20171120Lobb Direct.pdf

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IDAHO PUBLIC UTILITIES COMMISSION Sl0N
IN THE MATTER OF THE APPLICATION )OF ROCKY MOUNTAIN POWER FOR A )CASE NO.PAC-E-17-07
CERTIFICATE OF PUBLIC )
CONVENIENCE AND NECESSITY AND )BINDING RATEMAKING TREATMENT )
FOR NEW WIND AND TRANSMISSION )FACILITIES )
DIRECT TESTIMONY OF RANDY LOBB
IDAHO PUBLIC UTILITIES COMMISSION
NOVEMBER 20,2017
1 Q.Please state your name and business address for the
2 record.
3 A.My name is Randy Lobb and my business address is
4 472 West Washington Street,Boise,Idaho.
5 Q.By whom are you employed?
6 A.I am employed by the Idaho Public Utilities
7 Commission as Utilities Division Administrator.
8 Q.What is your educational and professional
9 background?
10 A.I received a Bachelor of Science Degree in
11 Agricultural Engineering from the University of Idaho in 1980
12 and worked for the Idaho Department of Water Resources from
13 June of 1980 to November of 1987.I received my Idaho
14 license as a registered professional Civil Engineer in 1985
15 and began work at the Idaho Public Utilities Commission in
16 December of 1987.I have analyzed utility rate applications,
17 rate design,tariff filings and customer petitions.I have
18 testified in numerous proceedings before the Commission
19 including cases dealing with rate structure,cost of service,
20 power supply,line extensions,regulatory policy and facility
21 acquisitions.My duties at the Commission include case
22 management and oversight of all technical Staff assigned to
23 Commission filings.
24 Q.What is the purpose of your testimony in this case?
25 A.The purpose of my testimony is to present staff's
CASE NO.PAC-E-17-07 LOBB,R.(Di)111/20/17 STAFF
1 position on the Company's request for a Certificate of Public
2 Convenience and Necessity (CPCN)and Binding Ratemaking
3 Treatment to construct new wind generation and associated
4 transmission.
5 Q.Please summarize your testimony.
6 A.Based on an evaluation of the Company's proposal,
7 Staff believes the Commission should conditionally approve a
8 CPCN to construct the project.Given that the proposed
9 generation and transmission project will be constructed well
10 in advance of need,project justification depends upon the
11 reasonableness of assumptions used in the Present Value
12 Revenue Requirement (PVRR)analysis and the Company's ability
13 to acquire all available Production Tax Credits (PTCs).
14 Consequently,Staff's CPCN recommendation comes
15 with conditions that include off-ramps and project
16 benefit/cost assurances whereby the Company would discontinue
17 project development,impute PTCs,or cap project costs
18 subject to recovery if it failed to meet necessary terms.
19 The terms include timelines,generation of sufficient PTCs,
20 or capping costs.Staff also recommends that the Commission
21 accept the proposed Rate Adjustment Mechanism (RTM)to
22 properly track costs and benefits but reject Binding
23 Ratemaking Treatment in this case due to lack of need and
24 justification for such a finding.
25 Q.Could you please briefly summarize the Company's
CASE NO.PAC-E-17-07 LOBB,R.(Di)211/20/17 STAFF
l request in this case?
2 A.Yes.The Company requests a CPCN to construct four
3 new wind projects in Wyoming with a name plate capacity of
4 860 Mw.As a necessary part of the new wind project,the
5 Company also proposes to construct 179 miles of new
6 transmission line with voltages ranging from 500 KV to 230
7 KV.Total project cost is approximately $2 billion and must
8 be in operation by December 31,2020,to secure necessary PTC
9 benefits.
10 The Company maintains that if the wind generation
11 and transmission line is constructed in a timely manner,
12 sufficient PTCs will be generated to make the project the
13 most economical resource on a Present Value Revenue
14 Requirement (PVRR)basis over the next 30 years.The Company
15 also maintains that Binding Rate Making Treatment with an
16 associated RTM is necessary to assure overall project cost
17 recovery and that costs and benefits are properly balanced.
18 Q.Does Staff support the Company's request for a CPCN
19 in this case?
20 A.Yes,based on Staff's review of the Company's
21 filing and provided conditions described below are included
22 with the CPCN,Staff supports the Company's CPCN request.
