20150827Comments.pdf

KARL T. KLEIN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720.0074
[phone]
IDAHO BAR NO. 5156
Street Address for Express Mail:
472 W . WASHINGTON
BOISE, IDAHO 83702-5918
Attomey for the Commission Staff
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION F'OR APPROVAL
OF LONG.TERM MAINTENANCE PROGRAM
CONTRACT WITH SIEMENS ENERGY, SALE
OF SPARE PARTS INVENTORY TO SIEMENS
ENERGY, AND DEFERRAL OF ASSOCIATED
COSTS
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC.E.15-17
COMMENTS OF THE
COMMISSION STAF'F'
The Staff of the Idaho Public Utilities Commission comments as follows on Idaho Power
Company's Application.
BACKGROUND
On June 5,2015, Idaho Power Company (the "Company") applied to the Commission for
an Order approving the Company's: (l) long-term program contract with Siemens Energy for
maintenance of the Company's gas plants; (2) sale and transfer to Siemens of $21.9 million in
spare parts for the Company's gas plants; and (3) proposed accounting treatment for the
transaction. The Company does not seek to change customer rates at this time.
The Company's Application notes that the Company owns and operates three natural gas
plants in Idaho: the Langley Gulch plant near New Plymouth, and the Danskin and Bennett
Mountain plants near Mountain Home. The Company presently maintains its plants by
contracting with the original equipment manufacturer, Siemens Energy, to service them on a
STAFF COMMENTS AUGUST 27,2015
case-by-case basis. The Company's current practice is to buy parts from Siemens before a
scheduled maintenance outage. The Company then capitalizes the parts. During the outage, the
existing parts are removed and replaced. They are then retired from the Company's books and
sent to Siemens' service shop, where they are inspected and repaired. Once repaired, these
"initial spare parts" are returned to the Company, capitalized. and ready for future use. The
Company states that this approach was the most cost-effective way to maintain its gas fleet until
the addition of Langley Gulch. Application at2-3.
The Company now desires to enter into a long-term service contract with Siemens
Energy, rather than continuing to self-manage the maintenance as it has done in the past. The
services to be provided by Siemens under the proposed contract include scheduled maintenance
on the three plants, including parts and repairs, shipping, service, labor, engineering services, and
program management services. The Company believes that the long-term program contract will
lower overall costs to the Company and its customers by leveraging Siemens' pool of inventory,
outage resources, and technical expertise, and will save costs over the life of the agreement when
compared to the Company continuing to contract with Siemens under the current case-by-case
maintenance approach. Id. at3-4.
Besides seeking approval of its long-term program contract with Siemens, the Company
asks the Commission to approve the Company's transfer of its current "initial spare parts"
inventory to Siemens. Id. Idaho Power believes the sale of this property satisfies the
requirements of ldaho Code $ 6l-328.
The Company also asks the Commission to approve a proposed accounting treatment
allowing: (l) the deferral of initiation fees (i.e., a prepayment towards Siemens' services under
the life of the long-term program (LTP) contract) to a regulatory asset to be amortized on a
straight-line basis over the length of the contract; (2) the transfer of the parts' net book value
(about $21 .9 million subject to true-up at closing) and associated tax expense (about $ 1.8
million) to a regulatory asset to be amortized on a straight-line basis over the length of the
contract; and (3) a carrying charge on a portion ofthe regulatory asset balance, consisting ofthe
initiation fees and $2.9 million of the initial spare parts that are not yet included in the
Company's authorized base rate and on which the Company is not yet earning a return.
Id. at 6-7.
STAFF COMMENTS AUGUST 27,2015
STAFF ANALYSIS
In its Application, the Company states that it began considering other maintenance
options for its fleet of gas generators when it was building the Langley Gulch plant. Langley
Gulch is the Company's only combined cycle combustion turbine (CCCT) and employs some of
the newest, most technologically advanced parts on the market. Idaho Power states that it
recognized that its employees did not have all of the necessary technical skills to maintain the
Langley Gulch, Danskin and Bennett Mountain plants as well as Siemens. Application at 3. In
addition, because the Company expected to run the Langley Gulch plant far more than the
Danskin or Bennett Mountain plants, major maintenance would be more frequent and occur at
more consistent intervals.
