20170705Larsen Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.PAC-E-17-07
OF ROCKY MOUNTAIN POWER FOR A )
CERTIFICATE OF PUBLIC )DIRECT TESTIMONY OF
CONVENIENCE AND NECESSITY AND )JEFFREY K.LARSEN
BINDING RATEMAKING TREATMENT )
FOR NEW WIND AND TRANSMISSION )
FACILITIES )
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ROCKY MOUNTAIN POWER
CASE NO.PAC-E-17-07
June 2017
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l INTRODUCTION AND SUMMARY
2 Q.Please state your name,business address,and current position with PacifiCorp
3 d/bla Rocky Mountain Power ("Company").
4 A.My name is Jeffrey K.Larsen,and my business address is 1407 West North Temple,
5 Suite 310,Salt Lake City,Utah 84116.I am currently employed as Vice President of
6 Regulation for Rocky Mountain Power.
7 Q.Please describe your education and professional background.
8 A.I received a Master of Business Administration degree from Utah State University in
9 1994,and a Bachelor of Science degree in Accounting from Brigham Young University
10 in 1985.I have also participated in the Company's Business Leadership Program
11 through the Wharton School,and an Advanced Education Program through the J.L.
12 Kellogg School of Management at Northwestern University.In addition to formalO13education,I have also attended various educational,professional and electric-industry-
14 related seminars and training programs during my career at the Company.I joined the
15 Company in 1985,and I have held various accounting,compliance,regulatory and
16 management positions before my current position.
17 Q.Have you provided testimony in previous regulatory proceedings?
18 A.Yes.I have filed testimony on various matters in the states of Utah,Idaho,Wyoming,
19 California,Washington,Oregon,and Nevada.
20 Q.What is the purpose of your testimony?
21 A.I explain the Company's requested ratemaking treatment for the 860 MW of new wind
22 facilities in eastern Wyoming ("Wind Projects")and for the 140-mile,500 kilovolt
23 ("kV")Aeolus-to-Bridger/Anticline transmission line and accompanying transmission
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l facilities (the "Transmission Projects")for which the Company is seeking approval in
2 this Application.Specifically,I describe and support the matching of the costs and
3 benefits of both the Wind Projects and the Transmission Projects (the "Combined
4 Projects")through the Energy Cost Adjustment Mechanism ("ECAM").
5 Q.Please summarize the proposed ratemakingtreatment for the Combined Projects.
6 A.The Company is seeking approval of binding ratemaking treatment for the Combined
7 Projects to allow the Company to act on a time-limited opportunity to implement cost-
8 effective generation and transmission facilities while minimizing the impact on
9 customer rates.The Combined Projects are inextricably linked-the Transmission
10 Projects relieve existing congestion in eastern Wyoming,and the Wind Projects will
11 rely on the new Transmission Projects for interconnectionand allow the Company to
12 realize the benefits of production tax credits ("PTCs")and zero-fuel-cost-energy.O 13 The proposed ratemaking treatment,known as the Resource Tracking
14 Mechanism ("RTM"),is designed to capture customer benefits and match those
15 benefits with the costs of the Combined Projects.The RTM would primarily operate
16 until the costs and benefits of the Combined Projects are fully included in base rates
17 through a general rate case.The RTM would be included as a component of the ECAM.
18 Once the full costs and benefits are included in base rates,only the incremental
19 fluctuations associated with production levels of energy and PTCs would continue to
20 be tracked in the ECAM,as they are today,since these are entirely dependent on the
21 variable output of the Wind Projects.The Company would begin deferring the costs
22 and benefits associated with each new facility in the month it goes into service.
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l Q.As the Combined Projects come into service,what are the annual,estimated
2 deferral balances that would flow through the RTM?
3 A.As described more fully later in my testimony and exhibits,the Company is projecting
4 the initial annual revenue requirement impact for the years 2020 to 2023 to be in the
5 range of ($1.0)million to $5.4 million in Idaho,as shown in Table 1 of Exhibit No.27.
6 The Company will capture the impacts of the Combined Projects through the RTM
7 until they are included in base rates.
