20171120Yankel Direct-Redacted.pdf

RECEIVED
2817 NOV 20 PM 5:06
0 PUBUCFSCOMMISSION
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF PACIFICORP DBA ROCKY MOUNTAIN )
POWER FOR A CERTIFICATE OF PUBLIC )CASE NO.PAC-E-17-07
CONVENIENCE AND NECESSITY AND )
BINDING RATEMAKING TREATMENT )
FOR NEW WIND AND TRANSMISSION )
FACILITIES )
IDAHO IRRIGATION PUMPERS ASSOCIATION,INC.
DIRECT TESTIMONY
OF
ANTHONY J.YANKEL
NOVEMBER 20,2017
l Q.PLEASE STATE YOUR NAME,ADDRESS,AND EMPLOYMENT.
2
3 A.I am AnthonyJ.Yankel.I am President of Yankel and Associates,Inc.My
4 address is 12700 Lake Avenue #2505,Lakewood,Ohio,44107.
5
6 Q.WOULD YOU BRIEFLY DESCRIBE YOUR EDUCATIONAL
7 BACKGROUND AND PROFESSIONAL EXPERIENCE?
8
9 A.I received a Bachelor of Science Degree in Electrical Engineeringfrom Carnegie
10 Mellon University in 1969 and a Master of Science Degree in Chemical Engineeringfrom the
11 Universityof Idaho in 1972.From 1969 through 1972,I was employed by the Air Correction
12 Division of Universal Oil Products as a product design engineer.My chief responsibilities were
13 in the areas of design,start-up,and repair of new and existingproduct lines for coal-fired power
14 plants.From 1973 through 1977,I was employed by the Bureau of Air Quality for the Idaho
15 Department of Health &Welfare,Division of Environment.As Chief Engineer of the Bureau,
16 my responsibilities covered a wide range of investigativefunctions.From 1978 through June
17 1979,I was employed as the Director of the Idaho Electrical Consumers Office.In that capacity,
18 I was responsible for all organizational and technical aspects of advocating a variety of positions
19 before various governmental bodies that represented the interests of the consumers in the State of
20 Idaho.From July 1979 through October 1980,I was a partner in the firm of Yankel,Eddy,and
2 l Associates.Since that time,I have been in business for myself.I have been a registered
22 Professional Engineer in the states of Ohio and Idaho.I have presented testimony before the
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l Federal Energy Regulatory Commission (FERC),as well as the State Public Utility
2 Commissions of Idaho,Montana,Ohio,Pennsylvania,Utah,and West Virginia.
3
4 Q.ON WHOSE BEHALF ARE YOU TESTIFYING?
5
6 A.I am testifying on behalf of the Idaho Irrigation Pumpers Association ("IIPA").
7
8 Q.WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
9
10 A.My testimony will address Rocky Mountain Power's ("Company")proposal to
11 invest $2 billion in new wind and transmission facilities ("Combined Projects").The economic
12 viabilityof the Combined Projects is based upon receiving the full benefit of the federal wind
13 production tax credit ("PTC").In order to receive the full benefit of the PTC,all of the
14 Combined Project would need to be operational by December 31,2020.The Company is
15 requesting from the Commission certificates of public convenience and necessity ("CPCN")as
16 well as binding ratemakmg treatment.
17 My testimony will address the costs and benefits of the Combined Projects as outlined by
18 the Company.I will addressthe unique nature of this request for a CPCN,given that there is not
19 an internal need for additional generation facilities for the next 10-years.Rather,Company
20 witness Crane bills these Combined Projects as an "exciting opportunity"'for ratepayers to
21 realize a net present value benefit of $137 million spread out between 2020 and 2050.
1 Crane Direct @ 2.
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l My testimony will also address the balance of interests between the
2 Company/stockholders and the ratepayers.Given the fact that the proposed Combined Projects
3 are not needed to serve internal load,but represent an "exciting"or more properly an economic
4 opportunity,it is important to understand the balance of interests between the
5 Company/stockholder and the ratepayers.
6 Finally,my testimony will addressa number of risks associated with the Combined
7 Projects and the impact those risks could have on the economic viability of the Combined
8 Projects for the ratepayers.
9
10 Q.FROM YOUR REVŒW OF THE FILING AND OTHER SOURCES,WHAT ARE
I I YOUR CONCLUSIONS AND RECOMMENDATION?
