20171218Link Rebuttal.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.PAC-E-17-07OFROCKYMOUNTAINPOWERFORA)CERTIFICATEOF PUBLIC )REBUTTALTESTIMONYOFCONVENIENCEANDNECESSITYAND)RICK T.LINKBINDINGRATEMAKINGTREATMENT)FOR NEW WIND AND TRANSMISSION )FACILITIES
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ROCKY MOUNTAINPOWER
CASE NO.PAC-E-17-07
December 2017
l Q.Are you the same Rick T.Link who previously provided direct testimony in this
2 case on behalf of Rocky Mountain Power ("Company"),a division of PacifiCorp?
3 A.Yes.
4 PURPOSE AND SUMMARY OF REBUTTAL TESTIMONY
5 Q.What is the purpose of your rebuttal testimony?
6 A.My rebuttal testimony supports the Company's request for certificates of public
7 convenience and necessity ("CPCNs")and binding ratemaking treatment for the
8 Company's proposal to construct or procure new wind resources ("Wind Projects")and
9 construct the Aeolus-to-Bridger/Anticline line and 230 kV Network Upgrades
10 ("Transmission Projects")(collectively,the "Combined Projects").I summarize the
11 status of the Company's 2017R Request for Proposals ("RFP")for the Wind Projects,
12 the results of which will be included in my supplemental testimony on January 16,O 13 2018,and outline the information and updated economic analysis that the Company
14 will include in that filing.I also rebut challenges on resource need and the Company's
15 economic analysis raised by Monsanto Company ("Monsanto"),PacifiCorp Idaho
16 Industrial Customers ("PIIC"),and the Idaho Irrigation Pumpers Association ("IIPA"),
17 and respond to testimony provided by Staff of the Idaho Public Utilities Commission
18 ("Staff").
19 Q.Please summarize your rebuttal testimony.
20 A.My rebuttal testimony demonstrates that:
21 PacifiCorp has near-term and long-term resource needs that will be partially
22 met with the proposed Wind Projects.
23 The heavily discounted cost of the Wind Projects are lower cost than all
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1 other near-term and long-term resource alternatives.
2 Contrary to certain parties'claims,there is nothing novel or unique about
3 the Combined Projects that justifies unprecedented cost-recovery treatment
4 to assign all risk to the Company.
5 The Company's long-standing methodology to develop its ofEcial forward
6 price curve ("OFPC")produces the best representation of future market
7 prices and is appropriatelyused for the central forecast in the Company's
8 economic analysis;the alternative price-policy scenarios provide a
9 reasonable foundationfor judging risk.
10 The Company's economic analysis appropriatelyaddresses project risks and
11 supports including the Combined Projects as an important element of
12 PacifiCorp's least-cost,least-risk resource plan.O 13 STATUS OF 2017R RFP
14 Q.When did the Company issue the 2017R RFP?
15 A.The Company issued the 20l7R RFP on September 27,2017.The 2017R RFP was
16 approved by the Public Service Commission of Utah ("Utah Commission")on
17 September 22,2017,and the Public Utility Commission of Oregon ("Oregon
18 Commission")on September 27,2017.
19 Q.Has the schedule for completion of the 2017R RFP changed?
20 A.No.
21 Q.Was the scope of the 2017R RFP modified before it was issued to include non-
22 Wyoming wind projects?
23 A.Yes.The Company's original proposal limited the RFP to wind resources capable of
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l interconnecting to or delivering on a firm basis to the Company's transmission system
2 in Wyoming.In response to issues raised in the RFP approval process,and consistent
3 with the recommendations of the Utah independent evaluator ("IE"),the Company
4 expanded the 2017R RFP to allow bids from non-Wyoming wind projects capable of
5 interconnecting to or delivering on a firm basis to anywhere on PacifiCorp's
6 transmission system.
7 Q.In response to the Utah Commission's approval order,did the Company decide to
8 issue a solar RFP to run concurrentlywith the 2017R RFP?
9 A.Yes.In its order approving the 2017R RFP,the Utah Commission suggested,but did
10 not require,a modification to expand the 2017R RFP to solicit solar resource bids.To
11 maintain the 2017R RFP schedule while addressing the Utah Commission's suggestion,
12 the Company issued a separate solicitation for solar resources,the 2017S RFP,onO13November15,2017.The 2017S RFP seeks bids for solar resources up to 300 megawatt
14 ("MW")per individual project that can deliver energy and capacity to the Company's
15 transmission system.
16 Similar to the 2017R RFP,the Company retained an IE to oversee the solar RFP
17 process.The 2017S RFP schedule allows the Company to:(1)evaluate how solar
18 resource bids might impact the economic analysis of bids selected to the final shortlist
19 in the 2017R RFP without delaying the schedule for the 2017R RFP;and (2)explore
20 whether new solar resource opportunities might provide all-in economic benefits for
21 customers.
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l Q.Does the Company anticipate that non-Wyomingwind and solar resources will
2 replace the Wyoming wind targeted by the 2017R RFP?
3 A.No.The Company anticipates that the Wyoming wind resources targeted by the 2017R
4 RFP will deliver customer benefits regardless of whether proposals for non-Wyoming
5 wind and solar resources can deliver incremental value for customers.The Company
6 will consider procuring renewable resources that deliver customer benefits,including
7 Wyoming wind resources and non-Wyoming wind resources targeted by the 2017R
8 RFP and solar resources targeted by the 2017S RFP.
9 Q.Has the Company received initial bids in the 2017R RFP?
10 A.Yes.The Company received initial bids for Wyoming wind projects on October 17,
11 2017,and initial bids for non-Wyoming wind projects on October 24,2017.The 2017R
12 RFP was well received by the market,as indicated by the fact the Company receivedO13Wyomingwindproposalsfromninebiddersoffering49bidalternativesfor13wind
14 projects.The Company also received non-Wyoming wind proposals from five bidders
15 offering 15 bid alternatives for six wind projects.In aggregate,5,219 MW of new wind
16 resource capacity was bid into the 2017R RFP (4,624 MW of Wyoming wind and
17 595 MW of non-Wyoming wind).
