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HomeMy WebLinkAbout20040803Vol VI Part I.pdfGli'JAL BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE APPLICATION OF) AVISTA CORPORATION FOR AUTHORITY TO INCREASE ITS RATES AND CHARGES FOR ELECTRI C AND NATURAL GAS SERVICE TO ELECTRIC AND NATURAL GAS) CUSTOMERS IN THE STATE OF IDAHO. CASE NOS. AVU-E- 04- AVU-04-1 ' Idaho Public Utilities Commission Office of the SecretaRECEIVED AUG - 1 2004 Boise, Idaho HEARING BEFORE COMMISSIONER PAUL KJELLANDER (Presiding) COMMISSIONER MARSHA H. SMITH COMMISSIONER DENNIS S. HANSEN PLACE:Commission Hearing Room 472 West Washington Street Boise, Idaho DATE:July 21, 2004 VOLUME VI - Pages 1067 - 1349 POST OFFICE BOX 578 BOISE, IDAHO 83701 208-336-9208 COURT REPORTING gtl'tl1~ tk ~I Ml/(1Ka/(1't! &.fU 1978 For the Staff:SCOTT WOODBURY , Esq. and LI SA NORDSTROM , Esq. Deputy At torneys General 472 West Washington Boise , Idaho 83702 DAVID J. MEYER , Esq. Avista Corporation Post Office Box 3727 1411 East Mission Avenue Spokane, Washington 99220-3727 GIVENS PURSLEY LLP by CONLEY E. WARD , Esq. 601 West Bannock StreetBoise, Idaho 83702 EVANS , KEANE by CHARLES L.A. COX , Esq. Post Office Box 659 111 Main StreetKellogg, Idaho 83837 BRAD M. PURDY , Esq. At torney at Law 2019 North Seventeenth StreetBoise, Idaho 83702 For Avista: For Potlatch: For Coeur Silver Valley: For Community Action: HEDRI CK COURT REPORTING P. O. BOX 578, BOISE, ID APPEARANCES 83701 WITNESS Patrlcia Harms(Staff) Kathy Stockton (Staff) Donn English (Staff) Rick Sterling(Staff) Michael Fuss(Staff) Keith Hessing (Staff) David Schunke(Staff) I N D E X EXAMINATION BY PAGE Ms. Nordstrom (Direct) Prefiled Direct Mr. Meyer (Cross) Ms. Nordstrom (Direct) Prefiled Direct Prefiled Rejoinder Ms. Nordstrom (Direct)Mr. Meyer (Cross) Ms. Nordstrom (Direct) Prefiled DirectMr. Meyer (Cross) Commissioner Smith Ms. Nordstrom (Redirect) Mr. Woodbury (Direct) Prefiled Direct Mr. Ward (Cross)Mr. Meyer (Cross) Mr. Woodbury (Redirect) Mr. Woodbury (Direct) Prefiled Direct Mr. Woodbury (Direct) Prefiled Direct Mr. Cox (Cross)Mr. Ward (Cross)Mr. Meyer (Cross) Commi s s i one r Hans en Commissioner Smith Mr. Woodbury (Redirect) Mr. Woodbury (Direct) Prefiled Direct Mr. Ward (Cross) Commissioner Smith 1067 1070 1108 1111 1114 1141 1145 1146 1149 1151 1175 1182 1184 1187 1189 1226 1231 1233 1234 1236 1254 1256 1282 1287 1298 1308 1309 1311 1313 1316 1337 1341 HEDRI CK COURT REPORTING O. BOX 578, BOISE , ID 83701 INDEX NUMBER PAGE For the Staff: Premar ked Admitted 1108 Premarked Admitted 1108 Premar ked Admitted 1108 Premarked Admitted 1108 Premar ked Admitted 1108 Premar ked Admitted 1108 Premarked Admitted 1108 PremarkedAdmitted 1108 Premar ked Admitted 1145 Premarked Admitted 1145 Premarked Admitted 1145 Premar ked Admitted 1145 Premar ked Admitted 1145 Premarked Admitted 1145 101.Staff I S Calculation of General Revenue Requi remen t 102 .Staff Pro Forma Idaho Electric Results of Operation 103 .Electric Transmission Adjustment 104 .Electric Advertising Expenses Adj ustment 105.Ten-Year Levelized Revenue Requirement 106.General Revenue Requirement Idaho Gas 107 .Pro Forma Idaho Gas Results of Operation 108.Gas Advertising Expenses Adjustment 109.Electric Pro Forma Adjustments 110.Electric Pro Forma Adjustments 111.Electric Pro Forma Adjustments 112 .Electric Pro Forma Adjustments 113 .Electric Pro Forma Adjustments 114.Electric Pro Forma Adjustments HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 EXHIBITS Electric Pro Forma Adjustments115. 116.Gas Pro Forma Adjustments Premarked Admitted 1145 Premarked Admitted 1145 PremarkedAdmitted 1145 Premarked Admitted 1145 Premarked Admitted 1145 Premar ked Admitted 1145 PremarkedAdmitted 1175 PremarkedAdmitted 1175 Premarked Admitted 1175 Premarked Admitted 1175 Premarked Admitted 1175 Premarked Admi tted 1175 Premar ked Admi tted 1175 128.2002 Test Year Power Supply Adjustments Premarked Admitted 1226 HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 117.Gas Pro Forma Adjustments Premar ked Admitted 1226 Premar ked Admitted 1226 Premar ked Admitted 1226 118.Gas Pro Forma Adjustments 119.Gas Pro Forma Adjustments 120.Gas Pro Forma Adjustments 121.History of Avista Pension Costs 122.Electric Adjustment Summary 123.Staff Adjustments to Legal Expenses 124.Staff Miscellaneous Adjustments 125.Gas Adjustment Summary 126.Staff Adjustments to Legal Expenses 127 .Staff Miscellaneous Adjustments 129.Summary of Costs - Boulder Park 130.Gas-Fired Distributed Energy Resource Technology Characterizations 131.What's Up Wi th Lean-Burn Natural-GasGenset s EXHIBITS 136 .Allocate Storage Costs Based on Storage PremarkedWithdrawal Schedule Admitted 1253 137.Staff Proposed Cost of Service By Schedule Premar kedAdmitted 1253 Premarked Admitted 1280 Premarked Admitted 1280 Premar ked Admitted 1280 Premarked Admitted 1280 Premarked Admitted 1280 Premarked Admitted 1337 Premarked Admitted 1337 Premarked Admitted 1337 Premar ked Admitted 1337 Premarked Admitted 1337 Premarked Admitted 1337 Admitted 1348 138.Cost of Service Summary 139.Case No. AVU-03-6 Comments of the Commission Staff 140.Avista Response to Staff Request No. 27 - Suppl emental 141.(Conf ident ial) 142.Revenue Allocation 143 .20 Percent Cost of Service 144.Pro Forma Electric Revenue Under Present Proposed Rates 145.Avista Electric Residential Rate Compar i son 146.Staff Proposed Revenue Increase by Schedule 147 .Spreadsheet 148.Comparison of Present & Staff Proposed Gas Rates For Potlatch: 214 - 219 HEDRI CK COURT REPORTING O. BOX 578, BOISE , ID 83701 EXHIBITS PATRI CIA HARMS, produced as a witness at the instance of Staff , being first duly sworn , was examined and testified as follows: DIRECT EXAMINATION BY MS. NORDSTROM: Good mornlng. Good morning. Please state your name and spell your last name f or the record. Patricia Harms , H- By whom are you employed and in what capacity? m employed by the Idaho Public Utilities Commission as a Staff auditor. Are you the same Patricia Harms that filed direct testimony on June 21, 2004, and prepared Exhibit Nos. 101 through 108? Yes, I am. Do you have any correct ions or changes to your testimony or exhibits? There have been revised exhibits filed on July 16, 2004 , by Staff witness Stockton.Those revi sed exhibits are Exhibits 101 , 102 , 106, and 107. And what portion of those exhibits were revised 1067 HEDRICK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 HARMS (Di) Staff in light of Ms. Stockton I s testimony? The adjustments associated with accounts receivable fees in the electric case, and that is Exhibit 102 page 2 , adjustment E12 has been revised and subsequently affects adjustment 1011 s revenue calculation. Addi t ionall y , for the gas case, in addi t ion to accounts receivable fees revised adj ustment, there I s also been a revision to the CAS inventory adjustment on Exhibit 107 , and that consequently affects Exhibit 106 revenue requirement calculation. Although Ms. Stockton filed the revised exhibits, are you still sponsoring them in their entirety? Yes, I am. If I were to ask you the questions set out in your prefiled testimony, would your answers be the same today? Yes, they would, as adjusted by Staff witness Stockton I S testimony. MS. NORDSTROM:I would move that the prefiled direct testimony of Patricia Harms be spread upon the record as if read, and Exhibits 101 through 108 be marked for identification. COMMISSIONER KJELLANDER:Okay.Without obj ection , we will spread the testimony across the record as if read , and admit Exhibits 101 through 108. 1068 HEDRI CK COURT REPORTING O. BOX 578 , BOISE , ID 83701 HARMS (Di)Staff MS. NORDSTROM:Thank you. (The following prefiled direct testimony of Ms. Harms is spread upon the record. 1069 HEDRICK COURT REPORTING O. BOX 578, BOISE, ID 83701 HARMS (Di)Staff Please state your name and address for the record. My name is Patricia Harms.My business address lS 472 West Washington Street, Boise, Idaho. By whom are you employed and in what capacity? I am employed by the Idaho Public Utilities Commission (Commission) as an auditor. Give a brief description of your educational background and experlence. I graduated from Boise State Uni versi ty, Boise, Idaho in 1981 with a B.A. degree in Business Administration, emphasis in Accounting.I am a Certified Public Accountant licensed by the State of Idaho.Prior to joining the Commission Staff in 2000, I was employed by the State of Alaska as an In Charge Audi tor and performed both financial and performance audits of governmental agencies.I have attended many seminars and classes involving auditing and accounting.While at the Commission I have audited a number of utilities including water, electric and telephone utilities and provided comments and testimony in a number of cases that dealt wi th general rates, hook-up fees, accounting issues, and other regulatory issues.I have also completed the National Association of Regulatory Utility Commissioners (NARUC) annual regulatory studies program at Michigan CASE NOS. AVU-E- 04 -l/AVU-G- 04- 6/21/04 (Di)HARMS, P STAFF 1070 State Uni versi ty.I also attend meetings of NARUC' Staff Subcommittee on Accounting and Finance.I am a member of the State/Federal Joint Oversight team for the Qwest 272 Audit. What is the purpose of your testimony? I have prepared Staff's revenue requirement exhibits for Case Nos. AVU-04-1 and AVU-04- testimony summarizes the Staff adj ustments, rate base, revenue requirement and revenue requirement lncrease proposed in these cases. Staff calculates an electric rate base of $418,277 000, an electric revenue requirement deficiency of $23 078,000 and an overall revenue percentage increase of 15.78%.Staff witness Hessing discusses Staff's total revenue allocation to customer classes, which includes the Power Cost Adj ustment and Demand Side Management rider rate adjustments in addition to the general rate adj ustment. Staff calculates a natural gas rate base of $58,867,000, a natural gas revenue requirement deficiency of $3,105,000 and an overall revenue percentage increase of 5.98%. ELECTRIC SECTION What exhibi ts are you sponsorlng associated with the electric utility operations? CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1071 I am sponsorlng Staff Exhibit Nos. 101 and 102. These exhibits outline Staff's proposed electric revenue requirement and itemize the adjustments to Avista Corporation (Avista; Company) proposed electric test year numbers.I also prepared Staff Exhibit Nos. 103 and 104 related to specific Staff adjustments proposed in this case on transmission and advertising.Finally, I am also sponsoring Staff Exhibit No. 105 which calculates a deferral of return related to the Coyote Springs proj ect What is the purpose of Staff Exhibit No. 101? This exhibit shows the overall electric net operating income requirement, revenue requirement deficiency and percent increase for the Idaho jurisdiction as calculated by Staff and, for comparison purposes, as calculated by the Company. What revenue requirement does Staff propose? The total Idaho electric net operating income requirement proposed by Staff is $38 691,000 as shown on Exh i bit No.1 0 1, in e 3.This resul ts in an overall electric base rate increase of $23 078 000 (line 9) or 15.78% (line 11) .The Company had calculated an overall electric base rate increase of $35,222,000 or 24.08%. How is this revenue requirement calculated? Staff calculated the electric revenue CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1072 requirement uslng Avista s proposed 2002 proformed test year, Staff's adjustments, and Staff's proposed rate of return while deferring the return on the Coyote Springs proj ect What is the effect of deferring the return on the Coyote Springs 2 proj ect? This deferral using Staff's recommended return reduces the Company s electric revenue requirement by $487 ,000 (Staff Exhibit No. 101, line 8) or $13,045 per $1 million in Coyote Springs 2 gross plant.Deferral of the return on Coyote Springs 2 in this case would reduce the revenue requirement but still provides the same net present value over 10 years.The deferred balance accrues a carrYlng charge at the return authorized in this case to allow the Company the opportunity to earn the same revenue it would have earned had the return not been deferred.The intent of this deferral is to help mitigate the large base rate increase in conjunction with recovery of deferred power supply costs.A further discussion of this deferred return and its calculation in Exhibit No. 105 is contained at the end of my testimony in this electric proceeding. What is the purpose of Staff Exhibi t No. 102? This schedule shows the Company Electric Pro Forma Totals (from Company Exhibi t No. 14 , page 9 of 10, CASE NOS. AVU-E- 04 -l/AVU-G- 04- 6/21/04 (Di)HARMS, P STAFF 1073 column aj) in the first column, Staff's proposed adjustments in the succeeding columns, and Staff' Electric Pro Forma Totals in the last column.For each Staff adjustment on Staff Exhibit No. 102, the net operating income is shown on line 27 , total rate base on ine 39, and revenue requirement change on ine 40.Net operating income is comprised of operating income before federal income taxes (line 24) less the sum of the current accrual and deferred lncome taxes on ines 25 and 26 of Staff Exhibi t No. 102. AVISTA' S PRO FORMA TOTALS How did Avista calculate its Pro Forma Totals on Company witness Falkner s Exhibit No. 14, page 9 of 10, column aj? The Company presented electric financial resul ts for the 2002 test year that were revised by Standard Commission Basis Adj ustments as well as additional pro forma and normalizing adjustments.Staff wi tness Stockton discusses the Company s Standard Commission Basis Adj ustments (Company Exhibi t No. 14, pages 4 through 7, columns c through x) and proposes the Commission adopt them. What does Staff recommend regarding each electric adj ustment proposed by the Company in columns y through ai on Company Exhibi t No. 14 , pages 7 through CASE NOS. AVU-E- 04 -l/AVU-G- 04- 6/21/04 (Di)HARMS, P STAFF 1074 The Commission Staff places these known and measurable adjustments into two categories.First, there are two adj ustments Staff accepts as reasonable in the amount proposed by the Company.Second, the remaining adj ustments proposed by Avista have meri t, but for a variety of reasons require a modification.I will discuss