20150514Reading Rebuttal.pdf

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BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION -lt
IN THE MATTER OF TDAHO POWER
COMPANY'S PETITTON TO MODIFY TERMS
AND CONDITIONS OF PURPA PURCHASE
AGREEMENTS
IN THE MATTER OF ROCKY MOUNTAIN
POWER COMPANY'S PETITION TO MODIFY
TERMS AND CONDITIONS OF PURPA
PURCHASE AGREEMENTS
)) CASE NO. rPC-E-15-01
)
)
)) CASE NO. PAC-E-I5-03
)
)
IN THE MATTER OF AVISTA CORPORATION'S )
PETITION TO MODIFY TERMS AND ) CASE NO. AVU-E-15-01
CONDITIONS OF PURPA PURCHASE )AGREEMENTS )
REPLY TESTIMONY OF
DR. DON READING
ON BEHALF OF
J.R. SIMPLOT COMPANY AND CLEARWATER PAPER CORPORATION
MAY 14,2015
a.PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
My name is Don Reading and my business address is Ben Johnson Associates, 6070 Hill
Road, Boise, Idatro. I am Vice President and Consulting Economist for Ben Johnson
Associates.
ARE YOU THE SAME DON READING WHO PREFILED DIRECT
TESTIMONY IN THE CURRENT DOCKET ON APRIL 23M,2015?
Yes.
WHAT IS THE PURPOSE OF YOUR REPLAY TESTIMONY?
The following Reply Testimony is to provide comments on the Intervenor testimonies of
Rick Sterling and Yao Yin of the Commission Staff(Staff), Adam Wenner and R.
Thomas Beach for Idaho Conservation League and the Sierra Club (ICllSierra), Anthony
J. Yankel for the ldaho Irrigation Pumpers Association (IIPA), John R. Lowe of the
Renewable Energy Coalition (Coalition), Ken Miller of the Snake River Alliance (SRA),
and Mark Van Gulik of the Intermountain Energy Partners (tEP). Each of the above
lntervenors filed Direct Testimony in response to the petitions filed by Idaho Power
Company (Idaho Power), Avista Corporation (Avista), and Rocky Mountain Power
(RMP) (collectively the "Utilities") asking the Idaho Public Utilities Commission
(Commission, IPUC) to modifu the terms and conditions of Public Utility Regulatory
Policies Act of 1978 (PURPA) contracts.
Five of the seven non-utility parties - including Simplot/Clearwater - that filed
direct testimony three weeks ago strongly urged the Commission not to shorten QF
contract lengths from the current 20 years. The IIPA witness Tony Yankel proposed a
Reading, Reply Testimony
IPC-E-1 5-01, AVU-E- I 5-01, PAC-E-l 5-03
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temporary two year contract length as a "stopgap" in order to allow time to correct errors
he identified in the Commission's avoided cost model. The Commission Staff
recommends maintaininga20 year contract length for PURPA projects that currently
qualify for SAR-based rates and a maximum five years for QFs subject to the IRP based
rates.
ln our reply testimony, Simplot/Clearwater recommend a compromise proposal
pertaining to PURPA contract length for QFs ineligible for standard rates. We propose
that capacity and energy be treated slightly differently within the term of a2}-year
contract. We recommend the Commission maintain a2D-year contract length with the
capacity component of the rate fixed for the entire 20-year term. However, as a
compromise, the energy portion of the rate would only be fixed for the first l0 years of
the contract. After the first l0 years, the energy component would be recalculated each
year adhering to the Commission approved method for the remaining term of the
contract. Simplot/Clearwater still believe the current ZD-year term, for reasons stated in
my direct testimony, should be maintained. However, as described below, this alternative
proposal addresses some of the concerns of the other parties.
YOU ARE RECOMMENDING THE ENERGY COMPONENT OF THE 2O-YEAR
CONTRACT BE UPDATED ANNUALLY OVER THE SECOND TEN YEARS.
