20090327Reading Direct.pdf

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BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE NORTHWEST
AND INTERMOUNTAIN POWER
PRODUCERS COALITION'S PETITION
TO OPEN A GENERIC INVESTIGATION
REGARDING COMPETITIVE BIDDING
REQUIREMENTS FOR NEW SUPPL Y
SIDE RESOURCE ACQUISITIONS
) -I; -
) CASE NO. GRNA08-03
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TESTIMONY OF
DR. DON C. READING
ON BEHALF OF THE
NORTHWEST AND INTERMOUNTAIN
INDEPENDENT POWER PRODUCERS
MARCH 27, 2009
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PLEASE STATE YOUR NAME AND AFFILIATION?
My name is Don C. Reading. I am Vice President and Consulting Economist for Ben
Johnson Associates, 6070 Hil Road, Boise, Idaho My resume is attached.
WHAT IS THE PURPOSE OF YOUR TESTIMONY?
I was asked by the Northwest and Intermountain Power Producers Coalition (NIPPC) to
lodge testimony in support of its Petition to Open a Generic Investigation regarding
competitive bidding requirements for new supply-side resource acquisitions by Idaho
investor owned utilities.
DR. KAN, IN HIS TESTIMONY, STATED THAT YOU WOULD BE FILING
TESTIMONY IN THIS DOCKET WITH A REAL WORLD EXAMPLE OF A
BIDDING PROCESS FOR A GENERATING RESOURCE BY AN INVESTOR-
OWNED UTILITY. CAN YOU PLEASE EXPLAIN WHAT DR. KAHN WAS
REFERRNG TO?
Yes. I will discuss the bidding process Idaho Power Company (the Company) used in
acquiring the 170 MW Evander Andrews Power Plant (now called Danskin Unit 3) near
Mountain Home, Idaho. The Company received a Certificate of Public Convenience and
Necessity (CPCN) for the plant in that case (IPC-E-06-09), in which I was a witness for
the Industrial Customers ofIdaho Power (ICIP). At the outset I want to make clear my
purose in this testimony is not to retry or dispute the results of that case. Rather, I want
to make use of that case as an example to help the Commission understand the need for
competitive procurement rules in Idaho. I should also point out that many aspects of the
bidding process in that case were provided to us under a proprietar agreement which I
executed. The following testimony will rely only on the pars ofthe testimony,
discovery, transcripts, and Commission Orders that are part of the public record. Nothing
herein utilized proprietar information.
CAN YOU BE MORE SPECIFIC ABOUT THE TYPES OF PROPRIETARY
Reading, Di
GNR-E-08-03
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1 INFORMATION THAT IS PART OF THE EV ANDER ANDREWS CPCN CASE?
2 Primarily the aspects of the case covered by the protective order dealt with the scoring
3 elements, the values assigned each element, and the actual scores given to the various
4 bids. I agree completely that the actual bids of firms responding to the Company's RFP
5 for generating plant are proprieta and should not be par of the public record. However,
6 the fact that the scoring attributes and the values assigned each attribute ere under
7 protective order is a prime example of why the Commission should establish competitive
8 bidding rules.1 As I wil explain below, keeping the "yard stick" that is used to rate each
9 bidder's response a secret can lead to selection of a facilty that is not in the best interests
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HOW WAS, WHAT YOU CALLED A "YARD STICK" USED TO GRADE AND
ULTIMATELY SELECT THE WINNING BIDDER IN THE EVANDER
ANDREWS CASE?
In this case the winning bid was from Siemens Power Generating, Inc. for a 170 MW
simple-cycle, natual gas-fire combustion tubine located on Idaho Power's 40 acre
property at the existing Evander Andrews.Power Complex north of Mountain Home,
Idaho. This bid, the winnng bid, was at a higher cost than the bid placed by the second
place bidder.
HOW IS IT THAT A HIGHER COST RESOURCE CAN WIN A BIDDING
CONTEST IN IDAHO POWER'S RFP.?
I agree that it sounds counter intuitive. But it did happen. The reason the Siemens bid
was selected even though it was not the least cost was due to the non-price factors in the
Company's evaluation method. The following exchange is taen from the public
transcript in this docket. Mr. Youngblood is the Company's witness. He is being
questioned by Mr. Walker, the Staff attorney:\
1 Order No. 30201 at fn 3, p. 9 "The actual non-price attributes, their scoring values, and
the actual scores are subject to a protective order as "trade secret" per Rule 67.)