12
13 A.I have concluded that,as filed,almost the entire benefit of the Combined Projects
14 goes to the Company/stockholders in the form of a guaranteed return on an investment of $2
15 billion.The Company only forecasts a benefit to the ratepayer of $137 million that will be
16 spread between 2020 and 2050.However,that forecasted benefit of $137 million is dependent
17 upon a host of risk factors resolving favorably for the ratepayers.These risk factors are not
18 trivial and can easily turn the perceived ratepayer benefit of $137 million into a significant cost.
19 Because of the clear risk factors that are present and the fact that the impact of these risk
20 factors would fall solely upon the ratepayers and not the Company/stockholders,I recommend
21 that no CPCN or binding ratemaking treatment be given at this time.The Company could refile
22 its case after the Combined Projects are put in service.
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l In addition,because this is an economic opportunity as opposed to a need for $2 billion
2 worth of new generation,a sharing mechanism must be put in place.If the Company requests a
3 rate of return on the Combined Projects,then it would be appropriate that 100%of the benefit go
4 to the ratepayers-as in the filing.However,because the Combined Projects are based upon
5 assumptions and forecasts put together by the Company,the Company should absorb all risks
6 associated with any changes that would otherwise raise the rates to its customers.
7
8 PTC BASED ECONOMIC OPORTUNITY
9
10 Q.WHAT IS THE PURPOSE OF THE COMPANY'S APPLICATION IN THIS
11 CASE?
12
13 A.As stated by Company witness Crane2,the Company's Application:
14 ...includes a request for certificates of public convenience and necessity
15 ("CPCN")for new wind and transmission facilities,and a request for
16 binding ratemaking treatment for investment in wind and transmission
17 projects ...(Emphasis added)
18
19 Q.WOULD IT BE APPROPRIATE TO AWARD THE COMPANY A CERTIFICATE
20 OF PUBLIC CONVENIENCE AND NECESSITY FOR THIS PROJECT?
21
22 A.No.The Company makes no claim that this project is "necessary".Its forecasted
23 need for new resources is at least 10 years out.There is no need or necessity.The Company is
24 proposing to add $2 billion to rate base for a project that was not even contemplated in last year's
2 Crane Direct @ 2
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CONFIDENTIAL
1 Updated 2015 IRP (filed March 31,2016).Basically,the Company's case rests not on "need",
2 but on a perceived economic benefit/opportunity.As stated by Company witness Crane':
3 The time-sensitive opportunity presented by the PTC's allows the
4 Company to provide cost-effective,emission-free generation to serve
5 Idaho ratepayers,while providing the cost savings necessaryto construct
6 the required Transmission Projects and provide economic benefits for
7 ratepavers.(Emphasis added)
8
9 As I will demonstrate later in this testimony,the "economic benefits"suggested by the Company
10 are highlyspeculative and miniscule compared to the return and depreciation expenses that will
ll be paid by the ratepayers.
12
13 Q.HOW IMPORTANT IS THIS "TIME-SENSITIVE OPPORTUNITY PRESENTED
14 BY THE PTC'S"?
15
16 A.Without the full benefit of the PTC's,the project would not be economical.As stated
17 by Company witness Crane4.
18 My testimony details the Company's proposal to invest $2 billion in new
19 wind and transmission facilities,all of which would be operational by
20 December 31,2020,as required to leverage the full benefit of the federal
21 wind production tax credit ("PTC"),the value of which is essential to the
22 combined projects'overall economic viability.(Emphasis added)
23
24 Company workpapers show a total benefit of the PTC credits over the 10 years of
25 3.Basically,the total PTC's amount to almost %of the cost of the entire
26 project.If this "time-sensitive opportunity"is not constructed by December 31,2020,the
27 economic viability of the project will be lost.The Company is making its case based upon an
3 Crane Direct @ 13
4 Crane Direct @ l
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l economic opportunity (more for itself than for its ratepayers)and not upon any contention of
2 "necessity".
