20100416Harvey Direct Redacted.pdf

RECE
2010 APR 15 PM 12: 50
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPAN FOR
AUTHORITY TO IMPLEMENT POWER COST
ADJUSTMENT (UPCA") RATES FOR
ELECTRIC SERVICE FROM JUNE 1 f
2010 f THROUGH MAY 31 f 2011.
CASE NO. IPC-E-10-12
IDAHO POWER COMPAN
DIRECT TESTIMONY
OF
TOM HAVEY
REDACTED VERSION
1 Q.Please state your name and business address.
2 A.My name is Tom Harvey. My business address
3 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 (UIdaho
7 Power" or uCompany") as Manager-Joint Proj ects.
8 Q.Please describe your educational background.
9 A.I have a Bachelor of Business
10 Administration-Business Management degree from Boise State
11 Uni versi ty.
12 Q.Please describe your business experience
13 with Idaho Power.
14 A. I have been the Manager-Joint Projects for
15 five months. In this position I supervise Idaho Power's
16 interests in the Jim Bridger, North Valmy, and Boardman
17 coal-fired power plants. I also manage Idaho Power's
18 interests in the Bridger Coal Company (UBCC") and coal
19 supply acquisition/fuel management. I am a member of the
20 Bridger Coal Management Committee which is comprised of two
21 Idaho Power and two PacifiCorp employees. This committee
22 directs Bridger Coal on both short and long-term strategy
23 issues, reviews current operations, and approves all
24 capital and 0 & M expenditures. with respect to the Jim
HAVEY, DI 1
Idaho Power Company
1 Bridger plant (UBridger Plant" or UPlant") r work with
2 PacifiCorp to develop and implement the fueling strategy
3 and oversee Idaho's minority share of the overall
4 operations of the Plant.Prior to my appointment to my
5 current position, I served as Idaho Power's Fuels
6 Management Coordinator from 1985 to 2009. In this position
7 I was responsible for coal supply acquisi tion/ fuel
8 management for Idaho Power's interest in the coal-fired
9 power plants and Bridger Coal Company. Prior to 1985, I
10 worked in Idaho Power's power supply and plant accounting
11 departments. Beginning with the Fuels Management
12 Coordinator position, I have worked closely with PacifiCorp
13 to coordinate fuel deliveries and coal purchase strategy.
14 Q.What is the purpose of your testimony?
15 A.The purpose of my testimony is to provide
16 information regarding the reasonableness of the Company's
17 coal supply expense for the Bridger Plant.
18 Q.Why does the Company feel it is necessary to
19 address Bridger coal costs in detail in this proceeding?
20 A.In Order No. 31042 issued in Case No. IPC-E-
21 10-01, the Commission directed the Company to support its
22 proposed adjustment to Bridger coal costs in this docket.
HAVEY, Dr 2
Idaho Power Company
1 Q.Have Idaho Power's costs for supplying coal
2 to fuel its portions of the Bridger Plant changed since
3 2008?
4 A.Yes. As stated in Mr. Scott Wright's
5 testimony for this case, the Bridger coal expense approved
6 in the 2008 base level Net Power Supply Expense (UNPSE")
7 was $82.1 million, while the 2010 base level NPSE is $106.9
8 million, an increase of $24.8 million. Wright, Dr, pg 10,
9 lines 4 through 6.
10 Q.What are some of the reasons that the price
11 of coal for the Bridger Plant has increased?
12 A.Coal cost to the Bridger Plant has increased
13 due to the execution of a new coal supply agreement with
14 the Black Butte Mine (UBlack Butte"), as well as higher
15 operating costs at the Jim Bridger Mine (UMine" or uBridger
16 Mine"). Bridger Mine costs have increased primarily due
17 to:
18 1.Increases in labor cos ts due to
19 workforce size, wage, and benefit increases;
20 2.Commodity cost escalation for
21 explosives, diesel fuel, electricity, and operational
22 supplies;
23 3.Maintenance cost increases for mining
24 equipment rebuilds, component exchanges, etc.;
HAVEY, DI 3
Idaho Power Company
1 4.Increases in depreciation, depletion,
2 and amortization expense;
3 5.Decreased usage of highwall mining at
4 the surface mine; and
5 6.Increases in final reclamation costs.