18 Q.Is the review and evaluation of these bids now underway?
19 A.Yes.On November 12,2017,the Company completed its initial shortlist evaluation and
20 scoring and began the third-party evaluation of capacity factors.The Utah and Oregon
21 IEs completed their review of the initial shortlist November 17,2017.Once the IEs
22 completed their review of the initial shortlist,the Company notified bidders whether
23 their proposed projects were selectedto the initial shortlist and providedan opportunity
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1 for bidders selected to the initial shortlist to update pricing.On November 22,2017,
2 the Company received best-and-final pricing for bids selected to the initial shortlist.
3 The Company is now conducting portfolio analysis of each bid to determine which bids
4 it will include on the final shortlist in January 2018.
5 Q.Do you have any general observations about the 2017R RFP?
6 A.At this time,I can state only that the Company's preliminary analysis indicates that the
7 winning bids from the 2017R RFP may be lower cost than estimated in the initial filing
8 in this case.To protect the integrity of the bidding process while the review and scoring
9 is ongoing,however,I cannot disclose any details or studies related to specific bids or
10 the on-goingportfolio analysis until the shortlist is finalized in January 2018.
11 Q.What is the status of the 2017S RFP?
12 A.The Company received initial bids for new solar resources on December 11,2017.InO13coordinationwiththeIE,PacifiCorp is currently reviewing the eligibility of proposals
14 and has initiated the initial shortlist price and non-price scoring process.As was the
15 case with the 2017R RFP,the market response to the 2017S RFP was robust.
16 Considering that the bid eligibility review process is ongoing,on a preliminary basis,
17 the Company received solar resource proposals from 31 bidders offering 109 bid
18 alternatives for 46 solar projects.In aggregate,6,496 MW of new solar resource
19 capacity was bid into the 2017S RFP.
20 The Company is on track to be able to evaluate how solar resource bids received
21 through the 2017S RFP might influence the economic analysis of bids submitted into
22 the 2017R RFP,which will be considered when selecting the 2017R RFP final shortlist.
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l Q.What specific information and analysis on the 2017R RFP will the Company
2 provide in its supplemental filing on January16,2018?
3 A.The Company's supplemental testimony will describe the winning bids from the 2017R
4 RFP,and provide updated project cost-and-performance estimates specific to winning
5 bids.The Company will provide the analysis supporting its selection of the winning
6 bids,including the third-party capacity factor review report,and an assessment of how
7 solar bids received in the 2017S RFP might affect the economic analysis of winning
8 bids from the 2017R RFP.
9 Using the updated project cost-and-performance information from the 2017R
10 RFP,the Company's supplemental filing will include an updated economic analysis of
11 the Combined Projects.This analysis will reflect an updated load forecast and updated
12 price-policy scenarios that reflect the most current forward price curves.If CongressO13passestax-reform legislation in the coming weeks,the updated economic analysis will
14 also reflect updated income tax assumptions.Bidders with proposals selected to the
15 2017R RFP initial shortlist have been notified that if Congress passes tax-reform
16 legislation,those bidders will be asked to update pricing to account for changes in the
17 final tax bill.If Congress has not yet passed tax-reform legislation,the updated
18 economic analysis will include sensitivities consistent with income tax proposals being
19 considered by Congress.
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l Q.Based on the fact that the Company will soon confirm winning bids in the 2017R
2 RFP and refresh its economic analysis,is the Company proposing to address
3 certain economic arguments raised by intervenors in more detail in its
4 supplemental testimony?
5 A.Yes.The Company believes that its updated economic analysis will address a number
6 of the specific issues raised around the size and certainty of the economic benefits of
7 the Combined Projects,including the impact of changesto federal tax law,as discussed
8 above.
9 RESOURCE NEED
10 Q.Monsanto,PIIC,and IIPA argue that the Combined Projects are discretionary
11 projects that are not tied to a specific resource need.(Phillips Direct,page 6,lines
12 6-9;Mullins Direct,page 9,lines 18-20;Yankel Direct,page 4,lines 22-23.)DoO13youagree?
14 A.No.The Combined Projects meet both a near-term and long-term resource needs
15 identified in the Company's 2017 Integrated Resource Plan ("IRP").The Combined
l 6 Projects leverage federal production tax credits ("PTCs")to provide least-cost
17 resources that meet this need,and do so with substantial savings to customers.
18 Q.How does the Company develop its forecast of resource need?
19 A.Resource need is the product of a load-and-resource balance,which is reported in the
20 IRP.Figure l summarizes the elements of the load and resource balance that are used
21 to establish resource need,and once identified,how that need can be met.
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l Figure 1.Elements of the Load and Resource Balance
OoligatiorExist:ng Resources &(Net load and PlanningContractsMargin)
Load &Resource Balance
(Need)
Gas CCCT Gas Peaker
Geotherrnal Nuclear
2 There are two basic elements to the load and resource balance:(1)existing
3 resources and committed contracts;and (2)obligations.Existing resources and
4 committed contracts account for any planned or assumed resource retirements and
5 contract terminations over time.Obligations include load,net of customer-sited
6 generation and interruptible contracts,over time.Obligations also include a planning
7 margin,which represents an incremental planning requirement,appliedas an increase
8 to the projected obligation,to ensure sufficient capacity on the system to manage
9 uncertain events (i.e.,weather and outages)and known requirements (i.e.,operating
10 reserves).In recent IRPs,including the 2017 IRP,the Company assumes a 13 percent
11 planning margin.
12 The load-and-resource balance reflects the difference between these two basic
13 elements.When existing resources and contracts exceed obligations,the Company has
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l sufficient resources to reliably meet customer needs.When existing resources and
2 contracts are less than its obligations,the Company has a resource need.This balance
3 between existing resources,including committed contracts,and obligationscan change
4 over time.When the Company faces a resource need,the IRP is used to evaluate a wide
5 range of supply-side resources (such as renewable resources,gas-fired resources,
6 uncommitted front-office transactions or "FOTs")and demand-side management
7 resources ("DSM")that can be used to meet that need over time.Different types of
8 resource portfolios that can be used to meet a resource need are evaluated in the IRP to
9 determine which portfolio is least cost,accounting for risk.
10 Q.Does the load-and-resource balance presented in the 2017 IRP show a near-term
11 resource need?