8 Q.What are the differences between your calculation of revenue requirement
9 impacts in Table I and Company witness Mr.Rick T.Link's analysis of revenue
10 requirementsavings from the Combined Projects?
11 A.Mr.Link conducted a revenue requirement differential analysis,and my analysis is a
12 revenue requirement calculationbased on his information.As such,my analysis showsO13theannual,near-term revenue requirement impacts of the large capital investments,
14 while Mr.Link's economic analysis estimates the change in nominal revenue
15 requirement,accounting for system costs that would have otherwise been incurred if
16 the Combined Projects were not pursued.Mr.Link also calculates the present-value
17 change in nominal revenue requirement due to the Combined Projects,which shows
18 net customer benefits over time.In other words,Mr.Link's testimony demonstrates
19 that over time customer rates will be lower with the Combined Projects than without.
20 Q.What is the potential rate impact to customers of the Combined Projects?
21 A.In the first full year of operation (2021),the rate impact to customers is less than
22 1.9 percent.While this percentage change reflects the year-one impact to customers,it
23 does not fully reflect the value of the Combined Projects due to costs avoided over
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l time.Table 3 of Mr.Link's testimony shows the present value savings calculated
2 through 2050 to be $137 million.This demonstrates that although there is an initial
3 increase in cost,the lifetime savings of the Combined Projects are significant.
4 Q.Is the RTM proposed here the same mechanism the Company proposes in the
5 concurrently filed application for an order approving non-traditional binding
6 ratemakingtreatment related to the wind repowering project?
7 A.Yes.The Company proposes to use the RTM as a component of the ECAM for both the
8 Combined Projects and the wind repowering project addressed in the Company's
9 concurrent filing.The Company proposes slight differences in the treatment of the
10 deferral balances,applying the surcharge cap to wind repowering only.
11 BINDING RATEMAKING AUTHORITY
12 Q.Does the Idaho Public Utilities Commission have binding ratemaking authority?O 13 A.Yes.Idaho Code §§61-541(2)provides that a public utilitythat proposes to construct,
14 purchase,or make major additions to an electric generation facility or transmission
15 facility:
16 [M]ay file an application with the commission for an order specifying
17 in advance the ratemaking treatments that shall apply when the costs of
18 the proposed facility are included in the public utility's revenue
19 requirements for ratemaking purposes.
20 The "requested ratemaking treatments may include nontraditional ratemaking
21 treatments or nontraditional cost recovery mechanisms."The Company's request for
22 binding ratemaking treatment fairly and reasonably balances the interests of customers
23 and satisfies each of the five requirements listed under the statute outlined in the
24 Application,as explainedby the Company's witnesses.
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l Moreover,the Company's proposed ratemaking treatment ensures that rates
2 reflect both the costs and the benefits of the Combined Projects and is consistent with
3 established Commission precedent.Binding ratemaking treatment is warranted because
4 of the magnitude of the proposed investment and the customer benefits resulting from
5 the Combined Projects.
6 Q.Why is the Company seeking approvalof Binding Ratemaking Treatment for the
7 Combined Projects?
8 A.The Combined Projects meet the statutory requirements regarding the public interest,
9 and the Company's proposed ratemaking addressed in this testimony reflects the
10 "nontraditional ratemaking treatments or nontraditional cost recovery mechanisms"
11 contemplated by the statute.The Combined Projects themselves are an innovative and
12 nontraditional project intended to take advantage of the time-limited opportunity toO13obtainone-hundred percent PTC benefits for customers.The Combined Projects are
14 inextricably linked in that the Wind Projects will rely on the new Transmission Projects
15 for interconnection and allow the Company to realize the benefits of PTCs and zero-
16 fuel-cost energy that support the economics of the Transmission Projects.The
17 Company's request for approval pursuant to Idaho Code §§61-541(2)provides
18 interested parties and the Commission the opportunity to meaningfully review,before
19 construction,whether the Combined Projects and expenditures are reasonable,prudent,
20 and in the public interest.The Company's proposed RTM is a nontraditional approach
21 that will properly match the timing of the benefits and costs of this unique and time-
22 constrained opportunity.Because the Combined Projects are in the public interest,
23 binding ratemaking treatment is appropriate and reasonable.
