19910122final_order_no_23520.pdf

..~~ry
JAN 221991
BEFORE lrHE IDAHO PUBUC UT COMMSSION
IN TH MATtER OF TH APLICATION )OF IDAHO POWE COMPAN FOR AUTO- )R1 TO RATEAS TH IN )REQUI FOR TH REUI OF TH )SWANFALHYROELCTCFACI )
)
CAS NO. IPE-902
ORDER NO. 23520
APEACE
For the Applicant Idaho Power Company: Larr D. Ripley, Evans,Keane, Koontz, Boyd, Simo & Ripley, Idaho First Plaza--Suite 1701, 101 South
Capital Boulevard, Boise, Idaho 83702.
For the Commssion Staff: Michael S. Gilmore, Deputy Attorney
General, Idaho Public Utilities Commssion, Statehouse, Boise, Idaho 83720.
For the Intervenor Industrial Customers of Idaho Power (lCIP): PeterJ. Richardson, Davis Wright Tremaine, 400 Jefferson Place, 350 North 9thStreet, Boise, Idaho 83702. .
For the Intervenor Idaho Consumer Afairs, Inc. (ICA): Harold C.
Miles, 316 15th Avenue South, Nampa, Idaho 83651.
SUY
By this Order we authorize Idaho Power Company to rebuild the Swan
Falls hydroelectric facility. We accept its offer of a cap for the cost of the rebuild
that can be passed on to ratepayers. We further recogne that, in the ordinary
course of events, the Company will be allowed to recver in its revenue
requirement its prudently incured investment and expenses of the Swan Falls
rebuild.
L INODUCTON
This case was initiated by Idaho Power's application for authority to
ratebase the investment required for its rebuild of the Swan Falls hydroelectric
project. In its application Idaho Power offered to cap the rate base that it would
request from the Commssion for rebuild of the Swan Falls project at
$80,285,000, subject to certain contingencies.
ORDER NO. 23520 -1-
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Idaho Power is an investor-owned electric utilty subject to this
Commssion's regulatory authority. It provides service to retail customers
throughout southern Idaho. It serves more customers in Idaho than any other
electric utitlity in the State and has more. hydroelectric generation in the State
than any other electric utility.
Idaho Power is not required to obtain a certifcate of public
convenience and necessity in order to reconstruct the Swan Fals project. That is
because Idaho Power "may, without such certifcate, increase the capacity of (its)
existing generating plant(l" at Swan Fals. See Idaho Code § 61-526.
Nevertheless, the Company is constraied in its desire that ratepayers
pay the cost of rebuildig Swan Falls. On Apri 24, 1985, this Commssion issued
Order No. 19623 in Case No. U-1006-240. That Order provided:
We put Idaho Power on explicit notice, however, that before it
undertakes any substantial reconstruction or replacement of
the Swan Falls facility, other than improvement or reconstruc-
tion of the existing spillway, it must first demonstrate to this
Commssion in a formal proceeding that the projec is the
least-cost method of acquiing a new resource for its system.
That Order built upon Order No. 19076, issued August 27, 1984, which had
initiated Case No. U-1006-240:
We concluded Order No. 18189 (the fial order in Case No.
U-1006-197, an investigation into Idaho Power's future plans
for construction of additional generating capacity and future
projections of load) by putting Idaho Power on formal notice
that it could no longer expect automatic rate base treatment
of construction expenditures that went significantly beyond
original cost estimates or that were not competitive with the
cost ratepayers would have to pay for power from alternative
resources. ...
The Company should ... explain the history of its decision to
rebuild and expand production of Swan Falls rather than
simply to refubish the existing site, including a narative of
alternative studies the Company performed in deciding that a
total rebuild and expansion of the site was the least-cost
ORDER NO. 23520 -2-
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alternative. Furher, the status of the Company's license and
water right at the Swan Falls site should be presented.Finally, a comparson with the cost of power available from
alternative resources should be presented to show that theSwan Falls rebuild is consistent with a least-cost energy
scenario for Idaho Power ratepayers.
Order No. 22412, issued March 30, 1989, in Case No. IPC-E-89-8,
quoted both of the passages above. Idaho Power's application in this proceeding
tied back to the Commssion's direction in these cases.
On August 22, 1990, a prehearig conference was held on the Swan
Falls case and a closely related case, Idaho Power's application for the Milner
hydroelectric project (Case No. IPC-E-90-8). Followig that conference, the
parties submitted written statements of position on legal or jurisdictional issues.
Based upon the Commssions's review of these statements and other materials in
the record, hearig was scheduled for the Swan Falls case immediately following
hearing in Milner.
ll. TH EVENY HEG
A hearing was held on the Swan Falls case begig the afrnoon of
November 28, 1990, and continuing on November 29, 1990. Al of the witnesses
who testifed in the Swan Falls case also testified in Milner, and testimony in the
two cases was similar because several issues in the cases were simlar.
Accordingly, to save time and avoid repetition, the Commssion ruled that in the
Swan Falls case it would consider those portions of the transcrpt for the Milner
case that were also relevant to the Swan Falls case so the same
cross-examination need not be repeated. See Tr. pp. 294-295, Milner.
A lda Power's Dict Ca. Idaho Power's direct case began with the
testimony of Jan Packwood, the Company's Vice President for Power Supply.
Packwood testifed that the existing 10.4 megawatt powerhouse at Swan Falls
would be retired and the existing project redeveloped. The new project will
ORDER NO. 23520 -3-
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consist of a new powerhouse containg two generating unts with a total rated
capacity of 25 megawatts, a switchyard, a new transmission line, and other
existing project works. Upon completion, the project wil consist of:
(1) The 25-foot-high, 1,218-foot..long concrete and rock-filledSwan Falls dam;
(2) The Swan Falls reservoir with a surface area of 900 acres...and a total storage capacity of 4,800 acre-feet;
(3) A spill-way with crest elevation of 2,300 feet above meansea-level with 12 bays, each provided with radial gates 31 feet
wide and 14.5 feet high;
(4) A powerhouse at the east abutment of the Swan Fallsdam containig two identical horizontal bit turbine-generat..
ing units, each with a rated capacity of 12.5 megawatts;
(5) A substation located on the upper deck of the powerhouse,equipped with a 13.8/138-kilovolt (kv), 30,000 kv ampere,
3-phase transformer;
(6) A 1,400-foot-Iong, 120-foot-wide (bottom width) tail race;
(7) A 1.2-inle-Iong, 138-kv transmission line connecting to anexisting 138-kv transmission line owned and operated by the
license; and
(8) Appurenant facilities.