12 A.Yes.Accounting for assumed retirement of resources,contract terminations,andO13incrementalDSMsavingsfromthepreferredportfolio,the 2017 IRP shows a near-term
14 resource need of 527 MW in 2017 rising to 1,023 MW in 2021,the first full year the
15 Combined Projects will be placed in service.'The resource need grows over time with
16 load growth,existing resource retirements,and committed contracts terminations.
17 Q.Do the Combined Projects fully satisfy the near-term resource need identified in
18 the 2017 IRP load-and-resource balance?
19 A.No.In the 2017 IRP,the Company updated its capacity contribution values for wind
20 and solar resources.Based on these values,15.8 percent of Wyoming wind resource
21 capacity can be relied upon at times when the system is most likely to experience
22 conditions where load exceeds available resources.Consequently,the 1,100 MW of
'Table 5.15,PacifiCorp's 2017 IRP,Volume I.
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l new Wyoming wind in the 2017 IRP preferred portfolio meets approximately 174 MW
2 (17 percent)of the 1,023 MW resource need in 2021.The remaining resource need in
3 2021 (83 percent)is met with uncommitted FOTs.
4 Q.If the Combined Projects were not included in the resource portfolio,how would
5 the 2021 resource need be met?
6 A.Resource portfolios that do not include the Combined Projects include more
7 uncommitted FOTs.The resource portfolios with more uncommitted FOTs are higher
8 cost than resource portfolios that include the Combined Projects under a wide range of
9 price-policy scenarios.Simply stated,resource portfolios with the Combined Projects
10 displace FOTs in the near-term because the Combined Projects,accounting for PTC
11 savings,are lower cost and lower risk than FOT resource alternatives.
12 Notably,this is the exact process described by Monsanto and PIIC.Mr.PhillipsO13testifiesthat,"[i]f there is a need for a new resource,the economics of alternatives can
14 be compared to determine the best way to meet the need."(Phillips Direct,page 8,lines
15 12-14;Mullins Direct,page 10,lines 10-17.)Here,the 2017 IRP identified a resource
16 need and determined the least-cost,least-risk combination of resources to meet that
17 need.That combination of resources in the preferred portfolio includes the Combined
18 Projects.
19 Q.Has the Company previously acquired renewable resources that displace FOTs?
20 A.Yes.This is not the first time the Company has implemented a least-cost,least-risk plan
21 to procure renewable resources that displace uncommitted FOTs.In fact,all 1,698 MW
22 of PacifiCorp's existing contracted and owned renewable resources included in rates
23 today,not including qualifying facilities,were acquired and approved by the
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l Commission because they were the least-cost,least-risk resources,displaced FOTs,and
2 were acquired well before any thermal capacity or state renewable portfolio standard
3 need.
4 Q.PIIC claims that FOTs do not represent fulfillment of a resource need (Mullins
5 Direct,page 11,lines 15-17.)Is this true?
6 A.No.PIIC claims that the 2017 IRP shows currently available resources and FOTs will
7 meet the Company's resource needs through 2026 and therefore the Combined Projects
8 "cannot be reasonably characterized as addressing a resource need[.]"(MullinsDirect,
9 page 9,line 20-page 10,line 7.)This claim improperly assumes that the maximum
10 level of FOTs assumed in the IRP are committed resources and that other resource
11 alternatives,such as the Combined Projects,cannot be used to meet the projected
12 resource need at a lower cost.As noted above,in the IRP,FOTs represent uncommittedO13resources,meaning they can be displaced if lower-cost alternatives are available.As
14 the 2017 IRP shows,the energy and capacity provided by the Wind Projects are lower
15 cost than other resource alternatives,including FOTs.
16 Q.PIIC further claims that FOTs do not represent a resource need because "[l]ittle
17 to no incremental ratepayer supplied capital is required [.]"(MullinsDirect,page
18 12,line 1.)Has the Idaho Commission previously recognized that the displacement
19 of higher-cost market transactions can meet a customer resource need?
20 A.Yes.I understand that in 2001,Idaho Power requested a CPCN to construct a natural-
21 gas-fired combustion-turbine plant.In the Matter of the Application ofIdaho Power
22 Co.for a Certificate of Public Convenience and Necessity for the Ratebasing of the
23 Mountain Home GeneratingStation,Case No.IPC-E-01-12,Order No.28773 (July 10,
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l 2001).Although the new plant was not identified in the near-term action plan of its
2 most recent IRP,Idaho Power argued that it would "provide[]a cost-effective
3 alternativeto the planned wholesale market purchases"that were included in the action
4 plan.Id.at 2.The Commission approved the CPCN.2 Although the circumstances of
5 that case are different (because it arose during the summer of2001 when market prices
6 were very high),nothing in the order limits the principle that a utility can show need
7 by displacing higher-cost market transactions with a utility-owned resource.
8 Q.What factors influence the type of resources used to meet the Company's resource
9 need over the long term?
10 A.Uncommitted FOTs are traditionally one of the lowest cost resources that can be used
ll to meet a resource need.This is because the cost of these FOT resources reflect only
12 the marginal,variable operating cost of existing resources selling excess firm energy
13 to market participants on a forward basis.While the availability of PTCs changes this
14 dynamic for the Combined Projects,supporting their inclusion in the Company's
15 resource portfolio by the end of 2020,uncommitted FOTs are still generally lower cost
16 than other resource alternatives.Consequently,as the resource need grows over time,
17 the level of uncommitted FOTs in the preferred portfolio generally grows,approaching
18 maximum limits.3 The timing in which the resource need exceeds maximum
19 uncommitted FOT limits,after accounting for other lower-cost alternatives such as the
20 Combined Projects,is a strong indicator of when the Company will require incremental
2 The Commission did not approve a commitment estimate and therefore did not provide Idaho Power a dollar
amount of rate base assurance due to the lack of a sufficient record that the particular plant was the least-cost
alternative.
3 These maximum limits are based on the Company's active participation in the wholesale power markets,
physical delivery constraints,market liquidity and market depth,and with consideration of regional resource
supply.
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l generating resources to meet its long-term resource need.