ARE THERE CURRENT PURPA CONTRACTS IN IDAHO THAT THE
ENERGY PORTION IS UPDATED ANNUALLY?
Yes. There are approximately 25 PURPA contracts that are adjusted periodically based
on coal costs. The commission uses the variable costs associated with the operation of
Colstrip, a coal-fired generation facility located in southeast Montana, for an annual
Reading, Reply Testimony
IPC-E-1 5-01, AVU-E-l 5-01, PAC-E-l 5-03
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adjustment of the adjustable portion of avoided costs for those contracts. These projects
had their rates set using an older coal SAR methodology. So there is ample precedent for
adjusting PURPA contracts on an annual basis.
ARE YOU AWARE OF OTHER PURPA CONTRACTS APPROVED BY THE
IDAHO COMMISSION WHERE CAPACITY IS FIXED FOR THE TERM OF
THE CONTRACT AND ENERGY IS ADJUSTED PERIODICALLY?
There are approximately 43 PURPA contracts tied to Idaho Power's Schedule 89 where
the energy rate is adjusted when Net Power Supply Expenses (NPSE) are changed in the
Company's base rates. For these projects the capacity component was fixed for the life
of the contract, however the utility's variable costs, including fuel and variable operation
and maintenance costs, are adjusted when these expenses change in the Company's base
rates, most often in a general rate case filing. This approach was intended to minimize
potential overpayments and underpayments. The Commission's rational for establishing
these contracts was:
Idaho Power appears particularly sensitive to Jluctuations in avoided
energl costs. Allowing energt payments derivedfrom annual estimation of
avoided costs may obligate the Company to payments in excess of the actual
avoided costs. Conversely, annual estimates of avoided energ/ costs may also
allow the QF too little. Underpayments are likely to occur from this scheme
during poor water years or during nearly every year for those facilities whose
production coincides with the months of high avoided energl costs. In the long
run, a policy based on ldaho Power's estimated avoided costs at delivery time
reduces the financial risk to both the utility and the QF.l
If the Companies were filing periodic rate cases or updates to base rates then the energy
costs would be adjusted every few years.
{ Order No. 15746, Docket No. P-200-12.
Reading, Reply Testimony
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YOU STATED ABOVE YOUR ALTERNATIVE PROPOSAL ADDRESSES
SOME OF THE CONCERNS OF THE OTHER PARTIES. COULD YOU
PLEASE BE MORE SPECIFIC?
The majority of the intervenors focused on the inability of a PURPA project to receive
financing with shortened contracts on the one hand, and on the other hand the Utilities
and Staff focused on the risks ratepayers face from the utilities signing fixed-price long-
term contracts. As I explained in my direct testimony, I do not agree with the latter
contention of ratepayer risk, however the altemative proposal offered here addresses that
issue by adjusting the energy component annually during the second ten years of the
contract.
YOU SAID MOST OF THE INTERVENORS ARE CONCERNED ABOUT THE
INABILITY OF PURPA PROJECTS TO OBTAIN FINANCING USING SHORT.
TERM CONTRACTS. COULD YOU CITE SOME EXAMPLES?
Without repeating the logic used by the intervenors, the crux of their positions was made
clear in their direct testimony. The shorter the contract length the more difficult it is to
obtain financing for a PURPA project. For example, "The consequence of a Commission
order limiting energy sales agreements to two or five years would be to bring any
meaningful PURPA development in ldaho to a halt."2 The Renewable Energy Coalition
witness John Lowe stated, "ln addition, imposing a policy change like a shortened
controct term on existing QFs could have significant and unnecessary harm on these
projects, the utilities, and ratepayers.t And,
This needfor long term ossurance of capital recovery is the same for QFs as it is
for a utility that proposes to build o new power plant and seel<s Commission
rDirect Testimony of Mark Van Gulik, Intermountain Energy Partners, March 23,2015, IPC-E-15-01, p.2.
