19910122final_order_no_23529.pdf

..Of " lh. secretary~Seí Dat"-
JAN 2 2 1991
BEFORE THE IDAHO PUBLIC UT COMMSSION
IN TH MA1*lER OF TH APCATION )
OF IDAHO POWE COMPAN FOR A )CERTCATE OF PULIC CONVCE )AN NECESSIT FOR TH RATE BASING )OF TH MI HYROELCTC )
PROJECT, ORIN TH ALTEATI, )A DETATION OF EX STATUS )FOR TH MI HYROELECTC )PROJECT. )
)
CAS NO. IPE-90
ORDER NO. 23529
SUY
This is a Final Order granting Idaho Power Company's ("Idaho Power";
"Company") April 25, 1990, Application for a Certificate of Public Convenience
and Necessity for the rebuild of the Milner dam and the construction of
hydroelectric facilities at that site. We recognize that, in the ordinary course of
events, the Company will be allowed to recover its prudently incurred investment
and expenses of the Milner project in its revenue requirement.
On November 27-29, 1990, a formal hearig was conducted concernig
the Company's Application. The parties represented at the hearig included:
Idaho Power Company; the Commssion Staf; Intervenor Industrial Customers
of Idaho Power ("ICIP"), and; Intervenor Idaho Consumer Afairs, Inc. ("ICA").
BACKGROUN
On April 25, 1990, the Idaho Power Company ("Company"; "Idaho
Power") filed an Application for a Certificate of Public Convenience and Necessity
for the ratebasing of the Milner hydroelectric project or, in the alternative, for a
determination of exempt status for the project. Since there have never been
hydroelectric facilities at the Milner dam site, Idaho Power is required by Idaho
ORDER NO. 23529 -1-
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Code § 61-526 to obtain a Certificate of Public Convenience and Necessity for the
project. This statute provides, in pertinent par:
61-526. Cecate of conven and necty.--No ...electrical corroration. ... shall henceforth begin the
construction 0 a... plant . . . without having first obtained
from the commssion a certifcate that the present or future
public convenience and necessity requies or will requie such
construction. . .
Idaho Power has couched its Application in the alternative. That is, it
seeks either a Certificate of Public Convenience and Necessity to construct the
Milner project and include it in ratebase or a detenation by the Commssion
that the project is exempt from reguation so that the Company may sell the
power generated at wholesale rates to outside buyers. The implication of the
issuance of a Certificate has become the paramount legal issue in this case.
On August 22, 1990, a prehearig conference was held in both the
Milner case and its companion case Swan Falls (Case No. IPC-E-90-2). Following
that conference, the parties submitted statements of position on legal and
jurisdictional issues. On October 15, 1990, this Commssion issued Order No.
23380, in both the Swan Falls and Milner cases, setting forth the following three
issues for legal briefing:
1. What is the legal authority for the Commission to
approve ratebasing of the Swan Falls rebuild before the
rebuild is in servce? What is the legal authority for the
Commssion to approve ratebasing for the Milner project
before the project is in servce?
2. What is the legal authority or propriety as a matter of
policy of using avoided costs as a cap for ratebasing the
Swan Falls 'rebuild? What is the legal authority or
propriety as a matter of policy of using avoided costs as a
cap for ratebasing the Milner project?
3. Does the Commssion have authority to declare in theabstract that a certified plant or a plant by statute
exempt from certification may be ratebased without yetknowing the cost of ratebasing the plant and retail
ORDER NO. 23529 -2-
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rates? Does the Commssion have authority to declarein the abstract that a certified plant or a plant by
statute exempt from certification may be excluded from
rate basing for a fixed period in the future without yetknowig the cost of ratebasing and retail rates? Howare the rights of utility investors affected in the implied
interval created by such a decision?
A formal hearing was conducted in the Milner case beginnng on
November 27, 1990, and continuing through November 28, 1990. The Swan Falls
case was taken up for hearing immediately following Milner and continued
through November 29. The parties represented at the Milner hearing included:
Idaho Power Company; Industrial Customers of Idaho Power; Idaho Consumer
Mairs, Inc.; and the Commssion Staff. Afon Energy, Inc. was granted leave to
intervene in Milner and Swan Falls on a limited basis but did not participate in
the hearig. In addition, all of the remainig parties, with the exception of Idaho
Consumer Mfairs, Inc., presented evidence through live testimony at the
hearing. Virtually all of the witnesses for each party testified in both the Milner
and Swan Falls cases.
By and large, Milner and Swan Falls presented identical issues. Those
issues tended to revolve around policy and legal matters rather than techncal
questions of fact. Because of the synonymous nature of the two proceedings, the
Commssion ruled from the bench, at the outset of the Milner hearing, that it
would consider those portions of the transcript for the Milner case that were also
relevant to the Swan Falls case so the same cross-examination would not be
repeated. See Tr. pp. 294-295, Miler.
IDAHO POWE'S CAS
The Milner project was descrbed by Idaho Power in its Application and
through direct testimony as follows:
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(l) The facilities will extend 1.3 miles from Milner dam along the
existing Twn Falls main canal headworks at Milner reservoir on the Snake
River;
(2) Water will be conveyed from these headworks on the south side of
the dam through an enlarged Twin Falls canal and directed into a fore bay and
intake structure, penstock and power houses.
