20101116Tallman Reb, Exhibits.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF TH )
APPLICATION OF ROCKY )
MOUNTAIN POWER FOR )
APPROVAL OF CHANGES TO ITS )
ELECTRC SERVICE SCHEDULES )
AND A PRICE INCREASE OF $27.7 )
MILLION, OR APPROXIMATELY )13.7 PERCENT )
CASE NO. PAC-E-l0-07
Rebuttal Testimony of Mark R. Talma
ROCKY MOUNTAIN POWER
CASE NO. PAC-E-l0-07
November 2010
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IP~ease state your name, business address and present position with
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iPacifiCorp (the "Company").
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M.y name is Mark R. Tallman. My business address is 825 NE Multnomah, Suite
2boo, Portland, Oregon 97232. My present position is Vice President of
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Rfenewable Resource Acquisition.
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i~re you the same Mark R. Tallman that submitted direct testimony in this
proceeding?
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"\es.
that is the purpose of your testimony?
,e purose of my testimony is to rebut the testimony of Mr. Joe Leckie of the
iI~aho Public Utities Commssion (the "Commssion") Staff as it relates to rate
b~se associated with the Dunlap wind project and operations and maintenance
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c1'O&M") costs associated with wind admnistration and the High Plains,
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¥cFadden Ridge I, and Dunlap wind projects.
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15 Dunlap iWind Project
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Rlease summarize Stas position as it relates to the Dunlap wid project.
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~taffis proposing a $1.0 miion (system) rate base reduction for the Dunlap wind
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18 ~roject. Specifcaly, Staf is proposing a rate base reduction in association with
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19 qie purchase cost to acquie the Dunlap Ranch property; which compnses the
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20 aijonty of the cntical property nghts necessar to constrct the Dunlap wind
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~roject.I .
iWht is the stated reaon for Stas propoed reduction?
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~taf testied that "it appear to Sta that some of the land purchased is not
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Rocky Mounta Power
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curently used and useful in providing utilty service."
Does the Company agree with Staff's contention that a portion of the Dunlap
Ranch property is not used and useful?
No, the entirety of the Dunlap Ranch is used and useful because it was used,
useful and necessar to effectuate a cost effective and environmentaly respectfl
wind project.
Does Staff recognize not all property is equally suitable for placement of
wind generation?
Yes, in their testimony Staff states: "Staff recognizes that not all property wil be
equally suitable for the placement of wind generation, and that there may be other
restrctions on the property that would curl the number of wind generation
sites."
What was Staff's reasoning in determining their proposed reduction?
Notwithstandig Staffs acknowledgement regardig the blanket suitabilty of
property for wind development, Staff's reasoning was based on their after-the-fact
observance of the as-built placement of wind turbine generator ("WTG") towers
and trsmission facilty towers. Staff concluded that if a section of deeded land,
or porton of a section, within the Dunlap Ranch propert did not ultimately house
a WTG tower or a transmission tower then the pro-rata costs associated with such
land should be arbitrarly declared "not currently used and usefu".
Was there any other reaoning assoiated with Staf's determination?
No, Stas work papers clealy demonstrate the sole reasonig behid their
determation was a simple countig of land sections that did not have an
Tallman, Di-Reb - 2
Rocky Mountan Power
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outcome of housing WTG towers or trnsmission towers.
Doe Staff's reasoning and simplistic approach overlook importt facts?
Yes, Staff's approach of focusing only on WTG and transmission tower
placement overlooks several important facts. First, the property was not offered
piecemeal; the Company had to purchase the entire ranch. Second, WTG or
transmission towers could not be placed in some areas due to restrctioris I wil
discuss later. Third, purchase of the propert is less expensive than leasing. In
addition, thee of the propert sections Staf declares as "not currently used and
useful" in fact housed meteorological towers that were used, useful and cntical in
. determnig the placement of WTGs upon the site. This meteorological tower
information was utilzed to optimally site WTGs; subject to constraints identied
after the purchase of the property. Finaly, the Company is receiving revenue
from an agnculturallease associated with the Dunlap Ranch property. I addrss
each of these issues later in my testiony.
What do you conclude from Staff's determination?
I conclude that Staf is inappropnately basing their assessment of what constitutes
"used and useful" on a few arbitrar cntena of where the Company constrcted
WTG and transmission towers. The appropnate cntena should be what the
Company knew at the time the Dunlap Ranch was purchased and the overall
benefit of the Dunlap Ranch to customers. Determation on ths lattr basis is
the most appropnate view and consistent with established regulatory pnnciple.
Was the Dunlap Rach propert being offered for sale piecemeal?
