20171228final_order_no_33954.pdf

Office of the Secretary
Service Date
December 28,2017
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.PAC-E-17-06
OF ROCKY MOUNTAIN POWER FOR )BINDING RATEMAKING TREATMENT )FOR WIND REPOWERING )ORDER NO.33954
On July 3,2017,PacifiCorp dba Rocky Mountain Power applied for approval of its plan
to upgrade (or "repower")its existing wind resources and approval of associated ratemaking
treatment.The Company claimed that repowering its wind resources would increase production,
reduce costs,and qualify for federal production tax credits (PTCs).The Company estimated
upgrading the system would increase output by an average of 19%with no additional facilities.
The Company estimated the project would cost about $1.13 billion.Because of the large scale of
the project,the Company is seeking Commission approval before starting the project.
The Commission issued a Notice of Application.Order No.33821.The Commission
granted intervention to Monsanto Company,PacifiCorp Idaho Industrial Customers (PIIC),and
the Idaho Irrigation Pumpers Association,Inc.(IIPA).Order Nos.33822,33835,and 33846.
The parties conferred and agreed upon a schedule for processing the case,which the Commission
adopted.Order No.33850.The parties then met several times to discuss settlement and
ultimately settled the issues in the case.See Order No.33927.Rocky Mountain Power filed the
Settlement Stipulation with the Commission,and the Commission issued a Notice of Settlement
and adopted a new schedule for processing the case under Modified Procedure.See Order No.
33939.Staff and Rocky Mountain Power timely filed comments to support the Stipulation.No
other comments were received.The Commission now issues this Order approving the
Stipulation,based on the record as it stands today.The Commission expects the Company to
provide additional analysis as it becomes available,as discussed further below.
THE APPLICATION
The Company proposed to modernize most of its wind generation resources in Wyoming,
Washington,and Oregon.Collectively,the facilities represent 999.1 megawatts (MW)of
installed capacity (594 MW,Wyoming;304.6 MW,Washington;and 100.5 MW,Oregon).
Application at 4.Upgrades include new rotors with longer blades and new nacelles with higher-
capacity generators.Id.The Company estimates these changes will cause an l1%to 35%
increase in wind generation,for an average of 19%.Id.at 5.
ORDER NO.33954 1
Besides increased generation,the Company claimed repowering would allow for greater
control over quality and voltage,allowing for greater reliability.Id Additionally,the Company
stated repowering would reduce future operating costs and extend the useful life of each plant by
approximately 10 years,without the cost and complication of permitting and constructing new
facilities.Id
The Company explained that the cost-effectiveness of repowering is "driven in part by
the fact that repowering requalifies the Company's existing wind facilities for PTCs,which are
set to expire 10 years from their original commercial operation date (expiration dates range from
2016 through 2020)."Id.To requalify for PTCs,the repowered facilities must meet the Internal
Revenue Service's (IRS)80/20 test-the fair market value of the retained property (that is,the
tower and foundation)must be no more than 20%of the facility's total value after installation of
the upgrade (the nacelle and rotor).Id The Company explained it has designed the repowering
project to meet this requirement.
The Company further explained its efforts to ensure the repowered facilities are eligible
for all available PTCs.Id.at 6.The Company has agreed to buy necessary equipment from
General Electric,Inc.and Vestas-American Wind Technology,Inc.Id According to the
Company,"these safe-harbor equipment purchases allow the repowered facilities to qualify for
100 percent of the value of available PTCs if they are commercially operational by the end of
2020."Id The Company estimated that to meet installation timelines,it will need Commission
approval for the project by December 29,2017,and requested such a processing,timeline.Ad
The Company explained that its 2017 IRP (Case No.PAC-E-17-03)identified wind
repowering as a least-cost,least-risk resource.Id at 6-7.In addition,the Company conducted a
"comprehensive economic analysis"of the project,which demonstrated it would provide $41
million to $589 million in customer benefits,depending on assumptions and scenarios.Id at 7.