(3) Two power houses, located 1.6 miles downstream from the dam,
will use the drop in elevation from the canal to the river bed;
(4) The turbines used wi be vertical-shaft, Kaplan-type coupled
directly to the generators;
(5) The larger unit will have a rated output of 46,000 kilowatts, a net
head of 150 feet, a discharge of 4,000 CFS and a speed of 200 rpm. The smaller
unit will have an output of 11,500 kw, net head of 157 feet, discharge of 1,000
CFS and speed of 400 rpm. Tr. pp. 39-44.
In addition to the two large turbines, the Company will construct a
power house near the north abutment of Milner dam consisting of a single
propeller turbine that will discharge a constant 200 CFS when in operation with
a net head of 50 feet. The maxmum output will be 770 kw. See Idaho Power
Application, pp. 2-3; Tr. pp. 4-9.
Idaho Power also contends that there is an immediate need for the
rebuild of the Milner dam itself. The Federal Energy Regulatory Commssion's
("FERC") Division of Dam Safety and Inspections has concluded that there is a
high risk of failure at the dam in the event of an earthquake. Such failure, the
Company contends, would be disastrous to the local farm economy, which relies
upon the dam for irrigation. Tr. p. 41.
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Accordig to the Company, the dam itself is cuently owned by the
Twn Falls Canal Company and the Northside Canal Company, Ltd. ("Canal
Companies"). Idaho Power states that the Canal Companies initially received a
license from the FERC to rebuild the dam and construct a single hydroelectric
unit rated at 43,650 kw. Idaho Power was later added as a co-licensee by FERC
and the project design was revised as discussed herein. Tr. p. 43. The Company
asserts that the timing of the Milner project cannot be deferred.
The Company's estimated cost of rebuildig the dam is $11,700,000.
Idaho Power states that it has agreed with the Canal Companies to provide
interim financing to rebuild the dam. The Canal Companies have allegedly
agreed to repay this initial loan, with interest, from fuds obtained elsewhere at
or near the time the plant and dam are completed. The Company will guarantee
payment of the complete debt servce on this permanent loan through a base
royalty equal to the original present value of $5,638,000 plus one-half the total
cost of repairing the dam over the term of the FERC license. Additionally, the
Canal Companies will receive an incentive royalty whenever the annual project
generation exceeds the base of 142,000 megawatt hours. The Company proposes
that if the project is not recognzed for revenue requirement purposes by the
Commssion, the Canal Companies may then exchange the fixed royalty option
for 50% of the net benefits derived from off-system sales of the power aftr the
deduction of Idaho Power's costs including a return on equity. Tr. pp. 95-96.
In response to cross-examination by ICIP, Idaho Power witness Lamont
Keen stated that the Company's agreement to guarantee payment of debt servce
on the Canal Companies' permanent financing for dam repairs was to facilitate
their obtainig financing under more favorable terms. Keen contends that the
ORDER NO. 23529 -5-
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only risk that Idaho Power has in this regard is that the royalty payments Idaho
Power agreed to make to the Canal Companies wil not equal the amount of debt
servce, and the Canal Companies fail to cover the balance. Keen perceives this
as a "pretty small risk." Tr. pp. 106-107
In its Application, the Company has made a commtment estimate .for, .the total cost of the Milner project of $60,334,000 at completion in 1992, with
dam reconstruction costing an additional $11,700,000. The Company has
included an additional 5% contingency margin for construction of the plant for a
total commtment estimate of $63,350,600. Tr. p. 49. The combined installed
turbine capacity will be 58,300 kw.
Accordig to the Company's calculations, the cost per kilowatt hour for
the Milner project would range from a maximum of 52.93 mils per kwh based
upon total cost of the facilities of $63,350,600, 60 years of water data and a 50
year levelized cost to 37.80 mills per kwh based upon total facilities cost of
$60,334,000, a cost of capital of 10.85%, twenty years of water data and a 50 year
levelized cost. Tr. p. 97. The Company's current avoided cost rates for projects
on line in 1992 are:
20 year projects: 52.19 mills kwh
35 year projects: 57.53 mills kwh
Idaho Power has voluntarily agreed to a cap of $63,350,700 as the
maxmum amount that may be included in the Company's rate base should the
Commssion choose to ratebase Milner. However, this commtment estimate
could be increased to account for documented changed in escalation rates or
scope. In particular, (1) force majeure or acts of God, (2) design optimiation
changes for increasing energy that more than offset the increase in initial
investment, and (3) foundation or site conditions significantly more expensive
than indicated by the Company's exploratory drilling would be reasons for going
above the ceiling.
ORDER NO. 23529 -6-
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In cross-examination by Staff, Company witness Baggs was not very
receptive to the concept of limiting the value of Milner for rate basing to
comparable avoided cost rates. Tr. p. 152
In the event that the Commssion chooses not to ratebase Milner, the
Company seeks a determiation that Milner should have exempt status for
revenue requirement and power supply purposes for a period of twenty years to
permit Idaho Power to enter into a long-term sale of the energy to another
utility. Tr. pp. 49-51.
