20171213Comments.pdf

CAMILLE CHRISTEN
DEPUTY ATTORNEY GENERAL 3
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE,IDAHO 83720-0074
[phone]
BAR NO.10177
Street Address for Express Mail:
472 W.WASHINGTON
BOISE,IDAHO 83702-5918
Attorneyfor the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
ROCKY MOUNTAIN POWER FOR BINDING )CASE NO.PAC-E-17-06
RATEMAKING TREATMENT FOR WIND )REPOWERING )COMMENTS OF THE
)COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission,by and through its
attorney of record,Camille Christen,Deputy AttorneyGeneral,and in response to the Notice of
Proposed Settlement,Notice of Modified Procedure and Notice of Comment Deadline issued in
Order No.33939 on November 30,2017,in Case No.PAC-E-17-06,submits the following
comments.
BACKGROUND
On July 3,2017,Rocky Mountain Power filed an Application requesting the Commission
(1)determine that a decision to "repower"its existing wind fleet is prudent;(2)approve the
Company's proposed ratemaking treatment for the cost recovery of new equipment required to
repower the Company's wind facilities,and (3)approve the continued recovery of replaced wind
equipment.
On October 19,2017,the parties to the case-the Company,Staff,Idaho Irrigation
Pumpers Association (IIPA),Monsanto,and PacifiCorp Idaho Industrial Customers (PIIC)----met
STAFF COMMENTS 1 DECEMBER 13,2017
to discuss potential settlement.On November 21,2017,all parties agreed to a Settlement
Stipulation (Stipulation)which is included here as Attachment A.Staff now submits these
comments supporting the Stipulation.Staff's comments are organized into the following
sections:
I.Staff Position Summary
II.Project Overview
III.Prudency Review
IV.Cost Recovery Evaluation
V.Asset Disposition
I.Staff Position Summary
Staff supports the Stipulation,in which the parties agreed that the Company's decision to
repower certain wind facilities is prudent.Staff's support is based in part on the Company
providing ongoing evaluation and notifying the Commission of all material changes in
circumstances in order to allow for additional review.Additionally,the Company is required to
mitigate ratepayer risks that are within its control.The specific terms are detailed in the
Prudency Review section below.
Staff also supports the Stipulation's terms regarding cost recovery ----specifically,the
Resource Tracking Mechanism (RTM)as a component of the Energy Cost Adjustment
Mechanism (ECAM)to enable recovery of the new wind facility investments and the
undepreciatedbalance of the replaced assets until the revenue requirement is reflected in base
rates.The cost recovery terms are described in the Cost Recovery Evaluation section.
Finally,Staff supports the Stipulation's requirements regarding replaced assets.The
specific terms related to undepreciated assets are discussed in the Asset Disposition section.
II.Project Overview
The Company is planning to upgrade 12 of its 13 existing wind facilities totaling
approximately 1000 MW of installed capacity to take advantage of a time-limited opportunity to
extend Production Tax Credit (PTC)benefits for another ten years.This benefit is primarily
economic,given that the first capacity deficit date doesn't occur until 2028 and because there is
only a marginal increase in the amount of capacity as a result of the project.
STAFF COMMENTS 2 DECEMBER 13,2017
The existing wind facilities were first installed between 2006 and 2010,all of which
qualified for ten years of PTCs at that time.The original PTC benefits associated with the
facilities begin expiring in August of 2017 and will be totally expired by October of 2020.These
PTC benefits are currentlypassed through to ratepayers at 100 percent in the ECAM.By
replacing the nacelle (that is,the generator at the top of the wind tower)and the rotor blades and
hub with more efficient and higher capacity equipment,the Company and ratepayers will gain an
additional ten years of PTC benefits and at least an additional ten years of useful life from the
facilities.The Company should also see higher levels of capacity and generation as compared to
the existing equipment,and reduced operation &maintenance cost (O&M)due to newer and
improved equipment.
