20081027Gale Direct.pdf

RECEI Ð
2D08 OCT 24 PM 4: 58
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR
APPROVAL OF A SPECIAL CONTRACT
TO SUPPLY POWER TO HOKU
MATERIALS, INC.
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) CASE NO. IPC-E-08-21
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IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
JOHN R. GALE
1 Q.Please state your name and business address.
2 A.My name is John R. Gale and my business
3 address is 1221 West Idaho Street, Boise, Idaho.
4 Q.By whom are you employed and in what
5 capacity?
6 A.I am employed by Idaho Power Company ("the
7 Company") as the Vice President of Regulatory Affairs.
8 Q.Please describe your educational background
9 and business affiliations.
10 A.I received a BBA in 1975 and an MBA in 1981
11 from Boise State Uni versi ty . I maintain a close
12 affiliation with the university and serve on the College of
13 Business and Economics' Advisory Council and on the Board
14 of Directors of the Alumni Association. I have also
15 attended the Public Utilities Executive Course at the
16 University of Idaho and am now on the faculty of that
17 program covering "Regulation and Ratemaking."
18 I am an active member of the Edison Electric
19 Institute's Rates and Regulatory Affairs Committee, which
20 is the committee that is concerned primarily with
21 regulatory issues and ratemaking methods. I am the current
22 Chair of this committee.
23 Q.Please describe your work experience.
GALE, DI 1
Idaho Power Company
1 A.From 1976 to 1983, I was employed by the
2 State of Idaho primarily as an analyst in the Department of
3 EmploYment. In October 1983, I accepted a position at
4 Idaho Power Company as a Rate Analyst in the Rate
5 Department. I initially worked on rate design, tariff
6 administration, and line extension issues. In March 1990,
7 I was assigned to the Company's Meridian District Office
8 where I held the position of Meridian Manager, which was a
9 one-year cross training position established to provide
10 corporate employees with an extensive field experience. I
11 returned to the Rate Department in March 1991 and in June,
12 I was promoted to Manager of Rates. In July 1997, I was
13 named General Manager of Pricing and Regulatory Services.
14 In March 2001, I was promoted to Vice President of
15 Regulatory Affairs, my current position.
16 As Vice President of Regulatory Affairs, I oversee
17 and direct the acti vi ties of the Pricing and Regulatory
18 Services Department. These activities include the
19 development of jurisdictional revenue requirements, the
20 oversight of the Company's rate adjustment mechanisms, the
21 preparation of class cost-of-service studies, the
22 preparation of rate design analyses, and the administration
23 of tariffs and customer contracts. In my current position,
24 I have the primary responsibility for policy matters
GALE, DI 2
Idaho Power Company
1 related to the economic regulation of Idaho Power Company.
2 I have testified frequently before the Idaho Public
3 Utilities Commission ("the Commission") on a variety of
4 rate and regulatory matters. I have also testified before
5 or submitted direct testimony to the regulatory commissions
6 in Nevada and Oregon, the Federal Energy Regulatory
7 Commission ("FERC"), the Bonneville Power Administration,
8 and the United States Senate Committee on Energy and
9 Natural Resources.
10 Q.What is the purpose of your testimony in
11 this matter?
12 A.I will describe the terms and conditions of
13 a new Special Contract consistent with the requirements of
14 Idaho Power's Schedule 19, Large Power Service. The
15 Special Contract is an Energy Services Agreement ("ESA")
16 between Idaho Power Company and Hoku Materials, Inc.
17 ("Hoku"). The accompanying new tariff sheet, Schedule 32,
18 contains the proposed rates for service to Hoku. The ESA
19 is Exhibit No. 1 to my testimony and Schedule 32 is Exhibit
20 No.2. My testimony will also describe the rationale for
21 each.
22 Q.Please describe the ESA.
23 A.The ESA provides for an initial four-year
24 contract term that begins on June 1, 2009, which is the
GALE, DI 3
Idaho Power Company
1 expected time that Hoku's load should exceed 25 megawatts
2 ("MW") of capacity. The ESA includes a contract demand
3 schedule that allows Hoku to ramp up to 82 MW, while
4 incorporating seasonal peak constraints that Idaho Power
5 expects to experience through 2012. The ESA provides for a
6 hybrid approach to the rate structure for the initial
7 contract term that incorporates both an embedded cost-based
8 price for a 25 MW block of power and a marginal cost-based
9 price for capacity amounts above 25 MW. Finally, the ESA
10 provides for a transition to traditional embedded-cost
11 retail pricing following the initial term.