The Company began exploring its options to maintain its gas fleet by hiring IEM Energy
Consultants, a consultant with extensive experience in long-term maintenance contracts for
thermal generation facilities. Once retained, the consultant issued a formal request for
information to multiple third-party providers of gas plant maintenance. The Company and its
consultant then analyzed the proposals received.
Evaluation of LTP Contract Bidders and Proposals
IEM Energy Consultants received information from ! differ"rt contractors with
experience and ability to maintain and repair utility-scale gas generation units and to supply
needed parts.
IEM helped the Company evaluate the
contractors and determined that f were able to provide the necessary parts and services. In
the initial evaluation,
Danskin and Bennett
however, the capabilities of supplying parts was restricted to only the
Mountain units.
After the initial evaluation, the consultant narrowed its focus to Siemens and one other
contractor.
STAFF COMMENTS AUGUST 27,2015
IEM
Energy Consultants and the Company agreed that Siemens offered the best proposal.
Staff believes that the Company vetted the contractor's proposals with reasonable
evaluation criteria, and that the evaluation was thorough and fair to all interested candidates.
Staff believes that the Company prudently decided to choose Siemens following this evaluation.
Comparison Between Siemens LTP and Self-Manage
Besides selecting the best qualified contractor, the Company had to revisit whether that
contractor could maintain the gas fleet better and at less cost than the Company could by
continuing to self-manage the maintenance. The Company recognized that its employees lack
the necessary technical skills to maintain the three gas plants as well as Siemens. But the
Company could alternatively continue to buy parts and technical services from Siemens on an as-
needed basis.
The Company compared the self-management alternative to the long-term maintenance
contract altemative in two ways. First, it assessed its own capabilities and compared them to the
services that would be provided by Siemens, including scheduled maintenance on the three
plants, parts and repairs, shipping, service, labor, engineering services, and program management
services. Because Siemens manufactured the Company's plants and is the industry leader in gas
plant maintenance, the Company concluded that its only alternative to the long-term program
contract with Siemens would be to continue contracting with Siemens on a case-by-case basis for
parts and technical support.
Second, the Company compared the cost of self-managing maintenance to the cost of
entering into a long-term maintenance contract with Siemens. The results of this comparison are
shown on Exhibit No. I to the direct testimony of Courtney Waites. Staff thoroughly reviewed
the Company's analysis and believes it is accurate and a fair financial comparison of the
altematives.
The Company's analysis shows that over the 20-year period considered, the revenue
requirement associated with the Siemens LTP contract has a net present value that is about $7.3
million less than the self-management option. For the first several years, however, the Siemens
STAFF COMMENTS AUGUST 27,2015
contract would be more expensive. Nonetheless, Staff believes that the long-tenn comparison is
most appropriate in this instance.
In its Application, the Company states that the long-term program contract will lower
overall costs for the Company and its customers by leveraging Siemens' pool of inventory,
outage resources, and technical expertise, and will save costs over the life of the agreement when
compared to the Company continuing to contract with Siemens under the current case-by-case
maintenance approach. Id. at 3-4. Staff agrees.
Requirements of ldaho Code $61-328
In addition to seeking approval of its long-term program contract with Siemens, the
Company also asks the Commission to approve the Company's transfer of its current "initial
spare parts" inventory to Siemens. The Company explains that Siemens would remove the
inventory after the Commission approves the long-term program contract, and that the contract
price has been reduced to reflect the net book value of the inventory being transferred to
Siemens. /d
Idaho Code $ 6l-328 governs the Company's transfer of property to Siemens. The
section provides, in summary, that an electric utility may not dispose of its property unless
authorized to do so by the Commission after a hearing in which the Company establishes: (l)
that the transaction is consistent with the public interest; (2) the cost of and rates for supplying
service will not be increased by reason of such transaction; and (3) the purchaser has the bona
fide intent and financial ability to operate and maintain said property in the public service.
The Company states that the transaction satisfies ldaho Code $ 6l-328 because the
transfer will let the Company return about $21.9 million of older spare parts to Siemens that
would otherwise have a limited market, and will result in lower overall costs to the Company and
its customers. Further, the Company believes Siemens has a bona fide intent and financial
ability to operate and maintain the parts in the public interest. Id. at 5-6.
