19911024Faull Rebuttal.pdf

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BEFORE 15IE IDAI{O PT]BLIC IIIILTTTES COMNMSSION
IN THE MATTER OF TI{E APPITCATION
OF IDAHO POWER COMPAI\TYFOR
APPROVAL OF A}I INTERCONNEGIION
TARIFF FOR NON-TITILNY GH{ERATION- SCHEDT'LE 72.
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CASE NO. IPC-F.9O-20
BEB{IITAL TESTIMONT OF TTIOMAS FAI'IT
IDAHO PTIBIJC UTILTUES COMIilISSION
ognoBER 24, 1991,
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a. Please state your name and business
address for the record.
A. l4y name is Thomas FauII and my trusiness
address is 472 West Washington Street, Boise, Idaho.
a. By whom are you employed and in what
capacity?
A. I am employed by the Idaho Public
Utilities Commission as a PubIic Utilities Engineer.
A. Are you the same Tom Faull who
previously filed direct testimony in thjs case?
A. Yes.
a. Otr page B e 6-7 of his di rect tes t irnony
on reconsideration Dr. WiIImoibh states that IPCo's
proposed "...O&M rate in Schedule 72 is not a levelized
number...." Do you agree wiLh this statement?
A. Technically, yes. The methodology
selected by IPCo to compute O&M rates yields level
rates, oot "levelized" rates. Ilowever, even though
the Schedule 72 rates are not calculated using a
present*val.ue levelizing rnethod, they are essentially
Ievel rates because they are constant over the life of
t-he QF contract (subject to minor clranges that may
resulL as IPCo's O&Ivl costs change over t-irne relative
to changes in net asset costs). My proposal is simply
to conveLt the essentially IeveI rate resutting from
rPC-E-90-20ttJ/24/9L
FALIL,L (tli-Reb) I
Staff
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IPCo's methodology Lo art
ttre inf lationary economy
decades.
escalal-ing raLe thaL
experienced over the
ref lects
past few
a. On page B e 14-18 of his reconsideration
tesbirnorry Dr. Willrnorth states that your proposal
would " . . . negat,e much of ttre adrninistraLive benefits
of placirrg the O&M charge in a tariff by requiring
irrdividualized accounting for each QF...." Do you
agree with this statemenl?
A. No. First, as I describe in more detail
beIow, IPCo must use " . . . individualized accounting. . ."
to implement ttre tarif f it proposes. So t-he issue is
not whether the tariff requireS individual application
to each QF, but wlrether the increased costs and
difficulLies of applying the non-Ievel Lariff I
propose irr lieu of Lhe level Lariff proposed by IPCo
ar:e reasonable relative to tlre increased acclrracy rny
proposal provides. As I show l.relow, the dif f erence
between applying the two methods is negligible.
A related issue raised by Dr. Willmorth
is whether implementation of a changed O&M tariff
resulting f rorn changes in IPCo's O&M cost.s relative Lo
net asset costs wi Il be unduly burdensome uncler my
non-leveI rate proposal. I do not believe it would.
f n f act, I believe that implernenting changes to ttre
r.Pc-E-90-20
LO/24/9r
FAULL (Di-Reb) 2
Staff
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non-leveI rates I propose would be substantially Ltre
same for IPCo as implementirrg changes Lo t,he level
rates proposed by IPCo. Either wdy, IPCo must make a
separate computation f or each Qf . A norl-leve1 o&['l
rate sj.milar to ttrat shown in Exhibit No. 105 of my
direct testimony could be published as part of
Schedule 72 jusL as easily as the leveI rates proposed
by IPCo could. For rny non-leve1 proposal, each time
relative O&M costs charrge a new SclreduIe 72 ral-e sheet
would be published. The new rates would apply directly
to each QF contract without requiring any manipulation
at a I I . The rate street could be keyed into the
computer at a minirtral cost diff'erential- over keying in
fPCo's proposed sirrgle leveI rate. Billing non-level
O&M rates would be r)o more complicated Lhan paying
non-leveJ. QF rates.
a. Can you give al1 exarnple of how you
believe O&I,1 charge computations could best be made for
a single QF under each mettrodology?