3
4 BALANCE OF INTERESTS
5
6 Q.THE COMPANY IS ALSO SEEKING APPROVAL OF BINDING RATEMAKING
7 TREATMENT UNDER IDAHO CODE §61-541.WHAT STANDARD DOES THE
8 COMPANY INDICATE MUST BE MET TO OBTAIN BINDING RATEMAKING
9 TREATMENT?
10
11 A.Company witness Crane6 StateS Rocky Mountain's understanding ofthe requirements
12 for binding ratemaking treatment:
13 I understand that the Commission must maintain a "fair,just and
14 reasonable balance of interests between the requesting utilityand the
15 utility's ratepayers,"considering specific factors.(Emphasis added)
16
17 As will be demonstrated later in this testimony,at best this applicationskews almost all the
18 benefit to the Company and very little to the ratepayers.In addition,it is very possible that the
19 Company could get all the benefit at an overall cost to the ratepayers.
20
21 Q.UPON WHAT DO YOU BASE YOUR STATEMENT THAT ALMOST ALL,IF
22 NOT ALL,THE BENEFIT OF THE COMBINED PROJECTS WOULD GO TO THE
23 COMPANY?
24
*Exhibit 27-29 Workpapers,Tab "NPC and Cost Rollup (Wind)",Line l 1.
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l A.This $2 billion is clearly a major investment in resources.If approved by the
2 Commission,the ratepayers would have a long-term commitment to be responsible to pay for the
3 Combined Projects,despite what happens.For example,assuming a pre-tax Return of
4 10.681%',this means that ratepayers would pay $214,000,000 ($2 billion x 0.10681)for a return
5 to the Company for the first year.This figure does not reflect the full cost to the ratepayer
6 because the equity portion needs to be gross up by a factor of 1.6116.
7 Roughly assuming an average depreciation life of 35 years"for the project,this would
8 mean that the ratepayers would pay an additional $57,000,000 ($2 billion /35)for a total of
9 $271,000,000 plus tax in the first year.The return costs will slowlydecrease over the assumed
10 35 years as rate base is slowlylowered by depreciation but,the cost to the ratepayers will be
11 substantial for many years to come.
12 By contrast,assuming benefits can be accurately forecasted,the present-value savings
13 based upon the Company's medium case (medium natural gas prices and medium CO2 PfiCO-
14 policy scenario and through 2050)is only$137,000,000.In other words,the first-year return and
15 depreciation that will be paid to the Company will be approximatelydouble what the ratepayers
16 will receive on a present value basis over the next 34 years.This assumes that all the Company's
17 assumptions/forecasts are accurate.
18
19
6 TSRC ÛÌf6CI i3
7 This pre-tax rate of return is based upon the example provided in Larson's Exhibit 28 page 2.This rate of
return is for demonstration purposes only and in no way showing support for the 37.951%tax rate assumed
by the Company.
"Assuming a life of 30 years for the Wind and a 55-year life for the Transmission.Weighting the
depreciation heavier on the Wind,results in a rough depreciation life for the Combined Projects of 35
years.
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l RISKS
2
3 Q.IS THERE ANOTHER WAY TO LOOK AT THE BALANCE OF THE
4 INTERESTS OF THE COMPANY AND THE RATEPAYERS?
5
6 A.Yes.The highly disproportionate amount of money that the Company will be
7 guaranteed from this project,compared to the relatively small amount of money that the
8 ratepayers will get,is only one way to assess the interests of the Company and the ratepayers.
9 Admittedly,the balance is highlyskewed in favor of the Company.However,it is risk that
10 makes this proposed balance between the ratepayers and the Company completelyunacceptable.
11 Risk is something that completely removes any pretention that there is balance between
12 the ratepayers and the Company with respect to this project.If a CPCN is issued,then the
13 Company will be guaranteed a return on all prudently incurred costs.As shown above,that
14 would be a substantial amount of money.However,the ratepayers bear essentially all the risk of
15 any shortfalls there are in the Company's assumptions.The Company will have essentially no
16 risk.
