus one ex-nuclear engineer did decide to do.
Milner was up for relicensing. In hydro country almost
automatically relicensing is in the regulatory community
dealt with, taken pretty seriously: so Milner Dam was not
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an old Idaho Power Company unit like Swan Falls.
A Correct.
Q This was a chance unl ike Swan Falls to add
some generation at a time of FERC licensing, still to come
before the PUC. Are you seriously saying that the
decisions that the Power Company made, the decisions that
the canal companies' board of directors made -- well, now
I'm having trouble how to ask you a question without
bringing Mr. Richardson out of his seat.
COMMISSIONER MILLER: I'll protect you.
COMMISSIONER SWISHER: You'll protect me,
all right.
Q BY COMMISSIONER SWISHER: Do you think that
that whole process should have taken place, the
application at FERC for the Milner project and the
calculation of the power component without regard to this
Commission's attitude toward lost opportunities? Let me
put it another way. Suppose Idaho Power had just gone
ahead and said we i ve got a deal wi th these canal company
boards and before the Swan Falls legal case we used to be
great friends and we're going to go ahead or suppose the
irrigation companies had gone ahead, do you think no
questions would have been asked by this Commission as to
why that particular resource was not looked at as a
resource for the Idaho ratepayer?
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A I would think that more than the IPUC would
have questioned that. If I understand your question
correctly, are there social and political concerns with
keeping hydro projects like Milner wi thin the state for
Idaho ratepayers, the answer is absolutely.
Q Is ita possibility that the Commission and
the Staff and other players overreached in the time of the
1980s when these rate cases were frequent and when these
quest ions, now you can put your economist's hat back on,
as between the need for new base load plant and the impact
of the rate increases we were passing through, when those
tensions were at their peak, do you think that the Staff
as well as the Commission overreached in the language of
the orders that you and Mr. Ripley were discussing?
Consider what the Company has done here.
The Company came in with this application, brought in a
number with a cap and the conditions under which that cap
could be moved up, the conditions under which that cap
would become irrelevant, but basically what the Company
was doing, tell me if I'm wrong, was saying with respect
to the issuance of that certificate based on our filing,
our sunk costs will not be stranded; isn't that what
they're say ing?
A Yes, that's what they're asking for.
Q Isn't that the profound change between the
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past and this proposal?
A I see some changes, and to get back to, if I
understood correctly, your earlier question on whether
there was overreaching, I think that in some specific
dimensions there may have been, but the general flavor of
what's in those orders as I read them is that before Idaho
Power or any iou in the state brings on new resources that
it needs to look at a variety of, the buzz words are least
cost planning and those things haven't been present, those
things were not present or highly evident in the past. I
don't think it's overreaching to say that those should be
the rules of the game going forward.
Q Well, let's try to recap some of those very
painful decisions. Keep in mind, for instance, that the
Cascade Dam, which was a relicensing upgrade affair, that
the costs that came in on the Cascade Dam rebuild were
higher than these costs.
A Yes.
Q In 1990 dollars, emphatically so. Keep in
mind that the Boardman plant came on at the time the full
impact of the rate changes both on the Idaho Power system
and at Portland General Electric along with the general
recession dramatically reduced the peaks that were
projected and even somewhat accepted by staff if I'm not
mistaken,and then keep in mind the other issues that were
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involved in not only Valmy 1 but Valmy 2 as to who ran
what when and who paid what costs.
Issues in all of those cases were different
and as we went through the '80s and all of those decisions
were made and all of them made in the shadow of the
Pioneer plant decision, the remedy proposed by the
Commission, the remedies plural proposed by the Staff in
the test imony of those cases added up to the kind of
instruction to the Company that may have framed this
application.
A Yes.
Q Now, to be terribly unfair, and I don't know
where Mr. Richardson will be, you were a member of Staff
during the penultimate part of that process.
A Yes.
Q After Pioneer and before the settlement on
Swan Falls, in that period you were on the Staff here.
A Yes.
Q Are you saying that the direction that the
Commission took and the advice to the Commission to the
degree that it was accepted by the Staff and all of it
having resulted in this kind of an application, having
thrown that ball, have you now gone into the private
sector, come in here, held up your mit and caught it and
said that i s a foul ball?