Staff concurs that the transaction satisfies the three-part test in ldaho Code $ 6l-328.
First, the proposed transfer of spare parts is consistent with the public interest because, as a
condition of the Siemens contract, the transfer would result in an overall cost savings and
operational benefit to ratepayers. Second, because ofthe expected cost savings, the transaction
will not raise customer rates. Third, Staff is satisfied that Siemens, as the original equipment
STAFF COMMENTS AUGUST 27,2015
manufacturer of all three generation units and as one of the leading manufacturers in the
industry, has the bona fide intent and financial ability to operate and maintain the parts for use in
the public interest.
Proposed Accounting Treatment
The Company asks the Commission to approve accounting treatment that includes: (1)
the deferral of initiation fees to a regulatory asset to be amortized on a straight-line basis over 20
years, the average length ofthe contract; (2) the transfer ofthe spare parts' net book value and
associated tax expense to a regulatory asset to be amortized on a straight-line basis over 20 years,
the average length ofthe contract; and (3) a carrying charge on part ofthe regulatory asset
balance, consisting of the initiation fees and $2.9 million of the initial spare parts that are not
included in the Company's authorized rate base and on which the Company is not yet eaming a
return. The supporting testimony of Company witness Trever Mahlum indicates that the contract
term is from the contract's execution date (defined to be the date on which the Commission
approves the contract) and the earlier of the ooperformance end date" for each combustion turbine,
or 25 years. Because the "performance end date" is based on a combination of the number
outages, equivalent baseload hours or equivalent starts, the contract would expire at a different
time for each CCCT. The Company estimates the LTP contract for each turbine will expire in
18-22 years. The Company assumed an average2}-year contract life when analyzingthe LTP
contract. See direct testimony of Trever Mahlum, p. I I ; see also LTP contract, p. 9.
Regulatory Assets
Regulatory Assets may be established for incurred costs that are deferred for recovery to
a future time, through future rates. The deferral allows for consideration of recovery in the next
general rate case. In this case, the Company requests deferral of the initiation fees to a
regulatory asset for recovery over the average contract length ofthe LTP contract, or 20 years.
The initiation fees for the LTP contract are per plant unit. The Application, Ms. Waites
testimony, and Mr. Mahlum's testimony indicates that the initiation fees serve as prepayment
toward services to be performed by Siemens over the contract's life. Mr. Mahlum indicates that,
under the current self-management maintenance approach, there has historically been an 89
percent capital, 1l percent O&M expense split and the milestone payments would receive similar
STAFF COMMENTS AUGUST 27,2015
treatment. Staff believes it is prudent to take the same approach in the initialization (initiation)
fee treatment. Because the initiation fees serve as prepayment toward future maintenance
expenses (including milestone payments), the Company would spend that amount under both the
LTP contract and the self-manage program approach. Staff supports the deferral of 89 percent of
the initiation fees f to a regulatory asset for amortization on a straight-line basis over
the remaining life of each asset. The remaining 11 percent of the initiation f...I
would normally be expensed, and the Company requests an amortization on a straight-line basis
over the full length of the contract.
The Company asks to transfer the initial spare parts' net book value and associated tax
expense to a regulatory asset for amortization treatment over the length of the LTP contract. The
Company requests that about $21.9 million in initial spare parts (subject to true-up at closing) be
transferred from the Plant-in-Service Account to the FERC Other Regulatory Asset Account.
$ 19. I million of the $21 .9 million initial spare parts mentioned are already included in rates, but
are unrecovered as of the filing date of the Application. Staffsupports the Company transferring
$21.9 million in initial spare parts'net book value, and $1.8 million associated tax expense, to a
regulatory asset for amortization treatment. The Company would no longer possess the assets
transferred to Siemens (except when placed in service at the plant). However, Siemens will
recirculate the parts back into service, at contractually defined intervals, as originals or as part of
planned outages and maintenance work performed. Staff notes that the Company's request to
transfer the spare parts to the regulatory asset removes those parts from the previous plant-in-
service accounting treatment with investment recovery through depreciation over 30 years, and
instead proposes investment recovery over 20 years. Although the initial spare parts are
"shorter-lived" assets, Staff does not recommend the requested 2}-yeat amortization treatment of
these assets and instead recommends continuing to amortize the regulatory asset over the same
period as the assets are currently depreciated, i.e., on the same schedule as the associated plant.
