20131011Direct D. Reading.pdf

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BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER )
coMPANY',S APPLICATION FOR A ) CASE NO. IPC-E-13-16
CERTIFICATE OF PUBLIC CONVENIENCE AND )
NECESSITY FOR THE INVESTMENT IN )
SELECTIVE CATALYTIC REDUCTION )
CoNTROLS ON JIM BRIDGER UNITS 3 AND 4. )
DIRECT TESTIMOI\IY AND EXHIBIT OF
DR. DON READING
ON BEHALF OF
INDUSTRIAL CUSTOMERS OF IDAHO POWER
ocToBER 11,2013
1 INTRODUCTION
23 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
4 A. My name is Don Reading and my business address is Ben Johnson Associates, 6070 Hill
5 Road, Boise, Idaho. I am Vice President and Consulting Economist for Ben Johnson
6 Associates.
7 Q. HAVE YOU PREPARED AN EXHIBIT OUTLINING YOUR QUALIFICATIONS
8 AND BACKGROUND?
9 A. Yes. Exhibitz0l serves that purpose.
10 a. WHAT rs THE PURPOSE OF YOUR TESTIMONY rN THrS CASE?
11 A. I have been retained by the Industrial Customers of Idaho Power ("ICIP") to review
L2 ldaho Power's (*IPC" or the "Company") application for a certificate of public
13 convenience and necessity for investments in selective catalytic reduction controls
74 ("SCR") on Jim Bridger units 3 and4. I address the imprudence of this Commission's
15 locking in a ratemaking treatment for this proposed investment such that future
76 commissions will effectively have their hands tied as to other, at the time, prudent
77 ratemaking decisions. I discuss the uncertain future of coal plant investments. While
18 not advocating the outright denial of the company's application, I urge the Commission
79 to proceed with great caution as to how it signals the future ratemaking treatment of this
20 investment.
2L Certificate of Public Convenience and Necessitv
22 a. DR. READING, COULD YOU BRIEFLY REVIEW WHAT IDAHO POWER'S
23 REQUEST IS IN THE CURRENT DOCKET?
Reading, Di
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A.Yes. The Company is asking for a Certificate of Public Convenience and Necessity
("CPCN") for the installation of selective catalytic reduction systems for Jim Bridger
units 3 and 4 to reduce nitrogen oxide ("NOx") emissions to comply with existing state
and proposed federal emission requirements. The Company expects the amount of this
investment to be $129.8 million for both units, and it is asking the Commission to accept
this amount as a "Commitment Estimate".
HOW DOES THE COMPANY DEFINE ITS "COMMITMENT ESTIMATE"?
According to ldaho Power's Application in this docket:
As it has done in prior CPCN applications, Idaho Power has termed this estimate
a "Commitment Estimate." The Commitment Estimate is a good faith estimate of
Idaho Power's total capital cost, including AFUDC, and additional costs the
Company anticipates it will incur but cannot quantifu with precision at this time.r
However the $129.8 million "Commitment Estimate" may or may not be the eventual
investment requested by ldaho Power in future rate proceedings.
Q. DO YOU ASSUME THE COMPANY WILL ASK FOR RATE RELIEF FOR ITS
SCR INVESTMENTS IN THE NEXT GENERAL RATE CASE?
A. At this point, when Idaho Power will ask the Commission to approve ratebase treatment
for the Bridger pollution control investments, is uncertain. In its response to an ICIP
production request the Company stated, "The Company has not determined the approach
by which future cost recovery will be requested."2 Therefore it may be in a general rate
case or possibly in some other type of filing by Idaho Power
r Idaho Power Application, IPC-E-13-16, Item 16, p 7.
2 tdaho Power Response to ICIP's First Production Request No. 3-C.
Reading, Di
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a.ARE YOU SAYING, FOR WANT OF A BETTER TERM, THE COMPANY IS
NOT ASKING FOR THE $T29.8 MILLION BE A HARD COMMITMENT,
RATHER A SOFT COMMITMENT, WHERE IT MAY WELL ASK FOR MORE
THAN THIS AMOUNT SHOULD THE COSTS EXCEED ITS ESTIMATE ?
