20090327Kahn Direct.pdf

Ms. Jean Jewell
Commission Secretary
Idaho Public Utilities Commission
PO Box 83720
Boise 10 83720-0074
Dear Ms. Jewell:
March 27, 2009
RE: Case No. GNR-E-08-03
RE.1CE
2009 MAR 27 PM 3= 58
Enclosed please find an nine (9) copies plus one (1) reporter's copy of Dr.
Kahn's and Dr. Reading's testimony in the above referenced case.
I have also enclosed an extra copy to be service-dated and returned to us for
our files.
Sincerely,
lsI
Nina Curtis
Administrative Assistant
;¡
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE NORTHWEST
AND INTERMOUNTAIN POWER
PRODUCERS COALITION'S PETITION
TO OPEN A GENERIC INVESTIGATION
REGARING COMPETITIVE BIDDING
REQUIREMENTS FOR NEW SUPPLY
SIDE RESOURCE ACQUISITIONS
) -IE ..
) CASE NO. GRl08-03
)
)
)
)
TESTIMONY OF
ROBERT KAN
ON BEHALF OF THE
NORTHWEST AND INTERMOUNTAIN
INDEPENDENT POWER PRODUCERS
')1-MACH'" 2009
Pr-r-¡i .,,""'r-', _.¡... t'1!,"-,'\ f~... 'v t_.F ~;_:..
2009 MAR 27 PH 3= 54
~
1 INTRODUCTION
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PLEASE STATE YOUR NAME AND AFFILIATION?
My name is Robert Kah. I am the executive director of the Nortwest & Intermountain
Power Producers Coalîtion (NIPPC). We are located at 1117 Minor Avenue, Ste. 300,
Seattle, Washington. My resume is attached.
COULD YOU PLEASE GIV A BRIEF DESCRIPTION OF YOUR
ORGANIZATION?
The NIPPC is an association of independent power producers established to actively
pursue informal and formal (i.e., laws, policies, rues and regulations) avenues and
forus to ensure a competitive electric power supply marketplace in the Pacific
Northwestand the Intermountan West. The NIPPC supports a fully competitive electrc
power supply marketplace. Our association has fifteen full members and six associate
members and includes some of the major energy producers in the countr. NIPPC's
members curently represent in excess of 3,500 MW of on line generating capacity.
WHAT IS THE PUROSE OF YOUR TESTIMONY?
My testimony is in support of the Petition to Open a Generic Investigation filed by Our
attorney, Peter J. Richardson, regarding competitive bidding requirements for new
supply-side resource acquisitions by Idao investor owned utiliies. (IOUs).
WH AR COMPETITIVE BIDDING REQUIREMENTS IMPORTANT FOR
BOTH UTILITY COMPANIES AND THEIR RATEPAYERS?
24 A recent report authored by the Analysis Group for the National Association of
25 Regulatory Commissions, (NARUC) outlines formal policies and rules electrc utilities
26 should follow in purchasing additional resources to meet their service terrtory loads.
27 That study stated, in par:
28 Competitive procurements can provide utilties with a way of obtaining electricity supply
29 that has the "best "fit to customers' needs at the "best" possible terms. In principle,
30 competitive procurements accomplish this goal by requiring market partiCipants to
31 compete for the opportunity to provide these services. However, for competitive
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1 procurements to fulfll their promise, they must be designed and implemented in a
2 manner that fosters competition among market participants, including potentially the
3 regulated utility and its affliated companies. 1
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5 This Report indicates that more than 40 percent of the states rely on formal policies and
6 rules for utilty resource procurements. States that suround Idaho with mandated formal
7 competitìve bidding rules include Montaa, Oregon, Utah, and Washngton. I have
8 attched Oregon Public Utility Coinission Order No. 06-446 (UM 1182, Augut 10,
9 2006) as an example of competitive bidding gudelines.
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IS YOUR PURPOSE IN ATTACIDNG THE OREGON ORDER TO SUGGEST
THAT THE IDAHO COMMISSION FOLLOW THE OREGON PROCESS?
Not at alL. The Oregon process mayor may not be a good fit for Idaho. It is just
provided as one example of how to implement competitive bidding rules.
DOESN'T THE IDAHO COMMISSION ALREADY REQUIRE THE UTILITIES
IT REGULATES TO FILE BIANNAL INTEGRATED RESOURCE PLANS?
Yes. the IRP process in Idaho appears to be transparent and collaborative. However,
there is a fudamenta difference between the identification of a generic stack of potential
resources in an IRP setting and the identification of a specific unque resource that the
utilty will actually acquire. An example of this operational distinctìon can be seen in a
Idaho Power's curent IRP that notwthtading the IR process, the utility pre-reserved
the tubines for a new thermal generating resource. Requesting bids though an RFP
process involves establishing a procedure of evaluating and scoring both the monetized
and non-monetized aspects of a resource that are offered in response to the RFP. Due to
the distinct differences between the IRP process of identifying the least ~cost resources
and the RFP process that leads to the actu acquisition of a resource, it is not advisable to
rely on the IRP as the methodology for resource selection.
1 Competitive Procurement of Retal Electric Supply: Recent Trends in State Policies and
Utility Practices, July 28, 2008, Analysis Group, Boston, Mass., p. ì.
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WHAT DO YOU MEAN BY MONETIZED AND NON-MONETIZED ASPECTS
OF A RESOURCE ACQUISITION SCORING SYSTEM?