each adj ustment category and each adj ustment individually. In addi tion to the Standard Commission Basis Adj ustments, which Avista pro forma adj ustments do Staff recommend the Commission adopt? Staff recommends the Commission adopt Avista ' s Electric Pro Forma Insurance adjustment proposed in Company Exhibi t No. 14, page 8 of 10, col umn ad.This adjustment increases operating expenses by $998,000. Staff witness Stockton testifies about these costs in greater detail. Staff also recommends the Commission adopt Avista s Pro Forma Power Supply adj ustment proposed in Company Exhibi t No. 14 , page 8 of 10 , column ab.This adjustment decreases net operating income by $7 832,000. Staff witness Sterling discusses the Company s Pro Forma Power Supply adjustment. Which Avista adj ustments have meri t but should be attributed a different dollar amount than that CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1075 proposed by the Company? All of the electric adj ustments proposed by the Company in columns y through ai on Company Exhibi t No. , pages 7 through 9, should be revised except for the adj ustments relating to insurance and power supply. many instances (Coyote Springs 2 , Cabinet Gorge, Vegetation Management and Labor), Staff recommends that the Company s adj ustments be revised to reflect actual costs instead of estimates.In other instances (Transmission , Small Generation , Capital Costs Small Generation Options and Pensions), Staff recommends disallowing a portion of the costs proposed by the Company as explained later in my testimony.Staff' revisions to these adjustments are included on Staff Exhibit No. 102. Transmi s s ion Please explain Staff's adjustment E1 on Exhibit No. 102 , page 1 of The first adjustment relates to three transmission proj ects estimated for completion after the Company s proposed 2002 test year.Two of these proj ects were estimated for completion after the Company s rate case filing.These proj ects are included in the Company s filing (Company Exhibit No. 14 , page 9 of 10, column ah) as if they were in service the entire year and CASE NOS. AVU-E- 04 -l/AVU-G- 04-6/21/04 (Di)HARMS, P STAFF 1076 use engineering estimates as the cost basis of the Company s adj ustment The Company increased rate base by $8,849,000 and decreased net operating income by $249,000 to reflect proj ect estimated costs, depreciation property taxes and lncome taxes. However , one of the three proj ects, the Beacon to Bell line, included within the Company s filing has been suspended until 2005 and should therefore be removed.Addi tionally, actual costs for the remaining two proj ects, Beacon to Rathdrum ine and Pinecreek Substation Rebuild, are less than those included in the Company s filing; therefore the pro forma rate base and operating resul ts should reflect these actual costs. These two updates result in reduced rate base of $438 000 and $615,000.Finally, the Company s filing has not reflected any reduced costs or increased revenues associated with the proj ects to provide proper matching. Therefore, including the plant investment as if the plant had been in operation the full year lS unreasonable. The Commission , in Order No. 29505 dated May 25, 2004 for Idaho Power Company, clearly recognl zes that transmission proj ects generate revenue or reduce expens e s .As noted on page 7 , " the Commission expects all utilities to attempt to identify expense saving and revenue producing effects when proposing rate base CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1077 adjustments for maJor plant additions.Avista proposed plant adj ustment does not provide any increased revenue or expense savings to match the proj ect costs it proposes.Al though the Commission stated in Order No. 29505 that the proxy calculation should not be used precedent in other cases, it is unreasonable to expect the Commission to allow full recovery of plant investment as if the plant had been in operation the full year wi thout a corresponding adj ustment to revenues and expens e s .To that end , Staff has proposed adj ustment E1. Adjustment E1 reduces rate base costs for these transmission proj ects to reflect actual costs provided by the Company during Staff's May 2004 on-site audit and removes the annualization of rate base costs for these proj ects.Plant annualization adjustments include new plant investment in the calculation of rate base as if it were in service the entire year when it was not.The Company s annualization of these costs is replaced by Staff's calculation of the projects ' actual costs as the proj ects were in rate base for one month (December 31, 2002) of the test year. This adjustment is necessary because the Company did not provide expense saving and revenue producing effects for this annualized rate base adj ustment Staff's adj ustment reduces the Company- proposed Idaho electric rate base by $8 518,000 and CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1078 7 - reduces the Company-proposed Idaho electric operating expenses for associated depreciation property and state income taxes by $358,000.After federal income taxes, the effect of this adjustment increases Idaho electric net operating lncome by $230,000.The net effect of this adj ustment decreases the Company s Idaho electric revenue requirement by $1 592 000. However, if the Commission chooses to annualize the proj ects ' costs rather than deny the adj ustment outright until Avista s next rate case, an adjustment is required to eliminate the potential mismatch between revenues, expenses and rate base.Using a ratio of revenues to plant and maintenance expense to plant, a proxy for imputed revenues and maintenance expense reductions can be developed.These ratios applied to the plant additions produces approximately $270 000 of Idaho electric revenue to be imputed and $30 000 of reduced Idaho electric maintenance expenses using a method similar to that identified in Order No. 29505, Case No. IPC-03 -13.Al though this methodology does not provide precedential value, it offers the Commission the option to include new transmission investment in rate base while protecting customers from inequities of a mismatch. I f these proj ects are incl uded in this case, the corrected annualized costs resul t in a $7 801 000 CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS , P STAFF 1079 rate base increase.As noted previous ly, based upon the most recent Commission Order discussing this issue, an adjustment imputing revenue increases and expense reductions is required before these proj ects can be included in rate base without the inequities of a mismatch. The rate base amount of $7,801,000 reflects a change in depreciation rates to incorporate the Washington rates recommended by Staff wi tness English in this al ternati ve rate base calculation.See Staff Exhibit No. 103 for a table including these proposals. Has the Company annualized other construction proj ects completed in or after its proposed test year? The Company has annual i zed the CoyoteYes. Springs 2 , Small Generation and Cabinet Gorge proj ect costs. Has Staff accepted annualization of these Company-proposed adjustments? Yes.The increased revenues or reduced expenses associated wi th these proj ects are incl uded in the Company s power supply model and, as a resul provide adequate matching of the revenue and expenses of these investments in plant. Cabinet Gorge Please explain why adj ustment E2 on Exhibi t No. CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1080 102 , page 1 of 3 reduces rate base for Cabinet Gorge. Adj ustment E2 relates to the Cabinet Gorge construction proj ect completed after the Company proposed 2002 test year.Based upon estimates of the total plant cost, the Company s proposed adj ustment (Company Exhibi t No. 14 , page 9 of 10, column ai) increased Idaho electric rate base by $2,232,000 and reduced Idaho electric net operating income by $17 000. Staff proposes reducing the costs in the Company s filing associated with Cabinet Gorge to those actually incurred as of April 2004 because the proj ect was completed in March 2004.Staff's adj ustment reduces the Company- proposed Idaho electric rate base by $110 000 and reduces the Company-proposed Idaho electric operating expenses for associated property and state income taxes by $2 000. After federal income taxes, this adjustment increases Idaho electric net operating income by $1,000.The net effect of this adjustment is a $17 000 decrease in the Company s Idaho electric revenue requirement. Small Generation (Boulder Park and Kettle Falls) Please explain why adjustment E3 on Exhibit No. 102 , page 1 of 3 reduces depreciation for Boulder Park. The Company s adjustment to annualize the costs of Boulder Park (Company Exhibi t No. 14 , page 7 of 10, column z which annualized costs for both Boulder Park and CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1081 Kettle Falls) used 5% as the depreciation rate for Account 344 (Generators) instead of 4 .14% as approved by the State of Washington.Staff witness English recommends the Commission adopt the depreciation rates approved by the State of Washington.As a resul t Staff's proposed adjustment reduces Idaho electric depreciation expense by $88,000 and reduces Idaho electric accumulated depreciation by $44,000.The after- tax effect is an increase in Idaho electric net operating income of $57 000 and an increase in Idaho electric rate base of $13,000.The net effect of this adjustment lS an $87 , 000 decrease in the Company s Idaho electric revenue requirement. Please explain why adj ustment E4 on Exhibi t No. 102 , page 1 of 3 reduces Boulder Park costs by 10%. Staff witness Sterling has reviewed the Boulder Park cost overruns and recommends that 10% of the proj ect costs be disallowed.Staff's proposed adj ustment reduces Idaho electric rate base (including changes in accumulated depreciation and taxes) by $1 085,000. Staff's proposed adjustment also reduces Idaho electric depreciation expense by $44 000.This adj ustment, after taxes, increases Idaho electric net operating income by $31,000.The net effect of this adj ustment on the Company s Idaho electric revenue requirement is a CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1082 205 , 000 decrease. Did Commission Staff reVlew the prudency of the Kettle Falls proj ect costs? Staff witness Sterling reviewed theYes. proj ect costs and recommended allowance of all costs included in the Company s Pro forma adjustment for Kettle Falls. Skookumchuck Please explain why Staff proposes adjustment E5 on Exhibit No. 102, page 1 of 3 related to Skookumchuck. Avista has entered into a Purchase and Sale Agreement to sell its interest in the Skookumchuck hydroelectric plant (see Case No. AVU-04-On a going-forward basis, this plant is not used and useful because it will no longer be owned by the Company. Staff's proposed adj ustment removes the financial effects of this plant.Staff's adj ustment, after taxes, reduces Idaho electric rate base by $104 000 , increases Idaho electric net operating income by $8,000 and reduces the Company s Idaho electric revenue requirement by $28,000. Deferred Federal Income Tax Please explain why Staff proposes adj ustment on Exhibit No. 102 , page 1 of 3 to reduce deferred taxes in rate base. Pursuant to Internal Revenue Service tax CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS , P STAFF 1083 changes, Avista is now allowed to expense and deduct certain plant and inventory in the current period that were once required to be capi talized.This tax benefit resulted in a 2003 refund on taxes paid by the Company in prlor years and is the basis of Staff's proposed $9,966,000 reduction in Idaho electric rate base.Staff witness English will provide additional details regarding this adj ustment, which reduces the Company s Idaho electric revenue requirement by ~1, 442,000. Coyote Springs Please explain why Staff proposes adj ustment on Exhibi t No. 102 , page 1 of 3 that reduces the Company s Coyote Springs 2 Pro Forma adj ustment. The Company s filing (Company Exhibi t No. 14, page 7 of 10, column y) included Coyote Springs 2 proj ect costs that were a combination of actual and estimated costs.The Company s pro forma adj ustment increased Idaho electric rate base by $36,965,000 and decreased Idaho electric net operating income by $1 896,000.The adjustment proposed by Staff witness Stockton reduces the Company-proposed Idaho electric rate base by $1 621,000 and increases the Company-proposed Idaho electric net operating income by $172 000 to reflect actual costs as of the end of April 2004.This adjustment incorporates the latest insurance payment received by Avista for the CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1084 transformer and reduces the Company s Idaho electric revenue requirement by $504 000. Did Commission Staff review the prudency of t proj ect' s costs? Staff witness Sterling reviewed theYes. Coyote Springs 2 proj ect costs and recommended allowance of all incurred costs. Small Generation Options Please explain Staff's proposed adj ustment on Exhibit No. 102, page 2 of 3 that reduces the Company s Small Genera tion Options Pro Forma adj ustment. The Company s filing included capital project costs associated wi th leased turbines that the Commission in Order No. 29130 stated should be removed from the Power Cost Adj ustment deferral accounts.These proj ects (Kettle Falls Bi-Fuel, Devil's Gap, and Othello) are not used and useful on a going- forward basis because the proj ects were never completed or beneficial to the customers.Staff's adjustment, as discussed in more detail by Staff witness Stockton, removes the rate base treatment of these proj ects.This adj ustment reduces Idaho electric rate base by $539,000 and has no impact on Idaho electric net operating income.This adj ustment reduces the Company s Idaho electric revenue requirement by $ 7 8 , 0 0 0 . CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1085 Labor (Executive and Non-Executive) Please explain why Staff proposes the adjustments to executive and non-executive labor expenses (adjustments E9 and E10 on page 2 of 3, Exhibit No. 102) In its filing (Company Exhibit No. 14, pages and 9 of 10, columns ae and af) the Company proposed adjustments to these expense categories for expected increases.As a resul t, the Company s pro forma adjustment