17
18 Q.IS THE COMPANY WILLING TO ABSORB ANY OF THE RISKS?
19
20 A.Onlyto a very limited degree.The Company is not willingto absorb any of the risks
21 addressed below.These risks are all associated with assumptions made in this filing to support
22 the Company's case.The Company differentiates between risks that are within its control and
23 those that are not.The Company has stated that it is willingto absorb the risks associated with
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l things that are within its control (meeting the five-percent safe-harbor requirement and the 80/20
2 test)in order to be eligible for the PTC's.However,it is not willingto take on any risk for the
3 items listed below.This is clearly stated in Company witness Crane's Rebuttal Testimony in the
4 Repowering case in Utah Docket No.17-035-39
5 Q.If significant portions of the repowering project do not ultimately
6 qualify for PTCs due to delay,or the project incurs unanticipated cost
7 increases within the Company's control,is the Company prepared to
8 bear those risks?
9 A.Yes.The Company has taken every precaution to ensure that each
10 repowered facilitywill meet the requirements and timelines of the five-
11 percent safe-harbor requirement,as well as the 80/20 test,and has
12 developed a construction schedule and negotiated contract terms that
13 minimize schedule risks.While we do not believeit is appropriate for
14 the Company to absorb risks bevond its control-such as those
15 associated with the actions of the U.S.Congress-we are prepared to
16 accept risks associated with our performance.(Emphasis added)
17
18 The risks listed below can be considered bevond the control of the Company.The Combined
19 Projects have been billed as an economic opportunity for ratepayers,but the ratepayers would
20 have to absorb almost all of the risk,while the Company would be making a guaranteed rate of
21 return on a $2 billion project.
22
23 Q.WHAT ARE SOME OF THE RISKS THAT THE RATEPAYERS WILL HAVE TO
24 BEAR IF A CPCN IS ISSUEDAT THIS TIME?
25
26 A.There are a host of issues that cause risk that could reduce any economic benefit to
27 the ratepayers from the Combined Projects,and even worse,cause rates to increase because
Crane Rebuttal @ 6 in Utah Docket 17-035-39.
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l circumstances did not work out as forecast by the Company in this case.A brief listing of such
2 risks includes:
3 *Natural gas prices could be less than used in the Company's forecast.
4 *The federal tax rate of 35%may be lowered.
5 *The New Wind may not generate as much energy as forecasted by the Company.
6 *The PTC may not be as valuable as forecasted.
7 *Today there is no policy imposing a carbon emission tax.
8 I will give more detail regarding each of these risks below.
9
10 Natural gas prices could be less that used in the Company's forecast.
11
12 Q.ARE NATURAL GAS FUTURE PRICES IMPORTANT TO THE COMPANY'S
13 FORECAST OF RATEPAYER BENEFITS OF THE COMBINED PROJECTS?
14
15 A.Yes,this is very important.Of the nine scenarios used to evaluate the economic
16 viabilityof the Combined Projects,two scenarios (low natural gas'°,no carbon tax and low
17 natural gas,medium carbon taxi)produced negative results-there was a net cost to the
18 ratepayers from the Combined Projects.However,the Company justifies the Combined Projects
19 primarilybased on a net benefitto ratepayers of $137 million assuming a medium natural gas
20 assumption and the medium carbon tax assumption.This suggests that the forecasted price of
21 natural gas is a very important variable.
22
10 Link Direct @ 32 --low price natural gas price at levelized $3.19 per MMBTU.
"Link Direct @ 32 --medium carbon price at $3.41/ton in 2025 growing to $14.40/ton in 2036.
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l Q.HAS THE COMPANY SHOWN AN ABILITY TO REASONABLY FORECAST
2 NATURAL GAS PRICES?
3
4 A.No.In recent history the Company has forecasted higher gas prices than actually
5 occurred in the near-tern.Additionally,the Company's long-term forecasted natural gas prices
6 continue to be high,but are reduced with each subsequent forecast.This pattern of projecting
7 higher natural gas prices and then lowing them in subsequent forecasts,has been consistent since
8 at least 2010.
9
10 Q.WHAT HAVE BEEN THE NATURAL GAS PRICES SINCE 2010?
11
12 A.The followingdata from the U.S.Energy Information Administration shows the
13 annual NYMEX natural gas future prices since 20 l0.
