20191203McDougal Direct.pdf

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BEFOR-E THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTIR OF THE APPLICATION
FOR APPROVAL OF THE 2O2O
PACITICORP INTER-JT] RI SDICTIONAL
ALLOCATION PROTOCOL
) CASE NO. PAC-E-19-20
)) DTRECT TESTTMONY OF
) STEVENR.MCDOUGAL
ROCKY MOUNTAIN POWER
CASE NO. PAC.E-I9-20
t December 2019
o I Introduction
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a Please state your nflme, business address, and present position with PacifiCorp
(the "Company").
My name is Steven R. McDougal, and my business address is 1407 West North Temple,
Suite 330, Salt Lake City, Utah 84116. I am currently employed as the Director of
Revenue Requirement.
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Qualifications
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a Briefly describe your educational and professional background.
I received a Master ol Accountancy degree from Brigham Young University with an
emphasis in Management Advisory Services in 1983, and a Bachelor of Science degree
in Accounting from Brigham Young University in 1982. In addition to my formal
education, I have also attended various educational, professional, and electric industry-
related seminars. I have been employed by the Company since I 983. My experience at
the Company includes various positions within regulation, finance, resource planning,
and intemal audit.
What are your responsibilities as director of revenue requirement?
My primary responsibilities include overseeing the calculation and reporting of tle
Company's regulated eamings or revenue requirement, assuring that the inter-
jurisdictional cost allocation methodology is correctly applied, and explaining those
calculations to regulators in the j urisdictions in which the Company operates.
Have you testified in previous regulatory proceedings?
Yes. I have provided testimony before the Public Utility Commission of Oregon, the
Califomia Public Utilities Commission, the Idaho Public Utilities Commission, the
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o I Public Service Commission of Utah, the Washington Utilities and Transportation
2 Commission, and the Public Service Commission of Wyoming.
3 Purpose of Testimony
4 Q. What is the purpose of your testimony in this proceeding?
5 A. The purpose ofmy testimony is to support the Company's application for approval of
6 the 2020 PacifiCorp Inter-Jurisdictional Allocation Protocol ("2020 Protocol" or
7 " Agreement") agreed to among PacifiCorp and the signatories to the 2020 Protocol
8 (referred to individually as a Party or collectively as the Pades). Specifically, my
9 testimony provides details on:
10 . Differences between the 2020 Protocol and the 2017 Protocol,
1 I . lmplementation ofthe 2020 Protocol during the Interim Period (January 1, 2020
12 through December3l,2023);
13 . Issues that are resolved by the 2020 Protocol, but that will not be implemented
14 until after the Interim Period, subject to resolution ofthe Framework Issues;r
15 . Special Contracts as a Framework Issue;2 and,
16 . An explanation ofthe 2020 Protocol Appendices A, B, C, E, and G.
r A process and timefmme to addrcss and altcrnpl to rcsolvc all outsLlnding issucs that thc Parties intend to
resolr,e after this 2020 Protocol has bccn filcd N ith thc cornmissions and during Urc Interirn Period
("Frame$ork"). including lhc inrplcmcnlation or rcsolulion of issucs associatcd $ ith a Nodal Pricing Model,
Resource planning and ne$ Rcsourcc AssignmcnL Linlilcd Rcalignment, Spccial Contracts. post-Interim Period
capital additions on coal-fuclcd Intcrim Pcriod Rcsourccs. and odrer items addrcssed hercin. \ lich are
collectivell refened to as "Framc*ork Issucs."
r As defined in Appendi\ A lo thc 2020 Protocol. "Special Contract' means a conlract enlered into bet\r'een
PacifiCorp and one of its rctail customcn $illl priccs, tcnns, and conditions different from oftem ise-applicable
tariff rates. Special Contncls uy pro!ide for a valuc consideration to the customer to reflect Customer
AnciIIary Sen ices Contract attributes.