decreases Idaho electric net operating lncome by $705,000 and $15,000 for non-executive and executive labor, respectively.Staff witness Stockton discusses these adjustments in more detail and proposes Staff adjustments E9 'and E10 to reflect actual labor expenses incurred during 2004.These adj ustments proposed Staff increase Idaho electric net operating income by $26,000 for non-executive labor and $9,000 for executive labor.These adj ustments decrease the Company s Idaho electric revenue requirement' by $41 000 (non-executive labor)and $14 000 (executive labor) Vegetation Management Please explain why Staff proposes adj ustment Ell on Exhibit No. 102 , page 2 of 3 to vegetation management expenses. In its filing (Company Exhibit No. 14, page of 10, column ag) the Company proposed an adjustment for CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1086 this expense category to reflect planned increases in these vegetation management expenses as discussed in more detail by Staff witness Stockton.The Company-proposed adjustment reduces Idaho electric net operating income by $785,000. The adjustment proposed by Staff represents an average of the actual amounts expended for vegetation management during 1998 through 2003.This average reflects the variability in the amount expended from year to year due to the cyclical nature of the vegetation management program and redognizes that the amount recorded in the test year is abnormally low in comparison to other years.This adjustment increases Idaho electric net operating income by $288,000.This adj ustment reduces the Company s Idaho electric revenue requirement by $ 4 51 , 0 0 0 . Accounts Receivable Fees Please explain why Staff proposes to remove accounts receivable fees in adj ustment E12 on Exhibi t No. 102 on page 2 of These fees are associated wi th the Accounts Receivable Sale Program.Staff wi tness Stockton discusses this adj ustment ln more detail.Staff has removed these fees from the filed expenses and increased Idaho electric net operating income by $357 000 because CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1087 the Company states that this program is like a working capital addition to rate base.Staff wi tness Stockton has calculated a negative cash working capi tal for the Company.As a resul t , working capi tal should not be included in the Company s filing.This adj ustment reduces the Company s Idaho electric revenue requirement by $ 5 5 8 , 0 0 0 . Pensions Please explain why Staff proposes adjustment E13 on Exhibit No. 102 on page 2 of 3 to pensions. Staff witness English addresses this adjustment In his testimony.He disagrees wi th the Company treatment of pension expense because the Company uses an actuarial assumption of future rates of return that are significantly different than those used for 2004. Additionally, he believes that recovery of pension expense in this case should be based on the actual amount of cash that a company is required to contribute to the penslon plan to meet its minimum funding liability and avoid interest and penalties.Staff's proposed adjustment increases Idaho electric net operating lncome by $554,000.This adj ustment reduces the Company s Idaho electric revenue requirement by $867 000. CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1088 Depreciation Expense Please explain why Staff proposes adjustment E14 on Exhibit No. 102 on page 2 of 3 to depreciation expense. Staff recommends that the Company depreciation rates authorized be the same as those in its Washington jurisdiction because logic dictates that plant ln Idaho would not depreciate faster than the same plant ln Washington.Staff witness English discusses this adj ustment in further detail and notes that the current overall depreciation rates of Avista for its Idaho jurisdiction are significantly higher than rates more recently approved by this Commission.The adjustment increases Idaho electric net operating income by $432,000 and reduces the Company s Idaho electric revenue requirement by $676,000. Corpora te Fees Please explain why Staff proposes adjustment E15 on Exhibit No. 102 on page 2 of 3 related to Corporate Fees. Staff proposes reducing these expenses to reflect costs attributable to the Company s affiliates. Staff wi tness Stockton discusses this adj ustment greater detail.The adjustment increases Idaho electric net operating income by $74,000 and reduces the Company CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1089 Idaho electric revenue requirement by $116 000. Legal Expenses Please describe Staff adjustment E16 on Exhibit No. 102 (page 3 of 3) related to legal expenses. This adjustment reduces expenses for legal costs that should have been directly assigned to unregulated affiliates or were for extraordinary events that will not recur (such as the bankruptcy filing of Enron Corporation and the closed Federal Energy Regulatory Commission investigation) Staff wi tness English discusses this adjustment in greater detail. This adjustment increases Idaho electric net operating income by $366,000 and reduces the Company s Idaho electric revenue requirement by $573,000. Miscellaneous Expenses Please describe Staff adjustment E17 on Exhibit No. 102 (page 3 of 3) related to miscellaneous expenses. Staff witness English proposes reducing expenses by amounts pertaining to the promotion of corporate image, holiday lunches and charitable organizations.This adj ustment increases Idaho electric net operating income by $250 000 and reduces the Company s Idaho electric revenue requirement by $391 000. CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1090 Western Electricity Coordinating Council (WEEC) Dues Please explain why Staff proposes adjustment E18 on Exhibi t No. 102 (page 3 of 3) related to WECC dues. The Company is no longer a member of WECC and therefore is no longer incurring the expenses for WECC administrative and security dues.Staff's adj ustment increase.s Idaho electric net operating income by $10,000 and reduces the Company s Idaho electric revenue requirement by $16 000. Avista is still incurring expenses associated with the Pacific Northwest Security Coordinator (PNSC) and as a result, Staff has not adj usted the expenses associated wi th the PNSC. Advertising Expenses Please explain why Staff proposes adj ustment E19 on Exhibit No. 102 (page 3 of 3) to advertising expenses. Staff has removed costs associated wi advertising expenses that include the naming rights contract for Avista Stadium and rotunda signage at the Spokane airport (see Staff Exhibit No. 104 for a further description of these and other advertising ~osts) Due to the nature of this advertising, the Company did not provide copies of them to Staff.Staff has observed the CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1091 Avista sign at the airport and photographs of the Avista Stadium sign; neither provides educational messages related to the Company s operations.Therefore, this advertising is lmage related and should be recorded below- the -ine. Staff's adj ustment also removes expenses associated with the Company s sponsorship of Spokane Hoopfest and the Spokane Interplayers Ensemble. While Staff does not discourage Avista from providing sponsorships and Company presence in its communi ty, these expenses should be recorded as below- the-line expenses that are not paid by regulated customers.This Commission has consistently disallowed charitable contributions and image advertising for ratemaking purposes.These costs should continue to be disallowed for ratemaking purposes because they are not a cost of providing electrical service to the Company customers. Finally, Staff has removed the expenses allocated to the utility s electrical operations for an educational radio spot relating to the reduction in natural gas expenses residential customers were to pay in 2002.These costs are not appropriate for the electrical utility and should have been allocated only to the Company s gas operations. CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1092 Staff's adj ustment for the preceding items increases Idaho electric net operating income by $36 000 and reduces the Company s Idaho electric revenue requirement by $56,000. Avista Foundation Please explain why Staff proposes adjustment E20 on Exhibit No. 102 on page 3 of 3 related to Avista Foundation. The Avista Foundation (Foundation) lS a chari table organization that was created by Avista Corp. While Staff does not discourage the chari table efforts of the Company, the costs (primarily consulting/legal fees) associated with the creation of the Foundation are not related to the provision of electrical service to customers and should be removed from the Company filing.The adjustment increases Idaho electric net operating income by $5, 000 and reduces the Company Idaho electric revenue requirement by $8,000. Restate Debt Interest Please describe Staff adjustment E21 on Exhibit No. 102 , page 3 of 3 related to the restatement of debt interest. This adjustment restates debt interest uslng the Staff -proposed embedded weighted average cost of debt and applies this percentage (4.69%) to Staff's pro forma CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1093 ra te base.This restatement decreases the Idaho electric current federal income tax accrual by $ 9, 000 and reduces the Company s Idaho electric revenue requirement by $14,000. Deferred Return on Coyote Springs 2 proj ect Please describe Exhibit No.1 0 5 that calculates a deferred return on the Coyote Springs 2 proj ect Line 22 on this exhibit reflects the deferred Idaho electric revenue requirement per million dollars of Coyote Springs 2 gross plant.This $13,054 is the difference between the present value of the revenue requirement return of $119 155 ln year one (line 19) and the levelized return -of $106,101 (line 21) This deferral changes from year to year because the revenue requirement associated wi th the Coyote Springs 2 proj ect decreases each year as a resul t of increasing accumulated depreciation. The deferral account activity (lines 26 through 30 on Exhibi t No. 105) shows that the deferral of return lS reversed wi thin the . ten-year period.This confirms that the overall effect of this proposal is to defer the return and not deny the return on the Coyote Springs proj ect Full recovery of this return deferral completed in year 10 as shown on line 30. Because this deferral is reflected on Exhibi CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1094 No. 101, line 8 after the conversion factor has been applied, the Idaho electric deferral amount of $8,345 (line 28) must be grossed up for ratemaking purposes to reflect the deferral on the same basis as the Idaho electric revenue requirement def iciency on Exhibi t No. 101 , line This resul ts in an Idaho electric deferral of $13,054 per million dollars of Coyote Springs 2 gross plant or $486,797 as reflected on Exhibi t No. 101 , line and note (1) Does this conclude your direct testimony in this electric proceeding? Yes, it does. GAS SECTION What exhibits are you sponsorlng associated with the gas utility operations? I am sponsoring Staff Exhibit Nos. 106 and 107. These exhibi ts outline Staff's proposed Idaho gas revenue requirement and itemize Staff's adjustments to Avista proposed test year numbers for the gas operations. also prepared Staff Exhibit No. 108 related to the advertising adjustment proposed by Staff in this gas case. What is the purpose of Staff Exhibit No. 106? This exhibit shows the overall natural gas net operating income requirement, revenue requirement CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1095 deficiency and percent increase for the Idaho jurisdiction as calculated by Staff and, for comparison purposes, as calculated by the Company. What revenue requirement does Staff propose? The total Idaho gas net operating lncome requirement proposed by Staff is $5,445,000 as shown on Staff Exhibit No. 106, line This resul ts in an overall Idaho gas base rate lncrease of $3,105,000 (line 7) or 5.98% (line 9)The Company had calculated an overall Idaho gas base rate increase of $4 754 000 or 16%. How is this revenue requirement calculated? Staff calculated the Idaho gas revenue requirement using Avista s proposed 2002 proformed test year, Staff's adjustments, and Staff's proposed rate of return. What is the purpose of Staff Exhibit No. 107? This schedule shows the Company Pro Forma Gas Total (from Company Exhibi t No. 15, page 7 of 8, last column) in the first column, Staff's proposed adjustments in the ~ucceeding columns, and Staff's Pro Forma Gas Total in the last column. AVISTA'S PRO FORMA TOTALS How did Avista calculate its Pro Forma Totals on Company witness Falkner s Exhibit No. 15, page 7 of CASE NOS. AVU-E- 04 -l/AVU-G- 04- 6/21/04 (Di)HARMS, P STAFF 1096 (last column)? The Company presented Idaho gas financial results for the 2002 test year that were revised by Standard Commission Basis Adjustments as well as additional pro forma and normalizing adjustments.Staff witness Stockton discusses the Company s Standard Commission Basis Adjustments (Company Exhibit No. 15, pages 4 through 6, columns c through 0) and proposes the Commission adopt them except for the Company s gas inventory adjustment that increases Idaho gas rate base by $1,572 000 (Company Exhibit No. 15, page 4 , column e) The Gas Inventory section of this testimony and Staff witness Stockton s testimony discuss Staff's view of this adj ustment in greater detail. What does Staff recommend regarding each adj ustment proposed by the Company in columns p through on Company Exhibit No. 15, pages 6 through The Commission Staff places these known and measurable adj ustments into two categories.First, there lS one adjustment Staff accepts as reasonable in the amount proposed by the Company.Second, the remaining adj ustments proposed by Avista have meri t, but require a modification.I will discuss each adjustment category and each adjustment individually. CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1097 In addition to the Standard Commission Basis Adjustments, which Avista pro forma adjustment does Staff recommend the Commission adopt? Staff recommends the Commission adopt Avista ' s Pro Forma Insurance adj ustment proposed in Company Exhibi t No. 15, page 7 of 8, column This adjustment increases Idaho gas operating expenses by $202 000. Staff