III.Prudency Review
Staff believes the project has a high likelihood of providing positive net benefits to
ratepayers when coupled with the risk-mitigating provisions contained in the Stipulation.This
conclusion is based on (1)Staff s thorough review of the Company's economic analysis,(2)a
comprehensive evaluation of risk factors,and (3)risk-mitigation provisions that were included in
the Stipulation.Staff acknowledges that some risk remains,but believes the amount of
remaining risk is acceptable.
Staff believesthat the Company's economic evaluation of the project is reasonable and in
many ways conservative.The Company compared the relative system net present value revenue
requirement difference (PVRR(d))between operating with the project and operating without the
project over the investment's 30-year useful life.The Company also calculated the PVRR(d)
across 9 different alternative futures includingdifferent combinations of low,medium,and high
natural gas price forecasts and zero,medium,and high carbon dioxide (CO2)cost adders to
understand their economic impact.According to the Company,with medium natural gas and
CO2 price assumptions,wind repowering results in customer benefits of $359 million.
Application at 7.(The Company estimated benefits at $41 million assuming low natural gas
prices and zero CO2 costs,and at $589 million assuming high natural gas prices and high CO2
costs.Id.)All scenarios assume that the repowered projects receive 100%of the available
PTCs.
STAFF COMMENTS 3 DECEMBER 13,2017
As part of its project evaluation,Staff identified and assessed several risks that could
impact estimated net benefits and placed them into two categories based on the Company's
ability to mitigate them.
Risks the Company Can Control or Can Mitigate
The first category of risks are ones the Company can control.The Stipulation includes a
number of provisions to mitigate the impact of these risks on ratepayers.For example one of the
most significant risks is that the repowering project might fail to qualify for PTCs under Internal
Revenue Service (IRS)rules (the 80/20 test and the safe harbor requirement discussed in the
Company's Application at 5-6).The Company has designed the project and taken action to
mitigate this risk.See Application at 5-6.Further,under the Stipulation,the Company will bear
the risk of loss of PTCs in the event repowering project does not qualify for PTCs under those
IRS rules.Stipulation,Paragraph #10.If the Company does not meet these provisions,Staff
expects that 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.
There is also a risk that project investment costs or future O&M costs may exceed
estimates,thereby reducing net benefits.Under the Stipulation,the Company will cap the annual
actual cost by the amount of annual benefits,thereby ensuring that the project pays for itself
during the implementation phase of the project and while the cost cap in the RTM is in place.
Id Paragraph #9.
Another risk is that the repowering equipment may not perform as expected.Under the
Stipulation,the Company will pass on all liquidated damages it receives from equipment
suppliers to ratepayers in case the repowered equipment does not meeting specified availability,
performance,or installation schedule requirements.Id.Paragraph #7.
There are also risk factors the Company cannot control but can mitigate prior to
committing capital investment.For example,one significant risk is a change in the corporate
income tax rate which could significantlyreduce the revenue requirement benefit from PTCs.
The Company will be required to monitor and evaluate all conditions and circumstances,both
within and outside of the Company's control,that could change the viabilityof the project.
Id.Paragraph #16.The parties have agreed that if there is a material change in circumstances,
includinga change to federal tax laws or changes in projected costs or benefits,the Company
STAFF COMMENTS 4 DECEMBER 13,2017
will make a filing with the Commission to allow for additional review and a determination of
whether the Company should proceed.Id.
Risks the Company Cannot Control and that are Difficult to Mitigate
There are also remaining risks outside of the Company's control that are nearly
impossible to mitigate after the project has been implemented.This includes factors such as
changes to natural gas prices,CO2 cost adders,and tax code changes after the project has been
implemented.
Natural Gas Price Risk
There is a risk that the actual price of natural gas is lower than assumed by the Company,
decreasing net benefits from the project.This would make the next best alternative base case,
which uses increased gas-fired generation,more beneficial in comparison to the project.Staff
draws two conclusions based on its evaluation.First,natural gas prices can have a large impact
on the economics of the project.Second,although the Company used a reasonable range of
natural gas price forecasts,Staff believes they are somewhat conservative compared to the most
recent Energy Information Administration (EIA)forecasts and that the project benefits could be
greater than estimated.