Reading, Di
GNR-E-08-03
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1 A. MR. YOUNGBLOOD: To the extent the evaluation of those non-price
2 attibutes was done within the RFP evaluation team, yes
3 Q. Okay, and would it be fair to say in short that the (***Confidential***) site
4 requires a lower capital investment than the Evander Andrews site?
5 A. MR. YOUNGBLOOD: Yes.
6 Q. And in fact, the (***Confdential***) site won the point factoring if we only
7 look at the price attribute categories, correct?
8 A. MR. YOUNGBLOOD: The (***Confdential***) site had a lower or, I'm
9 sorr, had a greater point score with regard to just the factoring with regard to10 price, correct.
11 Q. SO if that's all we looked at, that would have been the winning bid?
12 A. MR. YOUNGBLOOD: I am not sure that it was the lowest of all. I would
13 have to look back, but between the two that we're looking at right now, correct,
14 that would be the lower price in capitaL.
15 Q. SO if we. assume that these two we're talking about were the top two and if we
16 only look at the pricing, the (***Confidential***) site would have won on the
1 7 bid, would have been selected as the winning bidder?
18 A. MR. YOUNGBLOOD: If we only looked at the capita cost and the estimated
19 transmission cost, that would be tre.
20 Q. SO then Evander Andrews was selected because the evaluation of the non-price
21 attibutes when added in made that the best choice for the committee?
22 A. MR. YOUNGBLOOD: Evander Andrews was selected after the complete
23 evaluation of both price and non-price attibutes were evaluated, correct.
24 Q. And I think it's in your testimony on page 4 that ofthe non-price attibutes that
25 the (***Confidential***) attibutes is the area where these two paricular
2 6 proposals differed the most, correct?
27 A MR. YOUNGBLOOD: That is correct.28 Tr. 363-364.
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30 Non-price factors are importt in the selection process and should be balanced with the
31 aspects of the facility that are easily quantified. However, as discussed fuher below,
32 assigning numeric values to these non-price factors is very difficult and by its very
33 nature subjective.
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WHY DO YOU THINK THE SCORING METHODS AND THEIR ASSIGNED
VALUES SHOULD BE PART OF A PUBLIC COMPETITIVE PROCESS AND
NOT KEPT PROPRIETARY?
There are two basic reasons. First, in order to maximize the response to a Request for
39 Proposals for a facility, prospective bidding firms need to know how their proposals will
40 be graded. One of the first things a prospective bidder will look at is the "yard stick" or
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grading methodology that will be employed. In this way the firm can judge how well it
can meet the requirements of the utility as expressed in the RFP. The second reason is
outlined in Dr. Kah's testimony and expressed in the NARUC study that he references.
WOULD YOU PLEASE EXPAND ON YOUR FIRST BASIC REASON FOR A
TRANSPARENT PROCESS OF COMPETITIVE BIDDING FOR UTILITY
ASSETS?
Yes. Commission Staff Witness Rick Sterling expressed in his direct testimony in the
Evander Andrews case that he could see "no compelling reason" the exact price and non-
price evaluation methodologies should be kept confidential and that keeping them
confdential would "stifle" competition among the potential bidders. I thoroughly agree
with his observation on the need to make the bid scoring method of the RFP public and
known to all prospective bidders. Mr. Sterling's testimony stated:
Q. Were all of the exact evaluation criteria and the points associated with each
made known to bidders in advance?
A. No, all ofthe price and non-price scoring criteria, including the methods by
which scores would be awarded, were kept confidential, both before bids
were submitted and after the evaluation process was complete. Although
details of the price evaluation methodology were not disclosed, bidders
should have obviously known that price would be a major factor in the
scoring. The non-price evaluation criteria were not nearly as well known
by bidders, although the RFP stated "Projects that provide advantageous
siting, demonstrated community acceptace, completed environmental
analysis, completed archaeological analysis, and complete permitting may
be viewed favorably in the selection process. Reference P. 14. The RFP
also included the following in its list of non-price attributes to be
considered in the evaluation of proposals: Provide an advantageous project
location considering: grid location, zoning, community acceptance, use of
existing IPC operation and maintenance personnel, local water supply and
other environmental impacts and demonstrate enhancement of IPC system
reliability, integrity, and utilzation through application of matue
technologies.
Q. Do you believe that all evaluation criteria and methods should be kept
confidential in the futue?