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l RESOURCE TRACKING MECHANISM
2 Q.Why are you requesting approvalof the RTM?
3 A.The RTM is a nontraditional mechanism that advances the public interest by fairly
4 balancingthe interests of customers and shareholders regarding the ratemaking impacts
5 of the Combined Projects.As the other Company witnesses discuss,the Combined
6 Projects provide a net benefit to customers through incremental,zero-fuel-cost wind
7 generation,additional PTCs,and wheeling revenues,all of which help to mitigate near-
8 term costs.Without the RTM,a portion (90 percent)of the zero-fuel-cost energy from
9 the Wind Projects would automatically flow through the ECAM,while 10 percent of
10 these benefits and the costs associated with the investments and their operationwould
11 not be captured in rates and would flow to shareholders;one-hundred percent of the
12 PTCs would flow through the ECAM to customers.The RTM seeks to align the costs
13 and benefits so that customers and shareholders are treated fairly.
14 Q.Please describe the mechanics of the RTM in conjunctionwith the ECAM.
15 A.The ECAM will track the actual energy and PTCs produced from the wind facilities
16 compared to the amount included in base rates.Any variances of energy production
17 impacts Net Power Costs ("NPC")and PTCs.The changes in NPC are shared
18 90 percent by customers and 10 percent by Company shareholders,and PTCs are
19 tracked dollar-for-dollar with no shareholder sharing.The RTM would pass that
20 10 percent NPC value of the Wind Projects back to customers,along with the associated
21 costs incurred by the Company to provide these benefits.Absent the RTM,the ECAM
22 would automatically pass through all new PTCs and 90 percent of the value of the
23 energy to customers,while Company shareholders would bear all the costs until the
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l next general rate case.
2 To fully match the costs with the benefits of the Combined Projects and pass
3 these benefits entirely to customers,the Company proposes implementing the RTM as
4 a component of the ECAM.Upon completion of each component of the Combined
5 Projects,the Company will begin monthlydeferrals of the associated costs and benefits
6 in the ECAM balancing account,which operates on a calendar-year basis.On April 1
7 each year,the Company will file the ECAM deferral balance from the prior calendar
8 year,to be included in rates beginning June 1,consistent with the current ECAM
9 schedule.The RTM review would continue on the same schedule as a component of
10 the ECAM each year until the costs and benefits are fully included in base rates as part
11 of a general rate case.After a rate case,only the NPC and PTC associated with the
12 variability of wind energy production will continue to be tracked in the ECAM,as isO13donetoday.
14 Q.Why is it importantto incorporatethe RTM in the ECAM?
15 A.Incorporating the RTM in the ECAM helps match the production benefits of the wind
16 facilities,which will automatically flow,in part,through the ECAM,with the costs of
17 the Combined Projects.As the Combined Projects are completed and placed into
18 service,the RTM will calculate the monthlyrevenue requirement associated with the
19 Combined Projects and defer it with the incremental benefits,matching costs with
20 benefits.Also,by incorporating the RTM as a component of the ECAM,there is only
21 one tariff and a single line item on customer bills.
22 Q.What costs and revenues will be incorporatedin the RTM?
23 A.The deferral for the Combined Projects will include the followingrevenue requirement
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l components:
2 Plant revenue requirement,consisting of:
3 Capital investment
4 Accumulated Depreciation Reserve ("ADR")
5 Accumulated Deferred Income Tax ("ADIT")
6 Operations and Maintenance Expense ("O&M")
7 Depreciation expense
8 Property taxes
9 Wyoming Wind Tax
10 NPC savings
11 Wheeling Revenues
12 PTCs.
13 These items are summarized in Exhibit No.26.The Company will calculate the RTM
14 deferral as the difference between the value included in base rates for these items and
15 the ne value taking into account the costs and benefits of the Combined Projects as
16 they are placed into service.
17 REVENUE REQUIREMENTCOMPONENTS OF RTM
18 Q.Please describe how the RTM will track rate base components,which include the
19 capital investment,ADR,and ADIT.