A higher natural gas price forecast has a significant effect on project economics making
the project more beneficial to customers.The Company's high natural gas forecast increases
benefits by about $360 million as compared to the Company's low natural gas forecast (both
assuming zero CO2 cost).This is because the additional amount of zero-cost fuel generationas a
result of the repowering displaces natural gas generationthe Company would need to meet load.
Staff also concludes that the Company's forecasts are conservative based on their being
consistently lower than EIA's forecasts,as illustrated in the graph below.If actual gas prices are
closer to EIA's forecasts,ratepayers will experience more upside benefits than the Company has
estimated.
STAFF COMMENTS 5 DECEMBER 13,2017
Comparison of Natural Gas Forecasts
(2017 EIA Annual Energy Outlook Forecasts to Pacificorp Proposals)
$16 00
$14 00
$2 00
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036
---Adopted Medium---Adopted High Adopted Low
--2017 Ref EIA 2017 Lo EIA =>2017 Hi EIA
To the extent that natural gas prices are less than the Company's forecasts,the result
could be reduced benefits.There are two provisions included in the Stipulation that could
mitigate this risk:the RTM cost cap described in Paragraph #9,in which the parties agreed that
the annual cost to customers would be capped by the amount of annual benefits,and the
requirement that the Company file with the Commission in case of a material change in
circumstances,as described in Paragraph #16.However,once the project is implemented,there
is very little that could be done to mitigate the effects of lower than assumed natural gas prices.
Regardless,Staffbelieves the natural gas price risk is low overall because of the Company's
conservative natural gas assumptions.
CO2 Regulation Risk
Staff believes that the Company used a conservative,yet reasonable range of CO2 cost to
evaluate the CO2 regulation risk and concludes that the risk to ratepayers is insignificant.The
risk associated with CO2 regulation is if the actual cost of CO2 is lower than what the Company
assumed in its analysis.
The Company assessed the worst case for the repowering project using a zero cost for
CO2 in its economic evaluation.It resulted in favorable PVRR(d)s across all three natural gas
forecasts.Any incremental CO2 cost,such as the Company's medium or high CO2 cost
scenarios,only provides additional upside benefit.
STAFF COMMENTS 6 DECEMBER 13,2017
Although higher levels of CO2 cost provides better project economics,the effect is
relativelysmall.This is illustrated in the graph below by the small amount of difference in
annual revenue requirement differentials between the three CO2 adders the Company evaluated.
Impact of CO2 on System Revenue Requirement
($mllion)
---Med Gas/ZeroCO2 PVRR(d)=($362M)--Med Gas/Med CO2 PVRR(d)=($359M)Med Gas/High CO2 PVRR(d)=($401M)
Because the project has positive economics without federal CO2 regulations in place,
Staff believes mitigation of CO2 price risk is not necessary.If federal CO2 legislation is enacted
creating a price on carbon emissions,ratepayers will capture potential upside benefits from the
project.
Staff also identified a potential risk that the capacity factors of the wind facilities may be
lower in the future than they have been in the past,therebyjeopardizing the economics of the
repowering project.Staff believes this risk is low-the Company has almost ten years of
historical actual wind generation data for each site and used it to determine the amount of
generation that will occur once the facilities are repowered.There is little evidence that
conditions at the sites will change in the future and even if it did,this is not within the
Company's ability to control.However,if wind conditions at these sites change enough to make
the project uneconomic in the short term,the RTM cost cap outlined in Paragraph #9 of the
Stipulation will protect ratepayers at least until the cap is removed and the RTM is no longer
used for cost recovery.
