STATE OF VERMONT
PUBLIC SERVICE BOARD
Petition of Vermont Transco, LLC, and
Vermont Electric Power Company, Inc.
(collectively, “VELCO”), and Central Vermont
Public Service Corporation (“CVPS”) for a
Certificate of Public Good, pursuant to 30
V.S.A. § 248, for the “Southern Loop Project,”
located in Vernon, Guilford, Brattleboro,
Dummerston, Newfane, Brookline, Townshend,
Grafton, Windham, Andover, Chester, Ludlow
and Cavendish, Vermont, consisting of the
following elements: (1) a new, approximately
51-mile, 345 kV transmission line between
Vernon-Cavendish, to be built parallel to and
within the same utility right-of-way as
VELCO’s existing Vernon-Cavendish 345 kV
line; (2) a new VELCO 345/115 kV Vernon
substation, to be located just north of the
Vermont Yankee Nuclear Power Station; (3) a
new 345/115/46 kV Newfane substation; (4) a
new, approximately one-mile, 345 kV
transmission line loop between the new
Newfane substation and the new VernonCavendish 345 kV line; (5) expansion of
VELCO’s Coolidge substation in Cavendish,
Vermont; and (6) the implementing of
incremental energy efficiency to defer
transmission upgrades in Southern Vermont
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Docket No. ____
PREFILED TESTIMONY OF
RALPH ROAM
ON BEHALF OF
PETITIONERS
November 8, 2007
The purpose of Mr. Roam’s testimony is to present the cost estimate for the Southern
Loop Project.
TABLE OF CONTENTS
1.
Introduction ........................................................................................................... 1
2.
Cost Estimate Summary ....................................................................................... 8
3.
Cost Estimate Details ............................................................................................ 8
4.
Cost Estimate Risks & Assumptions ................................................................... 9
EXHIBITS
Exhibit Petitioners RR-1
Resume of Ralph Roam
Exhibit Petitioners RR-2
Southern Loop Cost Estimate Summary
Exhibit Petitioners RR-3
Milestone Schedule for Spending Plan
Exhibit Petitioners RR-4
Cost Estimate Spending Plan
Exhibit Petitioners RR-5
Handy-Whitman Cost Index Trend
Exhibit Petitioners RR-6
Summary of Project Costs Under Three
Different Commissioning Scenarios
Exhibit Petitioners RR-7
Summary of Incremental Deferral Costs
Exhibit Petitioners RR-8
Summary of Planned ISO NE and PJM
Projects
STATE OF VERMONT
PUBLIC SERVICE BOARD
Petition of Vermont Transco, LLC, and
Vermont Electric Power Company, Inc.
(collectively, “VELCO”), and Central Vermont
Public Service Corporation (“CVPS”) for a
Certificate of Public Good, pursuant to 30
V.S.A. § 248, for the “Southern Loop Project,”
located in Vernon, Guilford, Brattleboro,
Dummerston, Newfane, Brookline, Townshend,
Grafton, Windham, Andover, Chester, Ludlow
and Cavendish, Vermont, consisting of the
following elements: (1) a new, approximately
51-mile, 345 kV transmission line between
Vernon-Cavendish, to be built parallel to and
within the same utility right-of-way as
VELCO’s existing Vernon-Cavendish 345 kV
line; (2) a new VELCO 345/115 kV Vernon
substation, to be located just north of the
Vermont Yankee Nuclear Power Station; (3) a
new 345/115/46 kV Newfane substation; (4) a
new, approximately one-mile, 345 kV
transmission line loop between the new
Newfane substation and the new VernonCavendish 345 kV line; (5) expansion of
VELCO’s Coolidge substation in Cavendish,
Vermont; and (6) the implementing of
incremental energy efficiency to defer
transmission upgrades in Southern Vermont
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Docket No. ____
PREFILED TESTIMONY OF
RALPH ROAM
ON BEHALF OF
PETITIONERS
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1.
Introduction
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Q1.
Please state your name, occupation, and business address.
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A1.
My name is Ralph Roam. I am employed by McMillin & Associates as a Capital
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Project Consultant. I have been retained by Vermont Electric Power Company,
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 2 of 13
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Inc. (“VELCO”) as the Project Manager for the Southern Loop Project
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(“Project”). My business address is 366 Pinnacle Ridge Road, Rutland, Vermont
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05701.
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Q2.
Please describe your education and employment background.
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A2.
I have a bachelor’s degree from Dickinson College in Policy Studies with a focus
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in Private Sector Policy. I have worked in the utility industry since 1999 and held
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numerous positions in the areas of Project and Contract Management, Asset
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Management, and Operations. My resume is included with this filing as Exhibit
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Petitioners RR-1.
