19901109Reading Direct.pdf

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DAVIS WRGHT TRMAIE
PETER J. RICHARDSON .
LAW OFFICES
JEFFERSON PuCE' 350 N. 9TH, SVITE 400 . BoISE, IDAHO 83'iho Pub1ic Utilties Commission(z08) 336-8844 Office of the Secretary
RECEIVED
NOV 9-1990
Myrna J. Walters
Commission Secretary
Idaho Public utilities Commission
472 W. Washington
Boise, ID 83702
Re: Direct Prepared Testimony of Don Reading
Case No.
Case No.
J.1".
l
1Boise. idaho Îy¿~November 9, 1990
Dear Ms. Walters:
Enclosed are the originals and nine copies of the above
referenced Direct Prepared Testimonies on behalf of the
Industrial Customers of Idaho Power. Would you please file thesame? The original testimony in each case is for the Reporter.
If you have any questions concerning this filing, please do
not hesitate to contact me.
Sincerely,
DAVIS WRIGHT TREMAINE
pet~ß~
PJR/np
Enclosures
FAX: (z08) 336-8833
ANCHORAGE, ALSKA . BELLEVUE, WASHINGTON . Los ANGELES, CAIFORNIA
PoRTLAND, OREGON' RICHLAD, WASHINGTON' SEATTLE, WASHINGTON' WASHINGTON, D.C.
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF IDAHO POWER COMPANY FOR A )
CERTIFICATE OF PUBLIC CONVNIENCE )
AND NECESSITY FOR THE RATE BASING )
OF THE MILNER HYDROELECTRIC PROJECT ) CASE NO. IPC-E-90-8OR IN THE ALTERNATIVE )
A DETERMINATION OF EXEMPT STATUS )
FOR THE MILNER HYDROELECTRIC PROJECT)
)
)
DIRECT PREPARED TESTIMONY OF DON READING, PH. D.
ON BEHALF OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER
NOVEMBER 9, 1990
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Q.WOULD YOU PLEASE STATE YOUR NAME AND ADDRESS?
A.Don Reading, 1311 North 18th Street, Boise,
Idaho 83702.
Q.DO YOU HAVE AN APPENDIX THAT DESCRIBES YOUR
EDUCATIONAL AND OCCUPATIONAL HISTORY AND YOUR
QUALIFICATIONS IN REGULATORY AND UTILITY
ECONOMICS?
Yes. Appendix I, attached to my testimony,
was prepared for this purpose.
Q.DO YOU HAVE AN EXHIBIT WHICH SUPPORTS YOUR
TESTIMONY?
Yes. I have an exhibit consisting of one
schedule which was prepared under my
supervision.
WHT IS THE PUPOSE OF YOUR TESTIMONY?
Our firm was retained by the Industrial
CUstomers of Idaho Power (ICIP) to -examine
the request of Idaho Power Company (the
Company) for a Certificate of Pulic
Convenience and Necessity (CPCN) concerning
the Milner hydroelectric project. My
testimony has five sections. First, I briefly
describe my understanding of the Company' s
request. Second, I discuss the problems with
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the request and with the rate basing of the
Milner proj ect. Third, I address the
Company's alternative proposal. Fourth, I
suggest some methods of evaluating the proj ect
once it is completed and on line. Fifth, I
state my recommendations and conclusions.
Q.LET'S TU TO THE FIRST SECTION OF YOUR
TESTIMONY. WOULD YOU PLEASE DESCRIBE THE
COMPANY'S REQUEST?
Certainly. The Company's CPCN Application
sets forth its rather unique request.
Specifically, it asks to ... be issued a
Certificate of Pulic Convenience and
Necessi ty for the Rate Basing of the Milner
Hydroelectric Generation Facilities ... and
for recognition of the Milner royalty and debt
service payments made to the Twin Falls Canal
Company and the North Side Canal Company, Ltd.
. .. as revenue requirement expenses.
(Application, p. 2. J
IS THAT THE EXTENT OF THE COMPANY'S REQUEST?
No. In case the Commission denies the initial
request, Idaho Power Company has an
alternative proposal: that it be granted
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exempt status for the Milner proj ect for a
period of 20 years from the date of commercial
operation to allow the Company to enter into a
long-term sale of energy to another utility.
Q.LET · S TU TO THE SECOND SECTION OF YOUR
TESTIMONY. WHT is UNSUAL ABOUT THE
COMPANY · S PROPOSAL CONCERNING THE CPCN AND
RATE BASING OF MILNER?
The Company' s proposal departs from usual
practice in asking for approval of rate base
treatment at the time the CPCN is issued,
rather than when the project has been
completed or is nearing completion. It wants
rate base approval for the Milner proj ect
prior to the start of construction. In
return, the Company will agree to "cap" the
capital cost of the project at $63,350,600,
barring several uncertainties.