The Company proposes that two years prior to the expiration of the
order determining exempt status, it will apply for a redetermation of the status
of the exempted Miner plant. The Commssion would, within one year, issue a
order either continuing the exempt status or rate basing the plant. Id.
If the Commssion chose to ratebase Milner, the Company proposes, it
should issue a valuation order within three months. The value of the plant
would be based upon the new reproduction cost, less depreciation. Id.
In cross-examination, Idaho Power witness Packwood indicated the
Company's preference for including Milner in the Company's resource stack as
opposed to developing it as an independent power producer. Packwood's
rationale is that the Company desires to presere a unique resource for the
benefit of the State of Idaho. The Company, through its alternative proposal of
exemption, seeks a mechanism for capturing and preservng Idaho's hydro
resources even though they are not currently needed on Idaho Power's system.
Tr. pp. 75-79. Packwood would prefer the issuance of a certificate for the present
public convenience and necessity. Tr. p. 79.
In cross-examination, Company witness Keen identifed two possible
methods by which Idaho Power would operate Milner under a Certificate of
ORDER NO. 23529 -7-
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Exemption. One would be to place into the hands of a subsidiary for a period of
time, and treat it as basically an "unreguated independent power project." Tr.
pp. 108-109. The other method would be to treat it as a reguated project by the
FERC or, perhaps, the Oregon Commssion. Tr. p. 109.
Keen had no objection to the possibility of including Milner in -the
Company's rate base, but yet allow Idaho Power to sell the power under contract
on the open market. Tr. p. 111.
COMMSSON STAF
The Commssion Staff made its own analysis of the estimated cost of
the Milner project. Rather than estimating the construction costs of the project,
Staff accepted Idaho Power's proposed cap on capital costs of $63,350,600 as a
maxmum or worst case cost. From that, Staff estimated the 46 year levelized
cost to ratepayers for the Milner project of $62.73 millslh compared with the
comparable estimated cost by the Company of $52.93 millslKh. Tr. p. 300.
The differences between the estimates of Staff and the Company
regarding the cost of Milner can be explained as follows. First, Staff did not
consider the case of 20 water years as used by Idaho Power in calculating the
estimated cost of $37.80 millslK. Staffs opinion is that 20 water years, while
a valuable predictor of the flow immediately following a particular period, is
inappropriate for long-term analysis such as determining the value of generation
from a resource with a 46 year life. The average of stream flows over sixty years
is lower than over the twenty years used by Idaho Power which reduces the
estimate of annual average generation and increases estimates of energy costs.
Tr. pp. 300-301.
ORDER NO. 23529 -8-
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Staff witness Faull's analysis of the Milner costs also used capital
structure and rates from the recent avoided cost case (Case No. IPC-E..89-11;
Order No. 23357) which resulted in use of a weighted cost of capital of 11.447%
(as opposed to the Company's use of a 10.857% cost).
Staff also used an estimated annual operations and maintenance cost of
$815,780; annual average generation for the Milner project of $186,395 mwh per
year (as indicated in the Company's first FERC license application); an escalation
rate for determning cost of resources of 4.5% per year, and; a property tax rate
of 0.7381%.
According to Order No. 23357, the maximum avoided cost rate available
to qualifyng facilities purchasing from Idaho Power and coming on line in 1992
is $57.53 millslKh. In spite of this, Faull believes that its estiated cost for
the Milner project of $62.73 millslKh stil indicates that Milner is a
cost-effective project. For at least three reasons, the published avoided cost rates
are inappropriate for direct comparison to a cost estimate of a specific project.
First, the computer model that computes the published avoided cost rates
assumes a "first deficit year" (i.e., year of new resource need) of 1993 for Idaho
Power. Staff believes, however, that the correct first deficit year should have
been 1994.
Second, the published avoided cost rates include an adjustable portion
of $8.78 milslh that will be adjusted in the future based on actual operating
costs of the Colstrip coal-fired generating plant. For direct comparison to an
actual project, the adjustable portion should be assumed to escalate at the same
rate as comparable costs associated with the actual project.
ORDER NO. 23529 -9-
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Third, even as adjusted above, Staff argues that the published avoided
cost rates apply only to projects with a twenty year avaiability to Idaho Power.
Although there have been numerous arguments made about the unfairness of
limiting QF contracts and their rates to twenty years, nonetheless, Staff believes
that from a ratepayer's viewpoint, Idaho Power's project should be compared to
46 years of avoidable costs. That is, when Idaho Power Company builds, a
resource with a 46-year life, ratepayers can reasonably expect that they will have
access to the energy from that resource for the full 46 years so other resource
costs can be avoided for that time period. Taking into account the foregoing
adjustments as well as the seasonal weighting of avoided costs reduces the value
of the avoided costs applicable to Milner to $61.35 mislK.