Figure 1
0.5
2010 2011 2012 2013 2014 2015 2016
2010 2011 2012 2013 2014 2015 2016
Series1 4.382 4.026 2.827 3.731 4.262 2.627 2.546
14
15 Overall,there has been a downward trend in natural gas prices since 2010.
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l
2 Q.HOW HAVE THE COMPANY'S HISTORIC FORECASTS COMPARED TO THIS
3 ACTUAL DATA?
4
5 A.The Company's 2013 IRP contains a graph that compares its forecasted natural gas
6 prices from 2010,2011,and 2013.
7 Figure2
PAcmCon -2013 IRP Churrn 7 -Moonso Am.oAca
Figure 7.6 -Comparison of Base Henry Hab Gas Price Forecasts used for Recent IRPs
$12
00000000000000000000
9 The first thing that should be noticed from this graph is that the forecasts made over each
10 succeeding year (2010,2011,and 2012)drop over the range of the years being forecast.It is
11 also noteworthy to look at the data for the near-term years of each forecast.For example,overall
12 for a given year,the prices forecasted in 2012 are generally $1-$2 per MMBTU lower than
13 what was forecasted for the same future years made in the 2010 and 2011 forecasts.
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l The forecasted prices on this graph start at 2013.The actual natural gas Henry Hub
2 prices in 2013 was $3.73 per MMBTU.The 2012 (the forecast nearest in time to 2013)came
3 closest to the actual price at just under $4.00 /MMBTU.The 2011 forecasted natural gas price
4 for 2013 came in at approximately$5.00 /MMBTU.The 2010 forecasted natural gas price for
5 2013 came in at approximately$5.25 /MMBTU.In keeping with the general shapes of the
6 graphs for these three forecasts,each succeeding forecasted price was lower and each succeeding
7 lower forecast moved (slowly)in the direction of the actual price that was ultimatelyrealized.
8 A similar pattern can be seen for the prices forecasted for 2016.The actual futures price
9 for 2016 was $2.546 /MMBTU.None of the three forecasts shown above are anywhere near
10 this actual price for 2016.The 2010 forecasted price for 2016 (six years out)was approximately
11 $7.50 /MMBTU-approximately3times the price that was realized.The 2011 forecasted price
12 for 2016 (five years out)was approximately$5.70 /MMBTU-a little more than 2 times the
13 price that was realized.The 2012 forecasted price for 2016 (four years out)was approximately
14 $4.70 /MMBTU-a little less than 2 times the price that was realized.
15 Clearly,Rocky Mountain's forecasted natural gas prices are not accurately reflecting
16 future prices.This is not necessarily the fault of the Company,but is reflective of the nature of
17 the beast.The problem is that the Company is taking these very volatile future natural gas prices
18 and using them in its model to forecast whether the Combined Projects will have a positive or
19 negative impact upon ratepayers.Given the fact that the Company's natural gas forecasts have
20 been predicting prices higher than realized,the benefit of the Combined Projects to the
21 ratepayers could be significantly less than the Company's projections and could even result in a
22 net cost.In any event,the upshot of this great volatilityin the future price of natural gas renders
23 any attempt to forecast the economic value of the Combined Projects meaningless.Because the
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l Combined Projects are not needed facilities,but are being proposed for economic reasons,it is
2 inappropriatefor the ratepayers to bear the risk of natural gas prices not being as low as the
3 Company forecast in its medium natural gas scenario.
4
5 Q.DID THE NATURAL GAS FORECAST CONTAINED IN THE 2015 IRP
6 DEMONSTRATE BETTER ABILITY TO PREDICT THE FUTURE PRICE OF NATURAL
7 GAS?
8
9 A.No.The graph below of Henry Hub NYMEX Futures comes from Figure 3.5 of the
10 Company's 2015 IRP.
11 Figure 3
PACIFICORP-20l5 IRP CHAvrER 3-THil PLANNINGENVIRONME1
Figure 3.5 -Henry Hub NYMEX Futures
5.00
4.50
g 2.00
1.50
1.00
0.50
0.00
ooooooooooooo
---Annual Strip as of Jan 27,2015
12
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1 The shape of the curve is certainly smoother than the forecasts that are shown in Figure 2.