A. Yes. I presume that billing conlputatiorr
would be computerized regardless of methodology. For
the leveI methodology proposed by IPCo for the
Schedule 72 tariff (and currently in use), the computer
program would access a data base for the QF to
determine the interconnect cost associated wiLh that
rPC-E-90-20
L0/24/91
FAULT, (Di-Reb) 3SLaff
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pro ject. Ttre program would Lhen mrrlL,iply that inLer-
connect cost times the then current monttrly O&l,l ral-e,
thereby yielding t-he monthly 0&M clrarge f or that QF' .
Under the norr-IeveI mettrorlology that I
propose, the QF data base would include ttre QF' s
on-Iine date as well as its interconnect cost. The
program w<.ruId access the dal-a base to deLermine both
tlrose pieces of inf ormaLion. IL woulcl then subl-ract
the on-Iine year from the current year to deternrine
the appropriate "year of operation". The next step
would be f or the computer to access a " look-up l-ab.[e"
of the then current O&M rate sheet that includes O&M
rates by year of operation, and to select- the
appropriate O&M rate f or the QF's then currenl- year of
operaLion as deLermirred irr the prior computer
operaLion. The computer would then multiply ttre QF's
interconnect cost times the selected raLe to deLermine
Lhe appropriate monthly O&Ivl charge f or ttre QF.
Although there are more steps to the
norr-Ievel operation, Lhe orrly actual additiorral work
for IPCo would be to write a simple "do loop" and
"look-up" computer program, Lo input the on-Iine year
into the QF data base (if they don't already do that
for other reasons), and to irrput a column of non-level
rates into the look-up table. I find it unlikely Ltrat
rPC-E-9 0-20
LO/24/9L
FAUI,L (Di-Reb) aStaff
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non-IeveI O&M rates could exceed $I00 per
f99t dollars) for all QF purchases combined.
0. Please explain when the O&M
change.
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the totaI direcl- cost increase for converting
yea r
Lo
( in
rate wotrld
A. The O&M rate would change whenever IPCo's
O&M costs change by rnore than about leo relaLive to
capital costs. This could happerr in one of two ways:
Either the costs of Iabor ancl supplies (O&M comporrenLs)
could change at a differerrt rate ttran the costs of
related capital equipment, or IPCo could become more
efficient or less efficient irr the way it performs
O&M. In either case, however,'the cumulative change
in O&M costs woul.d have to exceed (or recede f rom) ttre
cumulative net capital costs by aboul- 7%. The
probability of this trappening is identical under boLh
IPCo's and my proposed meLhoclologies, and it is
unlikely to happen more often than once in every
several years.
a. Is it the purpose of your reconlmerrdation,
as staLed by Dr. WiIImorth (Di-Rec., pg. 7, @ 9-L4),
" . . . to cha rge O&M cosl-s to each Qf' somewhat i rr a
manner consistent wittr the expected increasing O&M
needs of l-hat QF's own irrterconnection f acility. . . "?
rPCi-E-90-2.0
t0/24/91.
FATILL (Di-Reb) 5St,aff
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A. No, although t.hat is a secondary benefit
of my rnethodology. The purpose of my recommendal-ion
is to account for past inflation of capital costs in
ttre ral-e structure. As I stated previous 1y (Faul l
Di. , pg. LZ e 3-I3. ) :
AILhough O&M expenses are relativelycurrent (i.e., include little infl.al-iorreffect) Lhe related gross plant accountsinclucle planL cosLs incurrecl for aperiorJ of over 30 years. Obviously,the arnount inelurled for investments
made over 30 years ago vastly understatethe replacement value of the assets theyrepresent. Therefore, the rateesLablished by IPCo's meLhodology is alevelized rate; applicable orrly over aperiod equal to the average plant lifefor each caLegory of plant.
a. Can
inftation affects
A. Yes.
yor-l please give an example of how
the O&M rate?