No. The Dunlap Ranch was being offered for sale in its entirety. The alternative
Tallan, Di-Reb - 3
Rocky Mountan Power
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of buying the property piecemeal was not being offered in the maket. Because
the Dunlap Ranch property compnses the majonty of the property nghts
necessar for the development of the Dunlap wind project, the entie ranch
propert was vital and was necessar in successfully developing a prudent and
cost effective generation resource that is indeed the Dunlap wind project.
Why was the entire ranch property necessary for developing the Dunlap
wind project?
The development and ultimate placement of WTGs and other facilities associated
with a wind project is a highly technical, time consumig and iterative process
that cannot be determned without a number of environmental, engineenng and
technical wind studies. In addition, it is necessar to have multiple consultative
sessions with agencies who are par to applicable permtting processes (i.e., the
Wyoming Game and Fish Deparent) and agencies who the Company may have
interaction with following the permtting process (i.e., the United States Fish &
Wildlife Service). The purose of the studies and consultations is to identify the
restrctions associated with the wind project site.
Do you have an exhbit showing the Dunlap Ranch property in the context of
the overall Dunlap wind project?
Yes, Exhibit No. 61 identifies the Dunlap Ranch property in the context of the
overal propert nghts necssar for the Dunlap wind project. It also ilustrates
the cntical natue of the Dunlap Rach propert relative to the overa property
nghts requi. Absent the Dunlap Ranch propert, the Company could not have
constrcted the Dunlap wind project.
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Rocky Mounta Power
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Exhibit No. 61 also identifies the environmental restrictions that resulted
in agency consultations and permt requirements that took place after the
Company acquired the ranch property and demonstrates why it is necessar to
have adequate propert nghts when developing a wind project. Whe the site
restnctions associated with the Dunlap wind project were many, the adequate size
of the Dunlap Ranch property to accommodate the restnctions was a critical and
necessar factor in constructing a generation resource in the best interest of
customers.
How should the used and usefulness of a wind site property be assessed?
Because of the iterative nature of developing a wind project, it is impossible to
have a complete foreknowledge about a piece of property at the time a
commtment to acquire the wind site property nghts must be made. The iterative
natue of wind project development underscores the inappropriateness of judging
used and usefulness of wind site property on the basis of outcome. The used and
usefulness of wind site property is most appropnately based on what the
Company knew at the time it acquired the property rights and the benefit to
customers in the overal context of a prudent and cost effective supply side
generation resource.
Doe Sta question the prudence of, or otherwie propose a rate base
reduction assoiated with, any aspect of the Dunlap Wind project other than
the Dunlap Ranch propert?
No.
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Rocky Mounta Power
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Did customers benefit because the Company acquired the entiety of the
Dunlap Ranch property?
Yes, the fact that the Company had the entiety of the propert to consider when
working though the iterative study, agency consultation and permttng processes
benefited customers because the Company could constrct a more economic
generation project while respecting environmental and other restrctions. In short,
had the Company had less property to work with, it is likely the Dunlap wind
project would have resulted in a higher cost resource.
How else does the Dunlap Ranch property benefit customers?
Customers benefit from the fact that the Company bought the Dunlap Ranch
because leasing a similar piece of propert would be more costly. It is not typical
for wind projects to be located on land owned by the entity who also owns the
wind project assets.
Have you quantified the benefit to customers of purchasing the property
versus a leae?
Yes, the Company is leasing state propert within the external and internal
boundar of the Dunlap Ranch that can serve as a proxy. The cost to purchase the
ranch was identied in Staffs Confidential Exhibit No. 103, page 1. When
conservatively compared to the proxy cost associated with the state propert
lease, customers nominaly benefit by more than $16 miion dunng the initial 25-
yea life of the project and by more than $317 milion if the site is repowered four
ties durg a 100-year period. Because the Dunlap Ranch is an attactive place
to house a wind project, it is reasonable to expect the Company wil have assets at
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Rocky Mountai Power
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the site well beyond the life of the initial project. This provides additional benefit
to customers because payments to a third pary are avoided in perpetuity and the
Company, on behalf of its customers, holds the option (the "Termnal Value") to
rep ower the site at cost after the initial 25-year life.
What other benefits are associated with the Dunlap Rach property?
The Dunlap Ranch property offers importt additional benefits to customers and
for the public interest. First, the Company has entered into an agrcultual lease
for that portion of the property where WTG towefs, transmission towers or other
assets (i.e., the O&M building and the collector substation) are not located. While
modest, this agricultual lease indeed provides revenues to the Company and
customers for those very sections of land that Staff has concluded are not
"curently used and useful". Dunng the construction phase, the revenues
associated with the agncultuallease appropnately reduced the capita associated
with the wind project, thus benefiting customers. Dunng the operational phase,
the agricultual lease wil contiue to generate revenues that wil be taen into
consideration in futue rate proceedngs. In addition, the agricultual lease
provides other benefits since a lease requirement is that the Dunlap Ranch house
be occupied to provide on~site seurity, improvements and to prevent trespassing.