The Company requested binding ratemaking treatment under Idaho Code §61-541.Id at
8.It proposed to track repowered wind project expenses using a Resource Tracking Mechanism
as a component of the Company's Energy Cost Adjustment Mechanism (ECAM),until the costs
and benefits are fully included in base rates.Id at 12.The Company proposed that customers
receive 100%of the benefit of incremental energy generated from the projects.Id.Once fully in
base rates,only the incremental fluctuations associated with production and PTCs would
continue to be tracked in the ECAM.Id Further,the Company explained it intends to file new
ORDER NO.33954 2
depreciation rates in 2019,when it will reset the 30-year depreciable life of the repowered
facilities.Id This effectivelyextends the depreciable life of the facilities by 10 to 13 years.Id
Finally,the Company asked to include the remaining book value of the replaced assets in
accumulated depreciation reserve and to continue to recover these costs in rates.Larsen Direct at
2.According to the Company,"[t]he remaining original investment plus new capital additions
will be depreciated using current depreciation rates until the Company's next depreciation
study."Id at 15.
In sum,the Company asked the Commission to issue an order (1)finding that the wind
repowering project is prudent and in the public interest;(2)approving the proposed binding
ratemaking treatment for the repowering project;and (3)approving the continued rate recovery
of and on the replaced assets associated with the repowering project as described in the
testimony of Company witness Mr.Larsen.Application at 13-14.
THE SETTLEMENT STIPULATION
The parties'Stipulation is summarized as follows:
1.Overview
If approved,PacifiCorp would use its ECAM to recover the replacement of certain assets,
new investment,incremental energy production,and wind repowering project PTCs through the
Resource Tracking Mechanism.The Resource Tracking Mechanism and ECAM will capture the
costs and benefits of the repowered wind facilities until they are recovered in base rates through
a general rate case.
2.Resource TrackingMechanism
Customers will receive 100%of the benefit of the incremental energy produced by the
repowered facilities.Under the ECAM's existing sharing bands,the Company credits customers
with 90%of the benefits from incremental energy production and retains the remaining 10%for
itself.The Resource Tracking Mechanism will return to customers the Company's 10%
associated with the wind repowering project,so that customers will receive 100%of the benefit
of the incremental energy produced by the repowered facilities.
The Resource Tracking Mechanism calculation will use a pre-tax return on investment
rate of 10.4%,or an after-tax return on investment rate of 6.45%.The Company will begin
deferring the cost and benefits for each repowered facility in the first month after its in-service
date.The Company has agreed to maintain a cap in the Resource Tracking Mechanism until its
next general rate case where it may ask,if appropriate,to remove the cap.
ORDER NO.33954 3
3.Change in Circumstances
The parties agreed,if there is a significant change in circumstances,such as changes to
the federal tax code,or a change in the projected costs or benefits to the project,that the parties
may initiate a further review before the Company proceeds.The Stipulation also includes a
"more favorable terms and conditions"clause allowing the parties to reconvene and amend the
Stipulation,with Commission approval,if more favorable terms are reached in Utah or
Wyoming.
4.Signing Parties
The Company,Commission Staff,Monsanto,the IIPA,and the PIIC signed the
Stipulation and represent it is in the public interest and is fair,just,and reasonable.
THE COMMENTS
1.Commission Staff
Commission Staff supported the Stipulation.Staff Comments at 2.Staff reviewed the
Application and Stipulation to determine whether the repowering project is prudent and to
evaluatethe Resource Tracking Mechanism.
Regarding the prudency review,Staff reviewed the Company's economic analysis of the
project,and believed the assumptions used in the analysis are reasonable and,in the case of
natural gas price assumptions,may be conservative.Id at 3,5.Staff thus believed the
Company's economic analysis is reasonable.Id at 3.
Staff also analyzed potential risks to the project that could increase costs or reduce
benefits,and believed the Stipulation mitigates many of these risks.Id While some risk
remains,Staff believed it is acceptable.Id Specifically,Staff identified a risk that the project
may fail to qualify for PTCs under IRS rules.Staff believes the Stipulation mitigates this risk by
stating that the Company bears the risk of losing PTCs if the project does not qualify.Id.at 4.