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Q3.
What is the purpose of your testimony?
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A3.
The purpose of my testimony is to present and summarize the cost estimate for the
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Southern Loop Project.
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Q4.
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Mr. Roam, please describe the approach for developing the Southern Loop Project
cost estimate.
A4.
There are five (5) principal Project elements:
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1) a 51 mile 345 kV line from Vernon to Coolidge;
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2) a new 345/115/46 kV substation in Vernon;
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3) expansions to VELCO’s existing Coolidge Substation;
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4) a 1 mile 345 kV loop in Newfane; and
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5) a new 345/115/46 kV substation in Newfane.
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 3 of 13
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Our first step was to identify the resources required to plan, design, and construct
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each of the five Project elements. The cost estimate was developed utilizing
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seven (7) resources categories to establish the total cost for each Project element.
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The seven (7) resource categories are as follows:
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1) Material;
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2) Labor;
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3) Equipment;
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4) Indirects;
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5) Escalation;
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6) Capital Interest; and
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7) Contingency.
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The Direct Costs were developed utilizing cost data from VELCO projects
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recently completed or currently in progress. Specifically, cost data associated
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with VELCO’s West Rutland to New Haven 345 kV line (the 370 Line) and the
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New Haven and Granite substations were utilized to develop the material, labor
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and equipment costs. Scopes of work for this Project for which VELCO did not
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have recent actual cost data from its prior projects were estimated by PLM
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Electric Power Engineering, Inc. (“PLM”), R.G. Vanderweil Engineers LLP
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(“Vanderweil”), and Commonwealth Associates, Inc. utilizing cost data from
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other projects recently constructed in the New England area.
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Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 4 of 13
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PLM and Vanderweil provided direct cost estimates for substation and
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transmission line elements, respectively. Both companies were provided access to
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VELCO’s actual costs data to develop material costs for each Project element.
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Labor and equipment costs were estimated by the respective parties utilizing the
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preliminary detailed designs discussed in the testimonies of Michael Barrett and
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William F. McNamara. The detailed line items for each Project element were
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estimated by the Federal Energy Regulatory Commission (“FERC”) code.
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Developing the cost estimates by FERC code enhances VELCO’s ability to track
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costs in a manner consistent with the reporting format of actual costs as required
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by FERC. Also, escalation costs can be more accurately calculated by applying
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the Handy-Whitman cost index to the estimated costs by FERC code. The
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Handy-Whitman cost index is discussed later in this section of my testimony
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where I present the method used to calculate Project escalation costs.
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Upon receipt of the third party Direct Cost estimates, VELCO’s Project Controls
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analyzed the estimates by comparing them to actual costs VELCO incurred for the
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recently completed comparable scopes of work. Variances were addressed in
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discussions between the third party firms, VELCO’s Project Controls and
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VELCO’s Construction team to determine the most accurate approach on a case-
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by-case basis.
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Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 5 of 13
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VELCO’s Project Controls developed the cost estimate for Indirects, Escalation,
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and Capital Interest. Indirect costs are defined by Association for the
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Advancement of Cost Engineering (AACE) as follows:
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(1) Costs not directly attributable to the completion of an activity. Indirect
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costs are typically allocated or spread across all activities on a
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predetermined basis.
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(2) In construction, all costs which do not become a final part of the
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installation, but which are required for the orderly completion of the
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installation and may include, but are not limited to, field administration,
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direct supervision, capital tools, startup costs, contractors’ fees, insurance,
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taxes, etc.
Site: “Cost Engineering Terminology” No. 10S-90 AACE
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Q5.
Please summarize the process used to develop the Indirect Costs.
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A5.
The Indirect Costs were estimated based on the resources required to support the
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completion of the Project by resource category. Resource categories included in
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the Indirect estimated costs are:
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1) Engineering and Design;
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2) Operations;
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3) Planning;
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4) Communications;
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5) Environmental Engineering;
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6) Archeological Studies, Field Surveys, Impact Mitigation;
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7) Aesthetic Impact;
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 6 of 13
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8) Legal Expenses;
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9) Regulatory Permitting and Filings, Administration, etc.;
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10) Mobilization and Demobilization;
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11) Direct Supervision – Project Management;
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12) Construction Supervision; and
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13) Project Support.
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The Indirect estimated costs of project support services are based on the number
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of people/hours (Level of Effort or LOE) required to support the particular
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function as well as outside consulting services for each resource category (e.g.
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archeology studies, engineering, and surveying, etc.). The legitimacy of the total
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cost of Indirects was validated by calculating their relative percentage to the
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estimated direct transmission line and substation Direct Costs. In recently
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completed projects, VELCO’s Indirects for transmission lines range from
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approximately 40-60% of the lines’ Direct Costs, and Indirects for substations
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range from 20-40% of the substations’ Direct Costs.