Reading, Reply Testimony 5
IPC-E-l 5-01, AVU-E-l 5-01, PAC-E-l 5-03
7 opproval for longlerm recovery of the plant's costs by including them in rate
2 base. This history suggests that, without long-term, 2)-year contracts, QFs will
3 not be developedin ldaho.3
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5 The Commission Staff, while recorrmending five year contracts for IRP method based
6 PURPA contracts, also acknowledged,
1 Q. But won't afive-year limit on maximum contract length, if approved, limit the
8 ability of projects to obtainfinancing, thus moking extensive project development
9 unlikely?10 A. Yes, I agree that development would likely slow considerably, at least under
11 PURPA.4
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13 Also Snake River Alliance witness Ken Miller said,
14 I think this application, if approved, will cause further migration of solar
15 developers away from ldaho, as the proposed reduction in contract terms to two
16 years is tantamount to afreeze onfuture solar PURPA projects.'
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18 a. DR. READING,I REALIZE YOU ARE AN ECONOMIST NOT A LAWYER,
!9 BUT DID ONE OF THE INTERVENORS EXPRESS SOME LEGAL CONCERNS
20 ABOUT SHORTER CONTRACTS FAILING TO MEET FERC'S PURPA
2L REQUIREMENTS?
22 A. Yes. ICL/Sierra witness Adam Wenner stated in his direct testimony,
23 In the electric utility industry, and as discussed in my testimony, o two-year term
24 .fails to permit a QF to estimate, with reasonable certainty, the expected return on
its potential investment in a QF, and wouldfrustrate the requirement of section
210 of PURPA that FERC's rules, as implemented by state commissions,
encourage cogeneration and small power production.6
3 Direct Testimony of R. Thomas Beach, Idaho Conservation League and Sierra Club, March 23,2015,
IPC-E-15-01, p.10.
4 Direct Testimony of , Rick Sterling, Idaho Public Utilities Commission Staff, March 23,2Ol5,IPC-E-
l5-01, p.8.
5 Direct Testimony of Ken Miller, Snake River Alliance, March 23,2Ol5,IPC-E-15-01, p.10.
6 Direct Testimony of Adam Wernner, Idaho Conservation League and Sierra Club, March 23,2Ol5,lPC-
E-15-01, p.10.
Reading, Reply Testimony 6
IPC-E-l 5-01, AVU-E-l 5-01, PAC-E-l 5-03
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The alternative proposal offered here is aimed at finding a balance among the parties'
concems about a QF's ability to obtain financing, FERC's legal requirements under
PURPA and the risks of longer term fixed contracts in an uncertain world.
YOU JUST USED THE TERM 6'BALANCE" AMONG THE VARIOUS VIEWS
OF THE PARTIES. WHY DO YOU BELIEVE YOUR ALTERNATIVE
PROPOSAL HELPS ALLEVIATE SOME OF THOSE CONCERNS?
The alternative proposal offered here maintains a fixed capacity component of the rate
for the full 20-year duration, which more closely matches the fixed capacity length of a
utility-built facility. A QF, under current Commission policy, does not receive capacity
credits until the utility's IRP shows a capacity deficit, therefore putting a QF resource and
a utility built resource on relatively equal footing. The energy component, on the other
hand, will be updated annually over the last ten years of the contract, reducing the
perceived risk to rate payers from fluctuating fuel costs. Because the contract length
would remain at 20 years and have a fixed capacity component, it should give financiers
an additional sense of confidence and also addresses FERC's legal requirements. Of
course the most important aspect of this compromise is the incorporation of a variable
component for energy, the most volatile portion of a utility's avoided cost.
YOU MENTIONED ABOVE YOU WANT TO ADDRESS, IN ADDITION TO
YOUR PROPOSED ALTERNATIVE, A SPECIFIC ASPECT OF A PARTY'S
DIRECT TESTIMONY. WHAT ASPECT WOULD YOU LIKE TO ADDRESS?