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A No. What I'm trying to say with my
testimony is that I'm agreeing with you that the Company's
response is to those kinds of things and is to those
orders where it comes in and says we're going to give you
a commitment est imate. Those orders also say to me, and
the language is in my testimony, and to use the buzz word,
that its least cost; otherwise, what the Company has done
is a narrow, in my mind, is a narrow slice to one part of
what those orders say.
Rather than coming in here and saying gosh,
let's look at this particular project relative to all of
the other kinds of resources we discussed with
Mr. Packwood, off-system sales, I don't know where Idaho
Power is in building a new power line, but I understand
that's going forward, where do these projects fit in to
this whole scheme of things.
I may put a footnote in that that the
particular project may come in over avoided cost, it may
come in higher than those alternatives and I said so in my
testimony that there may be other kinds of factors that
say this project is still good. What I'm complaining
about in my testimony is that the Company hasn't in its
application looked at all of those other things and made
those decisions; so I think that it's the Company's
responses to all those things, but it's not adequate for
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all those things.
Q Well, are you saying you wouldn't give them
a Certificate of Convenience and Necessity until they
carried out exactly the spirit, the tone, the quantity and
the quality of conservation, for instance, that you
wanted?
A That may be going too far, but the
conservation and I've been away from the Commission and
there have been lots of conservation hearings, so if I'm
to believe the rhetoric, conservation is now part of what
the Company does and some of the Staff's testimony, they
complain I think
Q Wel l, let's take the Company's publ ic
testimony before the legislature in support of a building
code for conservation. Let's take the Company's submittal
of its Design Excellence Award Program. Let's take the
Company's proposal for manufactured home standards. I'm
just thinking of three off the top of my head,
Dr. Reading, that have occurred in the last year as a move
frOm lip service into action. Are you really saying that
wi th respect to avoidance of the need for new plant that
the Company has been unresponsive in the time since you
left the Commission?
A What I'm saying is I don't know whether
they've been responsive or whether they haven't.
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Q How come you don't know? You're a witness.
Are you only supposed to be a wi tnessto -- I mean, when
you get on the stand, it's true, you're supposed to be an
advocate for your client's position, but keep in mind that
early on Mr. Ripley was making some objections to the tone
of your testimony because of your former employment here.
Is it really true that as a former employee and an
important person in policy matters and one who showed
beyond your professional duties an active interest in
rational energy policy that since you left the Commission
and went to work for a guy who specializes in telephones
you haven't noticed anything that's been happening in the
energy front, are you trying to tell me that?
A No.
Q What are you trying to tell me?
A What I'm trying to tell you is that I have a
casual knowledge of the conservation efforts that have
occurred and the hear ings that have occurred. I did not
investigate and I do not know, I cannot make a
professional judgment on whether Idaho Power's
conservation efforts to date are reasonable or
unreasonable.
Q Okay.
A I just don't know.
Q All right.
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A I know what Mr. Faull has to say about it,
bu t beyond that, I don't know.
COMMISSIONER SWISHER: And I thank you for
your testimony. That's all I had, Mr. Chairman.
COMMISSIONER MILLER: Commissioner Nelson.
COMMISSIONER NELSON: Well, thank you,
Mr. Chairman.
EXAMINATION
BY COMMISSIONER NELSON:
Q One of my questions was what was lacking in
the Company's submittal for you to say you wouldn i tissue
a Certificate of Convenience at this time and you've
discussed conservation. Is that the sum total of it, that
there wasn't enough discussion of the other available
resources?
A No, other available resources, what
independent power producers, you know, supply curve for
independent power, what the secondary market is, what load
management programs potentially could be, the whole
variety of things that are standard and traditional to be
looked at in least cost planning.
Q Well, you're familiar that I think each
spring they submit a resource management report or they
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have once, another one due. Wouldn't that report pretty
much cover what you're talking about?
A I have not looked at it. I would have to
look at it to know.
Q In your comparison of the 20-year rate and
the 50 year rate, am I correct that if you look at a
20-year rate, you're still using in this case 45- or
50-year depreciation, it's just what those rates would be
for 20 years?
A When one calculates it, they use an
escalation assumption if that's what you're asking. Maybe
I don't understand what you're asking.