Staff expects that if the project does not qualify,"the Company will calculate PTC benefits to be
passed through the ECAM to ratepayers as if full PTC benefits are being realized for the ten
years the Company is eligible."Id Staff further explained that the Company has designed the
project and mitigated the risk of the project failing to qualify for PTCs.Id
Staff also identified a risk that the federal corporate income tax rate may change,which
could significantly reduce the revenue requirement benefit of the PTCs from the project.Staff
believed the Stipulation mitigates this (and other)risks with a provision that if there is a material
change in circumstances,including a change to federal tax laws or changes in projected costs or
ORDER NO.33954 4
benefits,the Company will make a filing with the Commission to allow for additional review and
a determination whether the Company should proceed.Id at 4-5.
Staff also described provisions of the Stipulation that mitigate other risks.For example,
the Stipulation requires the Company to pass on to ratepayers all liquidated damages it receives
from equipment suppliers in case the repowered equipment does not meet specified availability,
performance,or installation schedule requirements.Id at 4.As another example,the
Stipulation's Resource Tracking Mechanism caps the Company's annual actual cost by the
amount of annual benefits,thereby mitigating the risk that costs will exceed estimates and reduce
net benefits.Id Further,parties retain the ability to challenge the prudence of actual costs and
benefits incurred with the project when the Company seeks recovery of the costs in a later
proceeding.Id at 8.In addition,the Company will provide a report of net power cost and PTC
benefits associated with the project,which Staff explained would enable parties to challenge
recovery of costs and benefits associated with the project.Id
Staff also described natural gas price risk.If natural gas prices are less than the Company
assumes,then the project's net benefits also will be less than estimated.Id at 5-6.While the
impact of lower natural gas prices could be large,Staff believes the natural gas price risk is low.
Id Staff compared the Company's natural gas price forecasts with those of the U.S.Energy
Information Administration (EIA),and found that the Company's forecasts are "consistently
lower"than the EIA's.Id at 5.Staff thus believed the Company's forecasts are conservative,
and explained that if actual gas prices are closer to EIA's forecasts,there will be more benefits
than the Company has estimated.Id.Staff also noted that some of the risk mitigation provisions
discussed above could mitigate the natural price risk.Id.at 6.
Staff discussed remaining risks-such as CO2 costs and changed wind capacity factors-
and believed the risks are low.Id at 6-7.
Further,Staff supported the cost recovery provisions of the Stipulation.Staff supported
the Resource Tracking Mechanism and explained it "will ensure an equitable match of project
costs with project benefits until the project can be included in base rates."Id at 8-9.Staff
explained that the Resource Tracking Mechanism passes 100%of net power cost benefits to
customers,while the ECAM would normally only pass 90%through due to customer sharing.
Id.at 9.
Staff explained that the Stipulation includes an option to extend the Resource Tracking
Mechanism-includingthe cost cap-past the next general rate case and to keep recovery of the
ORDER NO.33954 5
project separate from base rates.Id Staff believed this option should be considered in the next
rate case because it would allow customers to benefit from declining capital recovery costs.Id
The alternative--includingthe project in base rates-would hold project capital costs at test year
amounts.Id
Staff supported the pre-tax return on investment,10.4%,agreed to in the Stipulation for
calculating the resource tracking mechanism revenue requirement (which equates to an after-tax
return on investment of 6.45%).Id at 10-11.Staff also discussed its support of the Stipulation's
provision to consider any future settlements reached in other jurisdictions and the provisions
relating to the disposition of replaced assets.Id.at 11.
In sum,Staff supported the Stipulation and recommended the Commission approve it as
filed.Id.
2.Rocky Mountain Power
The Company explained all parties negotiated the Stipulation in good faith.Company
Comments at 4.The Company acknowledged that any project has risks,and described that the
Stipulation has protections and off-ramps to protect customers and the Company from risks
within the Company's control.Id
The Company described the provision regarding material changes in circumstances.Id.