The key to Idaho Power's approach is
its interpretation of the meaning of a CPCN,
as described by Company witness Mr. Baggs:
The issuance of a Certificate of Pulic
Convenience and Necessity is a determination
by the Commission that the decision to
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construct the proj ect is reasonable and
prudent, and that such construction is in the
public interest. If the Company utilizes
reasonable and prudent construction practices,
the issuance of the Certificate is recognition
that the investment, upon completion of
construction, is in the public interest and
will be rate based for revenue requirement
purposes. (Baggs Direct Testimony, p. 5. J
DO YOU SEE AN PROBLES WITH THE COMPANY'S
PROPOSAL AND ITS UNDERSTANDING OF WHT IS
IMPLIED BY THE ISSUANCE OF A CPCN?
Yes. I see several serious problems. First,
Mr. Baggs' interpretation of the CPCN' s
purposes runs counter to established usage.
Second, the Company's quid pro guo of a "cap"
of the construction expenditures is one-sided
and has little value in determining the
prudent cost of the plant or the amount that
should be included in rate base. Third, the
Company's proposal, if adopted, would shift
most of the risks of construction onto
ratepayers. Risk shifting, without some
compensating factors, would be unfair to Idaho
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Power's customers and is therefore not in the
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publ ic interest.
LET'S DISCUSS EACH OF THESE PROBLEMS
SEPARTELY. WOULD YOU BEGIN BY ADDRESSING MR.
BAGGS' INTERPRETATION OF THE MEING AND
PURPOSE OF A CPCN?
Yes. Mr. Baggs claims that issuance of a CPCN
for construction of the Milner proj ect will
document the Commission's determination that
construction is reasonable and prudent and in
the public interest. He further claims that
if a CPCN is issued and the Company uses
reasonable and prudent construction practices,
the project itself will be in the public
interest and upon completion should be rate
based for revenue requirement purposes.
DO YOU AGREE WITH MR. BAGGS' ASSERTIONS?
No. Mr. Baggs' view of the imp 1 ications of a
Certificate is overly broad. First, as its
decision concerning the Valmy plant makes
clear, the Commission does not interpret the
issuance of a CPNC as a requirement to proceed
with construction and/or a guarantee that the
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completed proj ect 's costs will be included in
rate base, regardless of the circumstances.
In the Valmy case the Company argued
that because the Commission had granted Idaho
Power a Certificate for Valmy I and II, the
Company was compelled to build both units.
Idaho Power argued that even though the
plant's power production was excess capacity,
this fact was irrelevant, because a
Certificate had been issued. (Idaho Pulic
utilities Commission, Order No. 20610, p. 94.)
Al though the Commission did not speak directly
to the issue of the Company's understanding of
the meaning of a CPNC, it rej ected Idaho
Power's arguent. The Commission found that
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"Idaho Power's share of the Valmy II
generating plant is not used and useful in the
service to Idaho ratepayers." (Ibid., p. 103.)
WHT DID THE COMMISSION CONCLUDE?
In determining the amount of Valmy II's costs
to be recovered from ratepayers, the
Commission concluded that a portion of those
costs--specifically the equity return on the
investment--should be absorbed by
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stockholders, not ratepayers, until the plant
became used and useful. (Ibid., p. 107.)
Clearly, if the Commission had viewed the
issuance of a CPNC as a guarantee that a
plant's construction costs would be included
in rate base, assuming "reasonable and prudent
construction practices," it would not have
ordered the disallowance concerning Valmy,
where the question of prudent construction
practices was not at issue.
Q.WHT is YOUR NEXT CONCERN ABOUT MR. BAGGS'
UNDERSTANDING OF THE MEANING OF ISSUANCE OF A
CPNC?
Acceptance of Mr. Baggs' notion of a CPNC as a
sweeping mandate would effectively free the
Company from accountability to the Commission
during construction, even though much could
happen after the CPNC was issued and before
the proj ect was completed--events that would
warrant that management alter its course of
action. For example, changes in load growth
might dictate slow-up, speed-up, or complete
abandonment of construction, ei ther to meet
increased load or to avoid installing excess
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1 capaci ty . Or technological progress might
call for canceling the Milner project and
replacing it with a more cost-effective
al ternati ve. Or heightened environmental
restrictions might impose an intolerable
burden of added cost on the Milner project,
destroying its economic feasibility.
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ini tial construction decision and possibly10
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Company's definition of a CPNC, such events
would be irrelevant to the determination of
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and paid for by ratepayers. Instead, that
issue would be judged solely according to
whether or not the Company had used "prudent
and reasonable construction practices." If
Idaho Power was deemed to have done so, by its
arguent it would be allowed full recovery of
the cost of the Milner proj ect, regardless of
any economic, financial, technological,
environmental, or regulatory events that might
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otherwise call for alteration of the Company's
initial decision.
Therefore, I rej ect Mr. Baggs'
interpretation of the meaning of a CPNC.
Instead, I agree with Staff's interpretation
in case U-1006-265 that the issuance of a CPNC
is an authorization by the Commission for the
Company to begin construction, not a
requirement that construction commence, nor a
certification that the decision to start
construction was prudent. (Ibid., p. 101.)
WHO DECIDES THE MEING OF A CERTIFICATE OF
CONVNIENCE AND NECESSITY, AND WHT FACTORS
AR SALIENT FOR DETERMINING THE RATE BAING OF
A GENERATING FACILITY?