The fact that the agrcultual lease generates revenues, albeit modest and other
benefits fuer demonstrates the flaw associated with Staf's reasoning and
approach.
What are the other benefits asociate with the Dunap Ranch property?
The Duap Ranch propert provides importt setback protetion for customers
Tallman, Di-Reb - 7
Rocky Mounta Power
1 in terms of wake effects from potential future adjacent wind projects, important
2 buffer propert to respect the environment and the potential for contiued public
3 access to the property. These additional customer and public interest benefits are
4 directly associated with those sections of land that Staff has identified as being
5 "not curently used and useful" and additionally demonstrate that those portons
6 of the ranch are indeed used, useful and in the public interest.
7 Wind O&M Costs
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Please summarize Stas position as it relates to O&M costs for wind
administration and the High Plains, McFadden Ridge I and. Dunap wind
projects.
Staf is proposing a $488,000 (system) reduction in the expense increase
requested by the Company for O&M costs associated with the High Plains,
McFadden Ridge I and Dunlap wind projects, and a $174,119 (system) reduction
in expense associated with wind admistration O&M costs. The total reduction
proposed by Staff is $662;119 (system).
What was the intent behind the O&M expens increas requested by the
Company for wind administration and the High Plains, McFadden Ridge I
and Dunlap wind projects?
Sta descnbes the intent, and the Company agrees, as: "These increases are
intended to captu the increase in costs to operate these facilties that were
recntly placed in service."
What is the stated reason for Staffs proposed reductons?
Staf testied that "The Company has not shown that the 2009 test year expenses
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Rocky Mountan Power
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are insufficient to cover these costs."
What was the basis for Staff's determination?
Staff determed that expected costs associated with 2010 contractual expenses
are acceptable known and measurable increases to the test year expenses but that
2010 expenses budgeted for labor, employee expense and electrcal pars,
breakers, fuses filters, gaskets, gear oils, propane etc. are not sufficiently known
and measurable and should not be included in the Company's test year expenses.
Does the Company agree with Staff's contention that the budgeted expenses
associated with wind administration and the High Plains, McFadden Ridge I
and Dunlap wind projects are not suffciently known and measurable?
No, the costs that Staff is targeting are costs typically associate with any of the
Company's owned wind plants and are the type of costs the Company has indeed
expenenced in association with fewer wind projects that were operating for the
entirety of 2009. Because addig three wind projects at two different sites is
indee known and measurable, it is unreasonable for Staff to declare such
expenses associated with the addition of those operatig wind projects as not
known and therefore unrecoverable.
Is there a practical rean the Company doe not have hitorical expenses
associated with the referenced "budgeted expenses"?
Yes, as my diect testiony described, the High Plains and McFadden Ridge I
wind projects reached their commercial operation date ("COD") durg
September 2009. In addition, the Dunlap wind project reached its COD on
October 1,2010. As a result, actual 2009 expenses largely do not reflect expenses
Tallan, Di-Reb - 9
Rocky Mountan Power
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associated with these paricular wind projects because they were either operating
for a very short period of time dunng 2009 or not at all (in the case of Dunlap).
Did the Company provide Staff with any information regarding expenses the
Company incurred during 2009 for other wind projects?
Yes, in response to data request IPUC 109 the Company itemied. actual expenses
associated with five wind projects located at two Wyoming sites (Seven Mile Hil,
Seven Mile Hil II, Glenrock, Rolling Hils and Glenrock III). These expenses are
similar in type to the expenses Staffs has taken issue with. In so doing, the
Company demonstrated that the expenses associated with the thee new Wyomig
projects (High Plains, McFadden Ridge I and Dunlap) are reasonable and known
and measurable on a dollar per site basis as compared with those incured durg
2009. Specifically, the Company is seekig an additional $488,000 (system) in
O&M expenses which amounts to $244,000 per new site. This can be compared
to the actual 2009 expense of approximately $319,000 per existig site. When
viewed on this basis, the expected costs for 2010 are reasonable as compared to
the known and measurable 2009 average cost per site. See Exhibit No. 62.
Did the Company provide Staff information regarding expected wind
admniration costs for 2010 compared to actual costs for 2009?
Yes, in response to data reuest IPUC 319 the Company itemized actual wind
admstration costs for 2009 associated with five sites in the system (Wyomig,
Oregon and Washington) as compared to wind admnistration costs for 2010
associated with seven sites in the system (two new sites added in Wyomig). In
so doing, the Company demonstrated the reasonableness of its wind
Tallan, Di-Reb - 10
Rocky Mountan Power
1 administration costs and the known and measurable nature of the 2010 expenses
2 on a per site basis. Specifically, the Company is seeking an additional $174,119
3 (system) which amounts to approximately $262,000 per site within the
4 Company's portfolio (7 total sites in 2010). This can be compared to the actual
5 2009 expense of approxiately $332,000 per site (5 total sites in 2009). When
6 viewed on this basis, the expected costs for 2010 are reasonable as compared to
7 the known and measurable 2009 average cost per site. See Exhibit No. 63.