Commission Staff witness Rick Sterling stated,
Q. Do you believe PURPA is an effective mechanism for utilities to ocquire new
generation?
Reading, Reply Testimony
IPC-E- 1 5-01, AVU-E- 1 5-0 l, PAC-E- I 5-03
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A. No, I do not. I believe PURPA was intended to permit relatively small, non-
utility-owned projects to be developed and to compete on an equal footing with
utility ownedfacilities. I do not believe PURPA wos ever intended to serve as the
primary, or even a major, mechanismfor utility acquisition of new rrrorrrrr.'
I fundamentally disagree with Mr. Sterling's statement that PURPA was "intended
primarily to permit relatively small non-utility-owned projects to be developed." Utilities
can, and do, develop PURPA projects. It is true that in the early days, utilities could only
own 50% of a PURPA project, but that restriction was repealed ten years ago. PURPA,
arising out of the energy crises of 1970's was part of National Energy Act enacted in
1978. The law was aimed at both relatively small renewable energy projects and large
projects with no limit as to size. These projects provide electrical energy at a more fuel
efficient altemative to traditional fossil fuel utility base load plant.
In addition, it appears at odds with StafPs recommendations in this docket and
Staff witness Sterling's statement that PURPA was intended to allow these projects to
"be developed and to compete on an equal footing with utility owned facilities." For
example, Idaho Power's certificate of public convenience and necessity (CPCN) for
Langley Gulch does not expire after five years with capacity rates adjusted to lower
ratepayer risk over the depreciated life of the plant. I would expect Idaho Power would
have difficulty financing the project with a CPCN that expired after five years.
One of the concepts behind the creation of PURPA is that the market (a.k.a
developers) could provide electric power at prices that are competitive with regulated
utilities' resources. This has been proven to be true as I demonstrated in my direct
7 Direct Testimony of , Rick Sterling, Idaho Public Utilities Commission Staff, March 23,2Ol5,IPC-E-
15-01, p.24.
Reading, Reply Testimony
Ipc-E-l 5-01, AVU-E-l 5-01, PAC-E-l 5-03
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testimony. In addition as these facilities are added to a utility's resource stack, they delay
or eliminate less fuel effrcient future utility-built generation plant. PURPA therefore is
indifferent to who provides the generation of electric power, the utility or a non-utility
generator, only the avoided cost of providing the power should be the determining factor.
DO YOU AGREE WITH MR. STERLING'S STATEMENT ON PAGES 20 _2I
THAT "AVOIDED COST RATES HAVE EXCEEDED COMPARABLE
MARKET PRICES THROUGHOUT MOST OF THE HISTORY OF PURPA IN
IDAHO"?
No I do not. As I pointed out in my direct testimony comparing long-term avoided cost
estimates with current market prices is, from an economist's point of view, inappropriate
and misleading. Long-term marginal cost rates (avoided cost rates) are not the same as
short-term market prices. When this Commission approved the Langley Gulch plant for
inclusion in [daho Power's rates, it did so using long-term cost estimates over the
expected life of the plant. Had the Commission used current market prices as the
benchmark, that plant would probably not have been built.
WHAT ARE YOUR RECOMMENDATIONS FOR THE COMMISSION?
While still maintaining the recommendation put forth in my direct testimony
Simplot/Clearwater are offering an alternative proposal should the Commission decide
alter the length of PURPA contracts. The altemative recommendation is that capacity and
energy be treated differently within the term of a20-year contract. Capacity would
remain fixed, however the energy component would be recalculated each year beginning
in the 1 I th year for the remaining l0 years of the contract.
