19901109SMiller Direct.pdf

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BEFORE TH IDAHO PUBLIC UT COMMSSION
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) CAS NO. IP-E-90
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DntCT TEONY OF STPH Mß.f.E'R
IDAHO PUC UT COMMION
NOVER 9, 199
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Q.Please state your name and business
address for the record.
A.My name is Stephanie Miller. My
business address is 472 West Washington Street, Boise,
Idaho.
Q.By whom are you employed and in what
capaci ty?
A.I am employed by the Idaho Public
utilities Commission as Director of the Utilities
Division.
Q.What is the purpose of your testimony in
this proceeding?
A.The general purpose of my testimony is
to address the two alternatives Idaho Power Company has
proposed in this case. Specifically, I will recommend
that the Commission issue a certificate for the present
convenience and necess i ty for the Hi Iner Proj ect . I
will also address the proposed certificate of exemption
alternative in the event the Commission should consider
this option.
Q.Did Idaho Power express a preference for
one alternative over the other in its application?
A.No, it did not. It did not state which
alternative the Company would prefer. Neither did it
25 explain why either alternative would be a benefit to
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Idaho ratepayers or whether one alternative was better
for ratepayers than the other.
Q.Did the Staff investigate the reasonable-
ness of Idaho Power's commi tment estimate for the
Mi Iner Proj ect?
A.Yes. Staff auditor Jack Taylor reviewed
the information upon which the Company relied for its
commi tment estimate. He concluded that the manner in
which the estimate was made was reasonable and that
with careful management, the Company should be able to
bring the proj ect on line at or below the $63,350,600
commi tment.
Q.Mr. Faull has tested the cost-effective-
ness of the Milner Project by comparing its cost to
avoided cost rates of fered to cogenerators and sma 1 1
power producers. How do the rates customers would pay
if the plant is rate based at $63,350,600 compare to
the hypothetical avoided cost rates calculated by
Mr. Faull?
A.Over the 46-year life of the project
ratepayers would pay only slightly more for power from
the Milner Project than for comparable power from
cogenerators or small power producers as estimated by
Mr. Faull. However, under rate of return regulation
customers would pay considerably more in the early
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years of the plant's lite than with an avoided-cost-
based contract.
There are some basic differences between
the way costs are recovered from customers through
traditional ratemaking and through contracts using
avoided cost rates. Avoided cost rates are levelized
over the life of the power contract and increase only
slightly as operating and maintenance expenses increase
(or, theoret ica 1 ly, decrease slight ly as O&M expenses
decrease. The capi tal costs associated with a rate-
based plant are not levelized; they are higher in early
years and lower in later years as the plant is
depreciated. This is especially true for hydroelectric
facilities with their high construction costs and
relatively lower operat ing and maintenance expenses
over the life of the plant.
Mr. Faull has calculated a levelized
cost for the Mi Iner Proj ect of 62.73 mi Ils per kwh.
Using Mr. Faull's assumptions, first year costs of the
project under traditional regulation would be 74.14
mills per kwh.
If the power generated at the Milner
Project could be sold at an average rate of 33 mills
per kwh, the Company would need a rate increase from
its customers of $7.7 million, or approximately 1.9%,
IPC-E-90-811/9/90 MILLER (Di)Staff 3
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as a result of including the proj ect in rate base. If
the Company were to buy a comparable amount of power at
the hypothetical contract rate calculated by Mr. Faull
of 61.35 mills per kwh from a cogenerator or small
power producer and receive the same 33 mills for the
power, the net increase to ratepayers would be $5.3
mi Ilion, or approximately 1.3\. i f the power were not
needed and had to be sold strictly on the secondary
market, the increase experienced by ratepayers would be
larger. At a secondary sales price of 20 mills, the
increase would be 2.4% wi th rate basing and 1.9% wi th a
power supply contract.
After 7 years, the average cost of the
power would be less wi th the plant in rate base (64.50
mills per kwh) than with a levelized power supply
contract including an adjustable portion that had
escalated, increasing the rate to 65.03 mi 1 Is per kwh.
Q.How firm are these numbers?
A.These numbers are estimates to help the
Commission make a decision on whether it is reasonable
to grant Idaho Power a Certificate of Convenience and
Necessity. The Company's commitment estimate is just
that, an estimate. Mr. Faull's hypothetical avoided
cost rate is his estimate of a 46-year avoided cost
rate. The Commission has not approved such a rate.