2 Q.How do the Combined Projects meet a long-term resource need?
3 A.The Company's 2017 IRP forecasts that maximum levels of uncommitted FOTs begin
4 to exceed resource needs by just under 400 MW beginning in 2028.The 1,100 MW of
5 Wyoming wind resources included in the 2017 IRP preferred portfolio in 2021
6 contributes 174 MW of system capacity.Consequently,the 2017 IRP analysis shows
7 that the Combined Projects will meet approximately 44 percent of the resource need
8 incremental to the resource need that can be met with FOTs.Therefore,beginning in
9 the 2028 timeframe,the Combined Projects begin deferring the need for other,high-
10 cost resource alternatives.In this sense,the Combined Projects can be viewed as
11 displacing higher-cost uncommitted FOT resources in the near-term and deferring other
12 higher-cost resource alternatives over the long-term.
13 Q.While the Combined Projects will be used to meet both near-term and long-term
14 resource needs,are you aware of examples where the Commission deemed early
15 acquisition prudent?
16 A.Yes.In 1993,I understand that the Commission approved an upgrade at an Idaho Power
17 hydro facility that increased its capacity from 9 MW to 43.5 MW.In the Matter ofthe
18 Application of Idaho Power Company for Authority to Rate Base the Investment
19 Required for Adding Capacity to the Twin Falls HydroelectricFacility,Case No.IPC-
20 E-91-4,Order No.25021 (June 1,1993).At the time,an intervenor argued that Idaho
21 Power had no need for additional capacity until 2006,and the Commission should
22 therefore deny the application.In response,Idaho Power argued that the upgrade was
23 cost-effective even if placed in service ahead of need based on the incremental
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l generation alone,particularly because the upgrade was a 50-year resource.Idaho Power
2 also stressed that it should acquire the least-cost resources regardless of ownership.The
3 Commission agreed with Idaho Power and found that the resource was cost-effective.
4 Q.Monsanto points to the fact the Company recently revised its load forecast down
5 as further evidence that the resources are not needed.(PhillipsDirect,page 7,lines
6 19-20.)Does this downward revision materiallyimpact the need for the Combined
7 Projects?
8 A.No.The Company's most recent load forecast shows that the summer coincident peak
9 demand in 2021 is down by approximately428 MW relative to the load forecast used
10 in the economic analysis summarized in my direct testimony,which is the same load
11 forecast used in the 2017 IRP.Before updating the load forecast,the projected resource
12 need in 2021 is 1,023 MW.With the updated load forecast,the 2021 resource need isO13reducedby428MWto595MW.The capacity contribution of 1,100 MW of new
14 Wyoming wind is 174 MW,which is just under 30 percent of the projected resource
15 need in 202l after accounting for the Company's updated load forecast.
16 Q.Monsanto claims that the "Company's proposal is based solely on projected future
17 savings for customers."(Phillips Direct,page 8,line 20-21.)Is this a fair
18 characterization of the Combined Projects?
19 A.No.Monsanto argues that the Combined Projects represent purely an economic
20 opportunity.But PacifiCorp's analysis shows that acquiring the new wind resources
21 now,when they are PTC-eligible,will displace higher cost resources in both the near
22 term and long term.The PTCs affect the timing and economics of the new resource,
23 not the need for the resource.The fact that the Combined Projects are a time-limited
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1 opportunity based on PTCs does not inherentlyindicate that they are disconnected from
2 a resource need.
3 Q.PIIC indicates that it was surprised when the Company announced as part of its
4 2017 IRP process that its preferred portfolio included the Combined Projects.
5 (MullinsDirect,page 5,lines 5-10.)How do you respond?
6 A.The Combined Projects were a logical development as the 2017 IRP analysis evolved.
7 In late 2016 and early 2017,PacifiCorp continued to study and refine its resource
8 portfolios,all of which contained new Wyoming wind resources.In reviewing these
9 resource portfolios,it became clear that the amount of Wyoming wind included in these
10 resource portfolios was limited by transmission constraints.The presence of the
11 Wyoming wind resources in these initial portfolios led PacifiCorp to assess whether
12 additional wind resources enabled by advancing sub-segments of Energy GatewayO13Westwouldfurtherlowersystemcosts.Consequently,after the January 2017 public
14 input meeting,PacifiCorp incorporated the Aeolus-to-Bridger/Anticline line as a
15 specific sensitivity case in its broader Energy Gateway sensitivity analysis.In late
16 February,PacifiCorp's modeling of four Energy Gateway transmission sensitivities
17 indicated there were potential benefits to including the Aeolus-to-Bridger/Anticline
18 line in the portfolio.At the March 2017 public input meeting,PacifiCorp presented this
19 preliminary analysis to stakeholders,along with next steps that communicated
20 PacifiCorp's intention to further refine key assumptions for this sensitivity case.
21 While the pre-filing stakeholder review process of the Combined Projects was
22 necessarily limited by the timing of PacifiCorp's analysis and 2017 IRP filing
23 deadlines,it was in customers'interest to consider these resources and ultimately
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l include them in the 2017 IRP preferred portfolio.PacifiCorp explicitly chose to share
2 the results of its analysis with stakeholders as it was being produced.Given the time-
3 sensitive nature of these resource opportunities,delaying the IRP to allow additional
4 pre-filing review was not a viable option.Instead,PacifiCorp expeditiouslycompleted
5 the necessary analysis and shared it with IRP stakeholders in real time.
6 Q.Were there wind resources in other scenarios?
7 A.Yes.The 2017 IRP analyzed all alternatives when identifying ways to meet customers'
8 near-term and long-term resource needs,including incremental DSM savings,
9 procurement of uncommitted FOTs,new supply-side resources,including new
10 renewable resources,and changes in use of or upgradesto existingresources to develop
l 1 the preferred least-cost,least-risk portfolio of resources.PacifiCorp's 2017 IRP shows
12 a need for new resources that can be partially met with new wind generation by the endO13of2020acrossalmostallmodeledportfolios.PacifiCorp examined alternatives for
14 meeting this near-term need,but transmission constraints limited wind resource
15 options.
16 Q.Are there risks associated with not pursuingthe Combined Projects?
17 A.Yes.If the Company does not pursue the Combined Projects,it will be forgoing the
18 opportunity for customers to acquire heavily discounted resources in the near term,in
19 exchange for greater reliance on near-term market transactions and waiting until after
20 the expiration of PTCs to acquire zero-fuel-cost resources to meet growing energy and
21 capacity needs.Contrary to parties'implication that there are no customer risks
22 associated with forgoing the opportunity to procure PTC-eligible resources,there are
23 risks associated with greater reliance on higher-cost FOT resources over the near term
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l and greater reliance on other higher-cost resources over the long term-and those risks
2 will be borne by customers.