6 Q.Has the cost of fuel for the Bridger Plant
7 been examined recently in any other dockets?
8 A.Yes. As I stated previously, the question
9 of the prudency of the Company's Bridger fuel expense was
10 addressed in Case No. rpC-E-10-01. In both Case No. UE
11 214, the Company's Annual Power Cost Update (UAPCU") case
12 in Oregon, and Case No. IPC-E-10-01, the Establishment of
13 2010 Net Base Level Power Supply Expenses in Idaho, parties
14 to those proceedings questioned the cost associated with
15 the coal purchased through the Company's affiliate, Idaho
16 Energy Resources Company (UIERCO") used to supply the
17 Bridger Plant. In Case No. rpC-E-10-01 before this
18 Commission, the Company filed Reply Comments, with three
19 attachments, addressing Bridger coal costs. The first
20 attachment was a Uwhite paper" which was provided to the
21 parties to Case No. IPC-E-10-01 in discovery. Attachment
22 Nos. 2 and 3 are the reply testimony and exhibits of both
23 myself and Greg Said which were filed with the Oregon
24 Public Utility Commission (UOPUC") for Oregon's APCU case.
HAVEY, DI 4
Idaho Power Company
1 The three attachments provide an in-depth analysis of the
2 reasons why the OPUC Staff's recommendation (which was
3 adopted as the Industrial Customers of Idaho Power's
4 (UICIP") recommendation in Case No. IPC-E-10-01) for a
5 downward adjustment in Bridger fuel costs is neither
6 logical, fair, nor in Idaho Power's customers' best
7 interest.
8 Q.Could you give a brief overview of how the
9 Bridger Plant is supplied with coal?
10 A.Yes. Idaho Power and PacifiCorp co-own the
11 Bridger Plant and its associated mining operation, the
12 Bridger Coal Company. The Plant is operated primarily on
13 coal from the BCC' s surface and underground mining
14 operations. Supplemental coal is purchased from the nearby
15 Black Butte Mine, which is operated by Kiewit Mining. The
16 Bridger Plant was designed and constructed as a umine-
17 mouth" plant, which means it is physically located next to
18 the coal mine that supplies the majority of its coal. This
19 arrangement ensures that the Plant has access to a
20 continuous and reliable supply of coal. Coal is delivered
21 to the Plant from the BCC mine by use of a large conveyor
22 belt system that transports and delivers coal directly from
23 the mining operation into the Plant. This type of mine-
24 mouth plant operation has several advantages over an
HAVEY, Dr 5
Idaho Power Company
1 operation where the coal is delivered from another
2 location. First, the mine-mouth operation has the obvious
3 advantage of eliminating the need to ship coal over long
4 distances in order to supply the generating plant - usually
5 at great expense and subj ect to transportation
6 interruptions. In addition, the mine-mouth operation
7 avoids the undesirable result of locating the coal-fired
8 generation plant in close proximity to large population
9 centers, which typically correspond to the large load
10 centers.
11 The BCC surface mine commenced commercial operation
12 in August 1974 and has been producing coal for the Bridger
13 Plant since that time. BCC started producing coal from its
14 underground mining operations in March 2007. The surface
15 and underground mines are run as an integrated operation.
16 While the underground mine provides the majority of the
17 coal to the Bridger Plant, the surface operation provides:
18 (1) coal critical to the blending process, (2) additional
19 overall mine capacity, (3) flexibility in running the
20 underground operations, (4) a hedge against increased
21 prices of non-owned coal, and (5) support for the costs
22 common to both the surface and underground operations of
23 BCC.
HAVEY, DI 6
Idaho Power Company
1 Q.What is the coal procurement strategy for
2 the Bridger Plant?