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o I Comparison ofthe 2020 Protocol to the 2017 Protocol
2 Q. What cost allocations have changed from the 2017 Protocol to the 2020 Protocol?
3 A. Generally for the states that approved the 2017 Protocol, the 2O2O Protocol continues
4 with the same allocation treatment with three exceptions: the Embedded Cost
5 Differentiat ("ECD"), the Equalization Adjustment, and treatment of qualifuing
6 facilities ("QF") contracts. I describe the changes to the ECD, while the change to QF
7 contracts is explained in Mr. Michael G. Wilding's testimony and the change in the
8 Equalization Adjustment is explained in Ms. Joelle R. Steward's testimony. Other
9 general terms have also been updated and modified in the 2020 Protocol to reflect
10 timing, governance, process, and other matters necessary in developing a new
11 methodology that will ultimately replace the 2020 Protocol at the end of the Interim
12 Period (the period from January 1, 2020 through December 31,2023).
'13 Tbe 2020 Protocol is intended to establish an agreement that incorporates the
14 general allocation concepts being used in the various states today (e.g., Z0l7 Protocol
l5 or the West Control Area Inter-Jurisdictional Allocation Methodology in Washington),
16 modified for immediate issues to be implemented during the Interim Period, while
17 addressing changes needed for a longer-term, more permanent solution.
l8 Embefuled Cost Ddferential
l9 a. Was the ECD part of previous allocation methods, including the 2017 Protocol?
20 A. Yes, the ECD has been part ofprior allocation protocols in various forms and methods
21 of calculations.
22 a. Please explain the changes to the ECD adjustment in the 2020 Protocol?
23 A. The Fixed ECD, as used in the 2017 Protocol, will continue for Idaho at $836,000
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a I through the end ofthe Interim Period. The Dynamic ECD, as used in the 2010 Protocol,
2 wlll continue for Oregon through the end ofthe Interim Period, capped at $l1,000,000.
3 No ECD adjustment exists for Utah or Califomia. In Wyoming, the ECD will terminate
4 December 31, 2020.
5 Q. What is the Dynamic ECD?
6 A. The Dynamic ECD measures the embedded cost differentials between the production
7 costs of pre-2005 resources, as defined in the 2010 Protocol, and the production cost
8 ofwest hydro-electric resources and certain Mid-Columbia Contracts. The first part is
9 computed by taking PacitiCorp's production costs reiated to pre-lCt05 resources,
l0 expressed in dollars per megarvatt-hour, compared to production costs of west-side
l1 hyclio-eiectric resources expressed in dollars per rnegawatt-hour with the ilillerence
12 rnultiplied by the hydro-electric testurces negarvatt-houis of production. Ihe second
l3 part is con'lputed bv taking the differentiai between the pre-2005 resources' dollars per
14 megawatt-hour c:cnnpared to Mid-Columbia Contracts' costs on a dollars p.'er msg vslt-
l5 hour multiplied b-v- the N{id-(lolumbia Contracts' ,negaw.rtt-hours.
16 Implemented Issues
17 a. What issues have the Parties agreed to implement under the 2020 Protocol?
l8 A. Subj ect to certain exceptions, the Parties have agreed that the company's method of
l9 allocating costs using the 201 7 Protocol through 2019 in all states, except Washington,
20 should continue during the Interim Period. Details on the process and timing for state
21 decisions to exit coal-fueled existing resources and the process lor potential
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1 Reassignment3 of coal-fueled Interim Period Resources is explained in the testimony
2 of Ms. Steward. I provide an explanation ol the process for the allocation of
3 decommissioning costs for states exiting coal.
4 DecommissioningCosts
5 Q. How will the Company treat the decommissioning cost allocation?
6 A. There are several scenarios that may play out over time related to plant closures and
7 the treatment ofthe associated decommissioning costs. For coal-fueled Interim Period
8 Resources with a common operating life across all states, each state shall be allocated
9 its share ofactual decommissioning costs based on either an System Generation ("SG")
l0 Factor (if closed during the interim period) or the Assigncd Production (-AP") Factor,
11 adjusted for any Reassignment or Limited Realignment impacts (if closed after the
12 Interim Period). This is similar to the treatment today.
'13 Ifa state exits a resource earlier than other states, its decommissioning costs
14 will be allocated in the same manner as the above and will be based on the latest
15 decommissioning cost estimates established for that resource by the Company. To
16 establish more accurate estimates for this purpose, the Company is currently
17 undertaking a third-party engineering study to be completed by January 15, 2020, for
18 certain plants, and March 31,2020, for Colstrip. The Company has also committed to
l9 undertake another third-party engineering study to update decommissioning costs by
20 June 30, 2024, for certain plants, which will be incorporated into the next depreciation
2l study. These estimates will establish the basis for the Exiting States to determine the
r "Rcassignmcnt. Reassign or Reassigncd" mcaff assigning bcnefits from an Exiting State's share of a coal-
fueled Interim Period Resources lo those States $ith Commission ordcn to accept that cost resporsibiliq
allocation for Exiting State's ponion of the coal-fueled Intcrim Rcsourcc. Scc Exhibit No. l, 2020 Protocol
Appendir A.