That appears to be true. According to the Company's testimony:
If binding ratemaking is approved for the Total Commitment Estimate of
9129,837,393, the Company could be assured that amounts incurred up to the
Commitment Estimate amount would be determined to be prudent. Should the
cost of the Project be less than the Commitment Estimate, the savings would
directly benefit the customer through a lower amount in rate base. On the other
hand, should the Project come in over the Commitment Estimate, Idaho Power
would have to demonstrate to the Commission that amounts above the
Commitment Estimate were prudently incurred and should be recovered in rates. 3
Therefore, tdaho Power is stating the Commission may need to engage in additional
examination of the prudence of the pollution control investment for Bridger 3 and4
sometime in the future. The Company will be asking that its proposed investment in SCR
equipment be put into rates at some future time. When that happens, it will then be the
time to examine the prudence of the total investment. A review of part of the investment
in this docket and part of the investment at a later unspecified time is simply not prudent.
A. IS THE COMMISSION REQUIRED TO IMPLEMENT PRE.APPROVAL OF
THE INVESTMENT IF THE COMPANY REQUESTS SUCH TREATMENT?
A. No. Idaho Code Section 6l-541 states:
3 Direct Testimony of Idaho Power Witness Mike Youngblood, IPC-E-13-16,p. 17.
Reading, Di
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1 Based upon the hearing record, the commission shall issue an order that addresses
2 the proposed ratemaking treatments. The commission may accept, deny or
3 modifu a proposed ratemaking treatment requested by the utility. In determining
4 the proposed ratemaking treatments, the commission shall maintain a fair, just and
5 reasonable balance of interests between the requesting utility and the utility's
6 ratepayers.4
7 Therefore, the Commission can approve the requested CPCN without pre-approving the
B requested "Commitment Estimate" of $128.9 million. The examination of the prudence
9 of the SCR emission investments would then take place at the time the Company requests
10 it to be placed into rates.
11 A. DID THE COMPAIYY NEED TO REQUEST THE COMMISSION ISSUE A CPCN
12 BEFORE IT WOULD BE ALLOWED TO IIYVEST IN THE SCR's FOR
13 BRIDGER 3 AND 4?
74 A. No. In fact ldaho Power is installing pollution control equipment at its Northern Nevada
15 Valmy coal plant without first requesting a CPCN for those investments. As Idaho
16 Power witness Grow stated:
77 a. ARE EMISSION CONTROL TNVESTMENTS AT VALMY PART OF THE
1B COMPAII"Y'S CURRENT CPCN APPLICATION?
1,9 A. No. While the Valmy plant is not a part of the Company's request for a CPCN for
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the SCR investments at Jim Bridger Units 3 and 4, the Nevada legislation
associated with NV Energy's announcement is yet another indication of the
Reading, Di
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a ldaho Code $ 6l-541(4)
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changing climate with regard to coal-fired generation.s
Witness Grow was referring to the announcement by the Company's partner in the
Valmy Plant, NV Energy, of its intent to remove coal from its generation portfolio. [t
was Idaho Power's choice to ask this Commission for a CPCN for Bridger Units 3 and 4.
WHY DID IDAHO POWER CHOOSE TO ASK FOR A CPCN AT THIS TIME?
According to ldaho Power:
The Company is requesting a CPCN and binding ratemaking treatment under
Idaho Code $ 6l-541for the SCR investment because of the magnitude of the
investment, the uncertainty surrounding coal--fired generation in today's political
and social environment, and the amount of interest expressed by stakeholders.
With the magnitude of the investment and the changing climate for investments in
coal-fired generation, the Company has chosen to request a CPCN even though it
does not believe it is required to do soby ldaho Code $ 6l-526.In this way, a
public process is initiated to provide the Company, Commission, and interested
parties a regulatory forum to fully vet these contested issues.6
Idaho Power asserts that by filing for a CPCN the Company would be able to use ldaho
Code section 6l-541 in asking the Commission for pre-approval of its pollution control
investments for Bridger. Idaho Power states by doing so it will provide for a regulatory
forum to fully vet the prudence of its investment. However what the Company does not
say, is that a full vetting of the contested issues, could equally occur at the time it
requests the investments be included in rates. There is no compelling reason the
5 Direct testimony of Idaho Power witness Grow, IPC-E-13-16 at p 19.
6lbid, p. 15.