Ul timately it is the Commission that must
determine the precise meaning of the issuance
of a CPNC. I f it follows Staff's
interpretation in Case U-1006-265, then no
decision on rate basing is called for at this
time. If it construes the issuance of a
Certificate as an endorsement of the prudence
of the decision to begin construction, then I
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1 believe that the Commission should rej ect the
Company's application.
The Company has not provided evidence
in its filing that would allow the Commission
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6 the Company decision to build Milner. For
that the Commission would need a substantial7
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9 this plant and al ternati ve forms of
generation. For example, the Company should
have provided information showinq the Milner
proj ect to be the least costly al ternati ve
available to ratepayers. While I do not
dispute the many advantages of hydro proj ects
over other forms of generation, those benefits
should not be the sole basis upon which the
determination is made. The Company has
presented no evidence that the construction of
Milner is less costly than installation of
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presented any evidence concerning the need for21
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23 Numerous other questions concerning the
construction of this proj ect remain unanswered24
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that demand a thorough analysis on the part of
Staff and intervenors as well as the
Commission and should precede any
determination of prudence. For example, the
Company has not explained the rationale behind
its 5% contingency factor, nor has it
explained in any detail the other components
of its "commitment estimate." The Company is
equally uncommunicative as to how it
determined that the estimated cost of this
project is between 37.80 and 52.93 mills per
kwh.
Q.AR THERE OTHER UNCERTAINTIES ASSOCIATED WITH
THE MILNER PROJECT THAT WOULD PRECLUDE TH
COMMISSION FROM PREAPPROVING A RATE BAE CAP
FOR MILNER?
Yes. In its decision concerning Valmy II the
Commission stated that its statutory charge
was to "establish 'just and reasonable'
rates. " (Ibid., p. 105.) For at least two
reasons, the Commission will be unable to
determine that adding this proj ect to the
Company's cost of service will produce just
and reasonable rates. First, the "cap" set by
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1 the Company is contingent upon several
favorable predictions. If inflation heats up
or the scope of the proj ect changes, then,
under the Company's proposal, its "commitment
estimate" would no longer hold as the cap for
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this in greater detail below.)
Second, the Company has estimated the
project cost at between 37.80 and 52.93 mills
per kwh. While it is unclear what costs and
assumptions this estimate includes, presumably
one of them is the Company's best estimate of
the operating costs of the plant.
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uncertain and could change, making the plant15
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pay for one-half of the cost of reconstructing
the Milner dam over the life of the FERC
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the best estimate for the total cost to21
22 rehabilitate the dam, the estimate is
uncertain. Indeed, the estimate has already
apparently increased from an earlier estimate
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of $9,000,000. (Packwood Direct Testimony, p.
10; and Agreement Regarding the Ownership,
Construction, Operation and Maintenance of the
Milner Hydroelectric Project, p. 60.) The
Company is also responsible for a portion of
the annual mitigation expenses, which are
likewise uncertain.
For these and other reasons, the
Company cannot accurately estimate the cost
per kwh of the Milner proj ect. Thus, neither
can the Commission. Nor can the Commission
determine today that just and reasonable rates
will result from inclusion of the future
capi tal costs of the plant in a future rate
base and preapproval of the royalty and debt
service payments to be made to the canal
companies for revenue requirement purposes.
WOULD YOU PLESE DISCUSS TH "CAP" ON THE
CAPITAL COST OF MILNER THAT THE COMPANY HA
PROPOSED?
Certainly. The Company has offered to treat
its "commitment estimate" of the capital cost
of Milner as a cap on the amount to be
preapproved for rate base. While the
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1 Company's proposal has surface appeal, there
are several arguents, in addition to those
discussed above, against the commission's
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the commitment estimate does not offer a5
6 guarantee that the proposed cap will in fact
be the amount that the Company proposes for
inclusion in rate base. Mr. Packwood notes
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10 project for $63,350,600, "as it may be
adjusted to account for documented changes in
escalation rates or scope." (Packwood Direct
Testimony, p. 13.) He goes on to explain what
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If major inflat~on occurs,resul ting in higher cost
indices, the Commitment Estimate
would be adjusted to reflect
these inflated cost indices.
Examples of possible scope
changes which could affect theproj ect ceil ing are Force
Maj eure or acts of God impacting
the construction, design
optimization for which increased
energy more than offsets the
increase in initial investment,
and foundation or site
conditions significantly more
expensive than indicated by
exploratory drilling. (Ibid.)
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The Company's reservations with respect
to the cap do not guarantee the commitment
estimate will be the rate based amount. That
is, little is left to affect the price of the
plant that the Company has not already covered
in its escalation and scope disclaimer.
Q.WHT PROBLES DO yOU SEE WITH THE COMPANY'S
CAP PROPOSAL?
A.There are several. First, the Company does
not define "major" inflation. Conceivably,
any inflation above what is included in the
commi tment estimate would be grounds for the
Company adjusting its estimate and including
these increased costs in rate base. Yet, the
Company doesn't explain the proj ected
escalation rate included in its commitment
estimate. Hence, the Commission cannot know
whether the Company is working from a tight
budget or an ample one.