12 Q.Is the recovery of the costs for the initial
13 construction of substation and transmission facilities
14 needed to serve Hoku's load addressed in the ESA?
15 A.No. The cost recovery of the initial
16 construction for substation and transmission facilities
17 needed to serve Hoku is provided for in a separate
18 construction agreement. Through that agreement, Hoku is
19 responsible for the construction costs of the new
20 substation and transmission upgrades, including the income
21 tax impact. Idaho Power retains ownership of these
22 facilities and is responsible for ongoing operating and
23 maintenance costs. Hoku's paYment for the substation and
24 transmission facilities was considered in the development
GALE, DI 4
Idaho Power Company
1 of the rates, the selection of the point of delivery, and
2 the measurement of transmission losses in the ESA.
3 Q.Why was 25 MWs chosen to establish the
4 pricing blocks?
5 A.Idaho Power provides tariff service to
6 industrial customers under Schedule 19, Large Power
7 Service. The Applicability Section of Schedule 19 states:
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"If the aggregate power requirement of a
Customer who receives service at one or more
Points of Delivery on the same Premises
exceeds 25,000 kW, the Customer is
ineligible for service under this schedule
and is required to make special contract
arrangements with the Company."
Q. What is the purpose of this provision?
17 A.The requirement for a Special Contract
18 serves several purposes. First, it allows for the unique
19 characteristics of customers of this size to be captured
20 within the terms of an agreement. Second, special
21 contracts allow for specific cost-of-service information
22 for each large load to be reviewed during rate proceedings.
23 And, third, special contracts provide protection to the
24 Company and the other retail customers from the system
25 impacts that some large loads could impose because of sheer
26 size or operating characteristics.
27 Q.Does Idaho Power currently serve other
28 special contract customers?
GALE, DI 5
Idaho Power Company
1 A.Yes. There are currently three: (1) Micron
2 Technology, Inc., located in southeast Boise; (2) the
3 United States Department of Energy's Idaho National
4 Laboratory, located west of Idaho Falls; and (3) the J R
5 Simplot Company's Don Plant, located directly west of
6 Pocatello. These customers range in size from 30 to 85 MWs
7 of load. From 1973 until 2001, Idaho Power also served FMC
8 Corporation under a special contract for up to 250 MW.
9 Q.What were the regulatory goals Idaho Power
10 was trying to achieve in developing a service plan for
11 Hoku?
12 A.There were five goals,:
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1. Provide requested service consistent
with system capability and the
reliability needs of existing customers.
2. Provide options to the customer when the
Company is unable to provide service as
requested.
3. Mitigate the rate impact on existing
customers by developing a rate structure
that includes a marginal price component
for an initial term of the service
agreement.
4 . Require upfront contributions to capital
expendi tures associated with facilities
that specifically serve the customer.
5. Provide a means to quantify known and
measurable amounts of additional load
for Integrated Resource Planning.
GALE, DI 6
Idaho Power Company
1 Q.How does the ESA provide the requested
2 service consistent with system capability and the
3 reliability needs of existing customers?
4 A. Hoku originally requested 82 MW of year-
5 round capacity. Because of supply and transmission
6 constraints, Idaho Power was unable to serve at this level
7 during certain summer months prior to 2012. Hoku and Idaho
8 Power discussed the possibility of Hoku supplying self
9 generation and/or load interruptibility as a means to
10 address the summer difference. Neither option worked well
11 in this particular situation. However, Hoku and Idaho
12 Power were able to devise a seasonally shaped contract
13 demand schedule that would allow Hoku to perform annual
14 maintenance and help Idaho Power avoid additional loads
15 during peak periods prior to 2012. Also, there is a
16 contingency provision that reduces the Company's 2012
17 capaci ty obligation in case Idaho Power is not able to add
18 additional generation and/or transmission as planned.