Tr. pp. 28-30.
Packwood explained that the Federal Energy Reguatory Commssion
(FERC) has relicensed the project. The Company's original license for Swan
Falls expired June 30, 1970. Idaho Power operated on annual license renewals
until the project was relicensed on December 22, 1982. That license provided for
a complete rebuid and up-rate of the project to 25 megawatts, with an expiration
date of June 30, 2010. Idaho Power postponed the rebuild of the project in
January 1985 until additional capacity would be needed. On April 30, 1987,
FERC deleted Idaho Power's authoriation for that additional capacity and
reduced the license period by ten years to June 30, 2000. In January of 1989
ORDER NO. 23520 -4-
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a safety and operational report indicated that the old power plant facilty needed
to be replaced by the year 1994. In response, Idaho Power alPlied to amend the
license and again requested authority to rebuid the project. By its order
reauthorig the rebuid, FERC then granted a fu 40-year license that will
expire June 30, 2010. In addition, the Portland regional offce of FERC has rated
the current Swan Fals faciity as havig a high downstream hazàrd -po~ntial.
Tr. pp. 30-31.
Packwood stated that the Company's existing water rights at Swan
Falls are defied in the Swan Falls Ageement between the State of Idaho and
Idaho Power. The Company has an unsubordinated right to 3,900 cubic feet per
second (cfs) in the sumer and 5,600 cfs in the winter, as measured at the
Murphy gauge a mie or two downstream from Swan Falls. The Company's
water rights above these levels are subject to subordination to new depletionary
uses. The unubordinated rights have a priority of 1919 or earlier; the identical
mimum stream flows in the State Water Plan car a priority of the mid..1980s,
when the Plan took effect. However, the Swan Falls Ageement contemplates
that the State of Idaho will assert Idaho Power's rights as necessary to protect
the minimum flows established by the agreement. To protect those flows, the
Swan Falls project must reman in existence. Tr. pp. 32-33.
Packwood testifed that the Company views its 3,900 cfs summer water
right and 5,600 cfs winter water right as far senior to the State Water .Plan's
identical rights. It is the Company's position that the priority of the water right
cannot be preserved if the Company walks away from the Swan Falls dam, and
that is an important reason for the rebuild. Tr. pp. 56-57.
Packwood maintained that protection of Swan Falls' flows is of great
importance to the Company because Idaho Power's water rights at the Hells
ORDER NO. 23520 -5-
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Canyon complex are subordiated to upstream depletion. There is little exposure
to major depletions between Swan Falls and the Hells Canyon complex, so
protecting the Company's water rights at Swan Falls has the effect of assurig a
water supply at the Hells Canyon plants downstream. Furhermore, in order to
meet these minium flows at Murphy, water must flow through some of.the
upstream dams as well. Tr.33.
Packwood explaied Idaho Power's estimates of the constrUction costs
for Swan Falls. The FERC license application estimate is prepared on the basis
of prelimiary layouts without (mal design or precse calculation of required
materials such as concrete, fill dirt, etc. The Commssion, however, has stated
the Company must provide a more accuate cost estimate. The Company is in a
position to make a "commtment estimate" aftr completion of design and
solicitation of bids for turbines and generators. Ths commtment estimate and
the additional 25% contingency in the application establish a cost ceiling for the
project that is the basis for the Company's proposal, with certain exceptions, to
absorb all costs of the project above a certain leveL. The Company's total
commtment estimate in its Exh. 3 ($80,285,000) represents estimated costs of
the various components of the project of $64,228,000 plus a 25% contingency.
However, this commtment estimate could be increased to account for
documented changes in escalation rates or scope. In particular, (1) force majeure
or acts of God, (2) design optimization changes for increasing energy that more
than offset the increase in initial investment, and (3) foundation or site
conditions signifcantly more expensive than indicated by the Company's
exploratory drig would be reasons for going above the ceiling. Tr. pp. 35-36.
Furthermore, the $64,228,000 cost estimate excludes removal costs of $804,000.
ORDER NO. 23520 -6-
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Packwood exlained that the Company's estimates for Swan Falls
conta contingencies for each component going into the total, and then a 25%
contingency for the sum of the components (each of which includes the
component's 15% contingency.) Tr. pp. 51-52. Packwood compared the 25%
contingency cap built into the estimate for Swan Falls with the 5% cap for
Miler. Miler's is smaller because its design and procuement process is
further along and a number of uncertainties have been removed by the actual
award of bids and contracts, but Swan Fals is in a more prelinary stage. The
biggest unknown for Swan Falls is the state of the site under the old powerhouse,
which is also the site of the new powerhouse. The Company does not know what
underlies the bed of the river and must buid considerable contingency into its
figures. Tr. pp. 54-55.
Packwood testified that Idaho Power intends to complete its
construction of the Swan Falls rebuild by January 31, 1994. The reconstructed
facility would be added to the Company's rate base aftr its completion. The
project will be integral to Idaho Power's development of its hydroelectric system,
will be used to serve retail and firm wholesale load, and is integral to retention of
the Company's water resources. Furhermore, the project is non-deferrable
because the physical state of the plant requires cuent reconstruction and
rehabilitation. Tr. pp. 36-37.