Thus, the Miler plant, with an estimated cost of $62.73 millslh is
cost effective within reasonable limits of estimating accuracy. (62.73 + 61.73 =
102.2%). Faull would not consider the Milner project cost effective when
compared to 20 year avoided cost rates in effect before Order No. 23357 if the
Commssion so ordered. Tr. pp. 308. Under those cicumstances, Faull believes
the Company should be limited in its recovery to an accurate Commssion
determined comparable avoided cost rate. Tr. p. 308. Further, the Commssion
could impute additional conservation or demand side resources to Idaho Power in
evaluating the need for a supply-side resource, thereby making the project less
attractive. Tr. pp. 309-310.
In addition to its analysis of the cost effectiveness of the Milner project,
Faull also provided an engineerig opinion relative to whether Idaho Power has
provided the most cost effective development practicable for this resource. Faull
does not believe that Idaho Power has made the same level of project optimizing
effort that one would find in a QF development. First, Faull considers Idaho
ORDER NO. 23529 -10-
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Power's royalty agreement with the Canal Companies as a "weakness." Even
though the irrgators were faced with mandatory dam repairs and a hydroelectrc
project that could not be made cost effective under avoided cost rates extant at
the time, the final royalty agreement not only assures the Canal Companies that
they will recover all of their costs of dam repairs, it also assures them of a
substantial profit on their investment. Faul believes that the irrigators would
have ended up with only partial reimbursement for their dam costs, not a profit,
if dealing with a QF developer. Tr. pp. 312-313.
Second, Faull believes that the Miler plant has been oversized for the
water flows at the site. The overall average capacity factor of the project is less
than 36% and the average estimated capacity factor in the most productive
month (December) is less than 60%. The standard in the industry is typically for
overall capacity factors between 45% and 65%. Tr. p. 313.
Finally, Staff takes exception to Idaho Power's use of the standard firm
bid process to procue equipment and construction servces rather than the more
cost effective request for proposals ("RFP") and negotiation process. Under the
Company's method, the design engieer is constrained to "guessing" about the
best combination of size, arrangement and timig with minimal input from
suppliers whereas in a competitively negotiated contract based on a request for
proposals, the suppliers are challenged to provide their most innovative
combinations with fritful give-and-take discussions between the suppliers,
owners and the engineer. RFPs also reduce the probability of suppliers receiving
cost overrn payments for extra work, unexpected conditions and ambiguous
contract language. Tr. pp. 313-314.
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Idaho Power rebuts that the use of the standard firm bid process has
the following advantages:
(1) Project design can be tailored to the owners needs;
(2) Contingencies to cover development risk are not requiredbecause the purchase and contracting is phased to the
design progress;
(3) Developer mark ups on equipment purchased from the
manufacturers are elimiated;
(4) The owner retains control of the combination and quality
of equipment purchased;
(5) Changes to the project can be made based on siteconditions without havig to renegotiate the project-
development package, and;
(6) Proposals received for the development or any part of the
package are competitive proposals where bidders haveeliminated contingency amounts to cover later
negotiation.
Tr. pp. 57-59.
Staff concedes that Idaho Power's royalty agreement with the Canal
Companies is not entirely disadvantageous. The royalty agreement has two
components, a base royalty and an incentive royalty. The base royalty assures
the irrigators of recovering nearly all of the costs of repairng the dam. This is
the component which Staff feels is excessive. The incentive royalty, on the other
hand is very beneficial to ratepayers. It provides the irrgators with a strong
financial incentive to limit their water use during good years and even provides
some incentive for irrigation effciency during moderate water years. Water that
is not consumed by the irrgators has a secondary value as it passes through
turbines at Milner and other downstream plants. Tr. pp. 314-315.
In summary, Staff believes that the Commssion should grant a
certifcate for the present public convenience and necessity for the Milner plant.
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Faull's criticisms of the Company's management practices do not constitute
evidence of imprudent management. Faull believes, however, that the Company
should be held to the standard of avoided cost in determning the ratemaking
allow ability of new resource costs and should be required to fully justify its
management and construction decsions prior to such costs being allowed for
ratemakig purposes. Staff futher asserts that the issuance of a certificate
should not imply that all costs incurred in developing the project are inherently
prudent. The Commssion, Staff believes, must review all costs incurred at a
later date and determie at that time whether Idaho Power's execution of the
project was prudent in light of the generally accepted standards of the
hydroelectric construction industry. Tr. p. 317.
Faull rejected the Company's alternative of exempting the Milner
project from regulation for a twenty year period. His rationale was that, since
the project is cost effective under comparable avoided cost rates, it should be
included in the Company's resource stack at this time. Tr. pp. 317-318.
Even if estimated project costs exceeded avoided costs, Faull believes
that the concept of an exempt status for Milner presents certain problems and
risks. For example, it would be extremely diffcult to establish a completely
independent, non-reguated subsidiary with clear controls to assure that there
can be no cross-subsidization between the subsidiary and the regulated utility~
Tr. p. 318-319.
Staf witness Stephanie Miller testified that, based upon the analysis of
Tom Faull, the Commssion should grant a certificate for the present convenience
and necessity for Milner. Tr. p. 405. She argues that the issuance of a certificate
does not guarantee that the amount of $63,350,600 will necessarily be included
in ratebase. If the Company is able to construct the project for less,
ORDER NO. 23529 -13-
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it would, of course, only be entitled to rate base that amount. Moreover, only
construction costs found prudent by the Commssion will be allowed into
ratebase. Tr. pp. 405-407.