Q I don't think so. When you're saying that
the 20-year rate is different than the 50-year rate, one
of the pieces that isn't different would be the
deprec iat ion factor; in other words, you'd deprec iate it
for 20 years to get the 20-year life and it would still
have 26 years or whatever depreciation left.
A Correct.
Q i was confused by what you said about the
difference in the rates. You said that a 50-year rate
would be higher than a 20-year rate on the same project.
A Yes.
Q Does that mean that if they come in and say
that their cost over the life of the project is 60 mills
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and the current avoided cost for that year of completion
on a 20-year contract would be 55 mills, say, that really
you're not talking about a five mills. difference, you're
talking about a difference in the cost of, a difference in
the computation; so that while I'm not going to guess as
to how much difference there would be, those costs would
tend to move towards each other.
A If I understand your question correctly,
yes.
Q Okay. I wrote this question when I read
your testimony so I'm not quite sure what I mean by it,
but I say, "i don't understand your argument for reducing
the cost of equity on Page 21 and 22." Maybe you could
look at that just a second. You're not suggesting a
12 percent equi ty return for the Company, are you or are
you?
A No. What I was doing was using an
illustration to bring home my point that reduction in
risks should have a quid pro quo.
Q What you're saying is, then, that if a
current adequate rate of return for the Company is 12.25,
you would reduce it?
A If the Commission were to rate base right
now that there should be some reduct ion.
Q In discussing why the irrigators d1dn' t go
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wi th this project on their own, isn't there a higher risk
involved with saying we'll build it and take the avoided
cost or we'll build it and get a contract off system
rather than saying well, Idaho Power, you build it and
give us a royalty and we'll live with that?
A My understanding of the the agreement
between the two is there are shared risks; so the answer
would be yes.
Q Yes, there's less risk with Idaho Power than
the other way?
A Yes, and I assume a trade-off between
greater return and higher risk.
COMMISSIONER NELSON: Thank you. That's all
I have.
COMMISSIONER MILLER: Commissioner Swisher,
you said you had another quest ion.
COMMISSIONER SWISHER: Yes, I did, prompted
by Commissioner Nelson's.
EXAMINATION
BY COMMISSIONER SWISHER:
Q I neglected to ask you if it's part of the
concern of your client, I have no other way to ask it than
ask you, that the addition of Milner and then Swan Falls
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as small increments to the total capacity of Idaho Power
is a concern to industry in the sense that Idaho Power
historically has not leaped with joy at each tendering of
a cogeneration offer?
Is part of the future for the Industrial
Customers in the '90s the capturing of their waste energy
for sale in the PURPA market and is this militating
against that in your judgment? Is that something the
Commission needs to address? After all, this Commission
has been fairly sanguine about PURPA.
Do I read between the lines of your
testimony that you are concerned that having acquired
these small increments, relatively small increments, that
going forward Idaho Power will take the position that we
don't need industrial cogeneration, is that a concern? Do
we need some linkage between how we deal with these base
load plants and how we deal with the industrial
cogeneration potential?
A To be candid, that was not in my frontal
lobes in putting this together. I think that is something
the Commission needs to be concerned with, certainly, and
those are the kinds of things that I mentioned I didn't
see in the whole application that should be part of the
decision process on whether to issue a certificate or not.
Q Let me put it another way. The water that
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goes over Milner is an Idaho resource that shouldn't be
lost. In the opinion of your clients, is it also true
that the water in the boilers of the potato processors,
for instance, is also a resource that shouldn't be
squandered?
A Without getting in the heads of my clients,
I would certainly advise them both publicly and privately
that it should be.
COMMISSIONER SWISHER: I wondered about that
aspect, I wondered if it helped shape your case. That's
all I had, Mr. Chairman.
THE WITNESS: No, it didn't.
COMMISSIONER MILLER: Okay, thank you,
Commissioner Swisher.
EXAMINATION
BY COMMISSIONER MILLER:
Q 3ust a couple of questions. First, let i s
just ask a little hypothetical question here. Let's just
assume that I'm a homeowner or property owner and I want
to have a house built and that you are a house builder; so
I say to you or we discuss it and I say to you well, why
don't you go ahead and start, but I'm not sure I'll want
you to finish and I'm not sure I'll want to pay all of
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your costs once you are finished. Would you as a home
builder proceed under that sort of an arrangement?