STAFF COMMENTS 7 DECEMBER 13,2017
Conclusion Regarding Prudency
The parties retain the ability to challenge the prudence of actual costs and benefits
incurred in implementing the repowering project when the Company seeks recovery of the costs
in a later proceeding.Stipulation,Paragraph #15.In addition,the Company will provide a
report of net power cost (NPC)and PTC benefits associated with the project in its ECAM filing
until the project is included in base rates.Id.Paragraph #11.This will enable parties to
challenge recovery of costs and benefits associated with the project.These provisions further
mitigate risk to ratepayers.Based on its review and the provisions in the Stipulation that
mitigate risk,discussed above,Staff believes the Stipulation is in the public interest and should
be approved.
IV.Cost RecoveryEvaluation
Staff supports the Stipulation's provisions outliningcost recovery for the project.The
provisions most important to Staff include the following:
1.The use of the RTM modified through the Stipulation providing the Company with cost
recovery so that benefits are matched with costs prior to the project being included into
base rates (Stipulation,Paragraph #8).
2.Flexibilityto extend the use of the RTM and the cost cap for a length of time sufficient to
ensure ratepayers can realize full benefits of the project (Stipulation,Paragraph #9).
3.An after-tax return on investment of 6.45%to be used in the RTM for both repowered
and replaced assets until a new return is authorized in the next general rate case or federal
tax rate change case (Stipulation,Paragraph #8).
4.The jurisdictional equity provided by the ability to modify the Stipulation with better
terms and conditions negotiated in other jurisdictions(Stipulation,Paragraph #17).
Each of these provisions are discussed in more detail below.
Resource Tracking Mechanism (RTM)
Staff fully supports the use of an RTM so that the Company can begin recovery of project
costs when benefits start accruing.Id.Paragraph #8.Without the RTM,ratepayers would begin
to see NPC and PTC benefits that automatically flow through the ECAM while the Company
STAFF COMMENTS 8 DECEMBER 13,2017
incurs costs without recovery until there is a rate case.The RTM will ensure an equitable match
of project costs with project benefits until the project can be included in base rates.
The RTM will work in conjunctionwith the ECAM.The annual balance of project cost
and benefits in the RTM will be included in a separate section of the ECAM and added to the
ECAM deferral balance for recovery through ECAM Schedule 94 rates.
If approved,the RTM will track capital-related expense,O&M cost,depreciation,and
taxes including a Wyoming wind tax.Benefits included in the RTM come primarily from PTCs
provided for each megawatt-hour of wind generated from the repowered facilities and reduced
NPC.
The RTM features a cap that limits the amount of annual project revenue requirement
subject to recovery by the amount of annual benefits.Id.Paragraph #9.This provides cost
mitigation as described above.The RTM also passes 100 percent of the NPC benefits to
customers while the ECAM would normallyonly allow 90 percent pass through due to customer
sharing.
Extended Use of RTM
The option to extend the RTM,including the cost cap,past the next general rate case and
to keep the recovery of the project separate from base rates should be seriously considered
during the Company's next general rate case.See id.Paragraph #9.This provision is beneficial
to ensure ratepayers realize the full potential net benefits from the project as reflected in the
Company's Application.
The amount of net benefits in the Company's PVRR(d)analysis used to justify the
project captures declining capital recovery costs and reflects total estimated costs and benefits
for each year of the project's life.However,if the Company files a general rate case in the 2020
timeframe,ratepayers will not see the benefit of declining capital recovery costs because they
will be held constant at test year amounts between general rate cases.This effect is illustrated in
the graph below.
STAFF COMMENTS 9 DECEMBER 13,2017
irnpact of 2O2O Rate Case on Idaho Net Benefits
($Thousands)sa,ooo
$2,000
$LOOO
($1 000)
($6,000)
($7.000)2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
----IViodeled Net Benefit --IViodeled Net Benefit wîth 2O2O Rate Case
The solid line represents the net benefit stream (negative amounts represent a positive net
benefit)the Company used to justifythe project over the first ten years while the dashed line
represents the net benefits customers will see if there is a rate case in 2020 and cost recovery is
locked into base rates for ten years.Staff's analysis shows that customers will lose
approximately $10 million in net present value benefits over this time frame which is represented
by the area between the two curves.