3 A.Large coal-fired generation plants, such as
4 the Bridger Plant, are less expensive to operate than other
5 forms of generation, and conversely, are expensive to shut
6 down and restart. For these reasons, the units are
7 normally run continuously and shut down only for planned
8 maintenance, unplanned outages, or emergencies. Because
9 these resources generate on a continual basis, it is
10 essential that they have access to a continuous and
11 reliable source of coal. The Plant's continuous operation
12 dictates, in part, the coal procurement strategy for the
13 Company. Idaho Power pursues a diversified coal supply
14 strategy. This strategy relies on a combination of fixed
15 price contracts, indexed contracts, and BCC coal to meet
16 the coal supply needs of its coal-fired plants. A key
17 component of this strategy is the use of BCC' s captive mine
18 and long-term contracts to produce a long-term, stable, and
19 low-cost supply of coal. For the Bridger Plant, this
20 strategy is further supported by the lack of a spot market
21 for coal purchases in the Green River Basin of Wyoming,
22 where the Plant is located.
23 Q.Are the coal prices for the Bridger Plant
24 prudent and reasonable expenses?
HARVEY, DI 7
Idaho Power Company
1 A.Yes. As previously stated, the Bridger
2 Plant was designed and constructed as a umine-mouth" plant
3 and located next to its ucaptive" mine. As part of the
4 long-term fueling strategy for the Plant, the Company and
5 its customers enjoy the long-term benefits associated with
6 a low cost and continuously available supply of coal which
7 enables the Plant to be operated as an efficient and low
8 cost base load generation resource. The Plant also takes
9 advantage of the only other viable and available
10 alternative source of coal for the Plant. The Company
11 diversifies its coal supply by acquiring approximately one-
12 third of the volume of the coal consumed by the Plant from
13 a third-party mine, Black Butte.
14 There is no al ternati ve coal supply available to the
15 Plant at a better cost than that which the Company seeks
16 recovery of in this case. Additionally, the regulatory
17 treatment of the operations of IERCO (Idaho Power's
18 affiliate that owns BCC) poses no risk of cross-
19 subsidization in the transactions between Idaho Power and
20 BCC. Unlike other utility affiliates, for ratemaking
21 purposes, IERCO' s operations are merged with those of Idaho
22 Power, and as a result Idaho Power pays for its coal the
23 same as if IERCO were not even involved in the transaction.
HAVEY, DI 8
Idaho Power Company
1 Q.Is there a less expensive alternative supply
2 of coal available to fuel the Bridger Plant?
3 A.No. There is no less expensive market
4 alternative and, overall, BCC coal is the lowest cost
5 resource. While BCC' s surface coal is more expensive than
6 its underground coal, the costs associated with any
7 available replacement coal are higher than the costs that
8 Idaho Power could avoid if the BCC surface operation ended.
9 As previously noted, BCC' s underground and surface mines
10 constitute one integrated operation. As a result, many of
11 the costs to run the BCC mine are allocated to the coal
12 produced by both the surface and underground mines. If the
13 surface mine were shut down, which is the logical
14 implication of ICIP's proposed adjustment in IPC-E-10-01,
15 many of the shared costs would not be avoided but would
16 need to be reallocated to the cost of the underground coal.
17 In other words, BCC cannot avoid all of the costs allocated
18 to the surface coal by shutting down the surface mine. So,
19 for the purposes of assessing whether there is a lower cost
20 market alternative, the cost of the surface coal must be
21 considered at the cost BCC could avoid by shutting down the
22 surface mine - or the decremental cost of the BCC surface
23 coal. BCC calculated the decremental cost of surface coal
24 based upon its most currently available mine plan. Based
HAVEY, DI 9
Idaho Power Company
1 on that analysis, the decremental cost of the surface coal
2 at BCC is ll per ton. In order to ensure a
3 conservative estimate, the Company rounded this cost up to
4 ll per ton. The decremental cost analysis estimates
5 that BCC would save approximately ll for every ton of
6 surface coal not mined. That sum would therefore be
7 available to purchase replacement coal.