Packwood explained that it was impractical to renovate the old power
house so it could be used for peaking purposes. The 50..year old equipment has
antique control systems, and there is a limited flow that could pass through those
turbines, so the Company's dam stabilization strategy requires removal of that
portion of the dam. Tr. pp. 47-48. Much of the electrical equipment installed in
the plant was installed within twenty years of the invention of the electric utility
ORDER NO. 23520 -7-
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industry. The insulation is on the verge of turnig to dust. There are concrete
deterioration problems. Fallig effciencies, increasing O&M costs, etc., descrbe
a plant that is worn out. Tr. pp. 57-58. Packwood had no idea what it would cost
to refubish the existing plant, but everyhig of note would have to be replaced
inside. Tr. pp. 58-59. To continue to generate at Swan Falls" th~ Company
would need to spend a certain amount of money regardless, so it is not fair to
characterize the entire expense of the Swan Falls plant as expense of new
generation.Tr. pp. 59-60.
Packwood explained the Company's choice of a 25-megawatt plant:
Swan Falls is not sized to take 100% of the flows in the river. One can obtain
80% of the benefit quite reasonably, 85% with more cost, but the high 90's are
achieved only inequently and not cost-effectively. Tr. pp. 48-49. Swan Falls
has a much higher usage factor than Mier because of its location on the river.
There are stady and predictable flows at Swan Falls, so the plant may be
designed to use a greater percentage of the flows available than at Miner. Tr. p.
60. The Company had not designed a 35- or 40-megawatt project and settled for
a lower capacity because there would only be spillage about 17% of the time
under its 25-megawatt design. The benefits gained by reducing that spillage do
not justif the additional costs of increasing the generation. Tr. pp. 62-63.
In response to various cross-examinations, Packwood explained: The
rebuild does not provide for fish passage; and fish passage would have be to
designed and added on if requied by regulatory offcials. Tr. p. 61. The ratebase
cap for the project that Idaho Power offered in its application was voluntary, and
it is not the Company's view that significant excesses beyond the Company's
commtment estimate for ratemaking purposes are beyond the Commssion's
ORDER NO. 23520 -8-
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ability to review. That does not mean the Company would not ask for ratebase
investment above its offered cap if it encountered unexpeted costs, but the
Commssion would have the opportunty to review those costs. Tr. pp. 67-68,
Milner. Otherwise, the Company will absorb the costs in excess of its proposed
cap. Tr. p. 68, Milner. Packwood characteried th~ applicatio.n's ratebase cap as
an attempt to impose. a disciplie on the Company that it has been accused of
lacking. Tr. pp. 81-83, Miler.
Idaho Power's second and last witness was James L. Baggs, the
Company's Manager of Rates. Baggs explained that the Company's rates will not
be affected while the Swan Falls project is under construction, nor will rates
automatically increase when the project is completed; the Company must first
apply to include the cost of the project in its rates before they will be recovered
from customers. Tr. pp. 74-75. If the Company uses reasonable and prudent
construction practices, he believed that all of its investment in the Swan Falls
rebuild should be included in its ratebase in the next rate proceeding aftr the
project is completed. Tr. pp. 75-76.
Baggs explained that the Company has never considered proposing
ratemaking treatment for the Swan Falls project other than conventional
ratebase/rate-of-return ratemaking, even though it had considered other
treatment for the Milner project, i.e., the vagaries of the wholesale market. Tr.
pp. 83-86. He agreed that the Company is now on notice based upon testimony of
ICIP and Staff witnesses that when Swan Falls is completed and proposed for
ratebase/rate-of-return treatment, parties may propose non-traditional methods
of cost recovery for Swan Falls. Tr. p. 87. The Company is not askig for a dollar
commtment of X dollars that could be inserted in the ratebase, but is offering a
cap beyond which it would not request ratebase treatment. Tr. pp. 93-94.
ORDER NO. 23520 -9-
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Baggs addressed the possibilities of changes in load, changes in
technology, and changes in stream flows as things that the Company should
monitor durg completion of a project, but stated the Company should be
entitled to ratebase a project previously authoried so long as it follows
reasonable and prudent construction practices. Tr. pp. 148-149, Milne~.
Baggs stated that it was the Company's position that the issuance of
Commssion authority to begin construction was in effect a finding by the
Commssion that it was reasonable, prudent and in the public interest for Idaho
Power to begin construction as propose, and, ü there were any challenges to the
Company's conduct, the burden of proof of substantiatig the challenge is upon
the challenger, not upon the Company. Tr. pp. 176-179, Milner. Costs of
construction exceedig the Company's commtment in the application, unless the
costs fall in one of the three categories excepted, will be absorbed by the
Company. Tr. p. 180, Milner.
On redirect Baggs explained that if there was a period of
hyper-inflation and the Company's cost estimates escalated, then the Company
would reapply to the Commssion for a new cap. If the Commssion declined to
authorize the cap, the Company would be entitled to recover its sun costs to
that point. Tr. pp. 182-183, Milner.
B. ICIrs Ca. The Industrial Customers of Idaho Power (ICIP) are an
unicorporated association of large industrial consumers of electricity. ICIP's
witness was Don Reading, a consulting economist employed by Ben Johnson
Associates. Reading did not dispute the importance of Swan Falls water rights to
Idaho Power, but stated that they should not be the sole basis for justifyng more
than $80 million in reconstruction expenditures and doubling the size of the
Swan Falls facility. The reasonable costs that should be passed onto the
ORDER NO. 23520 -10-
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ratepayers and the need for the Company to reta its water rights are in many
aspects separate issues. Tr. p. 104.
Reading believed that the Company provided little evidence concerning
cost effectiveness of the Swan Falls project or showig that the project is a
least-cost alternative available to ratepayers. Tr. p. 107. The Company has not
shown that reconstruction of Swan Falls is less costly than iìistaílati~~ of
demand-site management measures, has not explaied the rationale for the 25%
contingency in its cap (compared to the 5% contingency for Milner), has not
justified its rationale for the 25-megawatt size of the Swan Falls project, and has
not explained why Swan Falls' cost per kw is $3,244 whie Milner's is $1,187. Tr'
pp. 108-109.