witness Stockton testifies to these costs in greater detail. Which Avista pro forma adjustments have merit but should be attributed a different dollar amount than tha t proposed by the Company? The adjustments to labor costs (executive and non-executive) proposed by the Company in columns s and t on Company Exhibit No. 15, page 7 of 8 should be revised to represent actual costs as discussed in Staff witness Stockton s testimony. The Pro Forma Revenue Gas Supply adj ustment proposed in Company Exhibi t No. 15, page 6 of 8, column p decreases Idaho gas net operating income by $112,000. Staff witness Fuss discusses the Company s Gas Supply adjustment and proposes a minor adjustment related to it. The adj ustment to pension costs proposed by the Company in column q on Company Exhibi t No. 15, page 7 of 8 should be revised as discussed later in my testimony CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1098 and in Staff witness English's testimony.Staff' revisions to these adjustments are included on Staff Exh i bit No.1 0 7 . Gas Inventory Please describe Staff's adj ustment Gl on Exhibit No. 107 , page 1 of 2 that reduces Idaho gas rate base for gas inventory. The first adjustment eliminates gas inventory from rate base as discussed in greater detail by Staff wi tness Stockton.Inventory is a component of working capi tal.Because the Company is not eligible to rate base and earn a return on cash working capi tal, it should be removed from rate base.Staff witness Stockton discusses this adj ustment in further detail.This adjustment reduces Idaho gas rate base by $1 572 000 and decreases the Company s Idaho gas revenue requirement by $227 000. Deferred Federal' Income Tax Please explain why Staff proposes adjustment on Exhibit No. 107 , page 1 of 2 to reduce deferred taxes in rate base. Pursuant to Internal Revenue Service tax changes, Avista is now allowed to expense and deduct certain plant and inventory in the current period that were once required to be capi tal i zed.This tax benefit CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1099 resulted in a 2003 refund on taxes paid by the Company in prlor years and is the basis of Staff's $2 639,000 reduction in Idaho gas rate base.This adjustment reduces the Company s Idaho gas revenue requirement by $382 000.Staff witness English will provide additional details regarding this adj ustment. Labor (Executive and Non-Executive) Please explain why Staff proposes adj ustments G3 and G4 on Exhibi t No.1 0 7, page 1 of 2 to execut i ve and non-executive labor. In its filing (Company Exhibit No. 15, page of 8, columns s and t) the Company proposed adjustments to these labor expense categories for expected increases. The Company-proposed adj ustments decreased Idaho gas net operating income by $174 000 and $8,000 for non-executive and executive labor, respectively.Staff witness Stockton discusses these adjustments in more detail and proposes adj ustments to reflect actual labor expenses incurred during 2004.The adjustments proposed by Staff lncrease Idaho gas net operating income by $2,000 for executive labor and $6 000 for non-executive labor. These adj ustments reduce the Company s Idaho gas revenue requirement by $3,000 (executive labor) and $9,000 (non- executive labor) CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1100 Accounts Recei vahle Fees Please explain why Staff proposes to remove account receivable fees in adj ustment G5 on Exhibi t No. 107 , page 1 0 f 2. These fees are associated with the Accounts Receivable Sale Program.Staff wi tness Stockton discusses this adj ustment ln more detail.Staff has removed these fees from the filed expenses because the Company states that this program is like a working capital addition to rate base.Staff wi tness Stockton has calculated a negative cash working capi tal for the Company.As a resul t, working capi tal should not be included in the Company s filing.This adj ustment increases Idaho gas net operating income by $56,000 and reduces the Company s Idaho gas revenue requirement by $88 000. Pens ions Please explain why Staff proposes adj ustment on Exhibi t 107 , page 1 of 2 to pensions. Staff wi tness English addresses this adj ustment ln his testimony.He disagrees wi th the Company treatment of pension expense because the Company uses an actuarial assumption of future rates of return that are significantly different than those used for 2004. Addi tionally, he believes that recovery of pension CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1101 expense in this case should be based on the actual amount of cash that a company is required to contribute to the penslon plan to meet its minimum funding liability and avoid interest and penal ties.Staff's proposed adjustment increases Idaho gas net operating income by $137 , 000 and decreases the Company s Idaho gas revenue requirement by $214 , 000 . Depreciation Expense Please explain why Staff proposes adjustment G7 on Exhibit No. 107 , page 1 of 2 to depreciation expense. Staff recommends that the Company depreciation rates authorized be the same as those in its Washington jurisdiction because logic dictates that plant ln Idaho would not depreciate faster than the same plant in Washington.Staff witness English discusses this adjustment in further detail and notes that the current overall depreciation rates of Avista for its Idaho jurisdiction are significantly higher than rates more recently approved by this Commission.The adj ustment increases Idaho gas net operating income by $28,000 and reduces the Company s Idaho gas revenue requirement by $44,000. Legal Expenses Please describe Staff adjustment G8 on Exhibit No. 107 , page 2 of 2 related to legal expenses. CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1102 This adjustment reduces expenses for legal costs that should have been directly assigned to affiliates or were for extraordinary events that will not recur (such as the bankruptcy filing of Enron Corporation) as discussed in greater detail by Staff witness English.This adjustment increases Idaho gas net operating lncome by $13 000 and reduces the Company Idaho gas revenue requirement by $20, 000 Miscellaneous Expenses Please describe Staff adjustment G9 on Exhibit No. 107, page 2 of 2 related to miscellaneous expenses. Staff wi tness English proposes reducing expenses by amounts pertaining to the promotion of corporate image , holiday lunches and charitable organizations.This adj ustment increases Idaho gas net operating income by $71,000 and reduces the Company Idaho gas revenue requirement by $111 000. Corpora te Fees Please explain why Staff proposes adj ustment G10 on Exhibit No. 107 , page 2 of 2 related to Corporate Fees. Staff proposes reducing these expenses to reflect costs attributable to the Company s affiliates. The adjustment increases Idaho gas net operating income by $17 000 and reduces the Company s Idaho gas revenue CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1103 requirement by $27 000.Staff wi tness Stockton discusses this adj ustment in greater detail. Advertising Expenses Please explain why Staff proposes adjustment G11 on Exhibit No. 107 , page 2 of 2 to advertising expenses. Staff has removed costs associated wi advertising expenses that include the naming rights contract for Avista Stadium and rotunda signage at the Spokane airport (see Staff Exhibit No. 108 for a further description of these and other advertising costs) Due to the nature of this advertising, the Company did not provide copies of them to Staff.Staff has observed the Avista sign at the airport and photographs of the Avista Stadium sign; nei ther provides educational messages related to the Company s operations.Therefore, this advertising is lmage related and should be recorded below-the-line. Staff's adjustment also removes expenses associated with the Company s sponsorship of Spokane Hoopfest and the Spokane Interplayers Ensemble (see Staff Exhibi t No. 108) While Staff does not discourage the Company from providing sponsorships and Company presence in its communi ty, these expenses ' should be recorded as below- CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1104 the-line expenses that are not paid by regulated customers.This Commission has consistently disallowed charitable contributions and image advertising for ratemaking purposes.These costs should continue to be disallowed for ratemaking purposes because they are not a cost of providing gas service to the Company s customers. Finally, Staff has added expenses originally allocated to the utili ty ' s electrical operations for an educational radio spot relating to the reduction in natural gas expenses residential customers were to pay ln 2002.These costs are more appropriately wholly allocated to the Company s gas operations. Staff's net adj ustment for the preceding items increases Idaho gas net operating lncome by $6,000 and decreases the Company s Idaho gas revenue requirement by $9,000. Avista Foundation Please explain why Staff proposes adj ustment G12 on Exhibit No. 107 , page 2 of 2 related to Avista Foundation. The Avista Foundation (Foundation) lS a charitable organization that was created by Avista Corp. While Staff does not discourage the charitable efforts the Company, the costs (primarily consultant/legal fees) associated with the creation of the Foundation are not CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1105 related to the provlslon of gas serVlce to customers and should be removed from the Company s filing.The adjustment lncreases Idaho gas net operating income by $1,000 and decreases the Company s Idaho gas revenue requirement by $2 , 000 . Actual The~ Usage Please describe Staff adj ustment G13 on Exhibi t No. 107 , page 2 of 2 related to the Company s Cost of Service Study. Staff witness Fuss identified this adjustment during his review of the Company s Cost of Service Study and provides further detail about it in his testimony. The Company understated revenue when calculating its Pro Forma Gas Supply adj ustment The actual therm usage adj ustment reduces the Company s Idaho gas revenue requirement by $23, 000 Schedule M Allocator Please describe Staff adj ustment G14 on Exhibit No. 107 , page 2 of 2 related to the Company Jurisdictional Separation Study. Staff witness Fuss identified this adjustment during his review of the Company s Jurisdictional Separation Study and describes the reason for it in his testimony.He recommends, and the Company agrees, that the appropriate allocator be used to distribute certain CASE NOS. AVU-04-1/AVU-04-6/21/04 (Di)HARMS, P STAFF 1106 gas costs.This adjustment reduces Idaho s share of taxes.The Company Idaho reduced by $ 3 , 0 0 O. Restate Debt Interest gas revenue requirement is Please describe Staff adjustment G15 on Exhibit No. 107 , page 2 of 2 related to the restatement of debt interest. This adj ustment restates debt interest uslng the Staff -proposed embedded weighted average cost of debt and applies this percentage (4.69%) to Staff's pro forma rate base.This restatement increases the current Idaho gas federal lncome tax accrual by $49 , 000 and increases the Staff -proposed Idaho gas revenue requirement by $77 000. Does this conclude your direct testimony in this gas proceeding? Yes, it does. CASE NOS. AVU-04-1/AVU-04- 6/21/04 (Di)HARMS, P STAFF 1107 open hearing. (The following proceedings were had in (Staff Exhibit Nos. 101 through 108, having been premarked for identification , were admitted into evidence. MS. NORDSTROM:Tender this witness for cross -examination. wi th Mr. Ward. BY MR. MEYER: COMMI S S lONER KJELLANDER:Thank you.Let I s start MR. WARD:No questions, thank you. COMMI S S lONER KJELLANDER:Let I S move to Mr. Cox. MR . COX:No questions, thank you. COMMI S S lONER KJELLANDER:Mr. Purdy. MR . PURDY:I have no questions. COMMISSIONER KJELLANDER:And Mr. Meye r . MR . MEYER:Thank you. CROSS - EXAMINATION Ms. Harms, on page 4 of your testimony, you describe a proposed adj ustment to defer a portion of the return on the CS2 proj ect Is that correct? Yes, I do. And this has the effect of lowering the revenue 1108 HEDRICK COURT REPORTING O. BOX 578, BOISE, ID 83701 HARMS (X)Staff requirement to customers in the early years of the proj ect that correct? Yes, it does. Would you agree that this type of adjustment should not necessarily be precedent setting, but should be considered on a case-by-case basis? Yes, I do. Turning to page 10 of your testimony, Staff proposes an al ternati ve adj ustment.Thi s has to do wi recovery of transmission expense.And you propose an alternative adjustment to impute $270,000 of transmission revenue and 30 000 of reduced transmission expenses.Do you recall that testimony? Yes, I do. With regard to Avista I s investment in these transmission proj ects, it I S our understanding that your testimony does not take issue wi th the Company I s decision to invest in the proj ects or with the total costs of those proj ect s Is that correct? Tha tI s correct. Would you agree that it is possible that necessary upgrades to certain portions of Avista I s transmission system may, in fact, not resul t in an increase in wholesale revenue or a reduct ion in O&M expense? My understanding from the Commission's mostNo. 