Second, the Company's expansive scope
qualification can cover a multitude of
factors. Suppose, for example, that the
Company decides to increase the size of the
project. Would it be fair to charge
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1 ratepayers for the additional costs without
2 examining the Company's decision? But under
the Company's proposal, such a change would
presumably come within its definition of scope
and hence not be subject to further review.
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a significant percentage of their cost9
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one-sided. The Company wants to increase the
cap if major inflation occurs, but it does not
offer to reduce the cap if inflation subsides
and falls significantly below the escalation
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estimate. I see no reason for the Commission17
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Finally, Idaho Power does not explain
how its proposed 5% contingency fits in with
its escalation and scope adjustors.
Generally, a contingency of this nature is
included in a cost estimate to cover precisely
such factors as changes in scope and
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escalation. Hence the Company has not only
covered its uncertainties with its disclaimers
but added a substantial buffer by inclusion of
a contingency in the commitment estimate.
While I am not opposed to the use of a
contingency, ( it is common practice), I
believe it is important for the Commission to
realize how little risk the Company is
proposing to take on. (I am surprised that
the Company has not included a provision for
increases in borrowing costs; but then again,
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this might be covered under the Company's
escalation limitation.)
YOUR NEXT CONCERN DEALT WITH THE RISKS
INHERENT IN THE COMPANY'S PROPOSAL AND THE
PROPOSAL'S IMPACT ON THE COMPANY'S RATEPAYERS.
WOULD YOU PLEASE EXPLAIN?
Yes. The Company's proposal assigns most of
the risks of constructing Milner to its
ratepayers while eliminating most of the
potential risks to its stockholders.
Ratepayers would shoulder all the following:
the risk of escalation of construction costs,
the risk of increased scope, the risk of load
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1 growth changes, the risk of technological
2 changes, the risk of poor management
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construction prudence), the risk of
environmental changes, the risk of regulatory
changes, the risk that the project will not be
used and useful, and the risk that the project
will not be economical.
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10 other hand, would face only the risk that the
Company would not use reasonable and prudent
construction practices and the risk that some
costs of the plant might not be allowed in
rate base if the Company exceeded its cap.
The latter risk is practically eliminated by
the broadly defined escalation and scope
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Clearly, while ratepayers would bear a
great deal of risk, the stockholders would
incur very little.
Even though the Company's request
shifts most of the risks associated with
construction of the Milner project to
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ratepayers, the Company has not offered to
simultaneous reduce its cost of equity. In my
opinion if the Commission adopts the Company's
proposal, which I strongly recommend against,
it should also at a minimum reduce the
Company's cost of equity below the
Commission's last authorized return of 12.25%.
(Idaho Public utilities Commission, Order No.
20924, p. 62.)
WHY WOULD ADOPTION OF THE COMPANY'S PROPOSAL
CALL FOR A REDUCTION IN IDAHO POWER'S COST OF
EQUITY?
It is a basic financial principle that the
greater a security's risk, the higher the
investor's required return, and vise versa.
If the Commission significantly reduces
stockholder risk by adopting the Company's
proposal, then it should reduce the Company's
cost of equity. In Idaho Power's last rate
proceeding, the Company's witness Mr. BOwers
acknowledged this principle, testifying that
"the greater a security's risk the higher the
required return for that risk." (Bowers Di,
Case No. U-1006-265, p. 31.) Mr. Bowers also
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testified that a risk-free rate of return can
be approximated by using the interest rate on
long-term government bonds. (Ibid., p. 30.)
Recently, long-term (30-year) U. S. Treasury
Bonds have been carrying an interest rate of
about 9.0%, which is significantly below the
Company's authorized return on equity. Under
the Company's proposal, the equity risk
supporting the Company's investment in the
Milner proj ect would more closely approximate
that of a governent bond than of a security
yielding 12.25%, the Commission's last
authorized return.
Q.WOULD YOU ILLUSTRATE THE IMPACT OF EQUITABLE
RATEPAYER TRETMNT, ASSUMING ACCEPTANCE OF
THE COMPANY'S PROPOSAL?
Certainly. Let us assume that the Company's
investment in Milner (and in the Swan Falls
project) is financed in the same proportion as
the Company's capital structure, and that the
investor's return requirement on the equity
portion of this investment is approximately
10% (one percentage point above the measure of
a risk-free rate), this would indicate that
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the Company's cost of equity should be reduced
by about a quarter of one percent (0.25l) to
12.0%, using the Commission's last authorized
return. I have depicted these calculations on
my Schedule 1. The Company earned 13. 86% on
average equity during 1989. I would therefore
recommend that if the Commission accepts Idaho
Power's recommendations in this case, it
investigate the Company's earnings situation
and authorize a rate decrease, if one is seen
to be warranted. Indeed, it appears that,
absent such a decrease, an earnings
investigation is currently warranted.
Q.LET'S TU TO THE THIRD SECTION OF YOUR
TESTIMONY. WOULD YOU ADDRESS TH COMPANY'S
ALTERNATIVE PROPOSAL AND ANY PROBLEMS WITH IT?