A Never being a home builder, I don i t think I
would build it to specif ications for an individual, but my
understanding is builders build spec homes as a normal
course of business.
Q How in your opinion is the position that I
have tried to take as a home property owner different from
what the Industrial Customers recommend that the
Commission take when it issues its Certif icate of Public
Convenience and Necessity, aren't you suggesting that we
take about that sort of attitude?
A I hadn't thought about it in that context.
I'll stutter for a minute while my brain works here or
hopefully works. I think the Commission has a little
different position in that the Commission has its public
policy hat on and it is constrained by the statutes that
it needs to set rates that are fair, just and reasonable
and at the same time it sets earnings for the Company that
allow them to recoup a reasonable rate of return.
The fact that the Company, pardon me, the
fact that the Commission looks at events that have
occurred over the construction of a project is not exactly
equivalent to hindsight. In normal rate setting the
Commission is always in a position to sit back and say
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let i s look at what's happened and did the Company respond
in a responsible, reasonable way to those particular
changes and then does it balance between the ratepayer and
the stockholder.
Q That leads me to basically my second
question and that is on Page, I think, 19 of your
testimony, you have kind of a long list of the risks that
shareholders should assume in connection with construction
projects and kind of your view of the balance between
ratepayer risk and shareholder risk, and one of the risks
that you say shareholders should assume is the risk of
regulatory change, and this is kind of another
Commissioner Swisher-like question, you should find a
question in there somewhere, but isn't in a way that what
this case is all about and isn't that kind of the current
cri ticism of regulation, which is in fact there may be
regulatory change which creates uncertainty as to a future
commission's treatment of a company's investments and that
some future commission may disallow costs which the, which
this Commission initially authorized the commencement of
incurring those costs and is there a defect, do you think,
in regulation that a commission is less like a court where
changes in the composition of the commission don't change
the law that the court follows, but that the commission at
least in some people's mind is more like the Buhl City
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Council, that you get three new guys and who knows what's
going to happen and that this creates in the utility
communi ty an uncertainty or a risk of future arbitrary
disallowances?
That in general is the type of criticism you
hear of regulation from some people; so what should be the
Commission's response to that sort of criticism? Should
we say to the utility, look, we give you a return on your
investment that's adequate to compensate you for these
risks so don't whine about it, go do your job or should we
agree that there is some defect, or not defect, but
def iciency in regulation that creates that element of
uncertainty and try and create additional certainty
through more clearly defining what a Certificate of Public
Convenience and Necessi ty means?
A Well, that is a Commissioner Swisher-type
question.
COMMISSIONER SWISHER: No, it isn't, because
I remember the Bort case and I thought there was an awful
fuss about what would happen if you changed judges.
THE WITNESS: Let me answer that. I had at
least four thoughts, and I am not sure I can recapture all
of them, as you were going. I think one of the aspects of
your question/statement was that gosh, things are
different because commissions may change. I don't think
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that's true. I think utili ties have faced since the
beginning of commissions the problem that you've got one
set of folks and then you get down the road and another
set of folks get in and it could happen.
3ust anecdotally I've been involved the last
few years of regulation in Texas and certainly it seems at
least in the anteroom and in the bar's opinion that who
gets elected governor is a lot more important on what the
decision comes down to the PUC than what we present in the
hearing room; so I think that that's kind of a generic
thing that utili ties have always had to live with and
that's not necessarily new rules of the game, that's just
one of the ways that regulation has occurred and part of
the fact that a utility has got a monopoly and those kinds
of things.
Another aspect on certainly the Commission's
decision in risks is the building a block over the tower
here to the west and that is the checks and balances are
that the Commission has only the authority that the
legislature gives it and the legislature makes decisions.
When I was here, they made a decision on inverted rates.
You have another check on the Supreme Court; so it's a
risk to a utility, but checks and balances of the system
are there.
While you were asking the question, I was
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thumbing through my testimony and I didn't find it right
away, I think one of the things that those Swan Falls
orders that Mr. Ripley and I had cross-examination about,
the Commission does, has been saying over the past X
years, look, we want to look at these things in a .
different light, and when they use terms, I can't
remember, something about the days of high and hell water
financing are over and those kinds of things that rolled
into the orders that it's giving instructions, fairly
clear instructions, to the Company that when you bring in
a resource, we want to look at it in a different context
than past commissions have, and that's not a change.