1109 HEDRI CK COURT REPORTING O. BOX 578, BOISE , ID 83701 HARMS ( X )Staff recent Order 29505 is that transmission projects do increase revenue and reduce expenses. And that conclusion of yours has caused you to at least suggest an al ternati ve resolution in this case. Correct? Correct. And that I S the alternative that we just spoke to moments ago? Yes. Where you impute revenues or decreased expenses. Correct? Correct. And this is the al ternati ve , and then this alternative that you re recommending here is consistent with what was discussed and I believe ordered in the recent Idaho Power case? Yes, it is. And you were here when Company wi tness Falkner testified a few days ago to the effect that the Company would find this alternative resolution reasonable or acceptable? Yes, I was. Thank you. MR . MEYER:And that I s all I had. COMMI S S lONER KJELLANDER:Thank you, Mr. Meyer. Are there any questions from members of the 1110 HEDRICK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 HARMS (X)Staff Commission? Ready for any redirect. MS. NORDSTROM:No redirect. COMMISSIONER KJELLANDER:Okay.Thank you. Appreciate your presence and your testimony. (The wi tness left the stand. COMMISSIONER KJELLANDER:If you would like to call your next witness? MS. NORDSTROM:Thank you.Staff calls Kathy Stockton. KATHY STOCKTON produced as a witness at the instance of Staff , being first duly sworn, was examined and testified as follows: DIRECT EXAMINATION BY MS. NORDSTROM: Good morning. Good morning. Please state your name and spell your last name for the record. Kathy Stockton, S- By whom are you employed and in what capaci ty? m employed by the Idaho Public Utilities 1111 HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE, ID 83701 STOCKTON (Di) Staff Commission as a Staff auditor. Are you the same Kathy Stockton that filed direct testimony on June 21, 2004 , and prepared Exhibit Nos. 109 through 120? Yes. Did you also file rejoinder testimony on July 16, 2004, with revised Exhibits 114 , 116, and 119, in addition to the four exhibits that were filed as revised for Patricia Harms? Yes. Do you have any corrections or changes to your testimony or exhibits? No, I do not. If I were to ask you the questions set out in your prefiled testimony, would your answers be the same today? Yes, they would. MS. NORDSTROM:I would move that the prefiled direct testimony and rej oinder testimony of Kathy Stockton be spread upon the record as if read, and Exhibi t Nos. 109 through 120 be marked for identification. COMMI S S lONER KJELLANDER:And without objection we will spread the testimony referenced, and also the exhibits admitted as referenced. (The following prefiled direct and 1112 HEDRI CK COURT REPORTING O. BOX 578, BOISE, ID 83701 STOCKTON (Di)Staff rej oinder testimony of Ms. Stockton is spread upon the record. 1113 HEDRI CK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 STOCKTON (Di) Staff 18 Please state your name and business address? My name is Kathy Stockton.My business address is 472 West Washington Street, Boise, Idaho. By whom are you employed and in what capaci ty? I am employed as a Senior Audi tor by the Idaho Public Utilities Commission. Please describe your educational background and professional experience. I received my B. B. A. degree in Accounting from Boise State University in December 1992.Following graduation I was employed by the Idaho State Tax Commission as a Tax Enforcement Technician.In that capaci ty I performed desk audi ts on individual state income tax returns.I was promoted to Tax Audi tor and later to Senior Tax Audi tor.In my capacity as an audi tor, I performed audi ts on Special Fuel and Motor Fuel Tax returns, International Fuels Tax Agreement Returns and Special Fuel User tax returns.I accepted employment with the Idaho Public Utilities Commission Staff in July 1995.I attended the National Association of Regulated Utilities Commissioners Annual Regulatory Studies program at Michigan State Uni versi ty.I have conducted numerous audits and cases for electric, gas, and water utilities. I have previously presented testimony before this CASE NOS. AVU-04-1/AVU-04-06/21/04 (Di)STOCKTON, K.Staff 1114 Commission. What is the purpose of your testimony? The purpose of my testimony is to present Commission Staff (Staff) adjustments to the revenue requirement proposed by Avista Corporation (Avista; Company) in Company wi tness Falkner I s test imony. propose adj ustments to both net operating income and rate base for both gas and electric operations.I will also discuss the Company s Commission Basis Adj ustments and why they are appropriate, as well as Staff's acceptance of the Company s Pro forma Insurance adj ustment Would you please summarize your testimony in thi s case? I recommend 12 Staff adj ustments Yes. Electric and 5 Gas) to the Company-proposed test year revenue requirement in the following areas: Electric ( 1 )Coyote Springs 2 - increases net income by $172 , 000; decreases rate base by 621 000; and decreases the total revenue requirement by $504 000. (2 )Capi tal Costs of Small Generation Options - decreases rate base by $539 000; and decreases the total revenue requirement by $78,000. CASE NOS. AVU-E- 04 -l/AVU-G- 04- 06/21/04 (Di)STOCKTON , K.Staff 1115 Gas (3 ) (4 ) (5 ) ( 6 ) Non-Executive Labor - increases net income by $26, 000; and decreases the total revenue requirement by $41 000. Executive Labor - increases net income by $ 9 , 000; and decreases the total revenue requirement by $14 000. Vegetation Management - increases net income by $288,000; and decreases the total revenue requirement by $451 000. Accounts Receivable Program fees increases net income by $357 000; and decreases the total revenue requirement by $ 5 5 8 , 0 0 0 . ( 7 )Corporate Fees and Expenses - increases net income by $74 000; and decreases the total revenue requirement by $116,000. ( 1 )Gas Inventory - decreases rate base by $1,572 000; and decreases the total revenue requirement by $227 000. (2 )Non-Executive Labor - increases net income by $6,000; and decreases the total revenue requirement by $9,000. (3 )Executive Labor - increases net income by $2 , 000; and decreases the total CASE NOS. AVU-04-1/AVU-04- 06/21/04 STOCKTON , K.Staff (Di) 1116 revenue requirement by $3,000. (4 )Accounts Receivable Program fees increases net income by $ 5 6 , 000; and decreases the total revenue requirement by $ 8 8 , 0 0 0 . (5 )Corporate Fees and Expenses - increases net income by $17, 000; and decreases the total revenue requirement by $27 000. Did Staff perform an audit in preparing its case? In assessing the Company I s ApplicationYes. Staff reviewed and audi ted the Company I s books and records for the 2002 test year. Does Staff agree with the use of a 2002 test year? Staff accepts the average of monthly average, 2002 test year and agrees wi th the beginning resul ts of operations. Does Staff accept the allocation method used by the Company? Staff has reviewed the 'method the Company uses to assigned and allocate common costs and common general plant between services and between jurisdictions. Staff finds the allocation methodology to be sound and acceptable. CASE NOS. AVU-04-1/AVU-04-06/21/04 (Di)STOCKTON, K.Staff 111 7 Do you have any exhibi t s that support your testimony? Yes. ln my testimony: I am sponsoring 12 exhibi ts discussed Staff Exhibits No. 109 through 115 related to my electric adjustments; and Staff Exhibits No. 116 through 120 related to my gas adjustments. ELECTRIC SECTION Would you please enumerate the Standard Commission Basis Adjustments to Electric Results of Operations proposed by Avista? The Company adjustments detailed in Company Exhibi t No. 14, beginning wi th page 4 of 10, by column letter designation are: f . 1 . J . 1 . t . Per Resul ts Report Deferred FIT Rate Base Deferred Gain on Office BuildingColstrip 3 AFUDC Elimination Colstrip Common AFUDC Kettle Falls Disallowance MOPS Deferred costs Weatherization & DSM Investment Customer Advances Revenue Adjustment Hydro Relicensing Adjustment Eliminate Franchise Fees Property Tax Uncollectible Expense Regulatory Expense Injuries and Damages Federal Income Tax Restate Debt Interest Idaho PCA Nez Perce Settlement Adjustment Remove Misc Tariffs Adjustment CASE NOS. AVU-04-1/AVU-04-06/21/04 STOCKTON, K.Staff (Di) 1118 PGE Monetization Amortization Adjustment Payroll Clearing Adjustment The Company adjustments begin with the Column b, which starts with the December 2002 Results of Operations Report.The Resul ts of Operations reports are filed monthly, for both gas and electric, wi th the Commission.The amounts in the report are for the twelve months ended December 31, 2002.The net operating lncome dollar amounts tie back to the Company s general ledger. The Company computes rate base using the average of monthly averages method. Does the Staff accept the Standard Commission Basis Adjustments? Staff has audited these adjustments andYes. finds them acceptable. Please explain the reasonableness of the Company Pro Forma Insurance adj ustment and why Staff accepts the Company s adj ustment The Company s adjustment updates the 2002 lnsurance expense for general liabili ty, directors and officer liability, property and other policies to the actual cost of insurance policies that are in effect for 2004 .Staff has verified that the policy expenses have increased, and that these changes are known and measurable.Staff has verified that the insurance costs CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1119 that are properly charged to the various non-utility operations have been excluded from the Company adjustment.Staff accepts this Company adj ustment filed. STAFF ELECTRIC ADJUSTMENTS TO RATE BASE & NET OPERATING INCOME Please explain Staff's adjustment to the Company s Pro Forma Coyote Springs 2 adj ustment Staff's adjustment brings the Company adj ustment to the actual balance as of April 30 , 2004. This adjustment incorporates the latest insurance payment received for the transformer.In a confidential response to Staff Production Request No. 268 , the Company indicated that addi tional insurance proceeds had been received. Staff included the actual balance as of April 30, 2004 to capture those insurance proceeds.Staff's adj ustment includes the effect of this insurance payment on the Company s net plant investment in the Coyote Springs project; in contrast, the Company s filing estimated the net operating income numbers for 2004 and based the rate base numbers on the average of the proj ected plant balances at 12/31/2003 and 12/31/2004.I have verified that the Coyote Springs 2 proj ect was transferred from Avista Power (an un-regulated subsidiary of Avista Corporation) to Avista Utili ties at cost.Staff was CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1120 provided wi th access to the plant records for Coyote Springs 2 during two on- si te audi ts in Spokane.Staff wi tness Sterling has reviewed the prudency of this proj ect What is the effect of Staff's adjustment to the Company s Pro Forma Coyote Springs 2 adjustment? Staff's adjustment increases Idaho electric net income by $172 000; decreases rate base by $1 621,000; and decreases the total revenue requirement by $504 000 as shown on Staff Exhibit No. 109. Please explain Staff's adj ustment to the Company s adj ustment - Capi tal Costs Small Gen Options. In Order No. 29130 issued August 9, 2002 in Case No. AVU-02-6 the Commission stated: We find that the PCA mechanism is for recovery of variable costs and is not an appropriate vehicle for recovery of capi tal costs. Accordingly, we direct the Company to remove the capi tal costs associated with Kettle Falls Bi-Fu~l ($56,598), Devil' s Gap ($96,743), and Othello ($744,884) from the PCA deferralaccounts together wi th corresponding adj ustments to the carrying charges. Order 29130 at 15. The Company proposed to amortize the total of the capital costs and the related carrying charge of $921 184 over a 5-year period beginning January 2003, and Commission Staff concurred.Staff also agreed that the CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON, K.Staff 1121 direct inclusion in rates of any amortized expense would be addressed in a future rate proceeding.Consequently, the Company has asked to include the capital cost amortization e~pense in rates.The Company has al so asked to earn a return on the unamortized capital cost balance by including it in rate base. Staff finds it reasonable to include the $184,000 in amortized expenses for recovery in this rate case.However, Staff does not find it reasonable to include the $829,000 unamortized balance in rate base. The Company had pursued various proj ects in order to avoid the additional high-costs purchases of energy from the wholesale markets during the 2000/2001 energy crisis.The proj ects were terminated prior to completion after the energy crlsls subsided.The proj ects were never completed or beneficial (used and useful) to the customers. Therefore, the Company should not be entitled to earn a return on assets that are not used and useful.Because the plant investment is not used and useful, it does not meet the regulatory requirement for inclusion in rate base.Recovery of the actual capi tal expendi tures wi thout earning a return on the investment is the appropriate regulatory treatment in this case.Staff therefore removes the rate base portion of the Company s pro forma adj ustment. CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1122= What is the effect of Staff's adjustment to the Company s adj ustment - Capi tal Costs Small Gen Options? Staff's adjustment decreases Idaho electric rate base by $539,000; and decreases the total revenue requirement by $78,000 as shown on Staff Exhibit No. 110. Please explain Staff's adjustment to the Company s Pro Forma Labor Non-Executive and Executive adj ustments Traditionally, ratemaking principles have allowed for the inclusion of known and measurable changes to test year expenses.Wages and salaries in the test year are usually adjusted to reflect pay changes in the current level of expense and better match the expenses on a going-forward basis.The Company has included two adjustments that reflect known and measurable changes to the test period union and non-union wages and salaries, as well as known and measurable changes to the executive salaries.The test period expenses for wages and salaries is restated wi th the increases in wage and salaries for 2002, 2003, and 2004, as if they were in place during the entire pro forma test year.When the Company filed its case, the amount of the increase for 2004 was estimated to be 3.5% for both union and non-union employees. response to Staff Production Request 245, the actual CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1123 salary increase in 2004 for non-unlon employees was 2.9%, and not the 3.5% used in calculating the Company Pro Forma Labor adj ustments for Executive and Non-executive labor. Staff's adjustments replace the estimate used by the Company with the actual salary increases for 2002, 2003, and 2004.Staff's adj ustment not only updates the non- union budgeted 3.5% salary increase to the actual 2. increase, but also updated the Pro Forma Labor Executive adjustment for changes in salaries and staffing that resul ted from the retirement of several key executives and the subsequent hiring of replacements for those posi tions. What is the effect of Staff's adjustment to the Company s Pro Forma Labor Non-Executive adjustment? Staff's adj ustment increases