3 Although parties point out the risks of the Combined Projects,they do not
4 demonstrate that they are higher risk than the next best alternative.In contrast,the 2017
5 IRP and the economic analysis summarized in my direct testimony clearly
6 demonstrates that the Combined Projects are least-cost,least-risk compared to all other
7 alternatives,including the status quo alternative,which will result in increased reliance
8 on higher-cost FOTs.
9 Q.Has Monsanto,PIIC,or IIPA provided meaningful analysis demonstrating that
10 the status quo is less risky than pursing the Combined Projects?
11 A.No.In asserting,without analysis,that the status quo yields superior outcomes,
12 Monsanto,PIIC,and IIPA discount the availability of a lower-cost,lower-riskO13alternative.To the extent they assume inaction is less risky than action,this assumption
14 lacks either logical or factual support.There is nothing about inaction that makes it
15 preferable to action when objectively considering relative risk.For the Combined
16 Projects,the vast majority of modeling scenarios result in customer benefits.Declining
17 to pursue the Combined Projects results in a likely opportunity cost-that is,a likely
18 customer loss.
19 The parties'recommendation against the Combined Projects is substantially
20 more likely to achieve a less favorable outcome for customers in the form of increased
21 costs and increased risk-a result inadequately justified by the preference for inaction
22 over action.The Company seeks to develop the Combined Projects now because the
23 PTCs make this the least-cost,least-risk option to serve current capacity and energy
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l needs.Inaction will forgo a valuable opportunity,and delayingthe acquisition of least-
2 cost resources in favor of higher cost alternatives is not in the best interest of customers.
3 Q.Both Monsanto and PIIC also argue that the Company has an incentive to invest
4 in the Combined Projects and suggest that this incentive is improperly drivingthe
5 investment decision.(Mullins Direct,page 7,lines 64,and page 8,lines 1-4;
6 Phillips Direct,page 10,lines 3-12.)How do you respond?
7 A.These claims ignore the resource need discussed above.PIIC further supports this
8 conclusion by citing the Averch-Johnson thesis,which theorizes that traditional rate-
9 base and rate-of-return regulation biases a regulated firm,as compared to an
10 unregulated one,toward more capital-intensive modes of production.PIIC's reliance
11 on the Averch-Johnson thesis is misplaced,however,because there is considerable
12 debate about whether the Averch-Johnson effect is real and,even if it is real,whetherO13suchaneffectwouldbeundesirable.4 And even if the effect were both real and
14 undesirable,PIIC's concern assumes that PacifiCorp will own the wind resources;this
15 is not necessarily true.The RFP process will determine whether the Company or a third-
16 party will own the proposed wind resources and who will fund the concomitant capital
17 investment.
18 This argument also ignores that the Combined Projects are more cost-effective
4 Charles F.Phillips,Jr.,The Regulation of Public Utilities 892-93 (1993);see also James C.Bonbright et al.,
Principles of Public Utility Rates 362 (2d ed.1988)("[T]o the extent [the Averch-Johnson effect]exists,it could
well be a more important influence for good than for poor performance[.]")(quoting Alfred E.Kahn,
Applications of Economics to Utility Rate Structures,101 Public Utilities Fortnightly 59 (Jan.19,1978));id.
("To repeat:we find a paucity of data documenting the Averch-Johnson effects and instead find largely educated
speculation.").A recent meta-analysis of scholarship concerning the Averch-Johnson effect concluded that it
amounts to "an intellectual curiosity,"and suggested that further efforts to discern an Averch-Johnson effect on
regulated utilities be "abandoned in favourof more productive enterprises."Stephen M.Law,Assessing the
Averch-Johnson-Wellisz Effect for Regulated Utilities,6 INT'L J.OF ECON.&FIN.41,42,52 (2014).
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l than FOTs,even when including capital and run-rate operating costs.A higher-cost
2 resource should not be selected merely to prevent an opportunity for shareholders to
3 earn a rate of return.
4 Q.Monsanto presents a series of proposed conditions it recommends the Commission
5 impose if it approves the Combined Projects.(Phillips Direct,page 4,lines 14-32,
6 and page 5,lines 1-2.)Please describe the proposed conditions.
7 A.Monsanto's proposed conditions would:(1)disallow recovery of turbines that are not
8 PTC-eligible;(2)automatically disallow a portion ofthe estimated capital costs through
9 a cost-recovery cap set well below the cost estimate;(3)cap future costs associated
10 with the Combined Projects;(4)impute an assumed capacity factor and PTC value;
11 (5)impute full PTC value even ifthe Company cannot immediately monetize the value
12 of the PTC;and (6)disallow cost recovery if construction stops,for whatever reason.O 13 Q.Is there any basis for imposing such conditions on the Combined Projects?
14 A.No.The purpose of the proposed conditions appears to be the elimination of any
15 customer risk associated with the projects,based on the claim that the projects are
16 discretionary and not tied to an actual resource need.(Phillips Direct,page 34,lines
17 21-22.)But there is nothing novel or unique about the Combined Projects that require
18 this unprecedented treatment.These recommendations appear premised on the
19 Company not demonstrating a need for the Combined Projects,despite the fact that
20 Monsanto does not challenge the fact that the Company has an energy and capacity
21 need in 2028.At the very least,the Combined Projects are an early acquisition to meet
22 a future resource need.Even in the hypothetical scenario where there was a proposal to
23 acquire a resource early,Monsanto provides no support for its position that customers
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1 should bear no risk when a utility prudentlyacquires a resource ahead of need.
2 Q.Do Monsanto's proposed conditions relate to risks associated with early
3 acquisitions?
4 A.No.Monsanto's proposal to eliminate all customer risk is also unwarranted because the
5 Combined Projects do not present risks different than typical utility investments.Even
6 assuming the Combined Projects are being acquired early,the only incremental risk
7 associated uniquely with the Combined Projects is a timing risk.Monsanto never
8 explains why this timing risk outweighs the risk of forgoing PTC-eligible resources.