Reading, Di
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a.
Commission needs to bind itself or future Commissions with these investments at this
time.
THE COMPANY APPEARS TO BE SEEKING TO REDUCE INVESTMENT
RISK GIVEN THE "CHANGING CLIMATE FOR INVESTMENTS IN COAL.
FIRED GENERATION" BY ASKING FOR PRE.APPROVAL FOR ITS COAL
PLANT POLLUTION CONTROL INVESTMENTS. DO YOU THINK THIS IS A
RATIONAL STRATEGY FOR THE COMPANY TO FOLLOW?
From the shareholders perspective yes: however it is not rational from the perspective of
the ratepayer. Idaho Power, like all other regulated utilities, is allowed the opportunity to
earn a return on its investments. The Commission sets the utility's retum on equity
(ROE) in a general rate case setting. The ROE is designed to, among other things,
compensate Idaho Power's shareholders for the risk they take by investing in the
Company. The Commission sets the level of the Company's ROE so that it is high
enough to attract investors who are in the market evaluating their investment
opportunities compared to other places they could invest their funds. The Commission
also considers a level of ROE low enough that the regulated monopoly cannot take
advantage of its captive ratepayers.
Idaho Power currently enjoys a Power Cost Adjustment (PCA) that recovers its
net power supply costs on an annual basis. It also enjoys a Fixed Cost Adjustment (FCA)
for residential and small commercial customers that compensate it for some of the fixed
investments that are impacted by declines in loads outside of a general rate case. The
PCA significantly reduces risks to the Company for changes in a major part on their
variable cost. The PCA essentially holds Idaho Power harmless from the vagaries of the
Reading, Di
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volatile wholesale market. In addition, the FCA reduces risks for some of their
investments in plant on an annual basis. As noted, the retum on equity for the utility is
determined in a general rate case. Also the amount of plant that is included in ratebase is
likewise determined in a general rate case. The two need to be considered in tandem.
Pre-approving the SCR Bridger investments at this time would not allow the Commission
to fully weigh the investment and the ROE together. If the Commission were to pre-
approve these investments it should, at a minimum, take this binding commitment into
account and adjust the ROE level of downward accordingly.
ARE THERE OTHER CONSIDERATIONS THE COMMISSION SHOULD
TAKE INTO ACCOUNT IN DETERMINING WHETHER TO GRANT PRE-
APPROVAL FOR THE SCR INVESTMENTS IN BRIDGER UNITS 3 AND 4?
Yes. The Company indicates it will need additional investments in pollution control
installations for Bridger units I and2 in2022 and202l.7 These expected emission
compliance costs are based on current regulations and therefore the decision before the
Commission should not be looked at in isolation from the other already-on the-drawing-
boards future pollution control expenditures. Granting pre-approval can tend to establish
precedent for future filings by the Company. It would be good regulatory policy to
evaluate the level of these expenditures at the time Idaho Power asks them to be included
in rates.
The Company's coal studies indicate, in present value terms, the SCR
installations at Bridger are the lowest cost path. However, under the "Low Gas/High
Carbon" scenario it is not the lowest cost path. Under that scenario the lowest cost path
7 lnvestor Meeting Power Point, San Francisco, September 25,2013.
Reading, Di
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is to convert the units to natural gas rather than install the SCRs.8 As an economist, I
have learned the only thing true about economic forecasts is that they are not very good
about accurately predicting the future.e No one is prescient. It is possible the low
gas/high carbon scenario will come to fruition. Other scenarios could play out, even in
the near term, that makes the SCR option uneconomic. One likely scenario that could
impact the prudence of the SCR investment are tighter environmental requirements. The
Commission should avoid locking itself in and locking in all future Commissions with
these expenditures by pre-approving them in this proceeding
IS THE ICIP OPPOSING THE ISSUANCE OF A CPCN FOR BRIDGER UNITS 3
AND 4 AT THIS TIME?