2 The forecast in Figure 3 does not try to predict every nook-and-cranny over the 20-year planning
3 horizon.The forecasted prices for natural gas in this 2015 forecast are even lower than the
4 forecasts from 2010,2011,and 2012.In fact,the 2015 forecast shows a dramatic reduction in
5 future natural gas prices compared to 2010,2011,and 2012.For example,the forecasted 2027
6 price for natural gas in the 201l forecast was approximately$9.25 /MMBTU,while the 2015
7 forecast for 2027 was half of that at approximately$4.60 /MMBTU.The long-term forecasts
8 are quite volatile.
9 However,the January 2015 short-term forecast in Figure 3 is also not reliable.The
10 forecasted price for 2016 (one year out)in Figure 3 is approximately$3.40 /MMBTU.As
11 demonstrated in Figure 1 above,the actual 2016 natural gas futures price was $2.546 /MMBTU.
12 Even the short-term forecasts are proving to be very inaccurate.
13
14 Q.HOW DO THE HENRY HUB NYMEX FUTURES IN THE 2017 IRP COMPARE
15 WITH THOSE FOUND IN THE 2013 AND 2015 IRP'S?
16
17 A.The future natural gas prices look very different in the 2017 IPR as seen below:
18
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1 Figure4
PACIFICORP-2017 IRP CHAPTER3-THE PLANNING ENVIRONMENT
2
Figure 3.5 -Henry Hub NYMEX Futures
4.00
3.50
3.00
g 2.50
à 1.50
1.00
0.50
0.00
-Annual Strip as of Jan 20,2017
3
4 The prices in the 2017 IRP are substantially lower than the forecasted prices in both the 2013 and
5 the 20l5 IRP's.Instead of forecasting rising prices,the 2017 IRP shows lowering prices over
6 the next couple of years and then gently rising prices after that.Because this forecast is
7 "current"there is no actual data with which to judge its accuracy for the near-term,let alone the
8 long-term.
9
10 Q.DOES THE COMPANY CLAIM THAT ITS FORECASTED NATURAL GAS
11 PRICES ARE BETTER IN THIS CASE THAN IN THE PAST?
12
13 A.No.The Company recognizes that there can be great deviationbetween forecasted
14 prices and realized prices.Because of this,the Company offers three natural gas price scenarios
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l for use in its analysis of the economic value of the Combined Projects on its ratepayers (the ones
2 that are to absorb the risk).On a nominal levelized basis the prices at Henry Hub for 2018-
3 2036 used by the Companyl2 Tange ffOm:
4 Low Gas $3.19 //MMBTU
5 Medium Gas $4.07 /MMBTU
6 High Gas $5.83 /MMBTU
7 There is certainly a great deal of variability in the scenarios being used to develop the economic
8 analysis of the Combined Projects for which the ratepayers are being asked to absorb the risk.
9
10 Q.ARE THERE ANY OTHER FORECASTS THAT DEMONSTRATE THE
11 VOLATILITY OF THE NATURAL GAS PRICES BEING USED BY THE COMPANY?
12
13 A.Yes.In the rebuttal testimony filed by the Company in the Repowering case in Utah
14 that I mentioned above (Docket No.17-035-39),there was a comparison of the future natural gas
15 prices taken from the April 26,2017 with natural gas prices from September 30,2017.Mr.
16 Link's Rebuttal Testimony stated":
17 Over the period 2018 through 2036,the nominal levelized price for Henry
18 Hub natural-gas prices has dropped by approximately2.6 percent from
19 $4.07/MMBtu to $3.97/MMBtu.The reduction in levelized prices is
20 primarily driven by reductions in the 2023 and 2024 time frame.
21
22 These reductions,although seemingly small,took place within a 6-month period.Additionally,
23 the fact that the primary reductions took place in the near-term (2023-2024)demonstrates how
24 difficult it is to accurately forecast natural gas prices.
25
12 Link Direct @ 32."Link Rebuttal @ 6 in Utah Docket 17-035-39.
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l The federal tax rate of 35%may be lowered.