9 Again,PacifiCorp disagrees with the assertion that the resources are being procured
10 before they are needed because they are displacing higher-cost FOTs in the near-term
ll while also meeting a long-term energy and capacity need.But even if the Commission
12 accepts Monsanto's view,the Company's analysis shows that benefits from theO13CombinedProjectsaccruetocustomersinthenear-term,well in advance of the alleged
14 2028 capacity deficiency.
15 ECONOMIC ANALYSIS
16 Q.Monsanto,PIIC and IIPA argue that the Company has overstated the economic
17 benefits of the Combined Projects because natural-gas prices in the base case are
18 too high.(Phillips Direct,page 18,lines 18-19;Mullins Direct,page 17,lines 17--
19 18;Yankel Direct,page 11,lines 1-8.)How does the Company determine the
20 forecasted natural gas prices used for the economic analysis?
21 A.The medium or base-case forecast is the Company's OFPC,which uses observed
22 forward market prices for the first 72 months,followed by a 12-month transition to
23 natural-gas prices based on a forecast developed by a reputable third-party expert.The
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1 low-and high-natural-gas price assumptions were also based on recent forecasts
2 developed by reputable third-party experts.The Company verified the reasonableness
3 of the third-party forecasts by comparison to forecasts prepared by others,including
4 the U.S.Department of Energy's Energy InformationAdministration.
5 Q.Is the OFPC used in the Company's economic analysis the same forecast the
6 Commission has used for ratemaking,setting avoided-costs prices,and evaluating
7 both demand-and supply-side resources?
8 A.Yes.The OFPC,which represents the medium natural-gas price case is the same
9 forecast used for setting net power costs in the Company's Idaho rates.It is also used
10 when the Company calculates avoided-cost prices paid to qualifying facilities,and
11 evaluates the cost-effectiveness of demand-side and supply-side resources.
12 Q.How does the Company use each of the price-policy scenarios in its analysis?O 13 A.The price-policy scenario assuming medium natural-gas prices and medium carbon
14 dioxide ("CO2")prices represents the central forecast,around which the impact of
15 lower or higher price assumptions can be evaluated.In the Company's initial filing,the
16 present-value revenue requirement differential ("PVRR(d)")net benefit of the
17 Combined Projects derived from the central price-policy scenario is $137 million when
18 calculated off the forecasted change in annual revenue requirement through 2050.This
19 outcome indicates that,when central price-policy assumptions are used,there is a
20 reasonably sized cushion in the PVRR(d)results allowing for some erosion of the
21 favorable economics should long-term natural-gas prices and CO2 prices end up lower
22 than what is assumed in this scenario.The other price-policy scenarios are useful in
23 quantifying how sensitive the PVRR(d)results are to these key assumptions and
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l provide a foundationfor judging risk.
2 Q.Monsanto recommends the low-natural-gas price case be considered the base case
3 for purposes of evaluating the Combined Projects (Phillips Direct,page 18,lines
4 18-19.)How do you respond to this recommendation?
5 A.I disagree.Monsanto relies on NYMEX Henry Hub natural-gas futures to conclude this
6 comparison shows current market expectations most closely align with the Company's
7 low natural-gas forecast.But this conclusion is misguided because it relies solely on
8 NYMEX Henry Hub natural-gas futures after 2022,which do not accurately capture
9 market expectations for long-term natural-gas prices.Monsanto fails to consider the
10 open interest in NYMEX Henry Hub futures contracts,which quickly falls for futures
11 contracts further out in time.The sparsity of open interest in the out period makes these
12 futures contracts an unreliable indicator of market expectations for long-term natural-O 13 gas prices.
14 Each futures trade represents the creation of a new contract and is indicative of
15 new capital being committed to the market.Figure 2 shows NYMEX Henry Hub
16 natural-gas open interest as of September 11,2017.
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1 Figure 2.NYMEX Henry Hub Natural Gas Futures
2 Open Interest as of September 11,2017
70,000
>60,000
40,000
20,000
10,000
3 This figure shows that open interest is greater in the near term and significantly
4 lower in the long term.For instance,in 2018 open contracts average over 43,200.By
5 2023,open contracts averagejust over 2,600-approximately six percent of the open
6 interest observed for 2018 contracts.The concentration in the earlier futures indicates
7 the market is deeper and stronger in the near term because fewer market participants
8 are willingto commit capital required to enter and maintain long-term contracts.
9 There are very few contracts supporting NYMEX Henry Hub natural-gas-
10 futures prices over the period in which Monsanto claims the market outlook most
11 closely aligns with the Company's low natural-gas price forecast (i.e.,beyond 2024).
12 Contracts with greater open interest more accurately represent a market consensus of
13 where spot prices are likely to trade.Long-term prices are shaped by a handful of
14 participants who are lightlycommitted.These participants are basing their decisions on
15 highly imperfect data.Short-term prices are shaped by a large field of market
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1 participants,who commit far more capital because there is more transparency around
2 the conditions and variables that can impact prices.
3 Q.Do some parties claim that the Company's OFPC reflects market prices that are
4 too high?
5 A.Yes.PIIC claims that the Company's OFPC systematically overstates future market
6 prices.(Mullins Direct,page 17,lines 17-18.)Monsanto and IIPA similarly observe
7 that the Company's OFPC has historically exceeded the market.(Phillips Direct,page
8 19,lines 5-10;Yankel Direct,page 13,lines 15-22.)
9 Q.Does Staff agree?
10 A.No.Staff testifies that the "range of natural gas forecasts used in [the Company's]
11 analysis are conservative when compared to the most recent Energy Information
12 Administration (EIA)forecasts."(Keller Direct,page 16,lines 12-14.)O 13 Q.Please respond to the intervenors'challenges to the OFPC.
14 A.It is not reasonable to evaluate a forecast error for OFPCs.The Company's OFPC is
15 developed from a combination of market forwards on a given quote date and a long-
16 term,fundamentals-based forecast as a proxy for forward prices beyond the period in
17 which observed market forwards are not available.Forecast error is a measure of the
18 difference between forecasted spot prices and actual spot prices.Comparing forward
19 prices to actual spot prices is a misapplication of forecast error,because market
20 forwards,which are used in the first 84 months of the OFPC,are observed-not
21 forecasted.Forward prices represent transaction prices occurring at the time of a future
22 delivery date.
