20171218Steward Rebuttal.pdf

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BEFORE THE IDAHO PUBLIC UTILITIESCOMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.PAC-E-17-07OFROCKYMOUNTAINPOWERFORA)CERTIFICATEOF PUBLIC )REBUTTALTESTIMONYOFCONVENIENCEANDNECESSITYAND)JOELLER.STEWARDBINDINGRATEMAKINGTREATMENT)FOR NEW WIND AND TRANSMISSION )FACILITIES )
ROCKYMOUNTAINPOWER
CASE NO.PAC-E-17-07
December 2017
l Q.Please state your name,business address,and current position with PacifiCorp
2 d/bla Rocky Mountain Power ("Company").
3 A.My name is Joelle R.Steward.My business address is 1407 West North Temple,Suite
4 330,Salt Lake City,Utah 84116.My title is Vice President of Regulation for Rocky
5 Mountain Power.
6 QUALIFICATIONS
7 Q.Please describe your education and professional background.
8 A.I have a Bachelor of Arts degree in Political Science from the University of Oregon and
9 a Masters of Public Affairs from the Hubert Humphrey Institute of Public Policy at the
10 University of Minnesota.Between 1999 and March 2007,I was employed as a
11 Regulatory Analyst with the Washington Utilities and Transportation Commission.
12 I joined the Company in March 2007 as the Regulatory Manager responsible for allO13regulatoryfilingsandproceedingsinOregon.From February 2012 through May 2016,
14 I was a Director in charge of the work for the cost of service,pricing,and regulatory
15 operations groups for the Company.In 2016,I became the Director of Rates and
16 Regulatory Affairs and added responsibilities for regulatory affairs for Rocky Mountain
17 Power.In November 2017,I assumed my current position as Vice President of
18 Regulation for Rocky Mountain Power.
19 Q.Have you testified in previous regulatoryproceedings?
20 A.Yes.I have filed testimony in proceedings before the public utility commissions in
21 Idaho,Oregon,Utah,Wyoming,and Washington.
22 Q.Are you adopting the direct testimony of Mr.Jeffrey K.Larsen in this case?
23 A.Yes.
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1 PURPOSE AND SUMMARY OF REBUTTAL TESTIMONY
2 Q.What is the purpose of your rebuttal testimony?
3 A.In support of the Company's application to the Idaho Public Utilities Commission
4 ("Commission")requesting Certificates of Public Convenience and Necessity
5 ("CPCNs")and binding ratemaking treatment for wind and transmission projects
6 ("Combined Projects"),I respond to regulatory policy issues raised in the direct
7 testimonies of Monsanto witnesses Ms.Katie E.Iverson and Mr.Nicholas L.Phillips,
8 Idaho Irrigation PumpersAssociation,Inc.("IIPA")witness Mr.Anthony J.Yankel,and
9 Commission Staff ("Staff")witnesses Mr.Randy Lobb and Mr.Richard Keller.
10 Q.What are the key issues you address in your rebuttal testimony?
11 A.I address the followingkey issues:
12 The reasonableness of allowing full recovery of the prudent costs of theO13CombinedProjects,including a return on investment.
14 How the Company's proposed Resource Tracking Mechanism ("RTM")fairly
15 and efficiently allows costs and benefits to be tracked through rates on a
16 temporary basis until the next general rate case.
17 The reasons why the approval conditions proposed by the parties are
18 inappropriate and unreasonable.
19 Q.Please summarize your testimony.
20 A.The Company's application for CPCNs and binding ratemaking is reasonable and in
21 the public interest.The Combined Projects are the least cost alternative to meet
22 customers'needs today and into the future.As such,the higher standard for approval
23 of the Combined Projects proposed by parties is inappropriate and unwarranted.The
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l Company has issued a request for proposals for the new wind resources ("2017R
2 RFP"),and is obtaining engineering,procurement and construction ("EPC")bids to
3 ensure competitive costs for the Combined Projects.The Company has also actively
4 managed and mitigated project risks within the Company's control.
5 The RTM is an interim mechanism to provide all benefits of the Combined
6 Projects to customers until the resources are incorporated into rates in a general rate
7 case.The only "benefit"to the Company is the opportunity to recover its reasonable
8 and prudent costs,like any other resource investment.
9 RESOURCE TRACKING MECHANISM
10 Q.What should the Commission consider when determining whether to grant the
11 requested CPCNs and approve the proposed RTM?
12 A.For both the CPCNs and the RTM,the Commission must determine that the CombinedO13ProjectsareinthepublicinterestandtheRTMreasonablybalancestheinterestsofthe
14 Company and customers.This determination is supported by the results of the
15 Company's 2017 Integrated Resource Plan,and Company witness Mr.Rick T.Link's
16 direct and rebuttal testimony explaining why the Company selected the Combined
17 Projects as the least-cost,least-risk option to provide safe and reliable electric service
18 to customers.The Combined Projects provide substantial benefits to customers,and
19 these benefits should be matched in rates with project costs.The proposed RTM
20 combined with a future rate case is the best way to achieve that goal.