Yes. In the case that the Commission does not
grant the Company's request for a Certificate
of Pulic Convenience and Necessity and the
rate basing of the Milner project, Idaho Power
wants the Commission to deregulate the Milner
facility for a period of 20 years. I find the
Company's al ternati ve proposal troublesome.
PLEASE EXPLAIN.
22Reading, Di
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A.I question the integrity of the Company's
proposal, especially when one examines the
cost of this project relative to Swan Falls,
which the Company is not proposinq be
deregulated.
The estimated cost per kw of the Milner
proj ect is $ 1, 086 . Adding in the Company's
share of the cost of repairing the dam
increases this figure to $1,187. Compared to
Swan Falls at $3,244 per kw, Milner may be a
bargain, and much more profitable. It is easy
to see why the Company has framed its proposal
in this way. Idaho Power and its stockholders
would benefit from the economies associated
with the deregulated Milner, while ratepayers
would defray the relatively high costs of the
regulated Swan Falls. That may be good
private business, but it's not good public
policy.
HAVE YOU IDENTIFIED ANY OTHER PROBLES WITH
THE COMPANY'S ALTERNATIVE PROPOSAL?
Yes. The proposed deregulation could place an
additional future burden on ratepayers.
According to the Company's plan, after 20
23Reading, Di
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years either the plant would continue to
operate under its exempt status, or the
Commission would issue the Company a CPNC and
allow it to rate base the plant at that time.
In the latter case, the Company proposes, the
value of the plant for revenue requirement
purposes would be based upon the then current
cost of replication (reproduction cost less
depreciation) . Once again the benefits of the
Company's proposal would be retained by
stockholders. Adoption by the Commission of
the Company's proposal would be tantamount to
guaranteeing the Company's shareholders a
substantial gain on the proj ect at the expense
of ratepayers, due to the replication
provision. The Commission should reject the
Company's al ternati ve request as proposed.
However, if the Commission is inclined to
adopt the Company's proposal, it should set
the buy-back rate at the lesser of the
original cost less depreciation and the fair
market value.
LET'S TU TO THE FOURTH SECTION OF YOUR
TESTIMONY. WOULD YOU BRIEFLY DISCUSS WHT THE
24Reading, Di
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COMMISSION MIGHT WAN TO CONSIDER WHEN
DETERMINING THE VALUE OF TH MILNER PROJECT
ONCE IT is COMPLETED AND IN SERVICE?
Certainly. Let me emphasize that the
following suggestions apply only to a
completed proj ect that is ready for
consideration for inclusion in rate base. I
do not believe it is appropriate or in the
public interest to predetermine the investment
value of the Milner project at this time.
Numerous events could intervene before the
proj ect enters commercial operation- -events
that could render any such determination today
erroneous or unnecessary.
In evaluating a plant to enter rate
base, the Commission should study a variety of
factors of two kinds: those related to the
prudence of management's decision-making, and
those related to the economics of the
situation. The former include such things as
the reasonableness of the Company's decision
to begin construction of the project, the
reasonableness of the construction practices,
the reasonableness of feasibility studies
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1 undertaken, etc. The latter include the
used-and-useful issue and the economic value2
3 of the plant.
4 In determining a plant's economic
value, the Commission should of course5
6 consider an assortment of factors, but one
7 particularly useful method of validating total
cost is to compare the cost per kwh of the
proj ect to the Company's avoided cost rate.
The latter should provide a upper limit on the
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When evaluating the cost per kwh of12
13 Milner versus avoided costs, the Commission
14 needs to ensure that the basis of the
15 measurement is consistent. Only then can an
16 appropriate evaluation be made as to the
least-cost path of resource acquisition for
the Company. For example, since avoided costs
are determined over just a 20-year period,
they are not consistent with the cost per kwh
of Milner, which is determined over a period
of approximately 50-years. All else being
equal, a 20-year avoided cost rate would be
significantly less than a 50-year avoided cost
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rate. In addition, for comparison purposes, a
20-year amortization of Milner will produce a
significantly more expensive plant than Idaho
Power's current estimate for Milner.
other methods might also be used.
These would include the amount of plant costs
reasonably incurred during construction of
Milner, the fair market value, and the cost of
alternative forms of reliable power.
Regardless of what method will
eventually be used, now is not the time to
make this decision. Determining whether the
plant should be included in rate base, and the
portion so included, can be done only after
the project is completed and on line.
Q~WOULD YOU PLESE SUMIZE YOUR
RECOMMNDATIONS AND CONCLUSIONS?
certainly. I believe the Commission should
rej ect the Company's proposal for simultaneous
issuance of a CPNC and approval of rate basing
of the Milner project. In addition, I believe
the Commission should rej ect the Company's
alternative proposal to deregulate the Milner
project for a minimum period of 20 years.
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1 More particularly, I do not believe it would
be appropriate or in the public interest for
the Commission now to determine the rate base
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4 treatment or regulatory status of a proj ect on
which construction has not yet even bequn.
The Company's request has several serious
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7 flaws.