20 A.After each wind and transmission facility under construction is placed into service,the
21 Company will defer the full amount of the capital investment,ADR,and ADIT related
22 to that facility in the RTM.Once the Company has included some or all of the
23 Combined Projects in base rates through a future general rate case,the amount in rates
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l will become the base plant balances that in the subsequent annual RTM filings will be
2 subtracted from the capital investment.The Company will use the net plant balance
3 described above to calculate a return on investment using the most recent Commission-
4 approved cost of capital and income tax rate.
5 Q.Please describe how the RTM will track depreciation expense.
6 A.The Company will include depreciation expense in the RTM deferral as the actual
7 monthlyplant-in-servicebalances associated with the Combined Projects,less the wind
8 and transmission base plant-in-service balance,multiplied by the current depreciation
9 rates.Until a general rate case is filed,no depreciation expense associated with the
10 Combined Projects is reflected in base rates,so the full amount would be included in
11 the RTM.
12 Q.How will the depreciation expense be calculated?O 13 A.The current depreciation rates will be applied to the gross electric plant in service
14 ("EPIS")balance,associated with the Combined Projects,to calculate the depreciation
15 expense.
16 Q.How will the RTM reflect revenue from third-partytransmission customers?
17 A.Since the Transmission Projects will be included in the Company's Open Access
18 Transmission Tariff ("OATT"),part of the costs will be recovered from third-party
19 transmission customers,which is treated as a revenue credit to retail customers.Exhibit
20 Nos.27 and 28 assume that 12 percent of the transmission revenue requirement will be
21 paid by third-party transmission customers and is included as an offset in the RTM.
22 This percentage will be updated using the most current information at the time of each
23 RTM filing.
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l Q.How will the RTM reflect incremental O&M expense?
2 A.As facilities that are part of the Combined Projects are placed into service,the Company
3 will include the actual O&M expense associated with the facilities in the RTM deferral.
4 Q.How will the RTM reflect property taxes?
5 A.The Company will calculate property taxes associated with the Combined Projects by
6 taking the monthlyaverage of the capital investment less ADR included in the RTM
7 deferral,multiplied by the average property tax rate from the Company's last general
8 rate case.Exhibit No.29 provides an example of the property tax calculation.
9 Q.How will the RTM reflect Wyomingwind taxes?
10 A.The Company will calculate the Wyoming wind tax by taking the generation associated
11 with the Wind Projects that are subject to the Wyoming wind tax,multipliedby the
12 Wyoming wind tax rate.
13 NET POWER COST AND PTC BENEFITS IN THE RTM
14 Q.Please explain the calculation of the NPC benefits in the RTM.
15 A.The Combined Projects will add significant additional zero-fuel-cost energy to the
16 system,reducing total NPC.Under the sharing bands of the ECAM,90 percent of the
17 NPC benefits of the Wind Projects will be credited to customers,with 10 percent
18 assigned to the Company.Under the RTM,the Company is proposing to pass
19 100 percent of the NPC benefits of the Wind Projects to customers through a credit
20 equal to the amount of the NPC benefits that would otherwise be absorbed by the
21 sharing band,or 10 percent.
22 The Company will value the energy from the Wind Projects using a monthly
23 market price less wind integrationcosts,and the RTM will pass 10 percent of that value
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l through to customers.The calculation is shown on Exhibit No.29.The RTM will
2 continueto credit the full incremental NPC benefits associated with the Wind Projects
3 until the Wind Projects are included in base rates.
4 Q.What market price will the Company use to value the energy?
5 A.The monthly Four Corners heavy load hour ("HLH")and light load hour ("LLH")
6 market price will be used,depending on the time of generation.Additionally,the market
7 price will be reduced by the wind integration costs from the most recent integration
8 study,which currently would be from the Company's 2017 Integrated Resource Plan.
9 Q.Please explain the calculation of the PTCs.
10 A.Currently,the Internal Revenue Service ("lRS")rate for PTCs is $24 per megawatt-
11 hour and PTCs are generally applicable for a period of 10 years after a wind resource
12 is operational.The PTC rate is applied to the actual megawatt-hours of generation fromO13theeligiblewindturbines.This produces a tax credit that can be used to offset the
14 Company's income tax expense under IRS guidelines.To derive the revenue
15 requirement value of the tax credit,the pre-tax value must be grossed-up by the
16 Company's tax gross-up rate.The Company will use the tax gross-up rate from its most
17 recent general rate case to calculate the value of the PTCs from the Wind Projects.