1 final amount they should reserve to cover their liability for plant decommissioning and
remediation activities. The estimates also establish a basis for measurement of the
decommissioning responsibility between states at the time states actually exit a coal
unit while others continue to participate in its operation.
In the situation where a state continues to participate in a coal-fueled resource
at its fixed percentage after other states have exited, but it does not accept any
reassignment ofthe resource or limited realignment, then it will be responsible for its
fixed percentage share of the resource's actual decommissioning costs.
In the situation where states choose to take a greater allocation of the coal-
fueled resources through Reassignment or Limited Realignment, the Company mav.
with the burden ofproofand subject to PacifiCorp supporting its proposal in testimony,
propose to allocate to and collect from each state that is participating in that Resource
at the time ofClosure that state's share, based on either an SG Factor (ifclosed during
the Interim Period) or an AP Factor, adjusted for any reassignment or limited
realignment effects (ifclosed afterthe Interim Period), of actual decommissioning costs
less the regulatory liabilities for Exiting States including interest as described in Section
4.3.2 of the 2020 Protocol, and less any difference between the reserve balance
established for each Exiting State and the estimated costs allocated to each Exiting
State as described above.
Wit! the differences between decommissioning costs ordered to be included in the
reserve balances in states that have issued Exit Orders and the estimated
decommissioning costs established for those states be allocated to other states?
No. Such differences will not be allocated to other states.
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How will the Company account for decommissioning reserve balances when all
states do not exit a unit?
After an Exit Date by some but not all states, the decommissioning costs reserves
allocated to the Exiting State associated with a coal-fueled lnterim Period Resource
unit, for which that state is exiting, will be accounted for as a reserve account and will
be excluded from rate base. Interest will be accrued on that regulatory liability at the
Company's then-authorized after-tax weighted average cost of capital, not to exceed
the maximum carrying charge allowed by applicable law or commission order, for each
state that participates in the Reassignment ofthe exited share ofthat coal-flueled Interim
Period Resource after an Exit Date until the decommissioninq work on that unit is
completed.
Do all states have the ability to review the decommissioning cost estimates from
the Company's contractor-assisted engineering studies?
Yes. Any Party, at its discretion and cost, may take any actions they deem necessary to
review the study results, and may, upon the basis of such a review, take any position
they believe to be appropriate. Should a commission determine that an independent
evaluator is needed to review the study, the Company agrees to initially pay for the
independent evaluator, w-ith the ability to seek recovery ofthose costs.
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l9 Resolved Issues
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Haye certain issues been resolved, subject to implementation after the Interim
Period?
Yes. The 2020 Protocol addresses the future allocation treatment for certain revenues,
costs, and investments that would become part of the cost-allocation methodology to
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o 1 be used alter the Interim Period (the Post-Interim Period Method). These resolved
2 components of the 2020 Protocol are intended to take effect, conditioned upon
3 resolution ofthe Framework Issues, such that a new method can go into effect after the
4 Interim Period.
5 Allocution of Generation Costs and FLted Assignment of New Resources
6 Q. What does the 2020 Protocol resolve with respect to the allocation of generation
7 costs and revenues for the Post-Interim Period Method, should ongoing
8 negotiations be successful?
9 A. The 2020 Protocol establishes that the Post-Interim Period Method should assign all
10 Interim Period Resources and new resources to states on a fixed, as opposed to
11 dynamic, basis. To the extent that they are not otherwise assigned through the
12 Reassignment or Limited Realignment process as described in the 2020 Protocol,
l3 Interim Period Resources will be assigned per the System Generation-Fixed C'SGF")
14 Factor, which will be used to create AP Factors specific to each resource.
'15 0, How does this differ from the method for allocating generation costs and revenues
16 under the 2017 Protocol and during the Interim Period?