21 Q.Why is the RTM necessary?
22 A.The RTM is designed to match all costs and benefits over a short period of time.The
23 RTM will allow the Company to track costs and deliver benefits to customers until the
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1 next rate case,while also allowing the Company to include the Combined Projects in
2 base rates in a single general rate case filing.The RTM enables the Company to align
3 near-term cost drivers into one general rate case,rather than rate cases over a multiple-
4 year period.Without the RTM,a portion (90 percent)of the zero-fuel cost energy and
5 all of the production tax credits ("PTC")would flow to customers through the Energy
6 Cost AdjustmentMechanism ("ECAM")without recovery ofthe costs that enable those
7 benefits.
8 Q.Is the RTM intended to provide rate recovery over the life of the new resources?
9 A.No.The RTM is a short-term tracking mechanism that matches all benefits and costs
10 until they are included in rates in the next general rate case.The RTM is not intended
11 to be a permanent mechanism in place for the life of the Combined Projects.
12 Q.Does Ms.Iverson support binding ratemaking treatment and tracking benefitsO13andcostsoftheCombinedProjectsthroughtheRTM?
14 A.No.Ms.Iverson argues that because the Combined Projects are "discretionary,
15 uneconomical and pose unacceptable risks to customers,"the Company's proposed
16 ratemaking treatment should be denied.(Iverson Direct,page 6,lines 9-21.)Ms.
17 Iverson also claims that tracking both the wind repowering project and the Combined
18 Projects through the RTM would make monitoringthe impacts of two projects difficult,
19 if not impossible.(Iverson Direct,page 8,lines 7-10.)
20 Q.Do you agree with Ms.Iverson that the Combined Projects are "discretionary,
21 uneconomical and pose unacceptable risks to customers,"so the RTM should be
22 denied?
23 A.No.The proposed resources are a least-cost opportunity to fill both a near-term and
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l long-term need,so they should not be dismissed as discretionary.The Company's
2 economic analysis also shows that customer benefits substantially outweigh the costs
3 and that forgoing the time-sensitive opportunityto acquire the Combined Projects will
4 result in higher customer costs in the long-term.In addition,the investment in the
5 Combined Projects does not impose a greater risk on customers than typical utility
6 investments.Setting a different or higher standard for what benefits must be achieved,
7 as effectively proposed by Monsanto witnesses,is unwarranted and inappropriate.
8 Moreover,in light of the off-ramps built into the Company's development
9 schedule,approval of the resource decision in this proceeding does not lock in the
10 decision to proceed if circumstances change before the final notices to proceed,as
11 discussed by Company witness Mr.Chad A.Teply.Accordingly,a higher approval
12 standard or punitive conditions are not appropriate.The proposed RTM is consistentO13withthestatutoryrequirementsforbindingratemakingtreatmentsetforthinIdaho
14 Code §61-541.
15 Q.Second,do you agree with Ms.Iverson that tracking both projects in the RTM
16 would make monitoringthe impact of the Combined Projects difficult?
17 A.No.The Company's accounting system currently tracks capital,operation and
18 maintenance costs,net power costs,and PTC benefits by plant.The Company can
19 readily separate the wind repowering project from the Combined Projects in the RTM.
20 There is no reason to create another tracking mechanism,or develop the separate tariff
21 proposed by Ms.Iverson.(Iverson Direct,page 7,lines 9-14.)
22 Q.Are there other witnesses who testify on the RTM?
23 A.Yes.Staff witness Mr.Lobb supports the concept and purpose of the RTM.(Lobb
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l Direct,page 7,lines 20-25.)However,he recommends that the revenue requirement
2 for the Combined Projects continue to be tracked in the RTM even after it is included
3 in base rates because the Combined Projects will have a declining net rate base balance.
4 (Lobb Direct,page 9,lines 4-11.)
5 Q.Do you believe it is appropriate to make the RTM permanent and adjust for the
6 declining balance of the Combined Projects?
7 A.No.While the net rate base balance of the Combined Projects may decline over time,
8 that is true of other large investments in the Company's rate base and none have ever
9 been tracked separately.For example,Lake Side 2 is currently being recovered through
10 the ECAM without accounting for changes to its annual revenue requirement.
l 1 The balance of the Company's total rate base generally increases over time,due
12 to capital maintenance and system improvements.Isolating the Combined Projects andO
13 separately tracking their net rate base balance while ignoring the total net rate base
14 balance does not accurately reflect the Company's cost of service,and would unfairly
15 harm the Company.This could actually drive the need for more frequent rate cases,as
16 opposed to the RTM's intended purpose as a near-term tool to decrease the frequency
17 of rate cases.Mr.Lobb's proposal also does not explicitly state how long the RTM
18 should track the revenue requirement of the Combined Projects,but presumably it
19 would be over the life of the resources,which are between 30 and 55 years.This would
20 be an unprecedented rate treatment for a project.