A given resource has value to a utilty and its system that goes beyond the strict moneta
costs to build and operate the facilty. These non-monetized items can include the impact
on the company's tranmission infastrctue, fuel mix preferences, location preferences,
performance requirements, impact on resource stack and even credit considerations.
They can also include the distribution of fInancial and development risks between the
utility, power provider and the ratepayers. Depending on the method selected by the
utilty, some of these non-monetized varables can be monetized in an effort to make
them comparable to price variables.
DOES THE MONETIZING OF THE NON..PRlCE VARABLES CAUSE YOU
CONCERN?
Yes. A real world example of ths concern is addrssed in Dr. Reading's testimony.
However, it should be noted that many of these non-price items involve value judgments
and subjective evaluations. It is importt to note that subjectivity enters the valuation of
bid responses in at least two ways. Cost of servce calculations include both customer
class costs and revenues. First, though the value or score assigned to the non..price
factors by the utilty valuation team. Second, and perhaps more importantly, is the
weight given to these items in relation to the other aspects of the project being evaluated.
If these non-price criteria have a significant weight in relation to the price varables, then
the value judgments become the deciding factor in the selection of any given project.
Depending on who is makg these value judgments, a utilty's own self-build option
could be scored above that of an independent power producer (IPP), when in fact the IPP
project is less costly and quaitatively superior. Dr. Reading's testimony is instrctive in
ths regard.
GIVEN YOUR KNOWLEDGE OF COMPETITIVE BIDDING GUIDELINES, DO
YOU HAVE ANY INSIGHTS INO HOW THE EVALUATION OF NON-PRICE
FACTORS IS HANDLED IN OTHER JURISDICTIONS?
Among the states with competitive bidding rues there is, as would be expected, some
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varation. A good sumar that touches on the elements that most states use is found in
the NARUC study cited above.
The fist key issue for incremental resource procurements is the design of
safeguds to prevent potential improper self-dealing by the utilty. Because the
utilty may fiancially benefit from the selection of its own self-build offer or a
proposal from an affiliate, .safeguds are necessar to ensure tht the process is
not improperly tilted toward the selection of such offers. (Suggested safeguards
include:)
Involvement of a thrd-par independent monitor ("IM") and/or independent
evaluator;
Measures to increase the transparency of the procurement process to the market;
Providing potential bidders with detaled information needed to prepare
competitive bids
Utilty codes of conduct to prohibit improper sharing of informtion that is
valuable utility affiliates in their constrction of procurement offers and/or their
competitiveness in other electricity markets; and
Carefu disclosure and review of how "non-price" factors are considered and
evaluated by the utility in weighig offers from third pares against self-build
proposals or affiiate offers.
As the NARUC study states, the "first key issue" in setting fort resource procurement
guidelines is the fact that a utilty may derive financial benefit from building its own
resource which drves a natual tendency to tilt its RFP procedure in its favor. Rules
requirig such oversight as the involvement of a third-pary independent evaluator and
careful disclosure and review of how the non-price factors are considered are essential to
an even-handed competitive bid process.
WHAT AR THE CONSEQUENCES OF IDAHO NOT HA VINGCOMPETITIV
BIDDING RULES IN PLACE?
The most obvious consequence is described by Dr. Reading - it results in the lowest cost
resource being bumped for "non-price" reasons that are subjectively and inconsistently
applied. It also results in the RFP being undersubscribed - which I believe is tre for
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1 Idaho Power's most recent RFP. This is obviously not good for Idaho Power's
2 ratepayers.
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WHAT DO YOU CONCLUDE FROM YOUR INVESTIGATION INTO THE
LACK OF COMPETITIVE BIDDING RULES IN IDAHO?
As pointed out in our Petition that opened ths docket, we are asking the Cotnission to
open a generic investigation into the desirabilty of initiating competitive bidding
guidelines for the procurement of supply-side resources by the electrc utilities under its
jursdiction.
DO YOU HAVE AN INSIGHTS INTO IDAHO POWER'S CURNTLY
PENDING RFP?
I was not surrised to lear that Idaho Power recently selected the self-build option. The
entire RFP appeared to be designed to assure that Idaho Power would be selected because
in order to be competitive, bidders would have to pre-order the tubine sets, as Idao
Power did. The requirement of pre-ordering generating sets without any assurance of
being the winning bidder discouraged many from even paricipating in Idaho Power's
curent RFP. Many of my members, as well as other potential bidders, decided not to
paricipate in the curent Idaho Power RFP for ths reason. In short, Idaho Power's RFP
was NOT viewed by the industr to be a fair. As a result the ratepayers and this
Cotnission have been short changed and subject to a resource selection process that is
flawed. I thnk that is unfortate in light of the simple fix this Cotnission could
implement thugh the implementation of RFP gudelines.
WOULD ADOPTING COMPETITIV BIDDING GUIDELINES REPRESENT A
MAJOR CHANGE IN THE WAY IDAHO'S UTILITIES OPERATE?
Since all three Idaho jurisdictional IOUs already operate in states in which competitive
bidding gudelines are in place, it would not be very difficult for any of them to adjus to
operating in the same maner for resource acquisitions here. So the cost of implementing
such a program would be relatively low as we do not have to re-invent the wheel, so to
speak, and the benefits are potentially enormous in the form of lowered cost resources for
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the Idaho ratepayer.
DOES THIS CONCLUDE YOUR TESTIMONY?
Yes, it does.
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