23 Market participants cannot transact on a spot-price forecast.A spot-price
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l forecast merely represents a potential view of what prices will be at some point in the
2 future.Market forwards reflect pricing for contracts that reflect the price,on a given
3 quote date,at which buyers and sellers are transacting for future delivery.
4 Q.PIIC also claims:"If the OFPCs are reasonably accurate,one would expect
5 PacifiCorp's price forecast to be an unbiased expectation of future spot prices."
6 (MullinsDirect,page 20,lines 14-15.)Is this true?
7 A.Not necessarily.It is not strictly true that the forward prices will or should equal the
8 expected price.Forward buyers and sellers are considering the trade-off between using
9 a fixed forward price and simply waiting to transact at a risky spot price.To avoid
10 arbitrage,these two have to be equal in present value,not in delivery-date value.In
11 general,it is likelythat spot prices are somewhat systematically risky,because demand
12 for most commodities tends to move with the economy as a whole.Thus,it is unlikelyO13thattheappropriatediscountratefortakingthepresentvalueofexpectedspotprices
14 will be the risk-free rate that applies to discounting the forward price.For the two
15 present values to be equal,the two future values have to be somewhat different.
16 Q.PIIC argues that the historical difference between the forecasted and actual spot
17 prices indicates that there is a risk premium embedded in the OFPC.(Mullins
18 Direct,page 21,line 5-19.)How do you respond?
19 A.There may be a risk premium in the forward prices,which are used in the first
20 84 months of the OFPC,but that does not mean there is a risk premium further out in
21 the forecasted period.
22 Moreover,Mr.Mullins'position here is contradicted by his testimony before
23 the Oregon Commission earlier this year.In the Company's annual proceeding to
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l update power costs,Mr.Mullins testified that the Company's electric market
2 transactions entered more than seven days before the settlement period (i.e.,hedging
3 transactions)systematically generate customer benefits because the forward price
4 curve is systematically lower than actual spot market prices.
5 Q.PIIC claims that the Commission has expressed skepticism about the accuracy of
6 long-term forecasting when it ordered a reduction in QF contract terms to two-
7 years.(MullinsDirect,page 22,lines 12-19.)Please respond.
8 A.This argument is unpersuasive.First,the Company's avoided cost prices in Idaho are
9 set using the OFPC.Despite the Commission's concern over the inherent difficulty of
10 forecasting,it has not implemented a policy requiring the Company to use a lower
11 forward price curve for avoided-cost prices.Second,this argument ignores the fact that
12 all long-term resource planning requires the use of long-term assumptions andO13forecasts.The implication of PIIC's argument is that the Company should be planning
14 for only the next two years;but taking that approach to resource planning would be
15 unacceptable.There is no doubt that there is uncertainty in future wholesale market
16 prices,which is precisely the reason that the Company evaluated the Combined Projects
17 across a range of different price-policy scenarios.
18 Q.PIIC further claims that two gas hedging contracts entered into in 2012 have been
19 harmful to customers.(MullinsDirect,page 23,lines 5--21.)How do you respond?
20 A.PIIC inappropriately reviews the performance of these two natural-gas hedges as
21 financial trades.A financial trade is executed based on a speculative market view to
22 earn a favorable return.A hedge is made to limit exposure to market volatility,not to
23 earn a favorable return.The value of a hedge is not based on the fixed-price exposure
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l of the hedge,but its effectiveness in limiting exposure to volatilityin spot market
2 prices.The effectiveness of these hedge transactions have no relevance to the validity
3 of the Company's OFPC,which reflects the best and unbiased representation of future
4 market conditions available at the time the OFPC is produced,and has no relevance to
5 the economic analysis of the Combined Projects.
6 Q.Monsanto criticizes the Combined Projects because,under most scenarios,they
7 do not meet a benefit-to-cost ratio of 1.15 or 1.25.(Phillips Direct,pages 11-13.)
8 Please respond.
9 A.To my knowledge,the Idaho Commission has never required that supply-side
10 investments meet a particular benefit-to-cost ratio,and demand-side resources are
11 expected to meet a ratio of only 1.0-a ratio that Monsanto acknowledges the
12 Combined Projects meet under nearly all scenarios.The premise of Monsanto'sO13argumentisthattheCombinedProjectsshouldbesubjecttoanew,higher standard for
14 approval because they are not neededto serve customers.This premise is false because
15 the Combined Projects meet a resource need and will immediately be used to
16 economically serve customers.
17 Q.PIIC claims the Company used supplemental GRID studies to develop unrealistic
18 assumptions that are a "key driver in the economic benefits"of the Combined
19 Projects.(MullinsDirect,page 26,line 8 to page 27,line 8.)Is this true?
20 A.No.Contrary to PIIC's claim,the Company's economic analysis supporting the
21 Combined Projects does not include any assumptions derived from the supplemental
22 GRID studies referenced by Mr.Mullins.The GRID studies and assumptions referred
23 to by Mr.Mullins were used in the 2017 IRP,but not in the economic analysis included
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1 in this case.
2 Q.Does PIIC criticize the Company's assumed charge for wind integrationused in
3 the economic analysis supporting the Combined Projects?
4 A.Yes.PIIC notes that the Company's wind-integration charge assumed in the economic
5 analysis supporting the Combined Projects is $0.63/megawatt-hour ("MWh"),when
6 the current rate is $3.06/MWh.PIIC claims that the Company's recent filing to reduce
7 the wind-integration charge to $0.57/MWh is manipulativeand self-serving,and until
8 the charge is reduced,the Company should use the approved rate,which would
9 substantially reduce the economic benefits of the Combined Projects.(Mullins Direct,
10 pages 32-33).
11 Q.Please respond.
12 A.The Commission approved the Company's proposed change to the wind integrationO13rateonNovember28,2017,rendering PIIC's proposal moot.The change in regulation-
14 reserve costs is attributable to lower market prices,transmission congestion as a result
15 of sizeable increases in solar capacity in the Company's portfolio,and expanding the
16 pool of regulation-reserve resources to include 30-minute ramping capability,none of
17 which are disputed by PIIC.Thus,the wind-integration cost assumptions developed in
18 the Company's 2017 IRP are the most accurate estimate available,regardless of the
19 status of IRP acknowledgment or its inclusion in published avoided-cost prices.