The easiest way to analyze IPCo's
i-rrterconnect O&IvI methodology is to imagine an extremely
simple system. For example, inragine deterrrrining the
O&M rate for wood
traving only three
1970 at a cost of
the third in 1990
rPC-E-9 0-20
),0/24/9L
years). To reflect IPCo's contention that O&M costs
increase as systenr cornporrents Rg€, the O&M costs in
I991 were $21.00 for the 1970 pole, $16.50 for ttre I9B0
poles on a short distribution systern
poles. The first pole was bought in
$roo, the second in 1980 at $rSo, and
at fiZZS (lnflation = 50% every 10
FAtrI-,I, (Di-Reb) 6Staff
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pole, and $fO.O0 for the 1990 poIe. As strown in the
charL below, this yields a total capiLal investment of
$475.00, a total 1991 0&M cost of $47.50, an average
capital investment of $f58.33 per pole, dr average O&M
cost of $f S. g: per poIe, and an O&M rate of lOeo of
capital investment.
YE.ABI990
1980
1970
TOTAL =
AVERAGE =
O&},I RATE =
(]API'.fAI,
IILUESI'I{EN-I
$22s. oo
150.00
100.00
ANNTJAI,
Q&r{_qQsJ
$1o. oo
r6.50
_2-L 0 0
$+2. so$47s.00
$158.33/poIe $rs. B3lpo1 e
fiat .50/$475.00 = ro%
Now imagine Lhat in 1990 a QF carue on the
same smaII distribution system and installed one wood
pole at a cost of $225.00 (Lhe same as the cost of
IPCo's f990 wood pole) . According to the IPCo
methodology the QF's 1991 annual O&M payment would be
I0% of its capital investment, or $zz.:rO. This cosL
to the QF exeeeds IPCo ' s actrra I avera_se O&M cost by
42eo ($22.50/$15.83 = L.42), and exceeds IpCo's actual
O&M cost for 1990 poles by L25% ($22.50/$f0.00 = 2.25> .
Obviously, the numbers in my example are fictitious.
But the implications are real and irrefutable QFs
rPC-E-90-20
LO/24/91
FAULI, (Di-Reb) 7
Staff
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are disadvantaged jn the early years of the cont,ract
by IPCo's methorlology.
0. Wotrldn't QFs be disadvanLaged over the
entire life of the conLract?
A. Not necessarily. If , f or exarnple, our
irnaginary IPCo 1970 pole is retired and replaced in
ttre year 2000 at a cost of $337.50 ($225.00 * I50%
$gaZ. SO) and ttre O&I,1 rate continues to be 10% of
capital cost, then IPCo's average O&M cost wi 1l be
$7r.25 whi le the QF's o&IvI charge remains #22.50 .
Because 50eo inflation in ten years is
approximat-ely equal to 4eo per year, Lhe above scenario
is not unlikely, but the 'numbers are probably
exaggerated by the smal1 sample population.
As a1-ways wittr levelization, the question
i s , "Who pays too much, wherr? " The re a ):e two
answers: ( I) If the QF contract is strorter than Ltre
average asset life, the QF pays too rnuch, immediately;
and (2> if the QF contract is longer than the average
asset Iife, the ratepayer pays too much, eventualty.
A. Are there any methods other than
delevelization that solve this problem?
A. Yes, there are at least two other nrethods
that solve the problern. They were discussed by Staff
witness Hattaway in his direct testimony, but I will
rPC-E-9 0-20t0/24/9t FAULL (Di-Reb) BStaff
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The second obvious approach is to base
charge on replacement costs rather Lhan actual
Thus, for the example above, the O&M rate would
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restate them here. The first approactr is to base O&pl
rates on physical unit-s rather than cost. Thus, li.ne
extensj.on O&M worrld be staLed in dollars per mile,
meter costs in dol lars per rneter, swi Lchgear costs in
dollars per switch, eLc. The problern wiLh Ltris
approach is that j.t would require the utiliby to
develop an enLirely new accounting procedure Lo solve
a relal-ively minor problem. This seems unreasonably
trurdensorne.