Miller argues that the granting of a certifcate simply means that the
Company may proceed with construction with the understanding that the plant
will ordinarly be included in ratebase if major changes in either the cost of the
project or the environment in which the Company operates do not occu between
granting the certifcate and the completion of the project. Id.
From a policy standpoint, Idaho Power should be reminded that a
certificate is not an order to complete a project. It is authority to proceed with a
project, not a guarantee that it will be ratebased. If major project scope or
escalation changes do occur, or if the Company's projected power needs change,
the Company should use its good management judgment to decide w.hether to
proceed. The filing of quarterly construction reports keep the Commssion and
Staff apprised about progress on the project. The Commssion is not in the
business of managing the Company's construction program, however. The
Company should not be insulated from charges of mismanagement if it has
completed a certificated plant under circumstances that have changed since the
issuance of the certificate that would warrant some type of mitigating efforts on
the part of the Company. Id.
By the same token, the Company should not be asked to bear all costs
of the plant on its own if there are changed circumstances and the Company
reacts prudently to those changes. Id.
Miller feels that Idaho Power's proposed alternative for exempt status
for the Milner plant is new and innovative. It may serve as a vehicle for allowing
the Company to develop future resources within its service territory before they
ORDER NO. 23529 -14-
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are captured by out of state interests and even though the resources are not
curently needed on the Company's system, e..g., Lucky peak dam. Tr. pp.
407-408.
Miller does have several concerns, however, about the manner in which
an exempt status would operate. First, she feels that the Commssion should not
commt, at this time, to any methodology of valuing the new plant when it is put
into ratebase at the expiration of the exempt period. She is particularly
concerned about the use of reproduction cost new less depreciation. The Idaho
Commssion has generally subscrbed to the "origial cost" theory of ratemaking
in allowing plant into ratebase at the time it is devoted to public service. The use
of reproduction cost will, in all likelihood, produce a price that wil not reflect the
true value of the plant to be acquied by ratepayers when it is dedicated to their
servce. Determining reproduction costs twenty years into the future ignores
contemporary products and new technologies that may be available twenty years
from now. Not only might the physical plant be quite different, but labor and
construction methods used to construct a plant might also have changed
significantly. This may render the plant obsolete, requie increased maintenance
expense and would not be the most valuable plant for generating power because
technological improvements had resulted in reduced costs, better designs and
enhanced ability to provide service. Tr. pp. 408-412.
In the event that the Commssion chose the alternative of exempting
Milner from regulation, Miller believes that the Commssion's order could
contain the general statement that the Commssion will determie the value of
the plant for ratemaking purposes at the time it is dedicated to Idaho
ratepayers. Tr. p. 412.
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As an alternative, Miller proposes to bring the plant into ratebase at
original cost less deprecation accred using the annuity method. The annuity
method levelizes the capital costs of a project over the project life by applying low
depreciation rates in early years when required return is high and high
depreciation in later years when required return is lower. This approach would
have the advantage of relying on verifiable booked costs but would recognze that
any power sale made by the Company would probably be based on the levelized
cost of the project. Tr. pp. 412-413.
Even if the project does not appear to be curently cost effective to
Idaho Power's customers, but appears to be a good long term resource, Miller still
recommends approval of a certificate of public convenience and necessity by the
Commssion. Her rationale is that if someone other than Idaho Power builds the
plant, the Company's ratepayers will have no option on the facility and any
option is better than no option at all. Tr. p. 413.
Finally, Miller has concerns over Idaho Power's operation of the Milner
plant in the event that the Commssion chooses to exempt the plant from
regulation and it is operated through a subsidiary. Miller's concern, like that of
Staff witness Faull, is that there must be no subsidization of the subsidiary by
the utility and its ratepayers. At a minimum, the Staff would have to have
access to the power sales contract signed by the subsidiary to determine exactly
what the conditions of the power sales contracts are. The Staff would also
require access to the books of the subsidiary to trace transactions. Even with
careful segregation of costs and cost allocations between the subsidiary and the
utility, there would still be aspects of the relationship that would be
unquantifiable but that might very well result in higher prices obtainable by the
subsidiary for its power. Miller suggests that the Commssion could incorporate
ORDER NO. 23529 -16-
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any necessary language into the certificate of convenience and necessity which
may be issued for the future and not merely for the present. Tr. pp. 313-415.
In cross-examiation by Idaho Power, Miller testified that a
particularly strong case could be made for valuing Milner at original cost, less
depreciation, if it were given exempt status and then operated under the FERC
or Oregon jurisdictions, as suggested by Idaho Power witness Keen. Her
rationale is that, under this scenario, the Company would have been recovering a
full return on its investment, plus depreciation, in the initial twenty years. Tr.
pp. 430-432.