Maintaining the current recovery period minimizes any shift in cost or faster recovery.
Carr)rine Charee
The Company requests a carrying charge on the part of the regulatory asset balance
consisting of the initiation fees and $2.9 million of the initial spare parts that are not included in
the Company's authorizedrate base and not earning a return. Staff, on the other hand, does not
STAFF COMMENTS AUGUST 27,2015
recommend a retum or carrying charge on the regulatory assets. When parts are actually placed
in service, they may be capitalized as a transfer from the regulatory asset and included in rate
base in the next general rate case at the then authorized rate of return. Even under the
Company's proposal, Staff believes a carrying charge on 89% of the initiation f""r I,
is the maximurn amount that would ordinarily be capitalized upon the Effective Date of the
Contract. The remainder would typically be expensed. If the Company's proposal is accepted,
Staff recommends that the Commission not allow a carrying charge before 2016 when the first
scheduled maintenance outage for the plants occurs. This is when the initiation fees will be used
toward milestone payments and other maintenance that contributes to the delivery of services to
customers.
Staff does not support, under any scenario, interest or an accrual of return on the $2.9
million of the initial spare parts that will be returned to Siemens' possession when the contract
takes effect. These assets would not be "used and useful" because the Company would no longer
possess them. The Company should not, therefore, accrue further benefit other than the already
supported deferral in a regulatory asset and future rate recovery of the amortization. Staff
recommends the $2.9 million in initial spare parts be authorized on the same amortization
schedule as recommended above for the initial spare parts already in rate base, i.e., the same as
the depreciation rate on the associated gas plant with no return or carrying charge.
STAFF RECOMMENDATION
Staff recommends that the Commission approve the LTP contract with Siemens Energy.
Staff also recommends that the Company approve the sale and transfer to Siemens of $21.9
million in spare parts for the Company's gas plants. Lastly, Staff recommends that the
Commission order include an accounting paragraph authorizing the requested deferred
accounting treatment for the transaction in separate regulatory asset subaccounts upon the
following conditions:
o Initialization/initiation fees - deferral to a regulatory asset to be amortized over the
remaining life of each asset.
o Transfer of initial spare parts net book value (approx. $21.9 million, subject to true-up)
and associated tax expense (approx. $ 1.8 million, subject to true-up) to a regulatory asset
to be amortized over the life of the plant to which the initial spare parts are associated.
STAFF COMMENTS AUGUST 27,2015
o No carrying charge on any of the regulatory assets.
Respectfully submitted this ??+t= day of August 2015.
Karl T. Klein
Deputy Attorney General
Technical Staff: Rick Sterling
Amber Christofferson
Terri Carlock
i : umisc/commentVipce I 5 . I Tkkrpsactc comments
9STAFF COMMENTS AUGUST 27,2015
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 27TH DAY OF AUGUST 2015,
SERVED THE FOREGOING NON-CONFIDENTIAL COMMENTS OF THE
CoMMISSION STAFF, IN CASE NO. IPC-E-15-L7, By MAILING A COpy
THEREOF, POSTAGE PREPAID, TO THE FOLLOWNG:
LISA D NORDSTROM
REGULATORY DOCKETS
IDAHO POWER COMPANY
PO BOX 70
BOISE rD 83707-0070
E-mail: [e-mail]
dockets@idahopower. com
(Confi dential Comments)
PETER J RICHARDSON
RICHARDSON ADAMS PLLC
PO BOX 7218
BOISE TD 83702
E-mail: [e-mail]
(Confi dential Comments)
TIMOTHY E TATUM
IDAHO POWER COMPANY
PO BOX 70
BOrSE rD 83707-0070
E-mail: [e-mail]
(Confi dential Comments)
DR DON READING
6070 HILL ROAD
BOISE ID 83703
E-mail : [e-mail]
(Confi dential Comments)
SECRETAR
CERTIFICATE OF SERVICE