Reading stated that if the Commssion grants the Company's request
for preapproval for rate base treatment for Swan Falls, it will effectively foreclose
its ability to examne the prudence of the Company's decision-making between
the time reconstruction begins and the time the project is completed. The
Company's management wil be unconstrained by changes in load, technological
progress, or economic fe-asibility of the plant. Tr' p. 110. Idaho Power has no
right to automatic inclusion of the project in rate base merely on the condition
that it follows reasonable and prudent constrction practices because that
ignores the Company's management obligations in other areas. Tr. pp. 111-112
Readig characterized the Company's proposed cap of a "commtment
estimate" as attractive on the surace, but hollow because adjustments for (1)
documented changes in escalation rates or scope caused by force majeure or acts
of God, (2) design optimiation for increased energy, and (3) foundation or site
conditions significantly more expensive than indicated by exploratory drillng are
not covered by the cap. The commtment estimate is therefore not an upper
ORDER NO. 23520 -11-
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bound of the project's cost that could be included in rate base. Tr. pp. 114-115.
The Company's proposal assign most of the risk of reconstructing Swan Fals to
ratepayers whie eliating most of the risk to stockholders. The only risk
faced by stockholders is that the Company would not use reasonable and prudent
construction practices, which could result in some of the plant being disalowed if
investment exceeded the cap. Tr. pp. 118-119.
Reading contended that reduced equity costs are associated with
reduced risk. If the Company's true equity risk for a pre approved plant is 10%
(one percent above the risk free cost of capital), the Company's overall equity cost
for all of its rate base should be reduced about 25 basis points. Tr. pp. 119~122.
Although Reading believed it is inappropriate to determine ratemaking
methods to be used for a plant not yet constructd, he noted that traditional rate
base/rate of return reguation is not the only option. For example, the Company's
avoided costs could also be considered as a fair rate cap for ratepayers' costs.
Fair market value of the plant and the cost of alternative forms of reliable power
could also be considered. Tr. pp. 122-125.
Reading summarized his recommendations and conclusions as follows:
(1) The Commssion should reject the Company's proposal for
preapproval of rate basing of the Swan Falls project.
(2) If the Commission adopts the Company's proposal for preapproval,it should reject the Company's application on the grounds that it is
deficient.
(3) If the Commssion accepts the Company's proposal, approval
should be combined with an adjustment to the Company's cost of
equity recognizing the substantial shifting of risk from share-holders to ratepayers.
Tr. pp. 125-128.
Reading did not testify that the Company does not need the facility or
that it should not be built; he testified that the application has not shown need,
evaluation of alternative resources, etc. Tr' p. 133.
ORDER NO. 23520 -12-
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Readig agreed that one should not put bliders on, stack all possible
resources accordig to cost, and then mechanically pul the least cost resource
from the stack as the next resource. There are many policy reasons not captured
by least cost planning that would counel choosing a higher cost resource from
the stack. However, those reasons must be explained. Tr. pp. 147~148.
Reading agreed that briging a commtment estimate into the
proceeding is an appropriate step in cost contaient for new projects, but
questioned the scope and inflation exceptions to the commtment estimate. Tr. p.
258, Milner. The Company has excepted much of the risk from its commtment.
Tr. p. 261, Mier.
C. Th Commision Staffs Ca The Commssion's Staffs first witness
was Thomas Faull, a public utilities engineer. Faull understod the purpose of
the proceedig was to determie whether the Swan Falls project concept is sound
enough to authorize Idaho Power to proceed with project development, not to
determine now whether to grant rate base treatment of unkown future costs.
Tr. pp. 155-156. Faull believed that the priary consideration whether the
project should be developed is cost-effectiveness, with consideration of other
factors being supplementa. Tr. p. 156.
Faull accepted Idaho Power's proposed cap on capital costs of
$80,285,000 as a maxmum or worst case cost for his analysis. Tr. pp. 156-157.
From that cost, he estimated a 50-year levelized cost to the ratepayers for the
project at 7.305ølklowatt hour (kwh). His analysis was only slightly sensitive to
the number of years of useful life chosen, yieldig an average cost of 7.257ø/kwh
for 60 years and 7.388ø/kwh for 40 years. Tr. p. 157. He rejected the 17-year life
of the remaining time on the FERC license (which yielded 8.472ø/kwh) on the
ground that it is reasonable to believe that Idaho Power will obtain economic
ORDER NO. 23520 -13-
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benefits from the plant at the expiration of the license in the year 2010. Tr. pp.
157-158.
Accordig to Order No. 23357 recently setting Idaho Power's avoided
cost rates, the maxum avoided cost rate payable to qualifyng facilities
purchasing from Idaho Power comig on lie in 1993 was 6.14-:~/kwh. Faull
contended his calculation of 7 .305~/kwh shows that Swan Fall is cost-effective
for Idaho Power's ratepayers as compared to avoided costs for three reasons:
there is a mathematical error in that Order's avoided cost calculation that will
lower it to 5.917~/kwh; 0.878~/kh of that figure will be adjusted in the future
based on operating costs of the Colstrip generating plant, which would - yield a
6.4 77 ~/kwh rate Ü 20 years of coal escalation were included in the number; and
the 20-year rate must be scaled up to a 50-year rate for a true comparison. Tr.
pp. 161-163. Changing the v:arables underlying calculation of the 20-year rate to
those underlyig calculation of the 50-year rate yields an avoided cost of
7.054~/kwh, which after seasonal weighting is taken into account drops slightly
to 6.948~/kwh. This is within 5.2% of his estimate of Swan Fals' cost of
7.305~/kwh, which means that the Swan Falls plant is approxiately
cost-effective. Tr. pp. 162-163.