Idaho electric net operating income by $26,000, and decreases the total revenue requirement by $41 000 as shown on Staff Exhibit No. 111. What is the effect of Staff's adjustment to the Company s Pro Forma Labor - Executive adjustment? Staff's adjustment lncreases Idaho electric net operating income by $9 000 and decreases the total revenue requirement by $14,000 as shown on Staff Exhibit No. 112. Please explain Staff's adj ustment to the Company s Pro Forma Vegetation Management adj ustment. CASE NOS. AVU~E-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1124 Staff's adj ustment reflects replacing the Company s requested vegetation management expenses wi th an average of the actual amounts expended for vegetation management during the years 1998 through 2003.It is appropriate to use actual dollars , as these amounts are known and measurable, rather than an estimate based on a budget.The budgeted number is just that - a budgeted number, an estimate.Because the Company has some flexibili ty in the budgeting process, and because it is not known what the company will actually expend for vegetation management, it is more appropriate to look what has taken place in the past.The past expenses are known and measurable.The vegetation management budget has been reduced in many years based on the Company cash flow and earnings resul ts There is no reason to believe it will be different in the future. In the prior electric rate case (AVU-98-11) Staff found that the five-year average of the actual amounts booked for tree-trimming costs (vegetation management) was $1 205,893.The five year average similar to that used in the last rate case is $1 217,048.The average of the actual amounts booked for vegetation management for the years 1998 through 2003 is $1,322 464. Staff notes that the amount recorded in 2002 was abnormally low at $550,255.The amounts expended by year CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON, K. Staf f 1125 tend to fluctuate because of the nature of the program. Staff is aware that the vegetation management program expenditures are not the same from year to year, as integrated vegetation management includes specific treatments for each tree-trimming circuit, and each circuit is different in size, and the requirements for each circui t are different.The integrated management approach does not take a one size fits all approach , thus the fluctuation in expendi tures from year to year. Staff proposes to adjust the Company s Pro Forma Vegetation Management adjustment to reflect the average amount actually expensed during the six-year period from 1998 through 2003.Staff asserts that a SlX- year average is reasonable, given the fluctuation in the amounts actually expended from year to year.The last electric rate case used a 1997 test year.The six-year average reflects the activity in vegetation management from the last rate case through the end of 2003.This slx-year average allows the Staff to use known and measurable expenses in calculating an appropriate amount for future recovery in rates.The average reflects the variability in the amount expended from year to year due to the cyclical nature of the vegetation management program, and recognizes that the amount recorded in the test year is abnormally low in comparison to other years. CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON, K.Staff 1126 What is the effect of Staff's adjustment to the Company s Pro Forma Vegetation Management adj ustment? Staff's adjustment increases Idaho electric net operating income by $288,000; and decreases the total revenue requirement by $451,000 as shown on Staff Exhibit No. 113. Please explain Staff's Account Receivable Program Fees adjustment. This adj ustment removes the fees associated with the Company s Accounts Receivable Sale Program.The Accounts Receivable Sale Program was initiated in 1988 when the Company entered into a five-year agreement to sell $30 million of its accounts receivable.At that time, the effect of the program was to reduce the Company s need for financing and provide the Company wi a source of funds at a much lower effective cost.This arrangement was a true sale of assets because the accounts receivable were sold wi thout recourse to the Company.The Company previously agreed in a letter to Staff that the sale of the accounts receivable and all costs associated with the program would not be included or recovered through the Company s cost of capital.Since 1988, the Company has expanded the limit to sell up to $125 million of the Company s accounts receivables. In Production Request 261, the Staff asked CASE NOS. AVU-04-1/AVU-04-06/21/04 (Di)STOCKTON , K.Staff 1127 the Company to "explain and quantify the benefi ts of the Accounts Receivable Sale program for the ratepayer. The Company stated, in response to Production Request 261: The Accounts Receivable Sale program is a cost effective approach of funding the cost of carrying customer receivables on the Company s balance sheet. Theal ternati ve to factoring accounts receivable would be a working capi taladdi tion to rate base at the Company authori zed rate of return. While the response does not specifically explain the benefits of the program for the ratepayer it does state that the program is like a working capital addition to rate base, or a substitute for such a program. Why have you proposed disallowing the fees associated wi th the Accounts Receivable Sale Program? I have calculated a negative cash working capi tal for the Company.Because the Company asserts that the Accounts Receivable Sale Program is a substitute for a working capi tal requirement and the Company does not have a working capital requirement, I have removed the fees associated with the Accounts Receivable Program. What is the effect of Staff's Accounts Receivable Program fees adj ustment? Staff's adj ustment increases Idaho electric net operating income by $357 000 and decreases the total revenue requirement by $558 000 as shown on Staff Exhibit CASE NOS. AVU-04-1/AVU-04-06/21/04 (Di)STOCKTON, K.Staff 1128 No. 114. Please explain working capi tal. Working capi tal is the amount of capi tal needed to run the business between the time expenses are disbursed to provide the services paid for by consumers and the revenues from those services are received. Working capi tal includes prepayments, inventories, and cash working capi tal.Cash working capi tal is the average amount of capi tal (cash) that is supplied by the investors over and above the investment in plant and other rate base items that is required to fill the gap between the time when expendi tures are made to provide services and the time collections are received for these services. Historically this Commission has used the balance sheet method for determining cash working capi tal for large utilities. What is the balance sheet method for determining cash working capi tal? The balance sheet method of cash working capital evaluates the need for cash working capital by identifying whether investors , usually shareholders, are providing the working capi tal or whether it is being provided from some other source.Using the balance sheet method I have calculated a negative cash working capital for Avista Corporation.At the corporate level, the cash CASE NOS. AVU-E- 04 -l/AVU-G- 04-06/21/04 (Di)STOCKTON , K.Staff 1129 working capital requirement is a negative $139,799 million.This negative amount indicates that shareholders were not the source of working capi tal, and subsequently no return to the shareholders should be allowed.The Company does not readily maintain the information necessary to perform a working capi tal analysis at the Avista Utilities level , let alone for Avista Utilities, Electric Operations, at the Idaho Jurisdictional level. Therefore, Avista Corp data must be used to calculate cash working capi tal. Did the Company request a return on cash working capi tal? No, the Company did not request a return on cash working capi tal , nor did they request a return on materials and supplies (inventory), and prepayments. Has the Commission authorized negative cash working capital? Historically, the Commission has not recognized negative cash working capi tal, finding that the cash working capi tal allowance in those cases should be zero.In Case No. SOU-94-1 the Commission stated, Because the Commission has never recognized negative cash working capital, we find that the working capital allowance in this case should be zero. Order No. 25785 at CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1130 Consequently, to the extent the Accounts Receivable Sale Program is a substitutes for working capi tal , the program fees too should not be allowed recovery. Please explain Staff's Corporate Fees and Expenses adjustment. Staff's Corporate Fees and Expenses adjustment allocates 50% of the amounts recorded in FERC account 930., Corporate Fees and Expenses, Electric Operations, for the Idaho jurisdiction , to affiliates to reflect the benefit received by the other affiliates from these acti vi ties.In Staff Production Request 112, the Staff inquired of the Company how the Board of Directors fees and other expenses were allocated to Avista Utilities and to the other subsidiaries.The request specifically asked the Company to: identify expenses associated wi bond issuances, analyst fees , rating agencies, Board of Directors ' fees, and shareholder expenses and how they are allocated to Avista Corp. and its subsidiaries, including the utility and Idaho Gas and Electric Operations. The Company s response did not identify the expenses specifically.The response further stated: Other costs related to Avista ' s debt and equi ty financing acti vi ties, such as Board of Director fees , rating agency fees and other shareholder costs, are CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1131 generally recorded to FERC account 930.Miscellaneous General Expenses. Theseaccount 930 costs are primarily assigned the common-to-all utili ty code ' 7' which spreads those expenses ini tially to both electric and gas operations and then to all state jurisdictions, through application of the ' Four Factor Did the Company s response provide the amount of or indicate that the other subsidiaries were allocated any portion of these expenses? The Company did not provide Staff wi thNo. any information showing the subsidiaries ' portion of these expenses prior to being allocated to the utili operations using the common-to-all utility code.This utility code does not include the subsidiaries in the allocation process.Therefore, due to the nature of the allocation method, any apportionment to the subsidiaries must be done prior to the expenses being allocated to utility operations through the current allocation process. The Board of Directors of Avista Corporation responsible for all subsidiaries including Avista Utilities.Because the other subsidiaries are incl uded in the required SEC filings, and the Annual Report to Shareholders, among other things, the other subsidiaries benefit from these activities, and therefore should bear some of the costs.Therefore, the Staf f adj ustment asslgns 50% of these activities to the other affiliated CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1132 subsidiaries. Did you allocate 50% of the total in the 930.2 account to the other subsidiaries? No, I allocated 50% of sub-account 930. Corporate Fees and Expenses to the other subsidiaries, slnce this was the sub-account used by the Company for Board of Directors ' fees, shareholder expenses, and other corporate expenses. How did you determine that 50% was the appropriate allocation percentage? Absent any further information from the Company, I used the 50% allocation based on what other utility companies in Idaho use to allocate a portion of the Board of Directors fees and other related expenses to affiliates.In Case No. IPC-E- 03 -13, Staff wi tness Leckie recommended that the cost of the Document Management System be allocated equally between the ratepayers and the shareholders, because that is the same allocation percentage (50%) that IDACORP uses to allocate Board of Director fees.Moreover, Order No.2 9505 from that case states: The Commission finds that including the entire cost of the Shareowners Document Management System in rate base would be unfair to ratepayers. Because the system benefits IDACORP in its administrative responsibilities much like the fees paid to its Board of Directors we find that it should be allocated the CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1133 same as the Board of Director s fees inthi s case. There fore, only one hal f the cost of the system should be included in Idaho Power s rate base. Similarly, Intermountain Gas Company s utility operations is allocated 50% of the Board of Directors fees and other similar expenses , with the remaining 50% allocated to other affiliates. What is the effect of Staff's Corporate Fees and Expenses adjustment? Staff's adjustment lncreases Idaho electric net operating income $74,000; and decreases the total revenue requirement by $116,000 as shown on Staff Exhibit No. 115. Dd you have addi tional adj ustments for Electric Operations? No I do not. GAS SECTION Would you please enumerate the Standard Commission Basis Adj ustments to Gas Resul ts of Operations proposed by Avi sta? The Company adjustments as detailed in Company Exhibi t No. 15 , beginning wi th page 4 of 8, by column letter designation are: c . Per Resul t s Report Deferred FIT Rate Base Deferred Gain on Office BuildingGas Inventory CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON, K.Staff 1134 f . 1 . Weatherization & DSM Investment Customer Advances Eliminate Franchise Fees Property Tax Uncollectible Expense Regulatory Expense Adj ustmentInj uries and Damages Federal Income Tax Restate Debt Interest Payroll Clearing Adjustment J . 