No. However, we are asking the Commission to not pre-approve the requested
expenditures. For the reasons stated above we believe it is bad regulatory policy for such
pre-approval and will deny the Commission and intervenors the opportunity to examine
the reasonableness of the expected expenditures when the Company asks that they be
placed into rates.
DO YOU HAVE ANY THOUGHTS ON THE APPROPRIATE RATEMAKING
TREATMENT IF THE COMMISSION DOES CHOOSE TO GO DOWI\ THE
PRE.APPROVAL PATH?
Yes. Reference my testimony earlier on risk and rate of return. Should the Commission
go down that path, which I strongly oppose, I recommend this S129.8 million investment
a Idaho Power Coal Unit Environmental Analysis for the Jim Bridger and North Valmy
Coal-Fired Plants, 2011 IRP Update, p. 15.
I When I was an in-house economist for this very Commission, one of the
Commissioner's I worked for was fond of saying that an economic forecast is like a broken
clock: it is right twice a day whether it meant to or not.
Reading, Di
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Yes. Reference my testimony earlier on risk and rate of return. Should the Commission
go down that path, which I strongly oppose, I recommend this $129.8 million investment
be placed into rate base, at the appropriate time, and be allowed to eam a fraction of the
Company's overall rate of return. The Company's overall rate of return assumes much
riskier investments than one with regulatory pre-approval that ties the hands of future
commissions from questioning the prudence of this investment. Such favored regulatory
treatment surely does not carry the same risk as standard investments that must wait until
they are in the ground/used and useful and proven prudent after the fact.
a. DoEs THIS END YOUR- TESTIMONY AS OF OCTOBER 11,2013?
A. Yes.
Reading, Di
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I hereby certify that on the 1lft day of October, 2013,I served the foregoing DIRECT
TESTIMONY OF DR. DON READING in Case NO. IPC-E-13-16 to the following via
electronic mail.
Idaho Power Company
Lisa Nordstrom [e-mail]
Jennifer Reinhardt-Tessmer i reinhardt@idahopower. com
Commission Staff
Kris Sasser kris. [e-mail]. gov
Idaho Conservation League
Benjamin Otto [e-mail]
Snake River Alliance
Ken Miller [e-mail]
Dean J. Miller [e-mail]
Reading, Di
rPC-E-13-16
11
Don C. Reading
Present position
Vice President and Consulting Economist
Edacation B.S., Economics C Utah State University
M.S., Economics C University of Oregon
Ph.D., Economics c Utah State University
Honorc and
Auards
Professional
and Business
History
Firtn kperience
Reading, Di
Exhibit 201
Page I
Omicron Deha Epsilon, NSF Fellowship
Ben Johnson Associates, lnc.:
1989 - Vice President
1986 - Consulting Economist
Idaho Public Utilities Commission:
1 9 8 1-86 Economist/Director of Policy and Administration
Teaching:
1 9 80-8 1 Associate Professor, University of Hawaii-Hilo
1970-80Associate and Assistant Professor, Idaho State University
1968-70 Assistant Professor, Middle Tennessee State University
Dr. Reading provides expert testimony concerning economic and regulatory
issues. He has testified on more than 45 occasions before utility regulatory
commissions in Alaska, California, Colorado, the District of Columbia,
Hawaii, I&ho, Nevafu North Dakota, North Carolina, Oregon, Texas,
Utah, \flyominB, and ]tr7ashington.
Dr. Reading has more than 30 years experience in the field of economics. He
has participated in the development of indices refleaing economic trends,
GNP growth rates, foreign exchange markets, the money supply, stock
levels, and inflation. He has atalyzedsuch public policy issues as the mini
wage, federd spending and taxation, and import / export balances. Dr. Reading
is one of four economists providing yearly forecasts of statewide personal
income to the State of Idaho for purposes of establishing state personal income
tax rates.
In the field of telecommunications, Dr. Reading has provided expert test
on the issues of marginal cost, price elasticity, and measured service. Dr.
Reading prepared a state-specific study of the price elasticity of demand for
local telephone service in Idaho and recently conducted research for, and
directed the preparation of, a report to the Idaho legislature regarding the
status of telecommunications ition in that state.