Even though Faull discussed the Swan Falls plant as though Idaho
Power could avoid all costs of the project by simply walking away from it, he
believed that if Idaho Power were to abandon the Swan Falls site, it would be
required to return the site and reservoir area to a condition approxiating
natural conditions. This would be expensive and make abandonment
impracticaL. If walking away were the only alternative to the proposed upgrade,
restoration costs would have to be subtracted from the upgrade construction costs
for avoided cost analysis because they would not be avoidable. However, these
ORDER NO. 23520 -14-
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costs could be avoided by selecting a different alternative to Idaho Power's
proposed Swan Falls upgrade. Tr. pp. 164-165. Faull would not consider Swan
Fals cost-effective compared to 20-year avoided cost rates in effect before Order
No. 23357. Tr. p. 166. Further, the Commssion could impute additional
conservation or demand-side resources to Idaho Power in evalu.ating the need for
a supply-side resources-, which would make the project less attractive. Tr. p. 167.
Faul did not believe Idaho Power made the same level of project
optimiing effort that one would fid in a QF development. He believed the
project is undersized for flows at the site because it has an overall average
capacity factor of 72% while the standard for the industry is typically between
45% and 65%; there is uncertainty whether historic flows at Swan Falls will
continue in the future. Tr. pp. 170-171. By contrast, Milner has a capacity factor
of 35%. Tr. p. 171.
In sumary, Faull recommended that the Commssion find the Swan
Falls plant concept competitive enough for costs incured in developing the
project to be potentially reasonable for future ratemakig consideration, with a
specifc warning that costs in excess of the appropriate comparable avoided cost
rates are, by definition, imprudently incurred. He fuher recommended the
Commssion advise Idaho Power that approval to build the project does not imply
that costs incurred in developing the project are necessarily prudent, but they
will be reviewed at a later date like all other costs. Tr. pp. 176-177.
In answer to various cross-examiations, Faull stated: He did not
believe that the proposed Swan Falls investment of $3,000/kw for a project with a
22-foot net head is unreasonably excessive; it is within the range one would
expect. Tr. p. 184. The Company's commtment to acquire the resource at costs
exceeding its recommended reasonable cost for new resources appeared to be
ORDER NO. 23520 -15-
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imprudent; the Company was recommending the cost for new resources be under
5~/kh. Tr. pp. 324-325, Miner. Idaho Power's recent experiental programs
have shown that there are conservation resources avaiable in the State for
substantially less than avoided costs of 5~/kh; i.e., conservation (demand-side)
management resources are available for approxiately 2-2lA~/kwh. !r. p. 331,
Milner. There are probably no fim off-system purchases available for 50 years
at any rate, however. Tr. p. 331, Milner.
Faull agreed with the Company that Swan Falls and Milner represent
lost opportunties that if not taen now will be lost, but disagreed with the
Company that all opportunities should be taken regardless of cost.Tr. pp.
337-338, Milner.
In response to a question on how he would calcuate a comparable
avoided cost rate for a hydro facility, Faull said that he would use life-cycle costs
and reduce the capital costs of the project to a point where levelized long-term
costs of the project equal to comparable avoided cost rate. Tr. pp. 354-355,
Milner. In the absence of evidence to the contrary, he would continue
normalizing the most recent 20 years of water for retail ratemaking in
calculating capital costs for kwh. Tr. pp. 355-356.
In considering non-quantifiable factors associated with the new plant,
Faull would include the effect of the Swan Falls project on the Company's other
hydroelectric facilities like the Hells Canyon Dam complex. Tr. p. 359, Milner.
Faull hesitated to state that if the utility brought a project in at lower than
avoided costs it would nevertheless be entitled to full avoided cost recovery for a
project; he believed that avoided costs should be a cap, but not a floor. Tr. pp.
360-361, Milner. Faull opined that if a utility has an opportunity to acquire a
hydroelectric site at a cost that exceeds the comparable rate for CSPP or
ORDER NO. 23520 -16-
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conservation, then the utility should not acquie or develop the site. Tr. pp.
366-368, Milner.
Faul could not estimate whether future flows in the river would
increase or decrease. Irrgators may become more effcient in their use of
irrgation water, which would increase flows, but requirements for downstream
fisheries could reduce levels of generation on the Snake and Columbia rivers,
perhaps as far upstream as Miler. Tr. pp. 377-378, Milner. The figures that
Idaho Power presented to FERC in its application concerng the value of the
power were not the figues it presented to the IPUC on the value of power for
purchase from cogenerators or small power producers. Tr. p. 380, Milner.
Faull stated that Idaho Power considers Miler and Swan Falls as
resources in the pipeline to come on in 1992 and 1993, so they do not fit into the
resource stack for deferrable or avoidable resources. Tr. p. 384, Milner. In
Faull's opinion the Company had been slow to go aftr conservation resources,
but has been acting aggressively in that regard for the last year to 18 months.
Tr. p. 387, Miner. In response to a question that described two possibly
conflicting State policy goals of holding the Company to the requirements of a
least-cost plan on the one hand and preservg ownership of and encouraging
development of hydro capacity on the Snake River in entities subject to state
reguation on the other hand, Faull stated that the latter State policy must have
an implicit criterion of cost-effectiveness. Tr. pp. 388-390, Milner. The only
issue aside from cost-effectiveness is whether there are policy reasons for
wanting to retain reguatory control over a site. Tr. p. 395, Milner.
The Stafs fial witness was Bill Eastlake, an economist. He
addressed policy considerations that may infuence the Commssion's decision in
the case. According to Eastlake, ratepayers are not buying a simple,
ORDER NO. 23520 -17-
..
undifferentiated product (electrical generation) that is so standard that the only
important factor in the purchase decision is price. Tr. p. 189. The projected costs
C1"f rSt'øl)e
/' from Swan Fals are approxitely those o~avoided costs for purchase from
cogenerators and small power producers. Tr. p. 189. Idaho's hydroelectric base
has allowed Idaho Power and other utilities servg the State to remain among .- -
the lowest-cost utilities in the country. Where possible, it makes sense to keep
local control of resources like low-cost hydropower so that their bemefits are not
reaped by utilities and ratepayers out of state. Tr. pp. 190-191.
The State Energy Plan places a high priority on conservation and
renewables, with emphasis on improvig existing resources. The Plan does not
have the force of law, but the resource - policy board that developed it clearly
indicated a preference for getting more hydroelectric power at existing dams. Tr.
pp. 192-193. The same preference for hydroelectricity should hold today, nearly a
decade aftr the energy plan was published in February 1982. Tr. pp. 191, 194.