19 Q.How does the ESA provide options to Hoku
20 when Idaho Power is unable to provide the service as
21 requested?
22 A.In addition to the seasonally shaped load,
23 there is a provision in the ESA that allows Hoku to request
24 Idaho Power to initiate a summertime request for proposals
GALE, DI 7
Idaho Power Company
1 to determine whether some additional summertime supply can
2 be secured at an acceptable price.
3 Q.How does the ESA mitigate the rate impact on
4 existing customers through its rate structure?
5 A.The proposed rate structure for the Hoku ESA
6 includes an embedded-cost rate for a 25 MW block of power
7 and a marginal-cost rate for loads above 25 MW. The
8 embedded block is capped at 25 MW in recognition that had
9 Hoku limited its load to less than 25 MW, it would have
10 been entitled to buy 25 MW under Schedule 19 at embedded-
11 cost rates. The charges in the ESA for the embedded block
12 are equivalent to the costs a Schedule 19 customer
13 operating at a 90 percent load factor and served at
14 transmission voltage would experience.
15 The marginal block is applicable to capacity and
16 energy above 25 MW up to the total contracted capacity,
17 specified in the ESA as Contract Demand. The marginal
18 block capacity charges are reflective of transmission
19 access and ancillary services costs, plus some operating
20 and maintenance expenses related to the substation serving
21 Hoku. The marginal energy cost is based on Idaho Power's
22 published avoided cost rates as approved by the Commission,
23 applicable to the relevant contract time period. Marginal
24 costs could have been based on an actual purchase or market
GALE, DI 8
Idaho Power Company
1 proxy. However, because of the volatility, and perhaps
2 subj ecti vi ty, of these methods of determining marginal
3 costs, the avoided cost method is preferred.
4 Q.How are upfront capital contributions
5 incorporated into the cost of providing service to Hoku?
6 A.As previously discussed, the cost recovery
7 of the initial construction for substation and transmission
8 facilities needed to serve Hoku is provided for in a
9 separate construction agreement. Through that agreement,
10 Hoku is contributing the construction costs of the new
11 substation and transmission upgrades, including the income
12 tax impact. Idaho Power retains ownership of these
13 facilities and is responsible for ongoing operation and
14 maintenance.
15 Q.How does the ESA provide a means to include
16 additional load into the Company's Integrated Resource
17 Planning?
18 A.The ESA provides a contractual capacity
19 commitment from Hoku to take power that, once the
20 Commission approves, the Company can rely upon for resource
21 planning purposes. It is a much stronger commitment than
22 an application for service. In the past we have relied on
23 similar representations for planning. The most recent
24 example of this type of explicit commitment was when Micron
GALE, DI 9
Idaho Power Company
1 Technology was ramping up to its present size.
2 Q.Does the hybrid embedded/marginal rate
3 structure remain in place indefinitely?
4 A.No. The Company proposal is to maintain
5 this rate structure for the initial term of the ESA, which
6 is four years. After the initial term, it is Idaho Power's
7 recommendation that Hoku be treated just like all other
8 special contract customers for ratemaking purposes. The
9 ini tial four years provides a transition period for Hoku to
10 establish itself as a customer, while providing some rate
11 mitigation for the immediate impact of its load on other
12 customers. It also mutes an inappropriate price signal to
13 potential new large loads that look at our existing rates
14 and conclude that Idaho Power has an unlimited supply of
15 three-cent power.
l6 Q.Why is a transition period reasonable?
17 A.A transition period provides a balance
18 between the new customer's interest of access to low-cost
19 power and the current customers' interest of mitigating the
20 impact of new loads on their energy costs.
21 Q.Please describe the component charges for
22 the first or marginal block.
23 A.There are two "first block" component
24 charges; one for demand and one for energy:
GALE, DI 10
Idaho Power Company
1 First Block Contract Demand Charges are based on the
2 monthly number of kilowatts the Company has agreed to make
3 available to Hoku in accordance with the scheduled contract
4 demands delineated in the ESA. This Contract Demand is
5 supplied on a "take-or-pay" basis. However, the Company's
6 obligation to supply demand during the load period from
7 6/16/2012 to 9/15/2012 in excess of the 2011 summer
8 Contract Demand levels , is contingent on the timely
9 completion of the Company's major transmission and
10 generation projects.