23 Q.Has Staff evaluated the PVRR economic analysis
24 performed by the Company?
25 A.Yes,Staff witness Rick Keller has conducted a
CASE NO.PAC-E-17-07 LOBB,R.(Di)311/20/17 STAFF
l comprehensive review of the Company's PVRR analysis including
2 an evaluation of the associated risks.Mr.Keller's
3 testimony detailing the results of his analysis are included
4 as part of the record in this case.
5 Q.What does his analysis conclude?
6 A.His analysis concludes that the risks and
7 uncertainties associated with the project can be categorized
8 into one of two groups;those in which the Company can exert
9 control and those in which it cannot.
10 He maintains that if the Company protects customers
11 from those risks that are within its control,then he
12 believes the new wind and transmission project would be
13 least-cost least-risk when compared to the baseline
14 alternative.
15 Q.How does Mr.Keller's investigation affect Staff's
16 CPCN recommendation in this case?
17 A.Because the Company's identified first need for
18 capacity is approximately 2028,the need for the project is
19 currently driven by the limited opportunity to generate
20 production tax credits that make the project more economical
21 than other resource options over the next 30 years.Staff
22 witness Keller assessed the Company's ability to acquire PTCs
23 in a timely manner and whether the assumptions used by the
24 Company in its economic comparison are reasonable.Mr.
25 Keller also identified the risks that have the greatest
CASE NO.PAC-E-17-07 LOBB,R.(Di)411/20/17 STAFF
1 impact on the analysis.
2 Q.What are the most important risks identified by Mr.
3 Keller?
4 A.Mr.Keller identified two types of risk:1)those
5 that can be controlled by the Company;and 2)those outside
6 of the Company's control.The most important risk under the
7 Company's control is failure to complete the project in the
8 time specified to obtain PTCs.Company witness Crane agrees,
9 stating in testimony that PTC value is essential to the
10 combined projects overall economic viability.Other
11 important risk factors under the Company's control are
12 project cost overruns,the proper tracking of project costs
13 and benefits and mechanical availability of the project.
14 The most important risks outside the Company's
15 control include the potential change in corporate tax rate,
16 and the potential inaccuracy of future PVRR assumptions.
17 Q.Can the identified risk factors be mitigated to
18 allow a CPCN and assure customer benefits?
19 A.I believe some of the risks can be mitigated.As a
20 condition for granting a CPCN,the Commission should
21 establish conditions assuring that customers are held
22 harmless if benefits fail to materialize and the project
23 becomes uneconomical.Therefore,Staff recommends that the
24 Company continually reassess project economics due to
25 changing circumstances and establish off-ramps before
CASE NO.PAC-E-17-07 LOBB,R.(Di)511/20/17 STAFF
1 development occurs.
2 For example,the Company must reassess project
3 economics due to schedule delays that reduce PTCs.The
4 Company should also reassess pursuing the project if tax rate
5 changes reduce project benefits.Finally,the Company should
6 be prepared to justify its actions prior to any cost recovery
7 request if identified risk factors change materially.Once
8 the project is completed and PTCs are fully acquired,
9 remaining risks subject to further mitigation would include
10 transmission costs overruns associated with meeting the PTC
11 deadline,matching costs and benefits after a rate case and
12 project mechanical availability.
13 Q.How does Staff propose to mitigate transmission
14 costs overruns?
15 A.Staff recommends that project costs associated with
16 the new transmission be capped at a level not to exceed the
17 Company's estimate for cost recovery purposes.While costs
18 associated with the project's wind component are subject to
19 competitive bidding,they are backstopped by the Company's
20 self-build project cost.There is no such back stop for the
21 project's transmission costs component.
22 Timing is the most critical factor in securing
23 customer benefits.Staff is concerned that once the Company
24 reaches a point of no return in terms of project investment,
25 transmission costs could escalate in order to finish
CASE NO.PAC-E-17-07 LOBB,R.(Di)611/20/17 STAFF
1 construction by the PTC deadline.Staff witness Keller shows
2 that transmission costs overruns of 25%will make the project
3 uneconomical.Therefore,Staff recommends that the
4 Commission establish a cost cap for transmission costs
5 recovery based on the cost estimate provided by the Company
6 in this case.
7 Q.How will the Company assure a proper matching of
8 costs and benefits?