In addition, policy 1C of the State Water Plan, which has the force of
law because it was approved by the Legislature, designates non-consumptive
uses of water for hydro generation as beneficial and acknowledges a public
interest in maintainig miimum river flows at Swan Falls. This is a strikng
departure from previous narow definitions of beneficial use that emphasized
removal of water from the river, usually for irrigation. Tr. pp. 195-196. In
addition, policy 5A raised the minimum flows at the Murphy gauge near Swan
Falls in accordance with the Swan Falls agreement. Tr. p. 196.
Eastlake found persuasive Idaho Power's arguent that part of the
reason to approve the Swan Falls project is the need to protect an existing water
right. Tr. pp. 198-199. The value of maintaining miimum streamfows at the
Murphy gauge associated with Swan Fals minimum flows of 5,600 cfs year
ORDER NO. 23520 -18-
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around were estimated to be $105 milion annualy at avoided cost rates of
5~/kwh and $31 mion anually at the variable cost of generation rates of
1.5~/kwh. Tr. pp. 199-200. Further, when projected hydro power costs are
approxiately the same as avoided costs, then one should indulge a preference
for keeping control over local resources. Tr. p. 484, Milner.
D. lda Power's Rebut. In Idaho Power's rebuttal case, Packwood
disagreed with Staff witness Faull's estimates of operation and maintenance
(O&M) costs for the project. New plants like Swan Falls are built so that O&M
is lower because they do not need to be manned twenty-four hours a day. Tr. pp.
38-39. He disagreed with Faull that Swan Falls project is too small, noting that
Swan Falls' capacity factor is high because the flows are fairly uniform
throughout most of the year. Tr. pp. 39-40. The project size was selected upon a
maxmum flow of 14,700 cfs because flows exceeding this amount are present
only 17% of the time based upon sixty years of daily flow records. Tr. p. 40.
Additionally, FERC has reviewed the Company's plant size. Id.
Packwood explained that Idaho Power prefers standard firm bid
proposals rather than requests for proposals and negotiation because its method
has the following advantages:
1. Project design can be tailored to the needs of the owner
rather than the developer's contract.
2. Contingencies to cover development risk are not requiredbecause the purchase and contracting are phased to the
design process.
3. Developer mark-ups on equipment purchased from the
manufacturer are eliminated.
4. The owner retains control of the combination and quality
of equipment purchased by buying major equipmentseparately and analyzing each component based on
maxmizing the benefit to the project per dollar spent.
ORDER NO. 23520 -19-
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5. Changes to the project can be made based on siteconditions without havig to renegotiate the project
development package.
6. Proposals received for the development or any part of the
package are competitive proposals where bidders haveelimiated contingency amounts to cover later negotiation.
Negotiations with the preferred bidder do not give the bidder
the competitive incentive to improve his proposaL. - _, .
Tr. pp. 41-42. Packwood believed Idaho Power's procedures for obtaining bids are
appropriate and prudent. Tr. pp. 43-44.
m. WR SUMIONS FOLLWIG HEG
Idaho Consumer Afairs (ICA) submitted post-hearig comments. ICA
stated its position that conservation should stil be the preferred soUrce of
additional generating capacity. However, ICA was not convinced that
conservation should be the sole new source of Idaho Power's additional
generating capacity, and ICA believed that hydroelectric generation and fish and
widlife protection and enhancement are beneficial uses of water. ICA believed
that upgraded hydroelectric projects are reasonably environmentally acceptable.
Milner and Swan Falls should not become lost opportunities for Idaho's and the
Pacific Northwest's future needs for additional generating capacity. In addition,
hydroelectric projects' O&M costs are far less than thermal plants, they do not
contribute to acid rain, air pollution, fly ash or waste disposal problems, their
fuel (water) is considerably less costly than coal or uranium, their plant life is
considerably longer, and they do not consume water in the river.
Idaho Power needs to plan for additional hydroelectric generation, in
particular because the Canadian share of power from the Columbia River
(around 900 average megawatts) will revert to British Columbia beginning in
1998. Even if British Columbia decides to sell this power in whole or in part to
the United States, the cost will most assuredly rise.
ORDER NO. 23520 -20-
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With regard to lost opportunties, Idaho Power should get into these
plants now to secue them for the future. If the electricity they produce is sold
off-system at a reduced rate in the short-term, then the plant should not be rate
based until it becomes used and usefu for Idaho Power's ratepayers. The
crossover point for Idaho Power's need for newgeneratiòn is _ approximately
1998-1999, according to Idaho Power's testimony in the avoided cost case.
ICA concluded its comments with the followig discussion:
13.ICA has no great problem with the FERC's order for IPCto rebuild their Swan Falls Dam, or IPC's desire toincrease its generating capacity to 25 MW, since our
prelinary investigation has determined there will be
sufcient water durng several months of the year to
justif this additional generating capacity. Also IPC
could use this additional electrical power at a later date,
if not when the rebuild is completed.
This rebuild will be more expensive than it would beunder ordinary circumstances, due to the FERC
requirements that it be rebuilt in compliance with
certain historical preservation requirements. However,
this aspect is important to many people so IPC's
ratepayers will have to fund these requirements by
having their future rates slightly increased.
Regarding the FERC requirements that the picnic and
boating facilities at Swan Falls be upgraded at the time
of the rebuild, ICA respectfully requests the Commssion
to require the building of a boat launching dock
downstream from the dam and the installation of picnictables, a drinking water fountain and restrooms in the
wooded area downstream from the dam. Present picnic
and other mentioned facilities near the present lawn, as
well as the present boat launchig area are not adequate
for the increased usage of the recreation facilities by the
general public.
We feel IPC's decision to add additional generating
capacity when the Swan Falls Dam is rebuilt, as ordered
by FERC, is in the best interest of IPC's ratepayers, long
term at least. However, we request any contracts foroff-system power sales made by !PC be short term, five
to 10 years, and recallable.