REPTACEMENT COST = 3 * fi225.00 = $675.00
O&M RATE = $a2.50/$675.00 = 'lo.o per year.
There are two problems wittr ttris approaclr: ( f ) A
mel-hod would have t-o be developed to estirnate replace-
ment costs f or a Iarge inventory of equiprnent-, and (2)
the interconnect O&M raLe for each QF' would have to be
recomputed periodically (annually?) by comparing IPCo's
therr current O&M costs with its updated inventory's
replacemerrt cost at the time the QF eame on line rather
Llran irr the therr current year. This, tor-r, seems
unreasonably burdensome .
ttre O&M
costs.
be:
rpc-E-90-20
LO/24/9L
FAULL (Di-Reb) 9Staff
o
'l'herefore, it appears to me that the most
practical nrethod of assuring equiLable O&M rates is the
one I previously recommendecl requiring non-level
rates that reflect the approxirnate inflation rate over
Lhe average assel- life of the appropriate accounls. I
continue to reconunerrd adoption of ttris procedure.
A. Does this end your rebuttal Lestimony?
A. Yes.
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rPC-E-9 0-20
LO/24/9L
FALILL (Di-Reb) 10Staff
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CERTTFICA]E OF S1ERVICE
I HEREBY CERTIFY that I have this 24th day of October, 1991,
served the foregoing REBLIIIAL TESTIMONf OF TIIOMAS FAULL, in Case
No. IPC-E-90-20, by nrailing a copy thereof via Fecleral Express or Hand
Carried, to the following:
BARTON L. KLINE, ESQ.
LEGAL DEPARTMENT
IDAHO POWER COMPAI\-Y
P. O. BOX 70
BOISE, ID 83707-OO7O(Hand carried)
JOHN R FERREE
IDAHO POWER COMPANY
P. O. BOX 70
BOISE, ID 83707-0070(Hand carried)
GARY A. DAHLKE
R. BLAIR STRONG
PAINE, IIAMBLEN. COFFIN,
BROOI(E & MILLER
12OO WASHINGTON TRUST
FINANCIAL CENTER
SPOKANE, WA 99204
(Federal Express)
TOM DUKICH
RATES & TARIFF ADMINISTRATION
WASHINGTON \ryATER POWER COMPAIVY
P. O. BOX 3727
SPOKANE, WA 99220(Federal Express)
A. W. BROWN
A. W. BROWN COMPANY, INC.
3416 \rIA LIDO, SUITE F
NEWPORT BEACH, CA 92663(Federal Express)
JOHN M. ERIKSSON
UTA}I POWER & LIGHT
COMPANY
T4O7 NORTH WEST TEMPLE
SAIT LAKE CI'TY, UT 84140-OOO1(Federal Express)
W. F. MERRILL
MERRILL & MERRILL
P. O. BOX 991
POCATELLO, ID 83201-0091
(Federal Express)
JAMES FELL, ESQ.
STOEI,. RIVES, BOLEY, JONES
AND GRAY
SUITE 23OO
9OO ..qW FIFTH AVENUE
PORTLAND, OR 97204(Federal Express)
GREGORY N. DITVAI,L
UTAH POWER & LIGHT
COMPANY
424 PU BLIC SERVICE BUILDING
920 SW SIXTH AYENUE
PORTLAND, OR 97204
(Federal Express)
ROY L. EIGUREN, ESQ.
PETER J. RIC}IARDSON, ESQ.
DAYIS WRIGHT TREMAINE
7O2W IDAHO STREET, SUITE 7OO
BOISE, ID 83702-8908(Hand carried)
C. TOM ARKOOSH
RODEN & ARKOOSH
P. O. BOX 2tt0
BOISE, ID 83701.2IL0(Hand carried)
-'LOrby-
lCERT/I73 SECREMYT-