That's telling the Company what the Commission would like
to see and my reading of those Commission orders and this
application, the Company hasn't fulfilled what it says.
The last thought that I had is that there is
a very different thing in looking at all of these risks
and say ing to the Company, tough, you guessed wrong, to
hell with you. That's not what I'm trying to say. What
I'm trying to say is the Company always faces these risks
and what is important in a Commission decision is what the
Company i S reactions are and how it deals with those
changes and whether it real izes it's spending effort in
trying to assess and look at those kinds of changes and
what's going on; so I guess I agree with almost everything
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in your question except kind of a tilt that gosh, this is
a brave new world and r think in many ways it's really not
a brave new world and I think the Commission i s orders have
been very explicit to the Company on what it's looking for
and the Company's responded with only part of that, only
the commitment of a firm estimate, not a whole bunch of
other things.
COMMISSIONER MILLER: Redirect.
MR. RICHARDSON: Thank you, Mr. Chairman.
REDIRECT EXAMINATION
BY MR. RICHARDSON:
Q Dr. Reading, Mr. Ripley asked you on
cross-examination what avoided cost rates are used for and
I would like to ask you what is your definition of an
avoided cost?
A The def ini tion that I was using of avoided
cost is that cost that the utility would incur to buy its
next kilowatt or kilowatt hour.
Q Do you know whether Idaho Power's other
hydroelectric facilities that are on line, such as, for
example, the Hell i s Canyon complex, whether those
facilities are regulated in the same manner as Mr. Ripley
used that term by the Federal Energy Regulatory
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Commission?
A In the same manner as the Idaho Public
Utilities Commission does?
Q No, in the same manner as Mr. Ripley used
the term.
A I'm in trouble when my client -- I'm sorry,
I don't understand your quest ion.
Q Mr. Ripley asked you earlier whether or not
the Federal Energy Regulatory Commission would be
regulat ing Swan Fal ls and Mi 1ner --
A Yes.
Q -- in the sense that they granted a license
for the construction of those projects, do you recall
that?
A Yes.
Q And do you know whether Idaho Power's other
hydroelectric facilities are also regulated in that same
sense by the Federal Energy Regulatory Commission?
A Yes. Sorry it took so long to get there.
Q That's fine, it's getting late in the day.
To your knowledge, does this Commission exercise
ratemaking authority over those other hydroelectric
facili ties?
A Yes.
MR. RICHARDSON: That's all I have,
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Mr. Chairman.
COMMISSIONER MILLER: All right, thank you,
Mr. Richardson. Doctor, thank you for your help, a lot of
work this afternoon, we appreciate it.
(The witness left the stand.)
COMMISSIONER MILLER: Well, let's see, it's
slightly after 4:00 o'clock. I think it's unlikely that
we're going to conclude today, but would the parties
prefer to press on or recognizing that we're probably
going to be back in the morning simply prefer to take the
Staff case up in the morning? Does anybody have a
preference?
MR. RICHARDSON: I think that would be most
productive, Mr. Chairman.
MR. RIPLEY: I agree.
COMMISSIONER MILLER: Would that be all
right with you, Mr. Purdy?
MR. PURDY: Mr. Chairman, I might just
suggest that we put Mr. Faull on the stand, he's our first
wi tness and just swear him in and spread his testimony,
get that out of the way unless there i s any objection.
COMMISSIONER MILLER: All right.
COMMISSIONER NELSON: Let's skip it.
COMMISSIONER MILLER: You say skip it? I
say skip it. That takes about two minutes.
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MR. RIPLEY: 9: 00 0' clock?
COMMISSIONER MILLER: Commissioner Swisher
is slightly under the weather and 9: 00 0' clock is, let's
start at 9: 30 in the morning. I might just say that as
part of my effort to try and figure out what a Certif icate
of Public Convenience and Necessity is or should be, I did
go back and try and see if there was anything in the
nature of historical information that would exist from the
time, from around the time, when the certif icate statute
was enacted and how the Commission treated certif icates in
its earliest days to see if that would give you any hint
of how the certif icate has been treated historically.