14.
15.
ORDER NO. 23520 -21-
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In addition, the Commssion received a letter from Mitch Sanchotena,
Executive Director of Idaho Steelhead and Salmon Unlited (ISSU). That letter
addressed design of the Swan Fals Dam as follows:
Anadromous salmon and stelhead once migrated freely in
and out of the Snake River all the way upstream to Shoshone
Falls. Today that migration is either being or has been totally
blocked by hydro-electric dams on the Columbia and Snake-
rivers. ISSU does not oppose Idaho Power's application toincrease the generating capacity of Swan Falls Dam.
However, we do feel that any retrofitting or modification toany hydropower facility in potential anadromous areas
should be designed to incorporate both the juvenile fish
bypass system and upstream adult passage capacity.
Although anadromous fish do not migrate in the Snake Riverabove Hells Canyon Dam any longer, ISSU does not believe
this will be the long term scenario. ISSU believes that fish
passage around the Hells Canyon complex can and should
occur in the near future. When this does occu, it would be a
big plus and of significant economic benefit to Idaho Power
Company to have aleady designed a fish passage facility for
the Swan Falls Dam.
Therefore, ISSU ur~es the Public Utilities Commssion to
review Idaho Power s request and grant it--contingent on a
design to pass anadromous fish around the project.
IV. TH COM:ION' DECION
A Auhorin to Rebui th Facilit. WE FI: The current Swan
Falls dam has deteriorated to a point that the engineering staff of the Federal
Energy Regulatory Commssion believes the dam must be removed, refurbished
or replaced. The rebuild of the project is no longer avoidable or deferrable. In
particular, the project must be rebuilt not merely for safety, but also to protect
the priority of Swan Falls' water rights for the benefit of the entire Idaho Power
system. The dam can be replaced and upgraded to 25 megawatts of generation
consistent with FERC requirements. Idaho Power's proposed cap on the cost of
the upgrade of Swan Falls to 25 megawatts ($80,285,000) appears to be a
reasonable upper bound on the cost of expected generation from the project.
ORDER NO. 23520 -22-
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The upper bound is reasonable because it is approxiately (within 5% of) Idaho
Power's avoided cost of the acquisition of new resources, afr properly adjusting
avoided costs for a 50-year life for the project; because the upper bound is not
exclusively the costs of new generation, but also includes substantial costs that
Idaho Power would incur in any event to make the dam safe; because it is just,
fair and reasonable and in the public interest to authorie' hydroel,e~trc
development at this existing site; and because exective and legislative policies of
this State favor development of hydroelecricity at existing sites.
In addition, WE FI: Idaho Power has substantially complied with
the requirements of previous orders of this Commssion, priary among them to
provide a "commtment estimate" before the Commssion will authorize it to
reconstruct the Swan Falls hydroelecric facility. However, Idaho Power did not
meet Order No. 19076's requirement to include a narrative of alternative studies
performed to decide that rebuilding the Swan Falls dam was the least-cost
alternative to acquirg additional resources. Perhaps the non-deferrable nature
of the project made this analysis seem unnecessary to the Company, but that is
not the case. Costs of alternative resources must always be presented by the
Company as par of its case seekig approval of new generatng resources.
However, this application did include something of signal importance: Idaho
Power's proposal in this case and in Milner to offer a "commtment estimate" as a
rate base cap for the amount of recovery that it would seek from ratepayers for
this project. Even with the contingencies included in the cap, these offers are
important, far-reaching and exemplary steps toward containment of ratepayers'
costs. These offers cannot go unapproved or unapplauded. We accept the cap as
proposed by the Company. And, we note, as the Company itself did, that the cap
is a cap only, not also a floor.
ORDER NO. 23520 -23-
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Based upon the fidings in the previous two paragraphs, we authorize
Idaho Power to reconstrct the Swan Falls hydroelectric facility.
B. Revenu Reirment--Rery Compa Next, we review the
Commssion's regulatory compact with its electrical utilties with regard to the
authoriation to build new generating- facilities. Our analysis of this issue, in
which our order for Swan Falls is the functional equivalent of a certificate of
convenience and necessity for a generating project like Milner, is the same as in a
case involving a certificate. When this Commssion authories construction of
new generation, it has not as a matter of law authorized the utility to recover
from ratepayers whatever costs are invested in the new generation under all
circumstances whatsoever. The regulatory compact is not so one-sided.
This Commssion's authorization to construct new generation is a
practical document, not one with only a single legal consequence. It informs the
company, its ratepayers and its investors that, in the ordinary course of events,
prudently incurred costs of construction of bringig the authorized plant on line
will later be recognized in the company's revenue requirement. But prudence has
more aspects than management of the construction. A certificate does not
guarantee a utility recovery when it ignores or defies the laws of economics by
continuing to invest in plants no longer necessary or prudent because demand
has fallen from projections. A certifcate does not guarante recovery when
investment is no longer prudent because costs have escalated beyond reasonable
expectation. A certificate does not guarantee recovery when investment is no
longer prudent because the percentage of the company's capital tied up in the
project is unreasonable. A certificate does not guarantee recovery when
investment is no longer prudent because technology has changed. A certificate
ORDER NO. 23520 -24-
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does not guarantee recovery when management, operation or construction of a
project is beyond the utilty's control and under the diection of others.
The classic examples of cases in which the issuance of a certificate was
not a guarantee of full cost recovery were some utilities' investments in nuclear
plants in the middle 1970s to the middle 1980s. In many instances, the plants
reflected signcant percentages of the company's proposed generation or
capitalization (as much as half), escalated beyond all estimates of cost used in
applications before regulatory commissions to secure reguatory approvals, could
not be managed by the individual utility, continued to be pursued in the face of
declinig customer demand, and continued to be pursued as construction
deadlines were missed and numerous scope changes were imposed.
This hydroelectric project, by contrast, stands at the other end of the
spectrum. It represents a small portion of the Company's total generation and
total investment base. It involves proven and reliable technology. The Company
maintains management control of construction and is not at the mercy of other
companies or a consortium of other companies. The project should be completed
in three to four years.