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Q6.
How were Escalation costs developed?
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A6.
Escalation costs were developed by VELCO Project Controls utilizing an
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anticipated 2007-2011 spending plan and projected Handy-Whitman cost index.
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The 2007-2011 spending plan is based on the execution of activities required to
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have the Project in service by the end of first quarter of 2011 to address reliability
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issues as identified in Dean L. LaForest’s and Christopher Diebold’s testimonies.
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 7 of 13
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The milestones’ schedule associated with this spending plan is attached in Exhibit
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Petitioners RR-3, and the spending plan for Capital Interests and Escalation
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calculation is presented in Exhibit Petitioners RR-4.
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The Handy-Whitman cost index reflects the costs of different types of utility
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construction, including electric transmission and distribution. The cost index
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started in 1912, and is a widely recognized publication used by many entities in
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the utility industry, including regulatory bodies, operating bodies, and valuation
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engineering. The cost index conforms to FERC’s classification and follows its
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categorization. Utilization of the Handy-Whitman index provides a yearly rate of
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increase for specific cost categories in the utility industry instead of a generic
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inflation rate such as the Consumer Price Index (CPI). Only Indirect costs were
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escalated using CPI as the Handy-Whitman index does not provide information
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on the Indirect costs. A graph showing the Handy-Whitman cost index trend
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compared to CPI is presented in Exhibit Petitioners RR-5.
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Capital Interest (Interest cost during construction) was applied at a yearly
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compounded rate of 6% and follows the Project spending plan presented in
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Exhibit Petitioners RR-4. The Capital Interest rate is based on the company’s
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credit rating and is subject to change based on the financial market.
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Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 8 of 13
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The project cost estimate also accounts for a contingency of twenty-percent (20%)
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due to the preliminary detailed designs and the uncertainty and risk associated
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with the Project level of definition. Details are provided in section 4 of my
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testimony.
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2.
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Q7.
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Cost Estimate Summary
What is the total cost estimate for the Project based on the various cost elements
and resource categories described?
A7.
The total cost of the Project is estimated at $264,813,321. The total cost estimate
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is comprised of $114,544,449 of Direct Costs, $51,269,359 of Indirect Costs,
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$32,056,099 in Escalation, $22,807,861 in Capital Interest, and $44,135,553 in
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Contingency. Please refer to Exhibit Petitioners RR-2 for a cost summary by
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resource category and Project element.
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3.
Q8.
Cost Estimate Details
What is the design basis for the Direct Construction 345 kV Line estimates
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associated with the 51-mile Vernon-Cavendish 345 kV line and the 1-mile
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Newfane Loop?
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A8.
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The 345 kV Line Direct estimate is based on the Plans and Profiles as presented
in Exhibit Petitioners WM-2 and WM-3.
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Q9.
What is the design basis for the Vernon substation Direct Construction estimate?
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 9 of 13
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A9.
The Vernon substation Direct estimate is based on the General Arrangement Plans
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and the One-Line Diagrams as presented in Exhibit Petitioners MB-3, MB-4 and
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MB-5.
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5
Q10.
What is the design basis for the Newfane substation Direct Construction estimate?
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A10.
The Newfane substation Direct estimate is based on the General Arrangement
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Plans and the One-Line Diagrams as presented in Exhibit Petitioners MB-8, MB-9
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and MB-10.
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Q11.
What is the design basis for the Coolidge substation Direct Construction estimate?
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A11.
The Coolidge substation Direct estimate is based on the General Arrangement
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Plans and the One-Line Diagrams as presented in Exhibit Petitioners MB-13, MB-
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14 and MB-15.
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4.
Cost Estimate Risks & Assumptions
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Q12.
What known factor(s) have the potential to impact the cost estimate?
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A12.
The timeframe in which the Project is executed has a substantial impact on the
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estimated cost of the Project. As shown in the Handy-Whitman cost index trend,
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Exhibit Petitioners RR-5, escalation costs for FERC codes associated with the
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Project estimate increased at an average of 7.7% per year between 2004 and 2007.
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Using the average yearly rate of increase between 2004 and 2007 from the
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Handy-Whitman index for escalation as well as the incremental capital interest
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 10 of 13
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and indirect costs, a project completion at the end of 2011 would result in an
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estimated $26,097,999 of incremental costs compared to a project completion in
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the first quarter of the same year. Furthermore, a completion of the Project at the
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end of 2012 would result in an estimated $63,814,908 of incremental costs
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compared to a completion at the end of the first quarter of 2011. Please refer to
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Exhibit Petitioners RR-6 for the summary of Project costs under these three
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different commissioning scenarios.