21 PROPOSED CONDITIONS FOR APPROVING THE COMBINED PROJECTS
22 Q.Have the parties raised concerns about risks with the Combined Projects?
23 A.Yes.The parties raise similar concerns about the risks of the Combined Projects.
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l However,Mr.Keller from Staff summarized these risks into two categories:those
2 within the Company's control,and those over which the Company has no control.
3 (Keller Direct,page 4,lines 5-11.)Company witnesses Mr.Link,Mr.Teply,and Mr.
4 Rick A.Vail,explainthe steps the Company is takingto manage each of the risks within
5 the Company's control.
6 Q.Is it appropriate to cap cost recovery of capital investment estimated in the initial
7 filing as proposed by Monsanto witness Mr.Phillips?(Phillips Direct,page 25,
8 lines 14-20.)
9 A.No.Mr.Phillips proposes to cap (reduce)cost recovery for the Combined Projects to
10 match customer benefits and shareholder returns under the low gas and no CO2 scenario
11 in the initial filing.This cap automatically disallows approximately20 percent of the
12 project costsoven if those costs are prudently incurred.The recommendation isO13unjustifiedbecause,as described above,the Combined Projects are not discretionary
14 or unneeded investments.The recommendation is also punitive,especially given the
15 significant customer benefits the Combined Projects provide.
16 Q.Mr.Phillips claims that shareholders are receiving benefits associated with the
17 investment,which should be equally shared with customers.Please respond.
18 A.The recovery of capital costs is not a "benefit,"it is an integral component of the
19 regulatorycompact.Indeed,a basic premise of ratemaking,is that "a capital-attracting
20 rate of profit is here considered a part of the necessary cost of service."'The cost of
21 capital is no different than any other prudent cost recoverable in rates if incurred to
I James C.Bonbright,Albert L.Danielsen,&David R.Kamerschen,Principles ofPublic Utility Rates,112
(2d ed.Public Utilities Reports 1988).
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l provide utility service.It is inaccurate to say that shareholders are receiving a greater
2 benefitthan customers based on the fact that shareholders recover the costs incurred to
3 provide utility service.
4 The Company's proposal fairly matches the benefits with the costs of the
5 Combined Projects.Mr.Phillips'proposal,on the other hand,"flips the regulatory
6 compact"to justify taking all the benefits of the Combined Projects,while capping and
7 disallowing the costs the Company may recover.
8 Q.Does Mr.Phillips propose additional conditions to "flip the regulatorycompact"?
9 (Phillips Direct,page 3,lines 20-21.)
10 A.Yes.Mr.Phillips also recommends that the Company guarantee PTCs at the current
11 35 percent tax rate based on a fixed net capacity factor for the life ofthewind projects.
12 This is unreasonable for various reasons,includingthe fact that PTCs are only availableO13forthefirst10yearsoftheWindProjects'much longer life.Also,as Mr.Keller notes,
14 tax rates are beyond the Company's control.
15 Q.What risk is the Company assuming with respect to the PTCs?
16 A.As discussed by Company witness Cindy Crane,the Company accepts the risks that
17 are within the Company's control related to PTC qualification.The ECAM currently
18 assures that 100 percent of PTCs are passed onto customers,and the Company's
19 proposal in this proceeding is to continue with that same approach.
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l Q.Mr.Phillips and Mr.Yankel argue that the Combined Projects are inequitable
2 because the Company's shareholderswill receive substantiallymore benefits than
3 customers.(Phillips Direct,page 10,lines 5-12;Yankel Direct,page 8,lines 6-16.)
4 Do you agree with this characterization?
5 A.No.The purported shareholder benefit is the capital cost incurred to fund the Combined
6 Projects,which is no more of a shareholder "benefit"than the recovery of any other
7 cost associated with providing service.
8 The Company has shown it can deliver additionalgeneration to customers at a
9 lower cost than the alternatives,resulting in a net benefit to customers.The customer
10 benefits assume that shareholders recover the full cost of the Combined Projects
11 investment,including capital costs.
12 After the next rate case,the prudent costs and benefits of the Combined ProjectsO13willbeincludedintheCompany's full revenue requirement.However,there is no
14 guarantee the Company will recover its full cost of service related to the investment.
15 The Company must prudentlymanage its costs to achieve the full return allowed by the
16 Commission.
17 Further,Mr.Phillips'calculation assumes the wind resources will be the
18 Company's wind benchmarks.However,the final resources are being selected through
19 the competitive solicitation that is open to a number of structures,e.g.,benchmark EPC,
20 market build transfer,or market power purchase.