8 First, I reject the Company's
interpretation of the import of a Certificate
of Pulic Convenience and Necessity. Unlike
Mr. Baggs, I don't consider that the
Commission's issuance to Idaho Power of a CPNC
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13 for Milner means that the Company's decision
to construct the proj ect is reasonable and14
15 prudent and in the public interest. Nor do I
16 presume that the Company's mere use of
"reasonable and prudent construction
practices," once granted a CPNC, then
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20 Company's rate base. The Company's overly
21 broad assessment should not be endorsed by the
Commission. It is inconsistent with the22
23 Commission's decision concerning Valmy II. In
24 the Valmy case,' although Idaho Power had been
28
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1 issued a CPNC, the Commission disallowed
2 recovery of a portion of the cost, because the
plant was not used and useful.3
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Similarly, the Company's interpretation
should be rej ected because it would require
the Commission to ignore many relevant
circumstances that would otherwise force the
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8 Company to al ter its initial course of action.
The Commission would be barred from addressing9
10 the prudence of the Company i s management
decision-making process during the
construction period.
If the Commission does adopt the
Company's definition of a CPNC, then it should
rej ect the Company's application on the
grounds that it is deficient. Many factors
relevant to a decision of this magnitude
remain unaddressed by the Company, which has
not shown that the proj ect is economical, nor
that it is the least-cost alternative, nor
that it is even needed.
II
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lulled into thinking the Company's offer to
cap the cost of the project is an adequate
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1 consideration for preapproval for rate base.
The escalation and scope reservations attached2
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to the Company's cap do not guarantee the
final cost of the project will be at or below
the commitment estimate. Rather, they give
the Company considerable leeway in justifying
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Moreover, the Company's cap proposal is
one-sided. While the Company wants the
Commission to agree to cost increases if the
scope of the project enlarges or if escalation
occurs, it has not proposed that the cap be
adjusted downward under the converse
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14 circumstances.
15 Third, the Company's proposal saddles
ratepayers with most of the risks of
construction while eliminating most of the
risks to shareholders. Despi te this, the
Company has not offered to lower its cost of
equity. In my opinion, if the Commission
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the rate base treatment of the Milner proj ect,
it should adjust the Company's cost of equity
to be consistent with its reduced risk.
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1 I also believe that the Commission
2 should rej ect the Company's al ternati ve
deregulation proposal, which the Company has
not shown to be the public interest, since the
capi tal cost of the Company's companion Swan
Falls project (not included in the
deregulation request) is almost three times
higher. Furthermore, the Company's unfair
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stockholders a windfall gain at the expense of
ratepayers. If the Commission is inclined to
adopt the Company's proposal, then it should
set the buy-back rate at the lesser of
original cost less depreciation or fair market
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16 Finally, I have offered some
suggestions concerning the factors the
Commission should consider once the Milner
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considered for rate base treatment. Among20
21 them is a comparison of the cost per kwh of
the proj ect with the Company's avoided cost,
establishing a reasonable upper limit on the
economic value of the project. Other relevant
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data are the amount of plant costs reasonably
incurred in the construction of the Milner
proj ect, the fair market value of the plant
and the energy it produces, and the cost of
alternative forms of reliable power.
Q.DOES THIS COMPLETE YOUR TESTIMONY PREFILED ON
NOVEBER 9, 1990?
A.Yes, it does.
32Reading, Di
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INDUSTRIAL CUSTOMERS OF IDAHO POWER
CASE NO. IPC-E-90-8
SCHDULE 1
IDAHO POWER COMPANY
CHAGE IN COST OF EQUITY
(000)
Amount RatiQ
48.9%4.946.2
100.0%
Common Equity
Preferred Stock
Long-term Debt
$ 589,46258,923
557,851
$1,206,236
Investment in Swan Falls
and Milner
Equi ty Ratio
Swan Falls and Milner
financed by Equity
$ 150,29048.9%
$ 73,492
Amount Rate ~
Swan Falls and Milner
financed by Equity $73,492 x 10.00%=$7,3491989Common Equity 589,462 x 12.25%=72,209
$662,954 $79,558
Cost of Equity: $79,558 / $662,954 = 12.00%
Source: Idaho Power Company, 1989 Annual Report; Exhibit 3,
Case No. IPC-E-90-8; Attachment 3, Supplemental
Application, Case No. IPC-E-90-2; and Idaho Public
utilities commission, Order No. 20924.
Exhibit 1, Page 1Reading, Di
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~...
CEIFICATE OF SERVICE
-tv'-I HEREBY CERTIFY that I have this q day of November,
1990, served the foregoing DIRECT PREPARED TESTIMONY OF DON
READING ON BEHALF OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER,
Case No. IPC-E-90-8, on all parties of record by hand delivering
a copy thereof, to the following:
Michael S. Gilmore
Brad M. Purdy
Idaho Public utilities Commission
472 W. Washington
Boise, ID 83720
and by mailing a copy thereof, postage prepaid, to the following:
Larry D. Ripley, Esq.
Legal Department
Idaho Power Company
P.O. Box 70
Boise, ID 83707
David H. Hawk, Director
Energy Natural Resources
J .R. Simplot Company
P.O. Box 27
Boise, ID 83707-0027
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 Ave. S.