9 A.The proposed RTM is designed to match project
10 benefits such as reduced power supply expenses and PTCs that
11 track automatically through the annual ECAM with project
12 costs that are normally only included as part of a general
13 rate case.Under the Company's proposal,the RTM would be
14 discontinued once costs and benefits are included in a
15 general rate case.Because all benefits will automatically
16 flow through the Energy Cost Adjustment Mechanism (ECAM),a
17 general rate case or RTM in the ECAM as proposed by the
18 Company in this case would be required to allow recovery of
19 offsetting costs.
20 Q.Does Staff support an RTM in this case?
21 A.Staff supports the concept and purpose of an RTM.
22 Assuming an economical project is constructed,customers
23 would automatically receive benefits through the annual ECAM
24 mechanism but would not pay any project costs without a
25 general rate case.An RTM would equitably match project
CASE NO.PAC-E-17-07 LOBB,R.(Di)7
11/20/17 STAFF
1 costs with project benefits as costs are actually incurred.
2 Q.Has Staff evaluated the mechanics of the proposed
3 RTM?
4 A.Yes,Staff evaluated the details of an RTM in this
5 case,and in Case No.PAC-E-17-06,the Wind Repowering case.
6 Staff maintains that an RTM is a reasonable way to balance
7 benefits and costs as long as all benefits are included in
8 the ECAM.
9 Q.What happens to cost and benefit matching after a
10 general rate case?
11 A.Once the RTM is eliminated,benefits will continue
12 to track through the existing ECAM and cost recovery will
13 remain at a constant level until the next general rate case.
14 Q.Has Staff identified any problems with this
15 approach?
16 A.Yes,potentially.While an RTM would track
17 benefits and costs annually through the ECAM before a general
18 rate case,the timing of rate cases would dictate cost level
19 recovery from that point forward.If revenue requirement
20 associated with the project declines in between general rate
21 cases,the reduction in costs would not flow to customers as
22 assumed in the Company's NPVRR analysis.
23 Staff Exhibit No.102 shows how revenue requirement
24 declines in the Company's PVRR analysis and what the decline
25 would be without annual rate cases.Staff analysis shows
CASE NO.PAC-E-17-07 LOBB,R.(Di)811/20/17 STAFF
1 customers would lose approximately $13 million in net present
2 value benefits if rates are set in a 2021 rate case and are
3 not reset again until 2030.
4 Q.What does Staff recommend to assure that benefits
5 and costs are properly tracked after a general rate case?
6 A.Staff recommends that revenue requirement for this
7 project continue to be tracked after the first general rate
8 case as it would be in the RTM annually.If project revenue
9 requirement declines in between rate cases,then the benefit
10 of declining cost would be returned to customers through the
11 ECAM.
12 Q.Is there any risk that project generation will be
13 less than estimated?
14 A.As stated by Staff witness Keller,wind profiles,
15 wind velocities and wind turbine conversion efficiencies are
16 fairly well established and are reasonably estimated by the
17 Company.However,reduced mechanical availability of the
18 wind machines can significantly reduce project output.
19 Manufacturer warranties and proper wind turbine O&M can
20 mitigate that risk.
21 Staff maintains that the Company should provide a
22 Mechanical Availability Guarantee (MAG)for this project
23 based on the industry average of 97%as provided by Staff
24 witness Keller.While the Company can't guarantee that the
25 wind will blow sufficiently to produce the estimated PTCs,
CASE NO.PAC-E-17-07 LOBB,R.(Di)911/20/17 STAFF
1 reduced PTCs should not occur because the wind turbines are
2 not mechanically available.Through manufacturer guarantees
3 and proper maintenance,the Company should be able to
4 reasonably meet this MAG average or reimburse customers for
5 failure to do so.
6 Q.Does Staff support the Company's request for
7 Binding Ratemaking treatment?
8 A.No.Staff does not believe the Company has shown
9 that Binding Ratemaking is justified in this case.
10 Q.How did Staff evaluate the Company's request for
11 Binding Ratemaking treatment?
12 A.Staff reviewed Idaho Code,Company justification
13 and other cases before the Commission where Binding
14 Ratemaking was addressed.While Staff concedes that the
15 Company meets the statutory requirements of Idaho Code
16 §61-541 in terms of having a current IRP,participating in
17 regional transmission groups,and a showing that the project
18 is in the public interest,the Company has not shown that
19 binding ratemaking is necessary for the project to proceed.