DOES THIS END YOUR TESTIMONY AS OF MAy 14,2015? A. Yes
Reading, Reply Testimony
IPC-E-l 5-01, AVU-E-l 5-01, PAC-E-1 5-03
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 14ft day of M"y, 2015, a true and correct
copy of the within and foregoing REPLY TESTIMONY OF DR. DON READING
ON BEHALF OF CLEARWATER PAPER CORPORATION and the J.R. SIMPLOT
COMPANY was served as shown to:
Jean D. Jewell, Secretar5r X Hand Delivery
Idaho Public Utilities Commission _U.S. Mail, postage pre-paid
472 West Washington _ Facsimile
Boise, Idaho 83702 _ Electronic Mail
j ean. i ewell@puc. idaho. sov
Donald L. Howell, II _ Hand Delivery
Daphne Huang _U.S. Mail, postage pre-paid
Deputy Attorneys General _ Facsimile
Idaho Public Utilities Commission X Electronic Mail
472 West Washington
Boise, lD 83702
don. howell@f uc. idaho. eov
daphe. huans@puc. idaho. eov
C. Tom Arkoosh _ Hand Delivery
TWin Falls Canal Company _U.S. Mail, postage pre-paid
North Side Canal Company _ Facsimile
American Falls Reservoir District #2 X Electronic Mail
Arkoosh Law Offices
802 W Bannock Ste 900
Boise ID 83702
tom. arkoosh@arkoosh. com
Erin Cecil
Arkoosh Law Offices
erin. cecil@arkoosh. com
Ben Otto _ Hand Delivery
Idaho Conservation League _U.S. Mail, postage pre-paid710N6th _ Facsimile
Boise ID 83702 X Electronic Mail
bo ttq@id aho c o n se rvation . org
Leif Elgethun PE LEED AP _ Hand Delivery
Intermountain Energr Partners LLC _U.S. Mail, postage pre-paid
PO Box 7354 _ Facsimile
Boise ID 83707 X Electronic Mail
le ifi2 si te based e ne rgv. co m
Dean J Miller _ Hand Delivery
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Daniel E Solander _ Hand Delivery
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PacifiCorp/dba Roclry Mountain Power _ Facsimile
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wonne. hogel@pacifi corp. com
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Ted Weston _ Hand Delivery
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Ken Miller _ Hand Delivery
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Donovan E. Walker
Lisa A. Grow
RandyAllphin
Idaho Power Company
l22l West Idaho Street
Boise,ID 83702
dwalke(Eidahopower. com
[e-mail]
rallphin@idahopower. com
docket(Didahopower. com
Clint Kalich
Avista Corporationl4ll E Mission Ave MSC-7
Spokane WA 99202
clint. kalich@avistacorp. com
Michael Andrea
Avista Corporationl4tl E Mission Ave MSC-23
Spokane WA 99202
michael. andrea@avistacorp. com
Scott Dale Blickenstaff
The Amalgamated Sugar Company LLC
1951 S Saturn Way Ste 100
Boise lD 83702
s blic ke n s taff@amal su gar. c o m
Richard E. Malmgren
Micron Technolory Inc
8O0 South Federal Way
Boise ID 83716
remalmqren@micron. com
Frederick J. Schmidt
Pamela S. Howland
Holland & Hart LLP
377 South Nevada Street
Carson City NV 89701
fschmidt@hollandhart. com
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Matt Vespa
Sierra Club
85 Second St 2"d Floot
San Francisco CA 94105
matt. ve spa@sierraclub. orq
Eric L. Olsen
Racine, Olson, Nye, Budge & Bailey,
chd.
PO Box 1391
Pocatello, ID 83204- 1 39 1
elq2racinelaw.net
Anthony Yankel
29814 Lake Road
Bay Village, OH 44140
[e-mail]
Ronald L. Williams
Williams Bradbury, PC
1015 W. Hays St
Boise, ID 83702
ron@williamsbradburv. com
Irion Sanger
Sanger Law, PC
lll7 SW 53.0 Avenue
Portland, OR 97215
[e-mail]
Andrew Jackura
Camco Clean Energr
9360 Station Street, Suite 375
Lone Tree, CO 80124
andrew. i ackura@camcocleanenergv. com
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Signed \\)d;,\tr s
Nina M. Curtis