21 Q.Does Mr.Phillips propose additional conditions?
22 A.Yes.Mr.Phillips proposes that the Commission cap the future level of operation and
23 maintenance costs ("O&M")and capital expenditures to maintain the levels assumed
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1 in the Company's economic analysis.(Phillips Direct,page 34,lines 9-15.)
2 Q.Is Mr.Phillips'proposed cost cap reasonable?
3 A.No.In any forecast of the future,it is unlikelythat all assumptions will be completely
4 accurate.Some assumptions will be low and some will be high.Because of these
5 variances,the Company's modeling includes a range of assumptions that can be used
6 to assess the impact if a particular variable differs from the baseline.The Company's
7 applicationrequestsCommission review to verifythe reasonablenessof the Company's
8 assumptions and determine that customers will benefit as a result of the Combined
9 Projects.If approved,the Company should recover its full cost of service related to the
10 Projects.
11 Moreover,as described in the testimony of Company witnesses Mr.Teply and
12 Mr.Vail,the Company has strategies in place,based on its experience,to mitigate theO
13 risks of construction cost over-runs and schedule delays and those items that are within
14 the Company's control.
15 Q.Has the Commission previously approved resource acquisitions based on their
16 economic benefits to customers?
17 A.Yes.The Commission has allowed cost recovery for the Cholla,Craig and Hayden,and
18 Chehalis power plants.All of these were economic opportunities and in every case,the
19 Commission determined these facilities were in the best interest of customers,i.e.,
20 acquiring these resources provided net savings to customers.Although there were
21 customer risks with the resource decision in each case,the Commission allowed full
22 recovery.Consistent with this precedent,if the Commission determines the Combined
23 Projects providecustomer benefits,based on what is known today,then it should allow
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l full recovery of the costs associated with the Combined Projects.
2 Q.Why is Mr.Phillips'proposal unreasonable in this case?
3 A.The Company has shown it can deliver additional generation and transmission
4 resources to customers at a lower cost than the alternatives,resulting in a net benefitto
5 customers.The customer benefits assume that shareholders recover the full cost of the
6 Combined Projects investment,including O&M and capital costs.After the next rate
7 case,the prudent costs and benefits of the Combined Projects will be included in the
8 Company's rate base,but there is no guarantee the Company will recover its full cost
9 of service related to this investment.The Company must prudently manage all of its
10 costs to achieve the full return allowed by the Commission.
11 Q.Do you agree with Mr.Lobb's recommendation that the CPCNs and the RTM
12 make binding ratemaking unnecessary?O
13 A.No.Mr.Lobb identified four reasons why binding ratemaking should not be approved
14 by the Commission:1)the Company's ability to finance the project;2)Idaho only
15 represents 6 percent of the Company's system;3)Staff recommends approval of the
16 CPCNs and RTM,so binding ratemaking is not necessary;and 4)the Company has
17 already made significant investment in the project.(Lobb Direct,page 10,line 20 to
18 page l1,line 4.)
19 These conditions are not appropriate considerations under Idaho Code §61-541.
20 The first two,in particular,would effectively prohibit the Company from ever receiving
21 binding ratemaking treatment,even though nothing in the statutory language suggests
22 that it is inapplicable to PacifiCorp.In fact,I understand that PacifiCorp was one of the
23 sponsors of the legislationthat enacted binding ratemaking treatment.
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l Q.Why is the Company seeking binding ratemaking treatment?
2 A.Binding ratemaking is useful and necessary.Section 2(b)of the statute lists the
3 ratemaking treatment of the proposed facilities,which include the depreciation life,
4 maximum amount of costs that the Commission will include in rates at the time without
5 the utility having the burden of moving forward with additional evidence of prudence
6 and reasonablenessof costs,the method of handling variances between costs estimates,
7 and treatment of revenues.The proposed ratemaking treatment in the RTM reflects
8 these elements.
9 Q.What conditions does the Company accept related to its application for CPCNs
10 and binding ratemaking treatment?
11 A.The Company agrees that approval of the Combined Projects with binding ratemaking
12 treatment would be conditional on the circumstances known at the time of approval.IfO
13 there is a change in circumstances that may materially affect the project,the Company
14 agrees to bring the project back to the Commission for review.
15 In addition,the law allows the Commission to determine the maximum amount
16 of costs to be included in rates (IC §61-541(2)(b)(ii)),which is effectively a soft cap.
17 The Company agrees that the RTM would be consistent with that soft cap and reflect
18 actual costs (and benefits),up to a maximum of the final estimated costs from this
19 proceeding.The Company would apply for prudence determination of any variances
20 from the estimates in the next rate case.
21 Q.Does this conclude your rebuttal testimony?
22 A.Yes.
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