18 Since the PTCs are already tracked 100 percent in the ECAM per Order No.33440 in
19 Case No.PAC-E-15-09 they won't need to be included in the RTM calculation.
20 Q.Do the base rates that are currently in place include PTCs for the existing wind
21 facilities?
22 A.Yes.A value based on the generation from the Company's existing wind facilities
23 during the last general rate case test period is currentlyincluded in base rates and
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l tracked in the ECAM.The Company is not proposing to stop tracking the PTC variance
2 between base rates and actual PTCs in the ECAM,and is not proposing to change the
3 amount included in base rates until the next general rate case.
4 RTM CALCULATION AND STRUCTURE
5 Q.Have you prepared an exhibit that illustrates the calculation and structure of the
6 RTM on a year-by-yearbasis?
7 A.Yes.Page 2 of Exhibit No.27 provides an illustrative example of the calculation of the
8 RTM on an annual basis.The annual amounts will be the sum of the monthlyamounts
9 shown in Exhibit No.28,and the individual lines are described as part of that exhibit.
10 The Company will address variances in actual costs from the projections in this filing
11 at the time the Company seeks rate recovery.
12 Q.Please explain Exhibit No.28.
13 A.Exhibit No.28 is an example of the RTM's monthly calculation.The RTM will be
14 adjusted after a general rate case to exclude amounts that are recovered as part of base
15 rates in the rate case to assure against double-recovery.For items partiallyrecovered in
16 base rates,such as capital investments included for part of the test period,the portion
17 included in the test period will be removed as of the effective date of the general rate
18 case.Page 5 of Exhibit No.28 includes an overview of the total plant revenue
19 requirement,net power cost,PTC,and the deferral balances.
20 Once per year on a calendar-year basis,the Company will sum the monthly
21 RTM revenue requirement entries to prepare the annual RTM adjustment to be included
22 in the Idaho ECAM application for filing with the Commission on April 1,with a rate
23 effective date of June 1.
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l Q.How will the Company calculate rates to credit or recover RTM balances?
2 A.The Company is proposing that the allocation factors used in the RTM match the
3 allocation factors used in the calculation of the ECAM.Also,the Company proposes to
4 use the same class allocation and rate design as used for the annual ECAM filing.
5 INTER-JURISDICTIONAL COST ALLOCATION
6 Q.How will the Company allocate the investment in the Combined Projects to the
7 state jurisdictions PacifiCorp serves?
8 A.Currently,the Company's investments in wind generation and transmission resources
9 are treated as system resources under the approved 2017 Protocol Allocation
10 Agreement.That approved methodology will continue for ratemaking purposes
11 through 2019.The same treatment will apply to new investments that occur in that
12 period.After that time period,the then-applicableallocation methodologyapproved byO13theCommissionwouldgovern.
14 The Company's analysis demonstrates that the Combined Projects deliver
15 system benefits,and the Company believes that the Combined Projects should continue
16 to be allocated across the six-state service territory on a system basis unless there is an
17 agreement through the Multi-State Process to do otherwise.
18 CONCLUSION
19 Q.Please summarize your testimony.
20 A.To match the investments and operational costs with the benefits of the Combined
21 Projects until the costs and benefits are fully included in base rates through a general
22 rate case,the Company proposes to implement the RTM as a component of the existing
23 ECAM.Matching the costs and benefits through the RTM is fair to customers and
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l shareholders,and is consistent with the Commission's authority to approve binding
2 ratemaking treatment for non-traditional cost recovery mechanisms.The RTM would
3 become a component of the ECAM until the costs and benefits are fully included in
4 base rates through a general rate case,at which point the ECAM would continue to
5 track variances in NPC and PTC.
6 Q.What is your recommendation to the Commission?
7 A.I recommend that the Commission approve the Combined Projects and the Company's
8 proposal for the binding ratemaking treatment for the Combined Projects.Approval
9 will provide certainty to the Company and enable it to move forward with the
10 Combined Projects.
11 Q.Does this conclude your direct testimony?
12 A.Yes.
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