A. No, I do not. Obviously, I believe that bids should be kept confdential and
that price information should not be publically divulged at any time in the
evaluation process. However, I see no compellng reason for the exact
price and non-price evaluation methodologies and criteria to be kept
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confdentiaL. If all bidders know in advance what criteria and methods
wil be used to evaluate their proposes, I believe they are more likely to
make proposals that more closely match the utility needs and preferences.
By keeping evaluation criteria confidential, competition between bidders
is stifled. I recommend that all evaluation criteria and methods be
divulged in future RFPs. (Pp. 32-33, direct testimony of Rick Sterling,
IPC- E-06-09)
Mr. Sterling concluded his testimony on the competitive procurement process by stating
that it did not produce a fair outcome:
Q. Do you believe that the request for proposals, the criteria used by
Idaho Power to evaluate bids, and analysis of the bids was fair to all
proposals?
A. I believe that the RFP was fair and that the evaluation criteria were
reasonable. However, because some of the non-price evaluation criteria
were subjective and because some of the scores would likely be different
based on what is known today, I do not believe that the process produced a
fair outcome. In addition, I recommend that it future RFPs Idaho Power
be required to divulge all criteria and methods that will be used to evaluate
proposals so that bidders can more effectively compete.
TO YOUR KNOWLEDGE, HAS IDAHO POWER COMPLIED WITH ANY OF
THE STAFF'S RECOMMENDATIONS IN ITS CURRNTLY PENDING RFP?
It has not.
DR. READING, DID YOU TESTIFY IN THE EV ANDER ANDREWS DOCKET
AS WELL?
My testimony was redacted for confidentiality reasons. The Commission, in its public
order did paraphrase from my testimony as follows:
Dr. Reading also echoed much of Commission Staffs concerns regarding the
scoring of the proposals. He asserted that the difference in price between Evander
Andrews and the second place bidder was too great to allow the non-price factors
to trp the price scores. Tr. At 276. Furhermore, he stated that the scoring
methodology used by Idaho Power for the price factors, as well as the non-price
factors, undercut the significant price difference between Evander Andrews
(including transmission costs) and the second place proposaL. Tr. At 284. He
suggested that the points awarded to the top two projects essentially put them on
equal ground even though they were substantially different in price, and it was
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this fact that allowed the non-price factors to "swamp" the effect of the price
difference, resulting in Evander Andrews to being selected. (Order No. 30201,
IPC-E-06-09, pp.9-10.
WHAT DO YOU CONCLUDE FROM THE FACT THAT NON-PRICE
FACTORS SWAMPED THE LOWEST BID PROPOSAL IN THE EV ANDER
ANDREWS DOCKET?
Had Idaho Power made it clear what the scoring would be for all of the factors, including
non-price factors, prospective bidders would have been able to strctue their bids
accordingly instead of essentially shooting in the dark. Even though Idaho Power was
admonished for not publishing their scoring methodology in the Evander Andrews
docket, they are stil not publishing those methodologies today. I anticipate that this
would be an issue open for discussion in this docket, should the Commission decide to
proceed.
DID THE COMMISSION STAFF HAVE OTHER CONCERNS IN THE
EV ANDER ANDREWS CASE?
Yes. Commission Staff witness Sterling also expressed his concerns about the grading
process itself. His concerns focused on both the justification used to support the scoring
of bid responses and the timing of when scoring was accomplished. In his direct
testimony he stated:
I discussed the method used to evaluate bids and address the price and non-price
differences between the two top-raned proposals. I conclude that Idaho power
has not provided suffcient justification for selecting a project that is
approximately $11 milion more costly than the second place proposal, and I
recommend that this difference in cost not be allowed into rate base in the futue.
28 In response the Commission's order provided:
29 However, he expressed concern that the scoring of some of the non-price
30 attributes were subjective and the facts supporting certain scores were changed
31 after scoring. For example, the "community and environmental" non-price
32 attibutes had six elements. Information pertaining to some of the sub-elements
33 may have changed after scoring. Tr. At 129. The scoring for this non-price
34 attribute category represented most of the scoring difference between the
35 preferred proposal and the second place bidder. (Order No. 30201, p. 9)
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WHAT DO YOU CONCLUDE FROM ALL OF THE PROBLEMS ASSOCIATED
WITH IDAHO POWER'S EVANDER ANDREWS RFP?