20 Staff identified four reasons for the Commission to
21 reject the Company's request in this regard:1)the Company
22 admits that its ability to finance the project is not an
23 issue in this case;2)Idaho represents only 6%of the
24 Company's total system and it is the decisions on cost
25 recovery in the other jurisdictions that will drive rating
CASE NO.PAC-E-17-07 LOBB,R.(Di)1011/20/17 STAFF
1 agency perceptions;3)Staff has already recommended approval
2 of a CPCN and the alternative RTM ratemaking treatment so
3 Binding Ratemaking is unnecessary;and 4)the Company has
4 already made significant investment in the project.
5 Q.Has the Commission addressed this issue in the
6 past?
7 A.Yes.The Commission has addressed the issue twice.
8 The first time in Case No.IPC-E-09-03,Idaho Power requested
9 Binding Ratemaking treatment for construction of its Langley
10 Gulch gas fired generating plant during turbulent economic
11 conditions.The Commission approved binding rate making
12 treatment for project costs that had already been incurred
13 but did not assure recovery of estimated costs that were more
14 uncertain.Order No.30892 at 39.
15 The second time the Commission addressed a request
16 for Binding Ratemaking treatment was in Case No.IPC-E-13-16.
17 In that case,Idaho Power requested Binding Ratemaking
18 treatment for costs associated with Selective Catalytic
19 Reduction Controls (SCRC)for Jim Bridger Units 3 and 4.In
20 Order No.32929 the Commission rejected the request stated
21 that financial markets were risk averse to large investment
22 at the time the Commission approved binding ratemaking
23 treatment in the Langley Gulch case.The Commission
24 concluded that circumstances were entirely distinguishable.
25 The Commission also noted that the Company had already
CASE NO.PAC-E-17-07 LOBB,R.(Di)1111/20/17 STAFF
1 purchased a significant portion of the SCRC equipment needed
2 for the project.In this case,the conditions are also
3 distinguishable from the Langley case in terms of financial
4 urgency.Binding ratemaking should be denied.
5 Q.Does this conclude your testimony in this case?
6 A.Yes,it does.
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CASE NO.PAC-E-17-07 LOBB,R.(Di)1211/20/17 STAFF
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 20TH DAY OF NOVEMBER 2017,
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB,IN CASE
NO.PAC-E-17-07,BY MAILING A COPY THEREOF,POSTAGE PREPAID,TO THE
FOLLOWING:
TED WESTON YVONNE R HOGLE
ROCKY MOUNTAIN POWER ASSISTANT GENERAL COUNSEL
1407 WEST NORTH TEMPLE STE 330 ROCKY MOUNTAIN POWER
SALT LAKE CITY UT 84116 1407 WN TEMPLE STE 320
E-MAIL:ted.weston pacificorp.com SALT LAKE CITY UT 84116
E-MAIL:[e-mail]
DATA REQUEST RESPONSE CENTER RANDALL C BUDGE
E-MAIL ONLY:RACINE OLSON NYE &BUDGE
[e-mail] PO BOX 1391
POCATELLO ID 83204-1391
E-MAIL:rcb racinelaw.net
BRUBAKER &ASSOCIATES RONALD L WILLIAMS
16690 SWINGLEY RIDGE RD #140 WILLIAMS BRADBURY PC
CHESTERFIELD MO 63017 PO BOX 388
E-MAIL:[e-mail] BOISE ID 83701
[e-mail] E-MAIL:[e-mail]
ELECTRONIC ONLY ELECTRONIC ONLY
JIM DUKE KYLE WILLIAMS
IDAHOAN FOODS BYU IDAHO
E-MAIL:[e-mail] E-MAIL:[e-mail]
ELECTRONIC ONLY ERIC L OLSEN
VAL STEINER ECHO HAWK &OLSEN
NU-WEST INDUSTRIES INC PO BOX 6119
E-MAIL:[e-mail] POCATELLO ID 83205
E-MAIL:[e-mail]
ANTHONY YANKEL BRADLEY MULLINS
UNIT 2505 333 SW TAYLOR
12700 LANE AVENUE SUITE 400
LAKEWOOD OH 44107 PORTLAND OR 97204
E-MAIL:tony vankel.net E-MAIL:brmullins mwanalytics.com
SECRET4R
CERTIFICATE OF SERVICE