IPC-E-90-8ll/9/90 MILLER (Di)Staff 4
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Q.Based on this information, should the
Commission grant Idaho Power a Certificate of
Convenience and Necessity for the Mi lner Proj ect?
A.Based on this showing that the cost of
the Milner Project is approximately the same as avoided
cost rates and other policy considerations discussed by
Mr. Eastlake, I believe the Commission should grant a
certificate for the present convenience and necessi ty.
Q.Does your recommendation to the
Commission mean that the Milner Project should
inevi tably be included in rate base at $63,350,600 or
more if escalation and scope changes occur?
A.No, it does not. If the Company is able
to construct the project for less than the commitment
estimate it would enter rate base at the lower amount.
Also, whether the cost is $63,350,000 or a number lower
or higher, only construction costs found prudent by the
Commission will enter rate base.
The granting of a certificate simply
means that the Company may proceed wi th construction
wi th the understanding that the plant wi 1 1 ordinari ly
be included in rate base if major changes in either the
cost of the project or the environment in which the
Company operates do not occur between granting the
certificate and the completion of the project.
IPC-E-90-811/9/90
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Idaho Power should be reminded that a
Certificate of Convenience and Necessity is not an
order to complete a project. It is authority to
proceed with a project or a guarantee it will be rate
based. 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 whether to proceed. The f i ling of quarter ly
construction reports will keep the Commission and Staff
generally informed about progress on the project, but
the Commission is not in the business of managing the
Company's construction program. The Company is.
Neither should the Commission be in the business of
prospectively insulating the Company from charges of
mismanagement if the Company completes a certificated
plant under circumstances that have changed since the
certificate was issued when those circumstances would
have counseled against the plant had they been known
earlier.
By the same token, the Commission and
other parties should recognize that the Company is
proceeding with the project under the assumption that
it will be used to serve its utility customers. The
Company should not be asked to bear all costs of the
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plant on its own if there are changed circumstances,
provided it reacts prudent ly to those changes.
Q.Idaho Power has presented an alternative
to including Mi lner in its regulated rate base. Would
you describe your understanding of what has been
proposed?
A.If the Commission determines that it is
not reasonable for the Company to construct the Mi lner
Project for its regulated utility customers at this
time, Idaho Power requests the Commission issue a
Certificate of Exemption that would allow the Company
to operate the facility on an unregulated basis through
an affiliate for a 20-year period. At the end of the
20-year period, the Company would be obligated to offer
the project to the Commission for service to its
regulated utility customers at that time. The Company
asks the Commission to agree to allow the plant to
enter rate base at that time at "reproduction cost new,
less depreciation".
Q.Is this a reasonable proposal?
A.I think it is a new and innovative
regulatory approach. It would give Idaho ratepayers an
option on resources that may not be needed now, but may
very well be desirable in the future. There are prime
hydroelectric si tes in the Idaho Power service area
IPC-E-90-811/9/90 MILLER (Di)Staff 7
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1 that are very attractive to utilities serving areas
2 outside Idaho. A surplus on the Idaho Power system
3 would preclude Idaho Power under current regulatory
4 practices from developing the sites for its customers.
5 If development is delayed until power is needed, the
6 site may no longer be available. For example, in the
7 ear ly 1980s, Idaho Power was interested in bui Iding
8 generating facilities at Lucky Peak Dam, but it did not
9 need the power. Seattle Ci ty Light is now generating
10 power at Lucky Peak for use by its customers in
11 Washington.
12 Mr. Eastlake has addressed policy issues
13 important to the development of hydroelectric generation
14 in Idaho. As Mr. Eastlake points out hydropower
15 resources in the state have resulted over the years in
16 Idaho Power customers paying some of the lowest rates
17 for power in the count ry. Idaho Power's proposa I would
18 give Idaho ratepayers an option on such facilities in
19 the future, even if they were not needed today.
20 Al though I 1 ike the concept proposed by
21 the Company, I have some concern about how it would
22 actually work.
23 Q.What are those concerns?
24 A.My first concern is the detail in which
25 the application spells out reproduction cost new, less
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depreciation. At first blush, it sounds reasonable.
The utility should be compensated for the gain in the
value of the plant during the time it was used for
contract sales. The Idaho Commission has generally
subscribed to the "original cost" theory of ratemaking,
allowing plant into rate base at the value (ordinarily
the reasonable investment) at which it was originally
devoted to public service. Under Idaho Power's
alternative proposal, that would be the value 20 years
from now.