It seems obvious that many of Idaho Power's difficulties with the Evander Andrews bid
process would have been avoided had some of the principals identified in Dr. Kah's
testimony been in place at that time. As pointed out by Dr. Kah, competitive bidding
guidelines usually include the involvement of a third-pary independent monitor,
measures to increase transparency in the procurement process, detailed information
provided to bidders and careful disclosure and review of how non-price factors are
considered and evaluated by the utility. Had bidding rules been in place, such as those
listed above, the Evander Andrew's selection process would have had much more
integrity and less controversy - in addition a different outcome may have been the result.
WHAT WAS THE COMMISSION'S RESPONSE TO THE EV ANDER
ANDREW'S CONTROVERSIAL BID PROCESS?
While the Commission did approve the CPCN for Evander Andrews, it did express
concern about the bidding process by stating that "While we share Staffs and ICIP's
concerns about the subjective nature of some of the non-price attributes and the issue of
using updated information, we do not find their concerns outweigh our conclusion that
Evander Andrews is a reasonable means of meeting future loads" Order No.30201 at p
10.
YOU TESTIFIED THAT THE SECOND REASON FOR ESTABLISHING A
PUBLIC COMPETITIVE BIDDING PROCESS ECHOED DR. KAN'S
TESTIMONY AS WELL AS THOSE OUTLINED IN THE NARUC STUDY.
COULD YOU PLEASE EXPLAIN WHAT YOU MEAN?
There is no reason to duplicate Dr. Kah's discussion on the importance of a competitive
bidding process as outlined in the NARUC study, however I do want to affirm my
agreement with both Dr. Kah and the conclusions found in the study. The NARUC
study details the complexity of a competitive process and stresses the need for a credible
and transparent process:
While it is possible to design a procurement to elicit offers for comparable
products through detailed specification of fuel, technology type, project
size, and contract terms, many procurements are designed to leave such
importt details to the discretion of the bidders. As a result,
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procurements tyically involve both price and non-price factors which
introduce complexity into comparisons between offers. This complexity
makes it challenging, to say the least, to design and implement an overall
competitive procurement architecture and the details of its evaluation
process in ways that: (a) treat all offers fairly and objectively, (b) arrive at
selections efficiently and rigorously, (c) provide enough transparency to
be credible without revealing commercially sensitive business
information, and (d) allow the utility suffcient flexibility to respond to
potentially innovative and creative solutions from the marketplace. This
complexity means that commissions that commit to rely on competitive
procurements must be sensitive to these tradeoffs. (Footnote 20: Even
when there are clear metrics relating to the price terms for an offer, there
are often "non-price" issues (both monetized and non-monetized)
associated with, among other things, how a proposed resource interacts
with the rest of the utility's portfolio in a simulated dispatch and how risks
are assigned to the buyer and seller)2.
The Evander Andrews case is a perfect example of the controversy and doubt about the
bidding process that can occur when competitive bidding guidelines are not in place. I
urge the Commission to open a docket to establish competitive bidding procedures for all
of Idaho's investor owned utilities.
DO YOU HAVE ANY CONCLUDING COMMENTS?
It is especially important to institute competitive bidding procedures now that it appears
that Idaho Power selected the self-build option in its most recent RFP. In addition, Idaho
utilities need to make significant investments in plant over the next few years. For
example, Idaho Power's CEO stated in that utilty's most recent rate case:
Depending on the project, either our engineering and construction crews wil
build the necessary components on the system or we will work directly with third-
par developers and contractors chosen through a competitive bidding process.
Permitting and siting processes for many of the projects are extensive and
expensive. This is especially true for our planed 500-kilovolt (kV) transmission
project. Upcoming expansion and improvement in our infastructures will require
some of the largest capital expenditue levels in Company history. This era has
already begu. In 2008, we added a $66 milion, 170-megawatt natual gas-fired
peaking plant at the Evander Andrews complex near Mountain Home. This is
only one piece of the $900 milion investment in plant required from 2008
2 Competitive Procurement of Retail Electricity Supplies: Recent Trends in State Policies
and Utility Practices, July 2008, Analysis Group, Boston, MA, P 10-11.
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through 2010, not including costs associated with the 500-kV transmission project
or the new baseload resource. (Direct testimony, L. Keen, IPC-E-08-lO, p 8.)
DOES THIS CONCLUDE YOUR TESTIMONY?
Yes, it does.
Reading, Di
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