The Staffs final witness was Bil Eastlake, an economist. He
addressed policy considerations that the. Commssion may consider in reaching
its decision in both the Milner and Swan Falls cases. According to Eastlake,
ratepayers are not buyig a simple, undifferentiated product (electrical
generation) that is so standard that the only important factor in the purchase
decision is price. The projected costs from the Milner project are approximately
those of comparable avoided costs for purchase from cogenerators and small
power producers. Idaho's hydroelectric base has allowed Idaho Power and other
utilities serving the state to remain among the lowest cost utilities in the
country. Where possible, it is desirable to keep local control of resources like low
cost hydropower so that their benefits are not reaped by utilities and ratepayers
out of state.
The State Energy Plan places a high priority on conservation and
renewables, with emphasis on improving existing resources such as retrofitting
dams with power generation facilities. The plan does not have the force of law
but the resource policy that developed it clearly indicated a preference
ORDER NO. 23529 -17-
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for getting more hydroelectric power at existing dams. The same preference for
hydroelectricity should hold today, nearly a decade after the energy plan was
established in February 1982.
In addition, policy 1C of the State Water Plan which does have the force
of law because it was approved by the Legislature, designates non-consumptive, .uses of water for hydrogeneration as beneficiaL. This is a striking departure from '
previous narrow defintions of beneficial use that emphasized removal of water
from the river, usually for irrgation.
lNUST CUSTMERS OF IDAHO POWE (ICIP)
Dr. Readig believes that the Company provided little evidence
concerning the cost effectiveness of the Milner project or showing that the project
is the least cost alternative available to ratepayers. Dr. Readig testified that if
the Commssion grants the Company's request for pre-approval for ratebase
treatment for Milner , it will effectively foreclose its ability to examine the
prudency of the Company's decision making between the time reconstruction
begins and the time the project is completed. The Company's management will
be unconstrained by changes in load, technological progress or economic
feasibility of the plant. Idaho Power has no right to automatic inclusion of the
project in ratebase simply because it follows reasonable and prudent construction
practices. This ignores the Company's management obligations in other areas.
Dr. Reading characterized the Company's proposed cap of a
"commitment estimate" as superficially appealing yet hollow because
adjustments for documented changes in escalation rates or scope caused by (1)
force majeure or Acts of God, (2) design optimization for increased energy, or (3)
foundation or site conditions significantly more expensive than indicated
ORDER NO. 23529 -18-
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by exploratory drilling are not covered by the cap. The commtment estimate,
therefore, is not an upper limit of the project's cost that could be included in
ratebase.
Dr. Reading argues the Company's proposal assigns most of the risk of
constructing the Miner project to the Company's ratepayers while elimiating
most of the risk to its 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 disallowed if investment exceeded the cap.
Dr. Reading contended that reduced equity costs are associated with
reduced risk. Therefore, if the Company's true equity risk for a pre-approved
plant is 10% (1 percentage point above the risk-free cost of capital), the
Company's overall equity cost for all of its plant should be reduced about 25 basis
points.
Although Dr. Reading believed it is inappropriate to determne
ratemakig methods to be used for a plant not yet constructed, he noted that
traditional ratebaselrate of return regulation is not the only option. For example,
the Company's avoided costs could also be considered as a fair rate cap for
ratepayer's costs. Fair market value of the plant and the cost of alternative
forms of reliable power could also be considered.
In addition, Dr. Readig finds the Company's alternative proposal for
exemption of Milner from regulation to be troublesome. He questions the
integrty of the Company's proposal since the Company does not make the same
offer for the Swan Falls project for which the estimated cost per kilowatt is
nearly triple. Idaho Power and its stockholders would benefit from the economics
associated with a deregulated Milner, while ratepayers would defray the relative
ORDER NO. 23529 -19-
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high costs of Swan Falls. This, Reading argues, may be good private business
but is not good public policy. Tr. pp. 213-215.
Reading also objects to the Company's proposed methodology for
valuing the Milner project at the end of the exemption period. Adoption by the
Commssion of the Company's proposal would be tantamount to guaranteeing. the
Company's shareholders a substantial gain on the project at the expense of
ratepayers. Reading recommends that if the Commssion decdes to exempt
Milner, it should set the buy-back rate at the lesser of the original cost less
depreciation or fair market value. Tr. pp. 214-215.
Reading's recommendations and conclusions can be summarized as
follows. Reading rejects the Company's interpretation of a certificate of public
convenience and necessity, that a certificate means that the Company's decision
to construct the Milner project is reasonable and prudent and in the public
interest. To the contrary, the Company's mere use of reasonable and prudent
construction practices, once granted a certificate, does not guarantee inclusion of
the Milner project in the Company's ratebase. Such an interpretation is in
contradiction with the Commssion's decision concernig Valmy II. It would
require the Commssion to ignore many relevant circumstances that would
otherwise force the Company to alter its initial course of action. The Commssion
would be barred from addressing the prudence of the Company's management
decision making process during the construction. Tr. pp. 218-223.
If the Commssion does adopt the Company's interpretation of a
certificate, then it should reject the Company's Application on the grounds that it
is deficient. The Company's Application has not shown that the project is
economical, that it is the least cost alternative or that it is even needed. Id.
ORDER NO. 23529 -20-
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The Company's proffered cap on construction costs is an inadequate
consideration for pre-approval for ratebase. The escalation and scope
reservations attached to the cap render it without value. Id.