I am concerned that by specifically
prescribing how reproduction cost new, less depreciation
will be determined, the Company has offered an option
that may very well be no option at all. The method
described by the Company will in all likelihood produce
a "price" that wi 1 1 not ref lect the true va lue of the
plant to be "acquired" by ratepayers when it is
dedicated to publ ic service and, therefore, wi 1 1 be
rejected.
Idaho Power proposes to determine the
cost to "duplicate" the Mi Iner Proj ect at future costs
for all materials, supplies, labor, land and land
rights, transportation, etc. This would ignore contem-
porary products and new technologies that would be
available 20 years from now. Not only might the
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physical plant be quite different, but labor and
construction methods used to construct a plant might
also have changed significantly.
The Company would then reduce the cost
of the duplicate plant by an amount representing the
straight-line accumulation of depreciation of the
reproduction costs. Once again it would ignore the
fact that the plant had become to a certain extent
obsolete, requiring 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.
I am also concerned about the practical
matter of determining reproduction costs. It will be
no easy matter. The Commission will be faced with a
variety of cost estimates made by thoroughly reputable
engineers who will disagree on what the reproduction
cost of the facility would be. The following is an
excerpt from an Iowa State Commerce Commission Order:
The most serious defect of reproductioncost, and i therefore, of the "fai r
value" method, is that it has no
kinship with fact or reality. It is a
mass of assumptions, estimates having
no sound foundations in fact,
speculat ions, and conj ecture. (We do
not condemn reproduction cost because
estimates are involved. Estimates are
IPC-E-90-8
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often involved in rate making and in
many business matters. But there is a
difference between estimates having a
solid foundation of fact and estimates
derived from hypothesis and assumptions.
Such estimates are involved in
reproduction cost. They are built on
foundations of sand and have no
probative force.) Subjective judgments
of the engineers preparing the
reproduction cost regarding the methods
of pricing to be used, the assumptions
as to construction, and other elements
involved in the construction of utility
properties, are so vital to the process
that no two valuation engineers arrive
at the same result and differ so widely
as to cast grave doubt on the results
of each. Reproduction cost departs
from the solid ground of fact and
embarks upon guesswork. Scores of
items are involved on which equally
competent judgments might produce
widely divergent results. Final
figures appear to be so painfully
precise, yet they are built upon an
hypothesis so unreal as to make theexactness ludicrous.
Re Davenport Water Co., Iowa State Commerce Commission,
September 27, 1968 76PUR3d 220.
No doubt, reproduction costing has a Iso
experienced technological changes since the Iowa Order
was issued in 1968. This may make decision-making
easier, and then again may make it more difficult if
the Commission is deluged with computer models all
professing to estimate the same thing and arriving at
a different result. I include this quotation from the
Iowa Order because it illustrates a Commission' s
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frustration when faced with a case that revolves
around conflicting subjective judgments of a number of
highly qualified expert witnesses.
Q.Do you have a recommendation as to how
the plant might be valued 20 years in the future?
A.I think the most sensible thing to do
would be to replace the reproduction cost language
wi th a general statement that the Commission would
determine the value of the plant at that time for rate
making purposes. The Commission is not now restricted
to book cost, but may ascertain the value of utility
property "and every fact which, in its judgment, may
or does have any (blearing on such value." Idaho
Code, §61-523.
If the Commission and the Company are
uncomfortable wi th the uncertainty that such a general
provision would provide, I have an alternative. That
alternative would be to bring the plant into rate base
at original cost less depreciation accrued 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 method was
used in the past for hydroelectric projects like the
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Hells Canyon Complex of three dams. This approach
would have the advantage of relying on verifiable
booked costs but would recognize that any power sale
made by the Company would probably be based on the
levelized cost of the project. Using the 11.447%
return from the Idaho Power Avoided Cost Order No.
23357 assumed depreciation using this method over 20
years would be $3,374,140 on an original cost of
$63,350,600. The assumed depreciated value of
$59,976,500 would be the price at which the plant was
transferred from the affiliate to the utility.
Q.If neither of these changes is accepted,
would you recommend accepting Idaho Power's proposal?