17 A. During the Interim Period generation costs and revenues will continue to be allocated
18 dynamically among states, based on the SG Factol which will no longer exist in the
19 Post-Interim Period Method.
20 a. How will the SGF Factors be determined?
2l A, The SGF Factors will be created by taking an average of the four most recent years'
22 SG Factors available at the time the Post-Interim Period Method is filed. More detail
23 on this factor can be found in Appendix C.
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a When resources are assigned to states on a fixed basis, will the allocation factors
for other components of revenue requirement related to the resources change?
Yes. Section 5.1.1 ofthe 2020 Protocol addresses the change from dynamic factors to
fixed factors for the allocation of Interim Period Resources and the changes that are
necessary to other factors that are interrelated with the Interim Period Resource
allocation factors, including accumulated depreciation, accumulated deferred income
taxes and excess deferred income taxes, operation and maintenance ("O&M")
expenses, all generation-related O&M expenses that cannot be allocated to a specific
existing resource through an AP Factor, property tax, and all other rate base items
associated with Interim Period Resources.
How does the 2020 Protocol define "Post-Interim Period Resources" and how will
AP Factors for these resources be determined?
Post-Interim Period Resources are resources that begin commercial operation, or with
a contract or delivery date, as applicable, after the end ofthe Interim Period. All Post-
Interim Period Resources will be assigned to states on a fixed basis, based on an
assignment method to be determined through the Framework Issues process during the
Interim Period.
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l8 Transnission Costs
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What does the 2020 Protocol resolve with respect to the allocation of transmission
costs and revenues for the Post-lnterim Period Method should ongoing
negotiations be successful?
The 2020 Protocol establishes that transmission costs and revenues for the Post-Interim
Period Method should be allocated using the System Transmission ("ST") Factor
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o I calculated based on a classification of costs as 75 percent demand-related and
2 25 percent energy-related, and based on I 2 monthly Coincident Peaks, using weather-
3 normalized retail peak and energy data, as more thoroughly defined in Appendix C of
4 the 2020 Protocol.
5 The use ofthe 75 percent demand / 25 percent energy weighting lor allocation
6 of transmission costs is the result of the 2020 Protocol negotiations, and has been
7 consistently used for the allocation of transmission costs since shortly after the 1989
8 PacifiCorp merger. Company analyses have indicated that a wide range ofdemand and
9 energy classification methods could be supported on a technical basis, but this method
l0 continues to be selected because it produces an overall cost allocation result that is
I I acceptable to all the states.
12 Distribution Costs
l3 a. What does the 2020 Protocol resolve with respect to the allocation of distribution
14 costs for the Post-Interim Period Method should ongoing negotiations be
15 successful?
16 A. The 2020 Protocol establishes that all distribution-related expenses and investments
17 that can be directly allocated will be directly allocated to the states where the related
l8 distribution facilities are located. Those costs that cannot be directly assigned will be
19 allocated on the System Net Plant-Distribution ("SNPD") Factor
20 a. Does this differ from the method for allocating distribution costs under the 2017
21, Protocol and during the Interim Period?
22 A. No.
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Can the Company reclassify its facilities between transmission and distribution?
Yes. The classification offacilities as transmission or distribution depends on how the
facility is used, and may change over time. Any such reclassification is generally done
following an analysis by the Company, using tests adopted by the Federal Energy
Regulatory Commission ('FERC")
System Overhead Costs
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What does the 2020 Protocol resolve with respect to the allocation of system
overhead costs for the Post-Interim Period Method should ongoing negotiations
be successful?
The 2020 Protocol establishes that system overhead costs, i.e. costs which support more
than a single function such as generation or transmission, should be allocated on a new
System Overhead C'SO") Factor that is based on one-third weightings of the System
Capacity ("SC"), System Energy ("SE'), and System Gross Plant Distribution
C'SGDP") factors for the Post-Interim Period Method.
How does this differ from the method for allocating system overhead costs under
the 2017 Protocol and during the Interim Period?
The SO Factor used under the 2017 Protocol and during the Interim Period are based
on the ratio of gross plant allocated or situs assigned to each state, excluding that
allocated by the SO Factor- Generation and transmission gross plant was allocated
using the SG Factor, mining plant on the SE Factor, and distribution plant was directly
allocated to the states where the plant was located.