Nampa, ID 83651
R. Scott Pasley
Assistant General Counsel
J .R. Simplot Company
P. O. Box 27
Boise, ID 83707-0027
James N. Roethe, Esq.
Pillsbury, Madison & Sutro
P.O. Box 7880
San Francisco, CA 94120
R. Michael Southcombe, Esq.
Clemons, Cosho & Humphrey
815 W. Washington
Boise, ID 83702-5590
Afton Energy, Inc.
c/o OWen H. Orndorff
Orndorff & Peterson
1087 W. River st., Suite 230
Boise, ID 83702-7035
BytÁ~
Peter J. R chardson
CERTIFICATE OF SERVICE - PAGE 1
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APPEIX I
QUALFICATIONS
Present OCcupation
Q. WHT IS YOUR PRESENT OCCUPATION?
A. I am a consulting economist with Ben Johnson
Associates, Inc., a firm of economic and analytic
consultants specializing in the area of public utilityregulation.
Educational Background
Q. WHT IS YOUR EDUCATIONAL BACKGROUND?
A. I graduated from utah State University in 1962 with a
Bachelor of Science degree in economics. I earned the
Master of Science degree in economics at the University
of Oregon in 1964. Finally, I received a Ph.D. in
economics from Utah State University in 1972. The
title of my doctoral dissertation was New Deal
Expenditures in the 48 States, 1933-1939.
Q. HAVE YOU RECEIVED ANY ACADEMIC HONORS OR AWARS?
A. Yes. I am a member of omicron Delta Epsilon, the
national economics honorary, and was awarded a
National Science Foundation Fellowship in 1967.
Clients
Q. WHT TYPES OF CLIENTS EMPLOY YOUR FIRM?
A. Much of our work is performed on behalf of public
agencies at every level of government involved in
utility regulation. These agencies include stateregulatory commissions, public counsels, attorneys
general, and local governments, among others. We are
also employed by various private organizations andfirms, both regulated and unregulated. The diversity
of our clientele is illustrated below.
Exhibit I, Page 1Reading, Di
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Regulatory cOmmissions
Alabama Pulic Service Commission - Pulic Staff for utility
Consumer Protection
Alaska Public utilities Commission
Arizona Corporation Commission
Arkansas Pulic Service Commission
District of Columia Pulic Service Commission
Idaho Pulic utilities Commission
Idaho State Tax Commission
Kansas State Corporation Commission
Maine Pulic utilities Commission
Missouri Public Service Commission
North Carolina utilities Commission - Pulic Staff
Oklahoma Corporation Commission
Ontario Ministry of CUlture and Communications
Texas Pulic utilities Commission
Virginia Corporation Commission
Washington utilities and Transportation Commission
West Virginia Pulic Service Commission - Division of
Consumer Advocate
Wisconsin Pulic Service Commission
Pulic Counsels
Arizona Residential utility Consumers Office
Colorado Office of Consumer Services
Connecticut Consumer Counsel
District of Columia Office of People's Counsel
Florida Pulic Counsel
Georgia Consumers' utility Counsel
Illinois Small Business utility Advocate Office
Indiana Office of the utility Consumer Counselor
Maryland Office of People's Counsel
Minnesota Office of Consumer Services
Missouri Pulic Counsel
New Hampshire Consumer Counsel
Ohio Consumer Counsel
Pennsylvania Office of Consumer Advocate
Utah Department of Business Regulation - Committee of
Consumer Services
Exhibi t I, Page 2Reading, Di
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Attorneys General
Arkansas Attorney GeneralFlorida Attorney General - Anti trust Division
Idaho Attorney General
Kentucky Attorney General
Michigan Attorney General
Minnesota Attorney General
Nevada Attorney General's Office of Advocate
for Customers of Pulic utilities
South Carolina Attorney General
Virginia Attorney General
Washington Attorney General
Local Governments
ci ty of Austin, TX
City of Corpus Christi, TX
City of Dallas, TX
City of El Paso, TX
City of Fort Worth, TX
City of Galveston, TX
ci ty of Houston, TX
City of Lubbock, TX
City of Norfolk, VA
City of PhoenixA AZ
City of Richmond, VA
ci ty of San Antonio, TX
City of Suffolk, VA
City of Tucson, AZ
County of Augusta, VA
County of Henrico, VA
County of York, VA
Town of Ashland, VA
Town of Blacksburg, VA
Town of Pecos City, TX
other Government Agencies
Canada - Department of Communications
United States Department of Justice - Antitrust Division
State of Florida - Department of General Services
Provincial Governments of Canada
Exhibit I, page 3Reading, Di
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Regulated Firms
Americall LDC, Inc.
E . Ritter Telephone Company
Florida Association of Concerned Telephone Companies, Inc.Holywell, Inc.
Louisiana/Mississippi Resellers Association
Madison County Telephone Company
Mountain View Telephone Company
Nevada Power Company
Network I, Inc.
North American Telephone Company
North Carolina Long Distance AssociationPan-Alberta Gas, Ltd.Peninsula Communications, Inc.