A.If a project is clearly not currently
cost effective to Idaho Power's customers, but appears
to be a good long-term resource, I would recommend
approval. If someone other than Idaho Power bui lds
the plant, ratepayers would have no option on the
facility, and any option is better than no option at
all. It should be understood, however, that if
restricted to the Company's proposed use of reproduc-
tion cost, the value of the option to ratepayers may
not be high.
Q.Is the use of reproduction cost as
defined in the Company's application your only concern?
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A.No, it is not. Idaho Power proposes to
operate an exempted plant through a subsidiary that
would contract wi th a third party for a long-term sale
of the power. I am also concerned about the abi lity
of Staff to insure that there is no subsidization of
the affiliate by the utility and its ratepayers.
At a minimum, the Staff would have to
have access to the power sales contracts signed by the
affiliate to determine exactly what the conditions of
the power sales contracts are. The staff would also
require access to the books of the subsidiary so that
transactions between the utility and affiliate could
be traced. In the case of Mi Iner, which is located in
the heart of the Idaho Power service area, the staff
would also need to see load and dispatch data to
ensure that system power was not being used to supply
the third party purchaser unless the utility was
explicitly compensated for the power. Even with
careful segregation of costs and cost allocations
between the affiliate and utility, there would still
be aspects of the relationship between utility and
affiliate that would be unquantifiable, but that might
very well result in higher prices obtainable by the
a f f i 1 i ate for its powe r .
IPC-E-90-811/9/90
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Q.Do you consider your concerns about cost
allocation and monitoring the activities of the power
supply affiliate to be insurmountable barriers to the
alternative proposed by the Company?
A.No, I do not. I do consider them to be
important issues that would have to be worked out
between the Commission and the Company before final
approval could be given.
Q.Do you have a final comment on Idaho
Power's second alternative, the proposed certificate
of exemption?
A.Yes. The legal staff advises me there
is no statutory basis for such a certificate. The
Commission may, however, authorize construction of the
proj ect for the future convenience and necess i ty, not
merely for the present convenience and necessi ty.
This certificate could incorporate the terms of the
Company's proposed certificate of exemption.
Q.Does this complete your testimony?
A.Yes, it does.
IPC-E-90-811/9/90 MILLER (Oi)Staff 15
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CBCATB OF SEVI
I HEREBY CERTIFY THAT I HAVE THIS 9th DAY OF NOVEMBER,
1990, SERVED THE FOREGOING DIRECT TESTIMONY OF STEPHIE MILLER,
CASE NO. IPC-E-90-8, ON ALL PARTIES OF RECORD BY MAILING A COPY
THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
LARRY D. RIPLEY, ESQ.
LEGAL DEPARTMENT
IDAHO POWER COMPANY
P. O. BOX TO
BOISE, ID 83707
STEVEN L. HERNDON, ESQ.
LEGAL DEPARTMENT
IDAHO POWER COMPANY
P. O. BOX 70
BOISE, ID 83707
HAROLD C. MILES
IDAHO CONSUMER AFFAIRS, INC.
316 - 15TH AVENUE SOUTH
NAMPA, ID 83651
R. SCOTT PASLEY
ASSISTANT GENERAL COUNSEL
J. R. SIMPLOT COMPANY
P. O. BOX 27
BOISE, ID 83707-0027
DAVID H. HAWK, DIRECTOR
ENERGY NATURAL RESOURCES
J. R. SIMPLOT COMPANY
P. O. BOX 27
BOISE, ID 83707-0027
lCERT/142
CERTIFICATE OF SERVICE
GRANT E. TANNER, ESQ.
DAVIS WRIGHT TREMAINE
SUITE 2300
1300 S. W. FIFTH AVENUE
PORTLAND, OR 97201
PETER J. RICHARDSON, ESQ.
DAVIS WRIGHT TREMAINE
400 JEFFERSON PLACE
350 N. NINTH STREET
BOISE, ID 83702
JAMES N. ROETHE, ESQ.
PILLSBURY, MADISON & SUTRO
P.O. BOX 7880
SAN FRANCISCO, CA 94120
R. MI CHAEL SOUTHCOMBE, ESQ.
CLEMONS, COSHO & HUMPHREY,
815 W. WASHINGTON STREET
BOISE, 10 83702-5590
OWEN H. ORNDORFF
ORNDORFF & PETERSON
SUITE 230
1087 W. RIVER STREET
BOISE, ID 83702-7035
,h~SECRETARY"'