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Temporary deferral of the Project is another risk that could potentially have a
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significant impact on the cost of the Project. Temporary deferral of the Project is
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considered herein to be a deferral of the Project for some period of time, but not
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indefinitely. In order to estimate the incremental cost of temporary deferral, we
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assumed that the Project would be stopped immediately effective December 31,
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2008. The Project costs incurred to date would ultimately be carried and has been
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included in the Project total estimated cost. No additional project development
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costs are assumed to be added during the deferral period but for the cost of capital
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interest during construction since the project need will remain. The incremental
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Project cost of deferral was then estimated for a deferral of two (2) to five (5)
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years using a three (3) year timeframe to complete the Project prior to the
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assumed completion date. Again, using the extrapolation of the 2004 to 2007
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Handy-Whitman index escalation rates in addition to incremental indirect and
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capital interests cost, the estimated cost of Project deferral ranges from an
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 11 of 13
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estimated $68,449,806 to $140,896,622 for a two (2) to five (5) year deferral,
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respectively. Based on these estimated incremental costs of deferral, the total cost
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estimates increases from $264,813,321 to $333,263,127 and $405,709,943 for a
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two (2) to five (5) year Project deferral, respectively. Please refer to Exhibit
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Petitioners RR-7 for a summary of the incremental cost of deferral.
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7
Q13
What justifies the extrapolation of the 2004-2007 Handy-Whitman Index trend
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assumption is valid to calculate Escalation costs in the Project cost estimate as
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well as in the three (3) commissioning scenarios and in the three (3) deferral
10
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scenarios?
A13.
In order to validate this assumption, a study was conducted on transmission
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projects identified in the Independent System Operator of New England (“ISO-
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NE”) service territory. The purpose of this assessment was to determine if
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Escalation costs currently driven by the increased level of capital expenditures on
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transmission infrastructure will continue. Exhibit Petitioners RR-8 provides an
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overview of the projects planned in ISO-NE service territory. The EEI “Survey of
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Transmission Investment, Historical and Planned Capital Expenditures (1999-
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2008)” published in May 2005 further validates the assumption that increased
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demand for resources associated with transmission infrastructure investments will
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continue through at least 2008. The report sites a projected 60% or $28 billion
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increase in transmission infrastructure investment for the 2004-2008 period
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 12 of 13
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compared to the previous five year period. Exhibit Petitioners RR-8 depicts this
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trend.
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In addition, NERC projects that 12,873 miles of new transmission will be added
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by 2015, an increase of 6.1 % in the total miles of installed extra high-voltage
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(“EHV”) transmission lines (230 kV and above) in North America over the 2006
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to 2015 period. NERC notes that this expansion lags demand growth and
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expansion of generating resources in most areas. However, NERC’s figures do
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not include several major new transmission projects proposed in the PJM
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Interconnection LLC, such as the major new lines proposed by American Electric
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Power, Allegheny Power, and Pepco.
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Q14.
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15
What risk elements were considered when developing the cost estimate and how
were the risks addressed in the cost estimate?
A14.
Risk elements considered are the Project duration, level of certainty regarding
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structure locations, required aesthetic, environmental, archeology mitigation
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measures, higher escalation rate and potential resource constraints at the
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anticipated time of construction. Per standard project management practices
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widely recognized by organizations such as the Project Management Institute
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(“PMI”), contingency was applied to the estimate to account for these risks.
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Contingency is defined by AACE as:
Southern Loop Project, PSB Docket No._____
Prefiled Testimony of Ralph Roam
November 8, 2007
Page 13 of 13
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[a]n amount added to an estimate to allow for items, conditions, or events
for which the state, occurrence, and/or effect is uncertain and that
experience shows will likely result, in aggregate, in additional costs.
Typically estimated using statistical analysis or judgment based on past
asset or project experience. Contingency usually excludes: 1) Major scope
changes such as changes in end product specification, capacities, building
sizes, and location of the asset or project; 2) Extraordinary events such as
major strikes and natural disasters; 3) Management reserves; and 4)
Escalation and currency effects. Some of the items, conditions, or events
for which the state, occurrence, and/or effect is uncertain include, but are
not limited to, planning and estimating errors and omissions, minor price
fluctuations (other than general escalation), design developments and
changes within the scope, and variations in market and environmental
conditions. Contingency is generally included in most estimates, and is
expected to be expended.
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As described in Section 1 of my testimony, a contingency of 20% was applied to
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the total estimated cost based on the current level of Project definition.
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Q15.
Does this conclude your testimony at this time?
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A15.
Yes, it does.