11 First Block Energy Charges are based on the
12 kilowatt-hours computed by multiplying the First Block
13 Contact Demand by the number of hours in the billing period
14 multiplied by the Contract Load Factor of 90 percent. With
15 adequate notice and the written consent of the Company,
16 Hoku may request a release of all or part of its First
17 Block Energy purchase commitment in return for credit on
18 its First Block Energy Charges.
19 Q.Please describe the charges for the second
20 or embedded block.
21 A.There are two "second block" component
22 charges; one for demand and one for energy:
23 Second Block Contract Demand Charges are based on
24 25,000 kilowatts times the then-current demand charges
GALE, DI 11
Idaho Power Company
1 delineated in the Company's Schedule 19 tariff sheet
2 applicable to transmission level service. After the
3 Embedded Date of June 1, 2013, these demand charges will be
4 subject to the orders of the Commission.
5 Second Block Energy Charges are based on the total
6 kilowatts supplied during the billing month less the First
7 Block Energy usage, multiplied by the then-current energy
8 charges delineated in the Company's Schedule 19 tariff
9 sheet applicable to transmission level service. After the
10 Embedded Date of June 1, 2013, these energy charges will be
11 subj ect to the orders of the Commission.
12 Q.Why are the Excess Demand Charges included
13 on Schedule 32?
14 A.The availability of power in excess of the
15 Total Contract Demand (First Block plus Second Block), is
16 not guaranteed. Hoku will be responsible for any damages
17 to the Company or other parties if they exceed their Total
18 Contract Demand. However, if and when Hoku should ever
19 exceed their contact, the Excess Demand will be subject to
20 both daily and monthly Excess Demand Charges.
21 Q.Please describe the applicability of
22 Schedule 55, Power Cost Adjustment, Schedule 91, Energy
23 Efficiency Rider, and Schedule 95, Adjustment for Municipal
24 Franchise Fees, to the Hoku ESA and Schedule 32.
GALE, DI 12
Idaho Power Company
1 A.The Power Cost Adjustment (Schedule 55) bill
2 component is computed by multiplying the adjustment amount
3 by the kilowatt-hours being charged under the Second Energy
4 Block component only. The reason for only applying the PCA
5 rate to the Second Block is discussed in greater detail
6 later in my testimony.
7 The Energy Efficiency Rider (Schedule 91) charge is
8 computed by multiplying the rider percentage times the sum
9 of the monthly billed charge components in the Second
10 Block, except for the Power Cost Adjustment.
11 The Adjustment for Municipal Franchise Fees
12 (Schedule 95) charge is computed by multiplying the fee
13 percentage by the sum of all the monthly billed charge
14 components, including the Power Cost Adjustment.
15 Q.What PCA treatment do you propose for the
16 new ESA?
17 A.I propose that all the costs of supplying
18 power to both the First Block Energy and Second Block
19 Energy be included in the PCA. Additionally, revenues from
20 the First Block Energy would be treated as a surplus sale
21 and an offset to power supply costs. Accordingly, First
22 Block Energy - the marginal block - would not be included
23 as Idaho retail load and the First Block Energy rate would
24 not adjust each year with the PCA. Second Block Energy -
GALE, DI 13
Idaho Power Company
1 embedded block - would be included as an Idaho retail load
2 and would adjust each year with the PCA. Essentially, we
3 are treating the First Energy Block as if it were a four-
4 year off-system sale. This PCA treatment is similar to the
5 approach authorized when the FMC special contract was
6 served under two blocks, one priced at embedded rates and
7 one at market rates.
8 Q.Is it your opinion that the approval of the
9 ESA between Hoku and the Company is in the public interest?
10 A.Yes. Idaho Power and Hoku have worked
11 together to fashion an agreement that reflects current
12 energy economic realities (i. e., the existing supply of low
13 cost energy is finite, while new sources of power supply
14 are expensive). The ESA incorporates these economics in a
15 workable and equitable way that works for both the new
16 customer, for the system, and for existing customers.
17 Q. Does this conclude your testimony?
18 A.Yes, it does.
GAE, DI 14
Idaho Power Company