The Company's proposal saddles ratepayers with most of the risks of
construction. Despite this, the Company has not offered to lower its cost of
equity. If the Commssion adopts the Company's proposal to pre-approve
ratebase for Milner, it should adjust the Company's cost of equity downward to
be consistent with its reduced risk. I d.
The Commssion should also reject the Company's alternative
dereguation proposaL. The Company has not shown this to be in the public
interest. The capital cost of the Company's Swan Falls project is almost three
times higher than Milner. In spite of this, the Company does not offer an
alternative dereguation proposal for Swan Falls. Furthermore, the Company's
unfair buy-back proposal almost guarantees stockholders a windfall gain at the
expense of ratepayers. If the Commssion is inclined to adopt the Company's
proposal, then it should set the buy-back rate at the lesser of oiiginal cost less
depreciation or fair market value. Id.
Finally, Reading urges the Commssion to consider avoided costs as a
reasonable upper limit when valuing Milner for ratebase treatment, if that
occurs. Id.
IDAHO CONSU AFAI, INC. (ICA)
ICA participated in cross-examination of other parties witnesses during
the hearing but did not present any witnesses of its own. Pursuant to agreement
reached at the hearing, ICA filed written comments on December 5,1990.
ICA stated its position that conservation should still be the preferred
source of additional generating capacity. ICA was not convinced, however, that
ORDER NO. 23529 -21-
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conservation should be the sole new source of Idaho Power's additional
generating capacity. ICA believed that hydroelectric generation and fish and
wildlife protection and enhancement are beneficial uses of water. ICA believed
that hydroelectric projects, when constructed as upgrades, are reasonably
environmentally acceptable. Milner and Swan Falls should not become lost
opportunity for the needs of Idaho and the Pacific Northwest. In addition,
hydroelectric projects operating a maintenance costs are far less than thermal
plants, they do not contribute to acid rain, air pollution, fly ash or waster
disposal problems, their fuel (water) is considerably cheaper 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
particularly because the Canadian share of power from the Columbia River 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.
With regard to lost opportunities, Idaho Power should capture the
benefits of the Milner and Swan Falls projects now to secure 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 ratebased until it becomes used and
useful for Idaho Power's ratepayers. The crossover point for Idaho Power's need
for new generation is approximately 1998-1999, according to Idaho Power
testimony in the avoided cost case.
AFN ENRGY, INC. ("Afn")
Afon did not participate in the Milner hearing. Its sole act in this case
was the filing of written comments on August 31,1990.
ORDER NO. 23529 -22-
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Essentially, Afn states that it has excess capacity and energy
available to sell to Idaho power and that it wants a level playing field on which it
has the same ability to provide the Company's ratepayers with energy measured
against a 20-year contract, cash escrow guaranteeing performance and other
provisions applying to QF's.
Afon argues that Idaho Power's proposed front-end loading of costs
including depreciation and return on equity is not the least cost alternative for
new generation when compared with power purchased from a PURPA QF at
avoided cost. If Idaho Power contends that Milner presents a unique benefit,
then its shareholders should pay for such a benefit, and to the ratepayers
through higher energy costs.
PULIC TEONY
The sole public witness to testify at the hearig was DeWitt Moss,
Director of the North Side Canal Company. Mr. Moss explained that revenues to
the Canal Companies from Idaho Power wil provide for rehabilitation of the
dam, which serves 500,000 acres of farm land.
On examination by Staff, Mr. Moss stated that the Canal Companies
could not obtain fmancing for the needed rebuild of Milner without Idaho Power's
assistance. Tr. pp. 161-164. Moss also believed the incentive royalty would help
to foster conservative water consumption by the irrgators. Tr. p. 165.
COMMSSON DECISION
WE FI:
Certfúæ of Publu: Conveni and Necessit
The Company's cost estimate, as well as Staffs independent cost
analysis, indicate that the Milner project will be cost effective when compared
with comparable avoided cost rates. No evidence was submitted to the contrary.
ORDER NO. 23529 -23-
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This fact alone might be suffcient justifcation for this Commssion to issue a
certificate of public convenience and necessity for construction of Milner as Idaho
Power approaches load resource balance.
There are other attributes or benefits, however, that are somewhat
unique to Milner. Staff witness Eastlake highlghted the State of Idaho's
interest in developing its hydro resources; particularly those that can be obtained
through retrofit of currently existing facilities. The rationale for this is quite
obvious. Snake River hydro has graced Idaho Power's ratepayers with some of
the cheapest power in the nation. A resource such as Milner is especially
appealing where it is relatively envionmentally benign. The retrofitting of a
currently existing dam certainly has less of an adverse effect on the environment
than construction of a new dam or of a coal-fired or nuclear plant. There is no
doubt in our minds that Milner represents a rare opportunity for the state of
Idaho to obtain relatively inexpensive power with little impact on the currently
existing environment.
Regardless of whether Milner is "non-deferrable" in the true sense of
the word, it is a resource that we feel that Idaho Power should be allowed to
capture for the benefit of the people of Idaho. Such resources are certainly
desirable to out-of-state utilities and developers who, quite likely, would develop
these sites if Idaho Power does not.