2
3 Q.WHAT IS THE CONCERN WITH THE COMPANY'S TREATMENT OF THE
4 FEDERAL TAX RATE AS IT APPLIES TO THE ECONOMIC ANALYSIS OF THE
5 COMBINED PROJECTS?
6
7 A.In its analysis the Company used a corporate federal income tax rate of 35%.This
8 rate was in place when the Company filed its case (and is still in place at this writing).However,
9 since the Company filed its case,there has been a proposal in Congress to reduce the corporate
10 federal income tax rate down to 20%.This is only a proposal and there is no telling if the rate
11 will be changed or,if changed,to what level.However,there is a mood in Washington to reduce
12 taxes and any such change could greatly impact the economic analysis of the Combined Projects.
13 A lowering of the federal income tax rate would have a negative impact on the economic -
14 viability of the Combined Projects and the ratepayers who would bear the risk of such change.
15
16 Q.HAS THERE BEEN ANY ANALYSIS BY THE COMPANY IN THIS CASE THAT
17 ASSESSES THE IMPACT OF A CHANGE IN TAX RATE?
18
19 A.Not to my knowledge.However,the Company has performed such an analysis in its
20 rebuttal case in its Repowering case before the Public Service Commission of Utah (filed
21 October 2017).The analysis performed by the Company on the sensitivity of a change in the
22 federal tax rate was based upon an assumednew rate of 25%-not the 20%rate presently
23 proposed in Congress.The size of the wind facilities and primarily the PTC's (which are highly
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l impacted by the federal income tax rate)in the Repowering case are similar in magnitude to the
2 PCT's in the Combined Projects case.Likewise,the rate base additions for the two cases are in
3 the general ballparkof each other ($2 billion in this case14 and $1.13 billion in the repowering
4 case").Therefore,I assume that the Company's analysis in the Utah Repowering case will give
5 a ballpark figure of what a change to a 25%federal tax rate would do to the economic viability
6 of the Combined Projects.
7 In its rebuttal case in the Utah Repowering case,the Company calculated a reduction in
8 the economic value of such a change at $93 million to $97 million."This singular change in the
9 federal tax rate could be very detrimental to any ratepayer savings.
10
11 The New Wind may not generate as much energy as forecasted by the Company.
12
13 Q.WHAT WOULD THE MAGNITUDE OF THE RISK BE IF THE COMBINED
14 PROJECTS DID NOT GENERATE AS MUCH ENERGY AS FORECASTED BY THE
15 COMPANY?
16
17 A.The Company made assumptions about the capacity factor of the New Wind,like it
18 had to make hundreds of other assumptions.Only time will tell if those assumptions/forecasts
19 are accurate.Company witness Link indicated that the Company reviewed its New Wind cost
20 and performance criteria and lowered its capacity factor assumptions from 43.0%to 41.2%when
14 Ofânt ÛÌT€CÍ 1."Crane Direct @2 in Case PAC-E-17-06.
"Link Rebuttal @ 34 in Utah Docket No.17-035-39.
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CONFIDENTIAL
1 it did its sensitivity analysis of Aeolus-to-Bridger/Anticline Line."This 1.8 percentage point
2 drop gives an order of magnitude of possible changes in capacity factors.
3 In order to quantify the impact of possible fluctuations in capacity factor,I will assume
4 that the PTC's are based upon a capacity factor of 41.2%.A 1.0 percentage point decreasein the
5 capacity factor from 41.2%down to 40.2%would be well within the range of change that the
6 Company used in its sensitivity analysis.As pointed out previously,the Company calculated a
7 total PTC credit over 10 years of
8
9
10 .Comparing this possible loss of the
11 PTC credit to the Company's suggested present value benefit to the ratepayers of $137 million
12 indicates how volatile the ratepayer's suggested benefit is.