8 Q.Can the Bridger Plant purchase additional
9 coal from Black Butte?
10 A.No. Black Butte has very little additional
11 coal that it can commit to sell to the Bridger Plant. The
12 vast majority of Black Butte's production is already
13 committed to be sold under the Bridger Plant's current
14 contract, with most of the remainder committed to the North
15 Valmy Power Plant, which is co-owned by Idaho Power and
16 NVEnergy. In fact, in 2008, the Black Butte mine had no
17 excess production capacity at all.
18
19
20
21
22
23 By way of comparison, BCC
24 proj ects surface production of approximately'" and ..
HAVEY, DI 10
Idaho Power Company
1 million tons for 2010 and 2011 , respectively. Clearly,
2 Black Butte simply does not have enough volume available to
3 replace the BCC surface production.
4 Moreover, with respect to the Black Butte coal that
5 might be available, there is no evidence that it could be
6 obtained at the same price as under the existing contract.
7 On the contrary, the price quoted by Kiewit Mining for that
8 uncommitted production was substantially higher than the
9 price paid by Bridger under the existing Black Butte
10 contract. Kiewit Mining quoted an F. o. B. (free on board)
11 mine price of ll per ton, with an adjustor for changes
12 in diesel fuel costs, for volumes, such as the above
13 referenced II annual tons, in excess of the new
14 contract. This price does not include the price of
15 shipping the coal from the Black Butte Mine to the Bridger
16 Plant, estimated to be il per ton.
17 Q.How does the price for additional volumes
18 from Black Butte, if they were available, compare with the
19 decremental cost of replacing BCC surface coal with those
20 volumes?
21 A.Since Black Butte coal will cost at least
22 ll per ton at the Plant, and the decremental cost of
23 ceasing BCC surface coal is ll per ton, it is readily
HAVEY, DI 11
Idaho Power Company
1 apparent that substituting more Black Butte coal (if it
2 were available) would be more expensive for customers.
3 Q.Did the Company consider any other sources
4 of coal besides Black Butte?
5 A.Black Butte is the only possible available
6 source in the Green River Basin, the region of Wyoming
7 where the Bridger Plant is located.
8 The Company also investigated the possibility of
9 buying coal from the Power River Basin (UPRB") in eastern
10 Wyoming, approximately 566 miles from the Plant. Idaho
11 Power confirmed that the estimated cost to ship coal from
12 the PRB to the Bridger Plant is around ll per ton,
13 which is double the estimated ll per ton cost of the
14 coal itself. In total, the per ton cost of PRB coal,
15 including transportation, is likely to be at least ll
16 per ton F.O.B. plant without adding in the additional costs
17 that would be incurred for freeze protection and dust
18 suppression. Assuming that significant volumes of PRB coal
19 could be obtained and shipped to the Plant, use of coal
20 from the mines in the PRB would require significant capital
21 investment in the Plant because of the different quality
22 and make-up of the coal compared to the blend of BCC and
23 Black Butte coal the Plant currently burns. These issues
24 with the Powder River Basin coal make it uneconomical to
HAVEY, DI 12
Idaho Power Company
1 consider coal from that region as a possible fuel source
2 for the Plant.
3 Q.Is the fact that BCC is owned one-third by
4 an Idaho Power affiliate, IERCO, of concern in this case?
5 A.No, for two reasons. First, the coal costs
6 included in the present case represent the least cost
7 resource for Idaho Power's customers. The cost of coal
8 from BCC is lower than the alternative market price.
9 Second, the affiliate's (IERCO's) operations are merged
10 with Idaho Power's for ratemaking purposes, eliminating the
11 possibility of any cross-subsidization, or overcharging of
12 customers, in those transactions.
13 In the final analysis, the Company has carefully
14 considered all of the alternatives for providing fuel to
15 the Bridger Plant and has arrived at and implemented an
16 overall fuel acquisition strategy that provides the lowest
17 cost for customers.
18 Q.Does this conclude your testimony?
19 A.Yes.
HAVEY, DI 13
Idaho Power Company