The Company's proposal for generation resources to be allocated on the SGF
Factor or other AP Factor during the Post-Interim Period would make a major
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o I component ofthe SO Factor fixed. However, because administrative and general costs
2 are dynamic, it lollows that the allocation ofthese costs should also remain dynamic.
3 The 2020 Protocol relies on the following weightings to maintain the dynamic
4 nature of the SO Factor: SC Factor by one-third, SE Factor by one-third, and
5 distribution plant by one+hird. These ratios approximately align with the demand,
6 energy, and situs plant used for the previous SO Factor cost causation principles.
7 Administrative and General Costs
8 Q. What does the 2020 Protocol resolve with respect to the allocation of
9 administrative and general costs for the Post-Interim Period Method should
10 ongoing negotiations be successful?
I I A. The 2020 Protocol establishes that administrative and general costs, general plant, and
12 intangible plant, both expenses and investments, which can be directly allocated should
13 be directly allocated to the appropriate state or states, and those costs that must be
14 allocated among states should be allocated consistent with Appendix B to the 2020
15 Protocol.
16 a. How does this differ from the method for allocating administrative and general
17 costs under the 2017 Protocol and during the Interim Period?
l8 A. It does not; however, different costs may be subject to direct allocation given the fixing
l9 offactors, Reassignment, or for other follow-on effects of the implementation of a Post-
20 Interim Period Method.
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o 1 Other Alloctttion Issues
2 Q. What other allocation issues does the 2020 Protocol resolve for the Post-Interim
3 Period Method?
4 A. The 2020 Protocol establishes that items included in the Company's results of
5 operations, other than those that are specifically called out in the 2020 Protocol, should
6 continue to be allocated on the same factors used in the 2017 Protocol. The FERC
7 account and allocation factor combinations are included in Appendix B to the 2020
8 Protocol, and the algebraic derivation and factor definitions are included in Appendix
9C
10 a. Are there any changes required to other allocation issues for the sake of
11 consistency with the broader changes contemplated for the Post-Interim Period
12 Method?
13 A. There are several other allocation issues which need to be addressed to be consistent
14 with the various changes contemplated in the 2020 Protocol. They are specifically
l5 addressed in Section 5.6 of the 2020 Protocol and cover various issues for other
l6 miscellaneous revenue requirement items.
17 Dennnd-Side Managenwnt ('DSM")
18 a. What does the 2020 Protocol resolve with respect to the allocation of DSM costs
19 and benefits for the Post-Interim Period Method should ongoing negotiations be
20 successful?
2l A. Costs associated with DSM Programs, including Class I DSM Programs, will continue
22 to be directly allocated to the state in which the investment is made. The benefits from
23 these programs will flow back to the state through net power costs or through reduced
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I or delayed future capacity needs that will be addressed as part ofthe Framework Issues
2 process in the development and implementation of a Post-Interim Period Method
3 approach to resource planning and new resource assignment.
4 Q. Does this method for allocating DSM costs differ compnred to the 2020 Protocol
5 during the Interim Period?
6 A. No.
7 Stde-Specificlnitiatives
8 Q, How will costs associated with state-specific initiatives be allocated?
9 A. Costs and benefits associated with a state-specific initiative will continue to be directly
l0 allocated to the state adopting the initiative. State-specific initiatives include those
11 issues related to the provision of retail electric services to customers in the state, and
12 include, for example, incentive programs and customer and community energy
l3 generation programs. State-specific initiatives do not include local fees, taxes, or other
14 costs associated with operating transmission and generation lacilities within a state.
l5 Frameworklssues-SpecialContracts
16 O, Are there Framework Issues that you wish to address in your testimony?
17 A. Yes. Of the Framework Issues generally identified in the policy testimony of
18 Ms. Steward, I will address special contracts in more detail.
19 0. Does the 2020 Protocol change the treatment of the special contracts during the
20 Interim Period?
21 A. No. During the Interim Period, the treatment applied to special contracts underthe 2017
22 Protocol will continue to apply, The issue of how special contracts should be treated
23 after the Interim Period has been designated as a Framework Issue.
o 1 Q, Please explain.