1 . The Company adjustments begin with the Column b, which starts with the December 2002 Results of Opera t ions Report.The Resul ts of Operations reports are filed monthly, for both gas and electric, wi th the Commission.The amounts in the report are for the twelve months ended December 31, 2002.The net operating lncome dollar amounts tie back to the Company s general ledger. The Company computes rate base using the average of monthly averages method. Does the Staff accept the Standard Commission Basis Adjustments? Staff has audi ted these adj ustments and wi th the exception of the Gas Inventory adjustment, Staff finds them acceptable. Please explain the reasonableness of the Company Pro Forma Insurance Adj ustment and why Staff accepts the Company s adj ustment. The Company s adjustment updates the 2002 insurance expense for general liabili ty, directors and CASE NOS. AVU-04-1/AVU-04-06/21/04 (Di)STOCKTON, K.Staff 1135 officer liability, property and other policies to the actual cost of insurance policies that are in effect for 2004 .Staff has verified that the policy expenses have increased, and that these changes are known and measurable.Staff has verified that the insurance costs that are properly charge to the various non-utility operations have been excluded from the Company adj ustment Staff accepts this adj ustment as filed by Avista. STAFF GAS ADJUSTMENTS TO RATE BASE & NET OPERATING INCOME Please explain Staff's adj ustment to the Company s Gas Inventory Pro Forma adj ustment This adjustment removes the Company s Pro Forma Gas Inventory adjustment from rate base.Al t houg h the Company has been including a gas inventory adj ustment since 1984 , Staff has not identified a rationale to justify continuing its current inclusion in rate base. Gas inventory is normally considered part of working capi tal.Working capital includes inventories, prepayments, minimum and compensating bank balances, and. cash working capi tal.Typically three kinds of inventories are included in working capital:fuel stocks, construction material in inventory, and materials and supplies held for operating and maintenance purposes. Working capital is generally allowed in recognition that a CASE NOS. AVU -E- 04 -l/AVU -G- 04- 06/21/04 (Di)STOCKTON, K.Staff 1136 company pays some of its expenses before it recelves revenue, and to the extent shareholders supply that money, they should earn a return on it.However, as described previously in my testimony, Staff identified a negative cash working capi tal for Avista Corporation so cash working capi tal is not an appropriate rate base addi tion. Therefore, including gas inventory in rate base for this case also is not appropriate.As previously discussed, the Commission has not historically recognized negative cash working capi tal and had consequently found that the cash working capi tal allowance in those cases shoul d be zero. What the effect Staff'Gas Inventory adj ustment? Staff's Gas Inventory adj ustment decreases Idaho gas rate base by $1,572,000; and decreases the total revenue requirement by $227 000 as shown on Staff Exhibit No. 116. Please explain Staff's adj ustment to the Company s Executive and Non-Executive Labor Pro Forma adj ustments. As previously stated in the electric section, ratemaking principles have traditionally allowed for the inclusion of known and measurable changes to test year expens e s .Wages and salaries in the test year are usually CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1137 adjusted to reflect pay changes in the current level of expense and better match the expenses on a going-forward basis.As previously discussed, Staff's adj ustments replace the estimate used by the Company wi th the actual salary increases for 2002, 2003, and 2004.Staff' adjustment not only updates the non-union budgeted 3. salary increase to the actual 2.9% increase, but also updated the Pro Forma Labor - Executive adj ustment for changes in salaries and staffing that resul ted from the retirement of several key executives and the subsequent hiring of replacements for those posi tions What is the effect of Staff's adjustment to the Company s Pro Forma Labor Non-Executive adjustment? Staff's adjustment increases Idaho gas net operating income by $6,000; and decreases the total revenue requirement by $9,000 as shown on Staff Exhibit No. 117. What is the effect of Staff's adjustment to the Company s Pro Forma Labor Executive adj ustment? Staff's adj ustment increases Idaho gas net operating income by $2,000; and decreases the total revenue requirement by $3,000 as shown on Staff Exhibi No. 118. Please explain Staff's adj ustment to the Accounts Receivable Sale Program Fees? CASE NOS. AVU-04-1/AVU-04-06/21/04 (Di)STOCKTON, K.Staff 1138 As stated in the electric section of my testimony, this adjustment removes the fees associated with the Company s Accounts Receivable Sale Program.The Company has equated the fees associated wi th this program wi th working capi tal.As I stated previously, Avista Corporation has a negative cash working capi tal making a working capitol aQjustment or expenditures associated with working capi tal inappropriate in this case.As previously discussed , the Commission has not historically recognized negative cash working capi tal and has found that the cash working capi tal allowance in those cases should be zero. therefore, Staff has simply removed these fees in this case. What is the effect of Staff's Accounts Receivable Program fees adj ustment? Staff's adj ustment increases Idaho gas net operating incom~ by $56/000; and decreases the total revenue requirement by $88,000 as shown on Staff Exhibi No. 119. Please explain Staff's Corporate Fees and Expenses adj ustment As I stated in the electric section, Staff' Corporate Fees and Expenses adjustment allocates 50% of the amounts recorded in the corresponding natural gas FERC account 1930., Corporate Fees and Expenses, Gas CASE NOS. AVU-E- 04 -l/AVU-G- 04-06/21/04 (Di)STOCKTON , K.Staff 1139 Operations, for the Idaho jurisdiction to the other subsidiaries for the same reasons enumerated. What is the effect of Staff's Corporate Fees and Expenses adj ustment Staff's adjustment lncreases Idaho gas net operating income by $17 000; and decreases the total revenue requirement by $27 000 as shown on Staff Exhibit No. 120. Do you have additional adjustments for Gas Operations? No, I do not. Does this conclude your direct testimony? Yes, it does. CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)STOCKTON , K.Staff 1140 Please state your name and business address? My name is Kathy Stockton.My business address 472 West Washington Street, Boise, Idaho. By whom are you employed and in what capaci ty? I am employed as a Senior Audi tor by the Idaho Public Utilities Commission. Are you the same Kathy Stockton that submitted direct testimony in this case on June 21, 2004? Yes, I am. What is the purpose of your rej oinder testimony? The purpose of my testimony is to present 'Staff' s and the Company s agreed upon resolution to three of my adjustments. resolved? Which contested adjustments have Staff and Avista The electric Accounts Receivable Sale Program Fees Adj ustment, the gas Accounts Receivable Sale Program Fees Adjustment, and the Gas Inventory Adjustment. Have Staff and the Company reached an agreement on these adjustments? The Staff and the Company have agreed toYes. reduce these three Staff adjustments by 50%.Based upon the relative strengths and merits of both Staff and Company positions as stated in Staff's direct testimony and the Company s rebuttal testimony, Staff and Company agree that CASE NOS. AVU-04-1/AVU-04-7/16/04 STOCKTON K . STAFF (Rej) 1141 this is a reasonable resolution of these issues for the purpose of this proceeding.Based upon the Company s rebut tal testimony, confusion over Avista Utilities cash working capi tal requirement and its potential cost, and the lack other evidence to show whether these items were cost effective for ratepayers, Staff has agreed to reduce these three adjustments by half.While Staff continues to maintain that some adjustment is necessary, Staff believes that reducing the originally proposed adjustments by 50% is reasonable. What is the resul t of reducing the electric Accounts Receivable Sale Program Fees by 50%? Staff's revised adj ustment lncreases Idaho electric net operating income by $1 79,000 and decreases the total revenue requirement by $280,000 as shown on Revised Staff Exhibi t No. 114. What is the resul t of reducing the gas Accounts Receivable Sale Program Fees by 50%? Staff's revised adj ustment increase~ Idaho gas net operating income by $29,000 and decreases the total revenue requirement by $45,000 as shown on Revised Staff Exhibit No. 119. What is the result of reducing the Gas Inventory adjustment by 50%? Staff's Gas Inventory adjustment decreases Idaho gas rate base by $786,000, and decreases the total revenue CASE NOS. AVU-04-1/AVU-04- 7/16/04 STOCKTON, K. STAFF (Rej) 2 1142 requirement by $114,000 as shown on Revised Staff Exhibit No. 116. What is the effect of these revised adj ustments Staff witness Harms ' exhibits? These revised adjustments have been reflected in Staff's Revised Exhibit Nos. 101, 102, 106 and 107.The purpose of these exhibits remains the same as described in Staff witness Harms ' direct testimony of June 21 , 2004. What is the affect of your revised adj ustments Staff witness Harms ' proposed revenue requirement for electric operations? Staff calculates a revised electric revenue requirement deficiency of $23,356,000 and an overall revised electric revenue percentage increase of 15.97%.There is no change to Staff's electric rate base of $418,277,000 proposed on June 21, 2004.These changes increase Staff' recommendation by $278,000 or .19%.The method of calculating these items remains the same as described in Staff witness Harms ' direct testimony of June 21, 2004 except that the amount of the accounts receivable fees adjustment has been revised (Revised Staff Exhibi t No. 102, Page 2 of 3 Adj ustment E12) . What is the affect of your revised adjustments on Staff wi tness Harms ' proposed revenue requirement for natural gas operations? CASE NOS. AVU-E- 04 -l/AVU-G- 04-7/16/04 STOCKTON , K. STAFF (Rej) 1143 Staff calculates a revised natural gas rate base of $59,653,000 , a revised natural gas revenue requirement deficiency of $3,241 000 and a revised overall natural gas revenue percentage increase of 6.24%.These changes increase Staff's recommendation by $136,000 or .26%.The method of calculating these items remains the same as described in Staff witness Harms ' direct testimony of June 21 , 2004 except that my gas inventory and accounts receivable fees adj ustments have been revised (Revised Staff Exhibit No. 107 , Page 1 of 2 Adjustments G1 and G5) . Do your revised adjustments have any other effect? Yes.Because one of the components in Staff's debt interest restatement is Staff pro forma rate base, my gas inventory revision to rate base changes the product of this calculation.Staff's revised debt interest restatement (Revised Exhibit 107, Page 2 of 2, Adjustment GIS) now increases the Idaho gas current federal income tax accrual by $36,000 and increases the Idaho gas revenue requirement by $56 000. Does this conclude your rej oinder testimony? Yes, it does. CASE NOS. AVU-04-1/AVU-04-7/16/04 STOCKTON , K. STAFF (Rej) 4 1144 (The following proceedings were had in open hearing. (Staff Exhibit Nos. 109 through 120 having been premarked for identification , were admitted into evidence. MS. NORDSTROM:And with the Commission I indulgence , I I d like to ask the witness one question in response to Avista I s rebuttal testimony to clarify Ms. Stockton I s testimony. COMMISSIONER KJELLANDER:Please proceed. BY MS. NORDSTROM:Ms. Stockton , Avista proposed to create a one-way balancing account for its vegetation management expenses.Does Staff believe that this is an appropriate mechanism for vegetation management accounts? No, Staff does not believe that the one-way balancing account is necessary for vegetation management for two reasons: One, it I S unnecessarily complicated and administratively burdensome, and, two, the variability of the program is within the control of the Company. Balancing accounts are more appropriate for such things as the PCA , the PGA , and the hydro relicensing accounts where those expenses are outside the control of the Company. Thank you. MS. NORDSTROM:Staff has no further questions 1145 HEDRI CK COURT REPORTING O. BOX 578 , BOISE , ID 83701 STOCKTON (Di)Staff and tenders her for cross-examination. COMMI S S lONER KJELLANDER:Thank you.Let I s start wi th Mr. Purdy. MR . PURDY:I have none , thanks. COMMI S S lONER KJELLANDER:Mr. Cox. MR . COX:I have none, thanks. COMMISSIONER KJELLANDER:Mr. Ward. MR . WARD:No questions. COMMISSIONER KJELLANDER:And now Mr. Meyer. CROSS - EXAMINATION BY MR. MEYER: On the subj ect, Ms. Stockton , of vegetation management at page 11 of your testimony, you indicate that you use for the purpose of the adj ustment for vegetation management the average for the years 1998 through 2003 , do you not? Yes. And does that reflect an average level of approximately $1.3 million per year? Yes, it does. But does that, given the 1998 through 2003 time frame, that includes, of course, the year 2002 in your six-year average, doesn I t it? Yes , it does. 1146 HEDRICK COURT REPORTING O. BOX 5 7 8, BO I S E , I D 83701 STOCKTON (X)Staff Okay.Would you accept that in the year 2002, that only approximately $550,000 was spent? That I S correct. And isn t it true that you have acknowledged that the expenditures in 2002 for vegetation management were, I think ln your words, quote/unquote, abnormally low? Yes , they were. As a general matter , is it common for the Commission to exclude certain items that are considered otherwise to be, say, unusual or abnormal or nonrecurring in nature? Yes, that I s true. Have you proposed a calculation of what the pro forma level would be for vegetation management were one to exclude the abnormally low costs for 2002? 