The Company explained it has committed (in dockets in Utah and Wyoming)to provide an
updated analysis of the project,incorporating the results of the final equipment selected,any
contract terms,and the most current information regarding tax reform ld.The Company
committed to provide this analysis to this Commission and parties by February 7,2018.Id.The
Company explained that if this analysis results in a material change to the project,the Company
would make a supplemental filing per the Stipulation to allow the Commission and parties an
additional formal opportunityto review.Id.at 4-5.
Thus,the Company asked the Commission to approve the Stipulation as filed and issue
an order:(1)finding the wind repowering project prudent and in the public interest;(2)
approving the Resource Tracking Mechanism as described in the Stipulation;and (3)approving
the continued rate recovery of and on the replaced assets associated with the wind repowering
project.Id
COMMISSION FINDINGS AND DECISION
The Commission has jurisdiction over this matter under Idaho Code §§61-502 and 61-
503.Under Rule 276 of the Commission's Rules of Procedure,a settlement proposal is not
ORDER NO.33954 6
binding,but must be reviewed and approved by the Commission as "fair,just,and reasonable,in
the public interest,or otherwise in accordance with law or regulatory policy."IDAPA
31.01.01.276.
After reviewing the Application,the Stipulation,and parties'comments,the Commission
adopts and approves the Stipulation.We find the wind-repowering project to be prudent and in
the public interest,based on the record before us today.This finding,however,is contingent on
the Company's agreement,as reflected in paragraph 16 of the Stipulation and page 4 of the
Company's reply comments,to continue analyzing the project's costs and benefits and report the
results of its analysis to us by February 7,2018.We expect the Company's analysis to consider
the effects of new federal tax legislation and any other updated assumptions that are relevant to
whether the Stipulation remains in the public interest.We reserve the right to revisit our initial
prudency finding after the Company files its report.See Idaho Code §61-624 (empowering
Commission to,at any time,alter or amend any order or decision made by it).
We approve the ratemaking treatment described in the Stipulation,including the
Resource Tracking Mechanism as a component of the ECAM,to capture the costs and benefits
of the repowered facilities until they can be incorporated into base rates.Our approval of the
Resource Tracking Mechanism does not constitute approval of binding ratemaking treatment for
the project under Idaho Code §61-541.The Resource Tracking Mechanism is an appropriate
tool for cost recovery in this case,and we have approved similar tracking mechanisms before.
See Order No.32910 (Case No.PAC-E-13-04,approving a similar resource adder in Rocky
Mountain Power's ECAM to recover the Lake Side II generation facility at 100%until that
facility is included in base rates);Order No.33771 (Case No.IPC-E-16-24,approving a similar
tracking mechanism for the North Valmy generation facility for Idaho Power);Order No.32457
(Case No.IPC-E-11-18,approving a similar tracking mechanism for the Boardman generation
facility for Idaho Power).
We thus find the Stipulation appropriately resolves the issues concerning the project.We
further find that the Stipulation is a reasonable compromise of the contested issues and results
from substantial negotiations in which all parties participated.We recognize the parties'efforts
and commend their cooperation in reaching agreement on the various and complex issues.By
entering into the agreement,the parties resolve the contested issues,avoiding the expense,
inconvenience,and uncertainty of further litigation.Further,we find that the Stipulation's terms
achieve an appropriate balance of competing interests.
ORDER NO.33954 7
We thus find that the Stipulation is just,fair and reasonable,in the public interest,and in
accordance with the law and regulatory policy of this state,and we approve it without
modification.IDAPA 31.01.01.275and .276.
ORDER
IT IS HEREBY ORDERED that the parties'Stipulation concerning Rocky Mountain
Power's Application is approved.
THIS IS A FINAL ORDER.Any person interested in this Order may petition for
reconsideration within twenty-one (21)days of the service date of this Order with regard to any
matter decided in this Order.Within seven (7)days after any person has petitioned for
reconsideration,any other person may cross-petition for reconsideration.See Idaho Code §61-
626.
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of December 2017.
PAÙÚKJELLA hER,PRESIDENT
KRISTI E RAPER,CO SIONER
ERIC ANDERSON,COMMISSIONER
ATTEST:
Diane M.Hanian
Commission Secretary
I:\Legal\LORDERS\PACEl706ccI finatorderdoc
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