Staff also supports the option to extend the cost cap in the RTM,not to exceed the
eligibilitytimeframe of PTCs.See id.Althoughit is unlikely to be needed during the timeframe
that the project is earning PTCs,the cap provides ratepayers with stopgap risk mitigation
requiring the Company to share some of the risk in case of unforeseen circumstances.Staff
believes this is appropriate for a project that is almost totallybased on economics and not on the
need for capacity.
Rate of Return
Staff considered risk and rate of return in its evaluation of the reasonableness of the RTM
and proposed project.It is Staff s position that the RTM reduces rate recovery risk to the
Company while providing benefits to customers.While the current authorized return on equity
(ROE)in Idaho for Rocky Mountain Power is 9.9 percent,Staff evaluatedthe impact on revenue
requirements using various other ROE levels,including9 percent and 9.5 percent,to reflect
current market conditions and lower risk if the RTM is approved.Considering this evaluation,
the parties did not specify particular ROE but agreed to utilize a 10.4 percent pre-tax return on
STAFF COMMENTS 10 DECEMBER 13,2017
investment to calculate the RTM revenue requirement.See id.Paragraph #8.This equates to an
after-tax return on investment of 6.45 percent.Id.This rate applies to both repowered and
replaced equipment assets.
Jurisdictional Equity
Staff supports the ability to modify the Stipulation based on more favorable terms and
conditions that may be negotiatedwith other state jurisdictions.Id.Paragraph #17.Idaho is the
first state jurisdiction to develop a stipulated settlement and the parties did not have the benefit of
reviewing settlements in Utah and Wyomingto consider other terms.If either Utah or Wyoming
obtain approval of a settlement,the parties in Idaho have agreed to reconvene and reconsider the
terms and conditions contained in the other stipulation(s)and,if needed,realign the Idaho
Stipulation with agreements in other jurisdictions.
V.Asset Disposition
Staff fully supports the provisions related to the disposition of replaced assets outlined in
Paragraphs #12,#13,and #14 of the Stipulation.
Paragraph #12 clarifies the accounting treatment for depreciating replaced assets and the
reporting of net depreciation expense included in the RTM as outlined in Jeffrey Larson's Direct
Testimony.The parties also agreed upon provisions that requires the Company (1)to report on
the disposition and salvage value of replaced assets (Id Paragraph #13),and (2)to maximize the
salvage value of the replaced equipment and to do it in a timely manner or else it "may affect
cost recovery and return on remaining replaced assets."(Id.Paragraph #14).This provides an
incentive for the Company to work toward shared goals in dispositioning these assets.
STAFF RECOMMENDATIONS
Staff recommends that the Commission approve the Settlement Stipulation as proposed.
STAFF COMMENTS 11 DECEMBER 13,2017
Respectfullysubmitted this day of December 2017.
Camille Christen
Deputy AttorneyGeneral
Technical Staff:Mike Louis
i:umisc/comments/pace17.04cemicomments
STAFF COMMENTS 12 DECEMBER 13,2017
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SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF,IN
CASE NO.PAC-E-17-06,BY MAILING A COPY THEREOF,POSTAGE PREPAID,
TO THE FOLLOWING:
TED WESTON YVONNE R HOGLE
ROCKY MOUNTAIN POWER ASSITANT GENERAL COUNSEL
1407 WEST NORTH TEMPLE STE 330 ROCKY MOUNTAIN POWER
SALT LAKE CITY UT 84116 1407 WN TEMPLE STE 320
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DATA REQUEST RESPONSE CENTER RANDALL C BUDGE
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BRUBAKER &ASSOCIATES RONALD L WILLIAMS
16690 SWINGLEY RIDGE RD #140 WILLIAMS BRADBURY PC
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ELECTRONIC ONLY ELECTRONIC ONLY
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IDAHOAN FOODS BYU IDAHO
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ELECTRONIC ONLY ERIC L OLSEN
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E-MAIL:[e-mail] E-MAIL:brmullins mwanalvtics.com
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