The results of my little inquiry were that
you can't tell, but I in the process did reduce my little
review to writing and it doesn't lead you anywhere, but
it's something that I've been looking at and if any of the
part ies would 1 ike to have a copy of my research, they're
certainly welcome to it, although, as I say, I don't think
it leads anywhere, but just so you know that's one area
I've tried to look into and it's not very helpful, but if
you would like to have a little copy of what I have found,
you're certainly entitled to it.
MR. RIPLEY: I would like a copy,
Mr. Chairman.
MR. RICHARDSON: Mr. Chairman, a point of
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inquiry, what is your intention with regard to scheduling
oral arguments on the legal briefs in this matter in terms
of timing?
COMMISSIONER MILLER: Let's discuss timing
overall. Mr. Gilmore, do I understand that you got ahold
of the other parties, FMC and Afton?
MR. GILMORE: Yes, that's correct, neither
are planning to be here in an official capacity. Bob
Mills may come and watch, but he wasn't planning to speak.
COMMISSIONER SWISHER: On either
application?
MR. GILMORE: On either one.
COMMISSIONER MILLER: So would all the
parties agree that we could as soon as we finish Milner
tomorrow move directly into Swan Falls; would that be
agreeable to everyone?
MR. RICHARDSON: That's acceptable,
Mr. Chairman.
COMMISSIONER MILLER: The Commission may as
a formality, I suppose, convene a brief hearing Thursday
morning on the off chance that there were would be
somebody interested in public comment, but that will allow
us to get al 1 the way through; so if we proceed in that
manner, it seems to me we could have oral arugment or
would the parties like to have oral argument at the end of
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both cases or would you 1 ike to do Mi lner, have oral
argument and then do Swan Falls? Any preference?
MR. RIPLEY: Oh, I think oral argument may
be more benef 1cial if both cases are submi ttedand we
carefully listen to any questions the Commissioners might
have, 1 t might assist you more. I think oral argument is
for the trier more than anything else; so whatever you
desire and whatever you think is most beneficial is I
think the key.
MR. GILMORE: Mr. Chairman, oral argument
was originally scheduled at the end of the Milner case
because we didn't know if there would be an evidentiary
hearing in Swan Falls. At the time of the schedule that
was up in the air; so I think now that we know there's
going to be an evidentiary hearing on Swan Falls, it might
be more advantageous to delay the oral argument until
after that.
MR. RIPLEY: Could I suggest one thing?
When you're preparing for cross, it's difficult sometimes
to just shift gears to oral argument. Could we finish the
cross-examination of all witnesses tomorrow and then have
oral argument Thursday morning, say, starting at 10: 00 or
something? I can't imag ine it would take --
COMMISSIONER MILLER: That would be, I
think, a reasonable suggestion, give everybody time to
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prepares themselves.
COMMISSIONER SWISHER: I think it's fair for
the part ies, Mr. Chairman. I agree when you i re in here,
you know, with two different forms of the art, but I think
it would be especially, I'm thinking of the Staff attorney
who has an unusual position in this case.
MR. RIPLEY: That way I would only have to
prepare for one thing tonight to be quite honest about it.
MR. RICHARDSON: I have one additional point
of clarification, Mr. Chairman.
COMMISSIONER MILLER: Mr. Richardson.
MR. RICHARDSON: The question deals with the
Commission's intention in terms of dealing with the
records in the -8 and the -2 case. Is it my understanding
that you intend to review both records at the same time or
do you wish given the fact that much of the testimony in
the Swan Fal ls and Mi lner cases is ident ical, do you wish
for us to rehash all the cross we did in Milner that is
also applicable to Swan or will you take official notice
of both records in making your decisions in each case?
COMMISSIONER SWISHER: That's a better
question for him to ask of you three.
COMMISSIONER NELSON: I thought our
intention was that we were going to take official notice
of all of the questions in the Milner case in looking at
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1 the Swan Falls case so it wouldn't have to be duplicated.
2 COMMISSIONER MILLER: I'm not sure
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procedurally the exact way to go, that's why this morning
we discussed this idea of consolidating so it would
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clearly be all together. Why don't we think about that
and I suppose tomorrow morning if we had an understanding
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of how we ought to do it we could tell you about it
tomorrow morning.
9 All right, we'll try and figure out a
reasonable way to handle that. Thank you for bringing it
to our attention. All right, anything else that we have
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reconvene tomorrow morning at 9: 30.
(The Hearing adjourned at 4: 15 p.m.)
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