Dr. Reading's areas of expenise in the field of electric power include demand
forecasting long-range planning, price elasticity, marginal and average cost
pricing, production-simulation modeling, and econometric modeling. Among
his recent ci$es was an electric rate design analysis for the Industrial Customers
of Idaho Power. Dr. Reading is currently a consultant to the Idaho
Legislature=s Committee on Electric Restructuring.
Since 1999 Dr. Reading has been affiliated with the Climate Impact Group
(CIG) at the University of \(ashington. His work with the CIG has involved
an analysis of the impact of Global \fiarming on the hydo facilities on the
Snake River. It also includes an investigation into water markets in the
Nonhwest and Florida. In addition he hx analyzedthe economics of
snowmaking for ski area's impacted by Globd Varming.
Among Dr. Reading's recent projects are a FERC hydropower relicensing
study (for the Skokomish Indian Tribe) and an analysis of Nonhern States
Power's North Dakota rate design proposals affecting large industrial
customers (forJ.R. Simplot Company). Dr. Reading has also performed
analysis for the Idaho Governor's Office of the impact on the Nonhwest
Power Grid of various plans to increase salmon runs in the Columbia River
Basin.
Dr. Reading has prepared econometric forecasts for the Southeast Idaho
Council of Governments and the Revenue Projection Committee of the Idaho
State I*gislature. He has also been a member of several Northwest Power
Planning Council Statistical Advisory Committees and was vice chairman of
the Governor's Economic Research Council in Idaho. He is currently a Public
\florks Commissioner for the City of Boise.
Vhile at Idaho State University, Dr. Reading performed demographic studies
using a cohort/survival model and several economic impact studies using
input/output analysis. He has also provided expert testimony in cases
concerning loss of income resulting from wrongful death, injury, or
employment discrimination. He is currently a adjunct professor of economics
at Boise State University (Idaho economic history, urban/regional economics
and labor economic.)
Dr. Reading has recently completed a public interest water rights transfer case.
He has also just completed an economic impact analysis of the 2001 salmon
season in Idaho.
Reading, Di
Exhibit 201
Page2
izing Idaho", Idaho Issues Online, Boise State University, Fall2006.
.boisestate. e d.u/hixo ry / issuesonline / f.all2006 issues/index.html
Economic Impact of the 2001 Salmon Season In Idaho, Idaho Fish and
ife Foundation, April 2003.
Economic Impact of a Restored Salmon Fishery in Idaho, Idaho Fish and
ife Foundation, April, 1999.
Economic Impact of Steelhead Fishing and the Return of Salmon Fishing
ldaho, Idaho Fish and \flildlife Foundation, September, 1997.
Savings from Nuclear Resources Reform: An Econometric ModelG
with E. Ray Canterbery and Ben Johnson) Southem Econornic loumal, Spring
996.
Visitor Analysis for a Birds of Prey Public Attraction, Peregrine Fund, Inc.,
mber, 1988.
nvestigation of a Capitalization Rate for Idaho Hydroelectric Projects, Idaho
Tax Commission, June, 1988.
Post-PURPA Views," [n pssgssdings of the NARUC Biennial Regulatory
1983.
lnput-Output Analysis of the Impact from Proposed Mining in the Challis
(with R. Davies). Public Policy Research Center, Idaho State University,
1980.
and Southeast: A Socio Econornic Analysis (with J. Eyre, et al).
ment Research Institute of Idaho State University and the Southeast
Council of Governments, August 1975.
irnatingGeneral Fund Reoenues of tbe State of ldnho (with S. Ghazanfar and
. Holley). Center for Business and Economic Research, Boise State
niversity, l:ur;,.e 1975.
A Note on the Distribution of Federal Expenditures: An Interstate
Reading, Di
Exhibit 201
Page 3
1933-1939 e&d 196l-1965.' In Tbe Arncricdn Economist,
bl. XVItr, No.2 (Fall 1974),pp. L2rL28.
Ded Activity and the States, 1933-7939.' b, Jourtul of Economic History,
bl. )OO([tr, December 1973, pp. 792-8L0.
Reading, Di
Exhibit 201
Page 4