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1 Q.IIPA testifies that,given the present political climate,there may never be a carbon
2 tax within the timeframe of the Company's analysis,and the scenarios with
3 medium or high carbon prices should be given little weight.(Yankel Direct,pages
4 22-23.)Do you agree?
5 A.No.It is not reasonable to conclude that today's policy environment is the best indicator
6 of the policy environment we can expect over the next three decades.It is even more
7 unreasonable to dismiss the results of scenarios developed to quantify the economic
8 impact of potential environmental policy outcomes that could impute a financial cost
9 on CO2 emiSSions at some point over the next three decades.
10 Q.Did parties criticize the Company for how it evaluated risks related to projected
11 net capacity factors ("NCF")for the proposed new Wind Projects?
12 A.Yes.Monsanto criticizes the Company for not providing sensitivity analysis around theO13projectedNCF,and asserts that even a small deviationin NCF (10 percent)could make
14 the Combined Projects uneconomic.(Phillips Direct,pages 26-30.)IIPA makes a
15 similar argument about this risk,noting that the Company showed the material impact
16 of capacity factor assumptions when it reduced its estimates by 1.8 percent in its initial
17 filing.(Yankel Direct,pages 19-20.)
18 Q.How do you respond?
19 A.Monsanto and IIPA do not testify that PacifiCorp's wind generation forecasts are
20 invalid.They simply assert a potential risk to the overall economics if wind generation
21 output is reduced.This one-sided risk assessment fails to quantify the potential upside
22 benefits if wind generation exceeds the assumedforecast used in the economic analysis.
23 The Company retained an independent expert to study and confirm the reasonableness
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l of its NCF assumptions for specific projects bid into the 2017R RFP,and the fmdings
2 of this review will be reflected in the economic analysis of specific proposals,which
3 will be included in the Company's supplemental filing.
4 Q.Monsanto argues that moving forward with the Combined Projects now risks the
5 loss of more economic generation resources in the future.(Phillips Direct,page 21,
6 lines 3-11.)How do you respond?
7 A.The Combined Projects do not foreclose future options.In fact,the 2017 IRP preferred
8 portfolio balancesthe benefits of near-term wind-resource procurement with the upside
9 of potential future technological advancements that might lower renewable resource
10 costs.Near-term procurement of the wind resources in the Combined Projects partially
11 meets near-term and long-term resource needs and over the long term,the 2017 IRP
12 preferred portfolio includes additionalrenewable resources to partially meet long-termO13resourceneeds.
14 Over the 2028-to-2036 timeframe,the 2017 IRP preferred portfolio includes
15 over 800 MW of incremental new wind resources beyond those included in the
16 Combined Projects,and over 1,000 MW of incremental new solar resources.After the
17 Combined Projects are completed,the Company will retain sufficient future flexibility
18 to respond to changing demands and marketplace opportunities.
19 Second,Monsanto supports this claim by pointing to the Utah Commission's
20 suggestion that the Company initiate a solar RFP to test whether alternative resources
21 could be more economic than the Combined Projects.The Company issued the 2017S
22 RFP,and its results will be used to inform the outcome of the 2017R RFP.
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l Q.PIIC argues that projected oversupply conditions in the West pose a risk to the
2 Combined Projects that was not considered by PacifiCorp.(MullinsDirect,page
3 13,lines 19-14,line 7.)Was this considered?
4 A.The Company is aware of the development of renewable resources across the West.
5 However,oversupply conditions are driven by the correlation between large numbers
6 of intermittent renewable resources.For instance,wind resources in the Columbia
7 River Gorge are often either mostly on or mostly off,with appreciable impacts on
8 market prices in both directions.Similarly,solar resources across the West are strongly
9 correlated with the position of the sun and thus each other,and likewise impact market
10 prices in both directions.
11 While wind resources in Wyoming are correlated with each other,they are not
12 strongly correlated with wind resources in the Columbia River Gorge or solar
O 13 resources.The correlation of the proposed resources with the rest of the wind in the
14 Company's portfolio is already accounted for in the Company's analysis and the
15 expected overall impact of renewable resource additions in the West is accounted for
16 in the Company's OFPC.Thus,the Company's economic analysis reasonably accounts
17 for potential oversupply conditions applicable to the proposed resources.
18 Moreover,the majority of the benefits associated with the Combined Projects
19 are a result of fuel savings at PacifiCorp's plants,rather than market transactions based
20 on the OFPC,particularly in the first few years.The costs associated with the
21 Company's fuel supply are less likely to be impacted by oversupply conditions in the
22 manner suggestedby PIIC.
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1 Q.Monsanto,PIIC and IIPA also point out the risk associated with federal tax reform
2 (Phillips Direct,page 21,lines 11-14;Mullins Direct,pages 33-34;Yankel Direct,
3 page 18.)How will the Company account for this risk?
4 A.The Company's supplemental testimony will account for the impact of tax reform,
5 either based on the final version of legislation enacted by that time,or based on a
6 sensitivity using reasonable assumptions about the outcome of tax reform.The
7 Company expects resolution of the current uncertainty around tax reform in the coming
8 weeks.As discussed by Company witness Mr.Chad A.Teply,the schedule for the
9 Combined Projects will allow the Company to evaluate tax impacts before moving
10 forward with construction,and utilize off-ramps if tax law changes materially impact
11 the economics of the Combined Projects.
12 CONCLUSION AND RECOMMENDATIONO13Q.Do you recommend that the Commission approve the Company's application?
14 A.Yes.The updated economic analysis that will be included in the Company's January
15 16,2018 supplemental filing will address a number of the specific issues raised around
16 the size and certainty of the economic benefits of the Combined Projects,including the
17 impact of changes to federal tax law.Despite claims to the contrary,PacifiCorp has
18 near-term and long-term resource needs that can be partially met with heavily
19 discounted Wind Projects that are lower cost than all other near-term and long-term
20 resource alternatives.The Combined Projects are an element of PacifiCorp's least-cost,
21 least-risk resource plan and there is nothing novel or unique about these resources that
22 justifies unprecedented cost-recovery treatment to assign all risk to the Company.The
23 Company's long-standing methodology to develop its OFPC produces the best
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l representation of future market prices for the central forecast,and alternative price-
2 policy scenarios provide a reasonable foundation for judging risk.
3 Q.Does this conclude your rebuttal testimony?
4 A.Yes.
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