2 A. Special contracts fall into two categories, those with ancillary service attributes and
3 those without. When intem:ptions occur for special contracts with ancillary services,
4 the host jurisdiction's load-based dynamic allocation factors and retail service revenues
5 are calculated as though the intemrption did not occur. For special contracts without
6 ancillary services, the reduction in load will be reflected in the host jurisdiction's [oad-
7 based dynamic allocation factors and the actual revenues received from the special
8 contract customer will be assigned to the state where the special contract customer is
9 located. Appendix G to the 2020 Protocol provides the details on the appropriate
l0 allocation treatment to be applied for the special contracts and explains the two
I I alternative allocation treatments for special contracts under the 2020 Protocol during
12 the Interim Period. Because special contracts have the potential of impacting load-
13 based dynamic allocation factors, which will be fixed under the Post-Interim Period
14 Method for generation allocations, the approach to special contracts needs to be
15 reconsidered.
I6 a. Does the 2020 Protocol establish a timeframe for developing a proposal to resolve
17 the special contracts treatment as part of the Framework lssues process?
l8 A. Yes. The Company is planning to present a proposal to the Framework Issues
l9 workgroup by September 1, 2021, with the intention of incorporating agreement into
20 the Post-Interim Period Method.
?1 2020 Protocol Appendices
22 a. Please summarize the 2020 Protocol Appendices.
23 A. The 2O20 Protocol has seven appendices as follows:
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. AppendixA-Definitions;
. Appendix B-Allocation Factors by Account by Revenue Requirement
Components;
. Appendix C-Definitions ofAllocation Factors;
. Appendix D-Nodal Pricing Model Memorandum of Understanding;
. Appendix E--Coa[-Fueled Interim Period Resource Depreciation Lives;
. Appendix F-Washington Inter-Jurisdictional Allocation Methodology
Memorandum of Understanding; and,
. Appendix G-Special Contracts.
I will provide an explanation ofall ofthe Appendices, with the exception ofAppendices
D and F, which are addressed by Mr Wilding.
Please describe Appendix A-Defi nitions.
Appendix A of the 2020 Protocol is a summary of frequently used terms. Rather than
defining each term in the 2020 Protocol itself, Appendix A is provided as a quick
reference resource for defined terms. Appendix A was reviewed to remove defined
terms no longer used or new terms added in the transition from the 2017 Protocol to
the 2020 Protocol.
Please describe Appendix B-Allocation Factors by Account by Revenue
Requirement Components.
Appendix B is a summary by FERC account ofthe appropriate a.llocation factors used
to allocate either the costs or revenues recorded to that account. Appendix B has two
columns, one for allocation factors to be used during the Interim Period, and a second
column for allocation factors to be used during the post-Interim Period. Only minor
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changes were made to the 2020 Protocol allocation factors in Appendix B from the
2017 Protocol during the Interim Period. These changes included removing any
accounVfactor combinations no longer used, or adding new account/factor
combinations that have been added since the 2017 Protocol was approved.
PIease describe Appendix C-Definitions of Allocation Factors.
Appendix C is a summary ofthe algebraic derivations ofthe allocation factors used in
the 2020 Protocol. The derivations ofthe factors started with the 2017 Protocol factors,
and were updated for factors used during the Interim Period and post-Interim Period.
Appendix C also lists the FERC accounts that are used for each ofthe allocation factors.
Please describe Appendix E-Coal-Fueled Interim Period Resource Depreciation
Lives.
Appendix E lists the commi ssion-approved depreciable lives in effect October 1,2019,
and the Company's proposed depreciable lives for coal-fueled resources in pending
depreciation dockets as filed in September 2018. Appendix E is provided for
informational purposes to assist in the comparison ofthe depreciable lives olthe coal-
fueled resources in Section 4 ofthe Agreement to approved depreciable lives and those
proposed in the pending depreciation dockets.
Please describe Appendix G-Special Contracts.
Appendix G contains the description how special contracts are treated for cost
allocation purposes, which I summarized earlier in my testimony.
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o I Conclusion
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a What action do you recommend the Commission take with respect to the
Agreement?
I recommend that the Commission find that the 2020 Protocol is in the public interest
and requests that the Commission approve this Application including all the terms and
conditions ofthe 2020 Protocol in its order in this proceeding.
Does this conclude your direct testimony?
Yes.
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