13
14 The PTC credit may not be as valuable as forecasted
15
16 Q.PLEASE EXPLAIN WHY THE PTC CREDITS MAY NOT BE AS VALUABLE
17 AS FORECASTED BY THE COMPANY.
18
19 A.In establishing the PTC,the Company stated that:
20 The current value of federal PTC's which is adjusted annually for
21 inflation by the Internal Revenue Service,is $24 per megawatt-hour
22 ("MWH").At a federal and state effective tax rate of 37.95 percent,the
23 current PTC equates to a $38.68 per MWh reduction in revenue
24 requirement that can be passed through to consumers."(Emphasis added)
17 Link Direct @ 8.
"Link Direct @ 10.
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l
2 This statement is true-for now.However,the level of the annual adjustment may be less than
3 used in the Company's forecast.
4 Given the regulatory environment in Washington,the status quo may not reflect the
5 future.The future value of the PTC's may not get the same inflationary adjustment as is now
6 given.In fact,if the IRS stops this inflationary adjustment completely,the Company's
7 forecasted value of the PTC's could drop in the range of $100,000,000.This is almost
8 equivalentto the projected ratepayer benefit through 2050 for the entire project.
9 Another risk is that the Company may not get the full value of the PTC's as it forecasted.
10 The Company forecasted getting the full 100%of the PTC's value.However,this will only
11 happen if the entire projects'commercial operation date is no later than December 31,2020.If
12 commercial operation takes place after December 31,2020,the Company will not get the full
13 100%value of the PTC's.Assuming that the Company contends that this delay was outside of
14 its control,the risk will fall upon the ratepayers.The impact of such a delay could be
15 catastrophic as outlined by Company witness Crane":
16 Each of the Wind Projects are eligible for 100 percent of the PTC benefits
17 if the Wind Projects and the Transmission Projects are commercially
18 operational by December 31,2020.Failing to meet the 2020 deadline puts
19 the company at risk of lose of PTC benefits,and jeopardizes the overall
20 economics of the Combined Projects.
21
22 If the Commission were to grant certificates of public convenience and necessity for the
23 Combined Projects as well as the requested binding ratemaking treatment for the investment in
24 the Combined Projects,all the risk2°of loss of PTC benefits could fall on the ratepayers.This
"Crane Direct @ 10.
20 IÍ iS RSsumed that the Company will argue that it has taken every precaution to ensure that the December
31,2020 deadline is met,and thus,it follows that any loss of PTC benefits because the December 31,2020
date is not met would have been "out of the Company's control"
Yankel,DI-21
Irrigators
1 risk can be avoided simply by not obligating the ratepayers to be responsible for the cost of the
2 Combined Projects,until after they have been completed and the disposition of the PTC benefits
3 are known.
4
5 Today there is no policy imposing a carbon emission tax.
6
7 Q.WHAT ARE THE CONCERNS WITH THE COMPANY'S TREATMENT OF A
8 CARBON TAX?
9
10 A.The Company has taken all its assumptions regarding load growth,plant availability,
11 regional loads,regional generation available,regional electric prices,etc.and combined them
12 into one package and then ran nine different scenarios on this package to assess the economic
13 impact of the Combined Projects upon the ratepayers who are being asked to bear the risk.The
14 nine different scenarios were based upon a combination of three different Carbon Tax
15 assumptions (zero,medium,and high)and three different natural gas price forecasts (low,
16 medium,and high).
17 The Company's "preferred"scenario is based upon forecasted medium Carbon Tax
18 assumptions and medium natural gas prices.None of us have a crystal ball,so it is impossible to
19 say what Carbon Tax and/or natural gas price assumptions/forecasts are accurate.The best we
20 can do is to judge the viabilityof the various assumptions based upon past experience and
21 present knowledge.There is no Carbon Tax policy now.The earliest the Company forecasts a
22 Carbon Tax being in place is 2025 under its medium scenario.However,the present political
23 climate suggests that there may never be a Carbon Tax within the timeframe of the Company's
Yankel,DI-22
Irrigators
l analysis.At this time,the Company scenarios with medium and high Carbon Taxes should be
2 given little weight.If the Carbon Tax remains at zero (as opposed to the medium scenario
3 suggested by the Company),the ratepayer benefits of the Combined Projects would be lower
4 than the $137 million benefit upon which the Company's case is based.
5
6 Q.DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
7
8 A.Yes.
Yankel,DI-23
Irrigators