RDM Telephone Systems
South Carolina Long Distance Association
Stanton Telephone
Teleconnect CompanyTransamericall, Inc.
Yelcot Telephone Company, Inc.
Other Private Organizations
Arizona Center for Law in the Pulic Interest
Casco Bank and Trust
citizens' utility Board of Wisconsin
Colorado Energy Advocacy Office
East Maine Medical Center
Georgia Legal Services Program
Harris Corporation
Interstate Securities Corporation
J .R. Simplot Company
Merrill Trust Company
PenBay Memorial Hospital
Prior Exrience
Q. BEFORE BECOMING A CONSULTANT, WHERE WERE YOU
PROFESSIONALLY EMLOYED, AND IN WHT CAPACITIES?
A. From 1981 to 1986 I was Economist and Director of
Policy and Administration for the Idaho Pulic
utilities Commission. My duties at the IPUC included,
in addition to my testimony, the preparation of special
reports in the areas of forecasting, demand studies,
and economic analysis. As Staff Direotor I was charged
Exhibi t I, Page 4Reading, Di
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wi th overseeing the personnel and budget functions, and
with representing the Commission before the state
legislature, at the governor's office, before the
utili ty commissions of other states and before such
federal and regional entities as the Bonneville Power
Administration, the Northwest Power Planning Council,
and the Pu 1 ic Power Council.
Before that time I taught economics at Middle
Tennessee state University (Assistant Professor,
1968-70), Idaho state University (Assistant and
Associate Professor, 1970-80), and the university of
Hawaii at Hilo (Associate Professor, 1980-81).
Subj ects taught included economic theory and history,
quantitative analysis, econometrics, statistics, labor
economics, financial institutions, and international
economics.
In addition, between 1970 and 1986 I prepared
reports and expert testimony on loss of earnings in anumer of legal actions respecting wrongful injury and
wrongful death. Although many of these cases were
settled without trial, I gave expert testimony in court
on numerous occasions.
Q. HAVE YOU TESTIFIED PREVIOUSLY AS AN EXPERT WITNESS IN
THE ARA OF PUBLIC UTILITY REGULATION?
A. Yes. I have provided or am preparing expert testimony
on 19 occasions in proceedings before regulatory
commissions in Alaska, California, Colorado, District
of Columia, Idaho, Nevada, Texas, Utah, and
Washington, and before the Interstate Commerce
Commission. In addition, I have served as a hearing
examiner in Idaho.
My testimony in these proceedings dealt with
electric power planning and forecasting, power supply
models, avoided costs, demand elasticity models,
regional economic conditions affecting public
utilities, and cost of service.
Q. DO YOU HAVE ANY PROFESSIONAL PUBLICATIONS?
A. Yes. I have authored or co-authored more than 15 books
and articles, including the following:
Exhibi t I, Paqe 5Reading, Di
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of Idaho PowerIPC-E-90-8
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"Post-PUA views, II Proceedings of the NARUC Biennial
Regulatory Conference, September 1982.
An Input-Output Analysis of the Impact from Proposed lining
in the Challis Area (with R. Davies), Pulic Policy Research
Center, Idaho State University, February 1980.
"The Paradox of Voting," Reason 10 (April 1979): 39- 41
"Index of Prices Received by Idaho Farmers," Idaho Economic
Indicators, July 1978 (also continuing series publishedmonthly) .
"Income Distribution in Idaho Counties," Idaho Business ang
Economics Review.
Future-Gram, , ç' .. Series; Current Trends ang forecasts, , ç ,
Series (with R. Foster, et al.), Government Research
Institute of Idaho State University and the Southeast Idaho
Council of Governments, Pocatello, Idaho, June 1977.
An Emirical Analysis of Predictors of InCome Distributlon
Effects of Water Quality Controls (with J. Keith, et al.),
Utah Water Research Laboratory, Utah State University,
Logan, Utah, September 1976.
Regional Growth and Fiscal Impact in Southeast Idaho (with
V. Hj elm et al.), Government Research Institute of Idaho
State University and the Southeast Idaho Council of
Governments, Pocatello, Idaho, January 1976.
Phosphate and Southeast: A Socio Economic Analysis (with J.
Eyre et al.), Government Research Institute of Idaho State
University and the Southeast Idaho Council of Governments,
Pocatello, Idaho, August 1975.
Estimating General Fund Revenues of the State of Idaho (with
S. Ghazanfar and D. Holley), Center for Business and
Economic Research, Boise State University, June 1975.
"Pocatello/Bannock County Economic Impact through 1978"
(with R. R. Johnson), funded by the City of Pocatello (A
Regional Input-Output Model), December 1975.
"A Note on the Distribution of Federal Expenditures: An
Interstate Comparison, 1933-1939 and 1961-1965," Amerlcan
Economist 18, no. 2 (Fall 1974): 125-128.
Exhibi t I, Page 6
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"New Deal Activity and the states, 1933-1939," Journal of
Economic History 33 (December 1973): 792-810.
"Utah's Steel Industry" (with Reid R. Durtschi and Bartell
Jensen), Utah State University Research Paper, 1965.
Exhibi t I, Page 7
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