8 Q.Is Staff's recommended wind admintration reduction reasonable given the
9 information the Company provided Staff in IPUC 319?
10 A.No. By recommending a $174,119 (system) reduction in expense associated with
11 wind admnistration O&M costs, Staff is expecting the Company to absorb the
12 added admnistration costs associated with thee new wind projects.
13 Conclusion
14 Q.What conclusion do you have regarding Staff's proposal to reduce the
15 Dunlap wind project rate base by $1.0 millon (system)?
16 A.I conclude that the Dunlap wind project is a very cost effective resource that wil
17 benefit customers formany years. Staff is inappropnately reviewing the used and
18 usefulness of the Dunlap Ranch propert on the basis of actual WTG and
19 transmission tower placement. Instead, Staf should have viewed the used and
, 20 usefulness of the Dunlap Ranch propert on the basis of what the Company knew
21 at the time the propert was purchased, the cost benefit the propert bnngs
22 customers (Le., perpetualy avoided lease costs) and the ongoing benefit the
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Rocky Mounta Power
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propert bnngs customers (e.g., revenues from the agricultul lease) as well as
the overall public interest.
What are the policy implications of Stas rate base reduction
recommendation?
From a policy perspective, accepting Staf's proposal sends a signal that land
nght acquisitions for wind project sites should not be governed by what is in the
overall cost effective interest of customers, but rather based on how many of the
propert sections wil house WTG or transmission towers. Such an approach
does not constitute a least cost approach to generation development and is
contrar to the best interest of customers. The Company maintas that
acquisition of the Dunlap Ranch in its entiety was its only option, it was not
available piecemeal, and that the acquisition was indeed prudent, in the best
interest of customers, and constitutes a used and useful asset in the public interest.
What recommendation do you have for the Commission regarding Staffs
proposed Dunlap wind project rate base reduction?
I recommend the Commssion reject Staf's proposed $1.0 miion adjustment
associated with the Dunlap Ranch property and reject Staf s recommendation to
have $1.0 millon associated with the Dunlap Ranch property put into Account
105 (propert held for futue use).
Tallan, Di-Reb - 12
Rocky Mounta Power
1 Q.What conclusion do you have regarding Stafs propoal to reduce the
2 Company's cost recovery for O&M expenses associated with the High Plains,
3 McFadden Ridge I and Dunlap wind projects and wind administration
4 expenses by a total of $662,119 (system)?
5 A.I conclude that Staffs proposed O&M expense reduction of $662,119 (system) is
6 unwaranted and unreasonable because the Company adequatèly demonstrated via
.7 data request IPUC 109 and data request IPUC 319 that projected 2010 O&M
8 expenses for wind admiistration and the High Plains, McFadden Ridge I and
9 Dunlap wind projects are reasonable, given actual 2009 expenses associated with
10 like expense categones for the Company's wind project sites. My testimony
11 demonstrates that it is unreasonable to assume there will be no additional costs.
12 The projected wind resource O&M costs the Company included in its case ar the
13 most accurate reflection of the expense the Company expects to incur durng the
14 rate effective period.
15 Q.What recommendation do you have for the Commsion regarding Sta's
16 proposed O&M adjustment?
17 A.I recommend the Commssion disregard Staff's proposed $662,119 (system) in
18 O&M adjustments.
19 Q.Doe this conclude your rebutt testiony?
20 A.Yes
Tallan, Di-Reb - 13
Rocky Mountan Power
Case No. PAC-E-1O-07
Exhbit No. 61
Witness: Mark R. Tallman
BEFORE THE IDAHO PUBLIC UTITIES COMMISSION
ROCKY MOUNTAI POWER
Exhibit Accompanying Rebutta Testiony of Mark R. Tallman
Map of Dunlap Ranch
November 2010
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Case No. PAC-E-1O~07
Exhbit No. 62
Witness: Mark R. Tallman
BEFORE THE IDAHO PUBLIC UTLITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Rebutt Testimony of Mark R. Tallman
O&M Costs by Wind Facility
November 2010
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Case No. PAC-E-1O-07
Exhibit No. 63
Witness: Mark R. Tallan
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAI POWER
Exhibit Accompanying Rebutt Testiony of Mark R. Tal
Average O&M Costs per Facility
November 2010
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Exhibit No. 63 Page 1 of 1
Case No. PAC-E-10-07
Witness: Mark R. Tallman