In the former cases, the regulatory approval given before construction
was initiated bore little resemblance to the cost of completion, time of completion
or need for completion of the projects eventually placed in servce. The likelihood
of that occurig for hydroelectric projects like Swan Falls or Milner is slim,
indeed. Therefore, WE FI: In the ordinary course of events, the Company
may expect its investment in the Swan Falls project to be recognized in its
revenue requirement, barng unforeseen circumstances of a kind not
characteristic of hydroelectric facilities. Further, the Company's incurrence of
ORDER NO. 23520 -25-
..
costs for prelimnary site and engineering work through its commtment
estimate is reasonable and prudent and will later be recognized in revenue
requirement.
C. Ra of Re ICIP recommended that if the Commssion
acknowledged in this order that the Company's investment in t~e Swan Falls
project should be recognized in its revenue requirement, then its equity return
should be adjusted as a result. We disagree. The reguatory compact that we
described in Part B of our decision is not noveL. It has been implicit in our
treatment of new generating plant since the middle 1970s, when the last era of
new construction of generating plant began. What we have done in this Order
that we have not always done in previous orders is make the reguatory compact
explicit.
Accordingly, WE FI: Idaho Power's rate of return should not be
reduced from what it otherwise would be by our acknowledgement that its
investment in the Swan Falls hydroelectric facility will be recognzed in revenue
requirement, barrng extraordinary circumstances.
D. FEC-&ld IBBue. Idaho Consumer Afairs has called our
attention to proposals for picnic and boating facilities and other recreational
amenities downstream from the dam. The requirement for provision of
recreational facilities is normally the subject of a FERC license, and ordinarily
we do not review the terms of such licenses. In this instance, Commssioner
Swisher, who has viewed the project recently, believes ICA's recommendations
with regard to recreational facilities make sense. Arguably, the State may
require recreational facilities in addition to those required by the federal license.
However, rather than imposing such a requirement by this Order and then
confronting the issues of state and federal jurisdiction that would result, we
simply recommend the wisdom of ICA's proposals on recreational facilities to
ORDER NO. 23520 -26-
..
Idaho Power and encourage it to take whatever steps are appropriate, on its
own initiative or at the FERC, to provide such facilities. This reference to ICA's
recommendations carries with it an acknowledgement that prudent investment
in such facilities will be recogned in the revenue requirement..
Next, with regard to Idaho Steelhead and Salmon Unlimited's
recommendation for providing for the passage of anadromous fish, we note that
Article 401 of the FERC license provides:
The (Federal Energy Reguatory) Commssion reserves the
authority to require the licensee to construct, operate, and
maintain, or provide for the construction, operation and
maintenance of, fishways prescrbed by the Secretary of the
Interior.
WE FI: Adopting a design for the dam that includes fishways or could be
adapted with minimum expense to include fishways might be reasonable. It
could be unwise not to design the dam in such a manner and be forced to make
expensive alternations to an existing facility later because fishways or the means
of accommodating fishways were not originally engineered into the project.
OR DE R
IT is THEREFORE ORDERED that Idaho Power Company is
authorized to proceed on its reconstruction of the Swan Falls Hydroelectric
facility according to the terms of this Order.
THIS is A FINAL ORDER. Any person interested in this Order (or in
issues finally decided by this Order) or in interlocutory Orders previously issued
in this Case No. IPC-E-90-2 may petition for reconsideration within twenty-one
(21) days of the service date of this Order with regard to any matter decided in
this Order or in interlocutory Orders previously issued in this Case No.
IPC-E-90-2. Within seven (7) days after any person has petitioned for
ORDER NO. 23520 -27-
..
reconsideration, any other person may cross-petition for reconsideration. See
Idaho Code § 61-626.
DONE by Order of the Idaho Public Utilties Commssion at Boise,
Idaho, this /BU day of January 1991.
NOTE: Separate Concurrence ofComissioner Miller Attached.
DEAN J. MILLER, PRESIDENT
~+n~- "Ç-~aPERRY SWISH~R, COMMISSIONER~d~
RAPH LSN, COMMISSIONER
ATTEST:~"~~e=L~
A J. WALTERS, SECRETARY
MG:nh/O-1271
ORDER NO. 23520 -28-
..
Co Cot- No. 23520
De J. Mier, Prdent
I write separately only for the purose of fuher commenting on the
question as to the degree of assurance of cost recovery that is properly associated
with the granting of a certifcate of public convenience and necessity.
Durng the coure of this proceeding and its companon càse for ¥Rner
(IPC-E-90-8), we reviewed in detail historical and legal precedents to determe
whether a certificate has a fied legal meaning with respect to assurance of cost
recovery. All parties pointed us to helpful precedents, but in my opinon no clear
answer emerged.
I have thus concluded that a certificate does not have a fied legal
meaning that would be applicable in every circumtance. Rather, the
commssion is free, based on the facts of individual cases, to specify the degree of
assurance of cost recovery that is associated with the granting of a certificate.
In this case the commssion is justified in concluding, as is done in the
body of the order, that there should be a relatively high degree of cost recovery
assurance. Factors that justify this assurance include the non-deferrable nature
of the project, the importance of protecting water rights, short construction time
and proven technology.
By contrast if this case had been an application for authority to
construct a thermal generating facility, the commssion could have properly
concluded that granting a certifcate meant only that the company was granted
authority to commence construction, but that aU future risks were upon the
company and that the company would have the burden of proof to establish the
reasonableness of the investment in a subsequent rate proceeding.
MILLER CONCURRING COMMENT -1-
ORDER NO. 23520
..
In short, the specic facts of this case justify the terms of today's order,
in which I concur. It should be made clear, however, that the commssion has not
adopted for all future cases, a fied or binding defition of the legal effect of a
certificate of public convenience and necessity. That determination should be
based on the facts of specific cases as they are presented to us.
~;FSIDEN
MILLER CONCURRING COMMENT -2-
ORDER NO. 23520