Regarding Idaho Power's agreement with the canal companies, we find
that the bargain struck appears beneficial to both parties. It is not unreasonable
for Idaho Power to enter into this type of an arrangement in order to capture the
opportunity to develop a resource such as Milner.
Based upon the foregoing, we fmd that the Company shall be issued a
certificate for the present public convenience and necessity to develop the Milner
project. Along these lines, we note that the Company has invested millions of
ORDER NO. 23529 -24-
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dollars in this project prior to obtaining this certifcate. Idaho Code § 61-526
clearly requires the Company to obtain a certifcate of public convenience and
necessity prior to beging the construction of a plant. In future cases, Idaho
Power should obtain its certifcate prior to incurring investment costs beyond the
evaluation stage.
Reve Reuirme
Idaho Power structured its Application such that, implicit in the
issuance of a certificate for public convenience and necessity by this Commssion,
was the understanding that all investment prudently incured by Idaho Power in
Milner would be included in the Company's rate base.
The Commssion Staff and ICIP, on the other hand, assert that it is
inappropriate to assure the Company, in advance, that its investment in Milner
will be ratebased. This, they argue, eliminates all the risks of constructing the
project for the Company's shareholders and places those risks on the ratepayers.
This posturing by the paries defmed the paramount legal issue in this
case: "What is the import of a certificate of public convenience and necessity?"
We are not compelled, practically or theoretically, to render a decision on this
issue in the context framed by the parties. Indeed, it would be unwise to attempt
a "bright line" definition of the rate implications of a certificate of public
convenience and necessity. Idaho Power's projects can and do vary dramatically.
The risks inherent in constructing a coal-fired or nuclear facility are greater in
magnitude than those involved in construction of Snake River hydro. The latter,
to say the least, has a track record of proven and reliable technology. The
construction time for a project such as Milner is quite brief relative to
construction of other power plants. Extraordinary changes in circumtances are
ORDER NO. 23529 -25-
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less likely to occur in a shorter period of time. In short, Milner does not take us
on a flight into the unknown. For futher discussion, see Order No. 23520 issued
in Case No. IPC-E-90-2 (Swan Falls Case).
Therefore, we can offer the Company greater assurances of some form
of cost recovery when issuig a certificate for a project such as Miner than we
could for, perhaps, a coal or nuclear facility. This is not to say, however, that we
can guarantee Idaho Power that all of its investment in Milner will be
ratebased. Changes in the physical, political, and technological envions in
which the Company operates could possible dictate that design modications be
made or that construction ceases completely. The Company is obligated to
exercise good management judgment in this regard.
Therefore, the parties are instrcted that, in the ordinar course of
events, the Company may expect its investment in the Milner project to be
recognized in its revenue requirement, barrng unforeseen circumstances of a
kind uncharacteristic of hydroelectric facilities. Further, the Company's
incurrence of costs for prelimiary site and engineering work through its
commtment estimate is reasonable and prudent and will later be recognzed in
revenue requirement.
Ra ofRem
ICIP recommended that if the Commssion acknowledged in this Order
that the Company's investment in the Milner project should be recogned in its
revenue requirement, then its equity return should be adjusted as well. We
disagree.
Accordingly, we find that Idaho Power's rate of return should not be
reduced from what it otherwise would be by our acknowledgment that its
ORDER NO. 23529 -26-
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investment in the Milner hydroelectric facility will be recognized in revenue
requirement barrng extraordinary circumstances.
Certfi of Exemptin
Regarding the Company's alternative proposal for a certificate of
exemption, we believe that the lack of a statutory basis for the issuance of a
certificate of exemption does not preclude this Commssion from issuing the
functional equivalent through the issuance of a certificate for the future public
convenience and necessity, as authorized pursuant to Idaho Code § 61-526.
Because of our decision to issue a certificate for the present convenience
and necessity, it is not necessary to resolve all the issues raised by the
Company's alternative proposal. We express our concerns how such an
arrangement would operate. Specifically, we echo the concerns of Staff about the
manner in which the plant would be valued when it was dedicated to the
Company's ratepayers in the future. We agree with Staff witness Miller that the
use of reproduction cost is fraught with uncertainties and vagaries. It also
appears that it would be diffcult to devise a depreciation method that would be
fair to both the Company and its ratepayers.
We are also concerned with the potential for cross-subsidization
between the utility and the entity operating the plant under an exempt status.
These concerns would have to be worked out through innovative and cooperative
efforts by the Company and the Commssion Staff.
OR DE R
IT is THEREFORE ORDERED that the Idaho Power Company is
granted a Certificate for the present public convenience and necessity for the
Milner hydroelectric facility and is authorized to proceed with construction on
that facility.
ORDER NO. 23529 -27-
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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-90-8 may petition for reconsideration within twenty-one
(21) days of the servce 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-90-8. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See
Idaho Code § 61-626.
DONE by Order of the Idaho Public Utilities Commssion at Boise,
Idaho, this /9U day of January 1991.
~ß-~ td~PH LSON, COMMISSIONER
ATlST: £.
~;'7'WM.~TARY
BP:nh/O-1275
ORDER NO. 23529 -28-