1 h ...... '-' 'h"""T""'"..L ,.L ~~CI. V c::: . And what would the impact be of removlng 2002 from your average? If you remove 2002 , then you come up with a number that I s approximately 1.4 million instead of the 3 million.However, if we re going to start excluding abnormally low years, why donlt we -- we should also throw out the high years, and pretty soon youl ve defeated the whole purpose of an average. Was - - even wi thin this time frame, was the 1147 HEDRICK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 STOCKTON (X)Staff how shall I say this - - was the abnormally low year more abnormally low than the abnormally high year? Well , the abnormally high year would have been , I believe, the $1.8 million , and that I S $500,000 more than the average. Just to make sure that the numbers are on the record so that we have sort of the bookends wi th what would be the case if we were to exclude 2002, would you accept, subj ect to check - - I think you gave some approximate numbers here , but would you accept, subj ect to check , that if we were to remove 2002, that the number would be 1,477,000 for the Idaho jurisdiction , as compared to 1,771 000 proposed by the Company, and, finally, as compared with 1 322 000 as proposed by Staff? I would accept that, subj ect to check. MR . MEYER:That I S all I have.Thank you. COMMISSIONER KJELLANDER:Thank you, Mr. Meyer. Are there any questions from members of the Commission?None? Okay, thank you , Ms. Stockton , for your testimony here today. And we re ready now for the next witness. (The wi tness left the stand. MS. NORDSTROM:Thank you.The Staff calls Donn English as its next witness. 1148 HEDRI CK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 STOCKTON (X) Staff DONN ENGLISH, produced as a witness at the instance of the Staff, being first duly sworn , was examined and testified as follows: DIRECT EXAMINATION BY MS. NORDSTROM: Good morning. Good morning. Please state your name and spell your last for the record. My name is Donn English, E- By whom are you employed and in what capacity? I am employed by the Idaho Public Utilities Commission as a Staff auditor. Are you the same Donn English that filed direct testimony on June 21, 2004 , and prepared Exhibit Nos. 121 through 127? Yes, I am. Do you have any corrections or changes to your testimony or exhibits? No, I do not. If I were to ask you the questions set out in your prefiled testimony, would your answers be the same today? 1149 HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 ENGLISH (Di)Staff Yes, they would. MS. NORDSTROM:I would move that the prefiled direct testimony of Donn English be spread upon the record as if read, and Exhibit Nos. 121 through 127 be marked for identification. COMM IS S lONER KJELLANDER:And wi thou t obj ect ion we will spread the testimony of Mr. English across the record as if read, and admit Exhibits 121 through 127. MS. NORDSTROM:Thank you. (The following prefiled direct testimony of Mr. English is spread upon the record. 1150 HEDRICK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 ENGLISH (Di) Staff Please state your name and business address for the record. My name is Donn English.My business address 472 W. Washington , Boise, Idaho 83702. By whom are you employed and in what capaci ty? I am employed by the Idaho Public Utilities Commission (Commission) as an auditor in the accounting section. What is your educational and experlence background? I graduated from Boise State University in 1998 wi th a BBA degree in Account ing Following my graduation accepted a position as a Trust Accountant with a penslon administration, actuarial and consul ting firm in Boise. a Trust Accountant, my primary duties were to audi t the day-to-day financial transactions of numerous qualified retirement plans.In 1999 I was promoted to Pension Administrator.As a Pension Administrator , my responsibilities included calculating pension and profit sharing contributions, performing required non- discrimination testing and filing the annual returns (Form 5500 and attachments) In May of 2001, I became a designated member of the American Society of Pension Actuaries (ASPA)I was the first person in Idaho to receive the Qualified 401 (k) Administrator certification CASE NOS. AVU-04-1/AVU-04- 06/21/04 (Di)ENGLISH, D. STAFF 1151 and was one of only nlne people in Idaho with the Qualified Pension Administrator certification.In 2001 I was promoted to a Pension Consul tant, a posi tion I held until 2003 when I joined the Commission Staff. Wi th the American Society of Pension Actuaries, I served on the Education and Examination Committee for two years.On this committee I was responsible for writing and reviewing exam questions and study materials for the PA- and PA-2 exams (Introduction to Pension Administration Courses), DC-, DC-2 and DC-3 exams (Administrative Issues of Defined Contribution Plans - Basic Concepts, Compliance Concept s and Advanced Concept s) and the DB exam (Administrative Issues of Defined Benefit Plans)I have also regularly attended conferences and training seminars throughout the country on numerous pension issues. Since joining the Commission Staff (Staff), I have attended workshops at the Institute of Public Utilities at Michigan State University sponsored by the National Association of Regulatory Utility Commissioners. These workshops included many different topics, such as lncome taxes, d~preciation , Sarbanes-Oxley,. and rates return on equi ty. Have you previously testified before this Commission? Yes, I have provided wri t ten and oral CASE NOS. AVU-04-1/AVU-04- 06/21/04 1152 ENGLI SH, D. STAFF (Di) 2 testimony in Idaho Power Company s general rate case (Case No. IPC-E- 03 -13), primarily regarding treatment of pension expense and pre-paid pension costs for regulatory recovery. My testimony in that case also presented arguments against recovery of miscellaneous organizational dues and chari table contributions, interest expense and legal expenses. What is the purpose of your testimony in this proceeding? The purpose of my testimony in this proceeding to present Staff's position regarding penslon expense, depreciation expense, pro forma deferred income tax adj ustments relating to recent accounting methodology changes, legal expenses and certain miscellaneous expenses found in the Company s Application. Are you sponsoring any exhibi ts wi th your testimony? Yes, I will be sponsorlng Exhibit Nos. 121-127. ELECTRIC SECTION Pension Expense Please describe Avista Corporation (Avista; Avista Corp.; Company) pension plan. Avista Corp. sponsors a traditional defined benefit pension plan in which participants will receive a set monthly income upon retirement that is based on their CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH , D. STAFF (Di) 3 1153 years of serVlce and their final average earnings.This plan is fully funded by Avista Corp.Assets in the Plan are secured in a trust and guaranteed by the Pension Benefi ts Guaranty Corporation. Please describe the Company s treatment of penslon expense in its current rate filing. Avista proposes to use a pension expense of $14,000,000 on a total system-wide basis (Falkner Direct page 24)The amount of Idaho s electric jurisdiction penslon expense proposed to be recovered in this rate case is $2,095,423. How was this amount calculated? During the 2002 test year, the Company s Net Periodic Pension Cost (NPPC) on a total system-wide basis was $9,277 622.The Company has estimated that for 2004 the NPPC will be $13,600,000 using an estimate of actual rates of return on assets of 3.88%, compensation increases of 5% and a discount rate of 6.25%.In its Application the Company rounded this estimated $13.6 million amount up to $14 million , and then made a pro forma adjustment to lncrease penslon expense by $4 615 000 system-wide or by $691,039 for the Idaho electric jurisdiction (Exhibit No. , page 8 of 10 , Column ac) I have included Company witness Falkner s Workpaper No. ac6 that illustrates this calculation in my Exhibi t No. 121, page 3 of CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH, D. STAFF (Di) 4 1154 Does Staff agree wi th the Company s penslon expense? No.Staff disagrees wi th the Company s treatment of pension expense.The pro forma adj ustment is based on an estimated pension expense that was calculated uslng speculative assumptions that may or may not hold true. Specifically, the Company uses an 8 percent actuarial assumption of future rates of return on assets; however, for 2004 the Company uses an estimated actual return on assets of only 3.88%.It is impossible to predict wi th any certainty the actual investment performance of the plan assets for 2004.Therefore, this adjustment is not known and measurable and should be rej ected by the Commission. Furthermore, I do not bel ieve that the recovery of FAS 87 expense is appropriate in this case. Please describe FAS 87 expense. FAS 87 expense lS a reference to Statement Financial Accounting Standard No. 87 and is synonymous with Net Periodic Pension Cost.The Statement was issued by the Financial Accounting Standards Board to alleviate long- standing controversy regarding how to report for pension liability.It mandates the use of Net Periodic Pension Cost for reporting pension expense on a company s financial statements.The NPPC is an accrual of pension expense for a given year , but it is not the actual amount of cash that CASE NOS. AVU-04-1/AVU-04- 06/21/04 1155 ENGLISH, D. STAFF (Di) 5 a company is required to contribute to a penSlon plan to meet its minimum funding liability and avoid interest and penal ties.It is also important to note that FAS 87 makes no mention of regulatory accounting. Has there been any perceived problems wi FAS 87? Yes.There has been a growlng concern among accounting professionals regarding the use of FAS 87 and the potential for manipulation of financial statements. Just last year , the Financial Accounting Standards Board agreed to put further review of FAS 87 on its formal agenda.Though the Board has not made any changes to the Statement, the concern lS still present. What 'was the actual cash amount that Avista was required to contribute to the pension plan during the 2002 test year? The Employee Retirement Income Security Act (ERISA) and section 412 of the Internal Revenue Code mandate the required minimum contribution necessary for plan sponsor to meet its funding obligations.A completely different calculation is used to determine the mlnlmum cost for a gi ven plan year.Avista s 2002 ERISA required mlnlmum contribut ion was $ 7 ,481 , 201 on a total system-wide basis. Please briefly describe ERISA. CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH, D. STAFF (Di) 6 1156 ERISA was enacted by Congress in 1974 to ensure some level of security in employee benefit plans. Since its enactment penslon plans are subj ect to intense federal regulation because of the long-term nature of the benefit obligation and the resul ting potential for changed circumstances.One of many ERISA requirements is the systematic advanced funding requirements to protect employees against employer default.ERISA mandates the ffilnlmum amount that must be funded each year to a pension plan to avoid a funding deficiency. How is this amount calculated? The first step of the calculation is to determine the Normal Cost for the year.The Normal Cost is the annual cost of the plan uslng the plan s actuarial cost method as established in the plan document.The Normal Cost is a calculation that takes into consideration the present value of future benefits , the actuarial value of the Plan s assets, any unfunded liabilities and the present value of the Company s future payroll.This information is used to calculate an accrual rate that is then mul tiplied by the Company s current payroll to produce the Normal Cost.By adding or subtracting any charges or credi ts to the Normal Cost one can obtain the Annual Cost.The Minimum Required Contribution is the lesser of the Annual Cost or the difference between the Full Funding Limi tation CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D. STAFF (Di) 7 1157 and any credi t balance.This mlnlmum contribution is the amount that a company must fund in order to avoid a funding deficiency in the Funding Standards Account. Is this Minimum Required Contribution the amount that Avista Corporation actually contributed to the Plan for the 2002 plan year? In its discretion, Avista contributed anNo. additional $4 518,799 beyond the minimum required amount for a total of $12 million. What amount of pension expense do you believe appropriate for Av~sta Corporation to recover in rates? I believe that it is appropriate for the Company ln this case to recover only the amount that it was legally required to contribute to the Plan.For the 2002 test year, this amount was $7 481,201 system-wide and $1,120,217 for the Idaho electric jurisdiction.However, Staff has pro formed our adj ustment to update the pension expense to 2003 actuals.The 2003 system-wide mlnlmum penSlon contribution was $8 694,685 with $1 301,921 allocated to Idaho s electric jurisdiction.Staff's adj ustment reduces the Company s proposed pension expense from $14 000,000 to $8,694,685, resulting in a decrease to Idaho revenue requirement of approximately $867,000. Are you suggesting that this Commission adopt a policy that only the ERISA required minimum contribution CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D. STAFF (Di) 1158 accepted for rate recovery? I am not necessarily recommending a strict policy of only accepting the ERISA required minimum amount for rate recovery purposes, but I do believe that the ERISA minimum contribution is the best starting point in determining the amount to allow for recovery.When deal ing with the different pension calculations, it is important to remember that these "costs " we are referring to are artificial numbers that have no connection to real-world values.These costs do not accurately estimate the value of the plan s liability to pay benefits, the Company legal liability should the plan be terminated, or the value of benef i ts accumulated under the plan.These calculations are- simply a means by which the federal Tax Code and the ERISA regulations dictate the level of funding in a plan for purposes of tax deductions and minimum funding rules. The calculation methodologies consist of using inaccurate data and speculative assumptions and running them through an overly precise formula to produce a cost calculation. Therefore, there is no accurate contribution value, and we are forced to rely on a number that is produced by the calculations.Given this speculative nature of penslon contributions, I believe it is wise for the Commission to reserve some discretion in determining amounts to be recovered through rates based on the individual facts and CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D. STAFF (Di) 9 1159 circumstances of each case.Given the large requested rate increase in this case, funding at the ERISA minimum level lS appropriate. Please explain Exhibi t No. 121. Exhibit No. 121 consists of four pages.The first two pages are simple line graphs that compare Avista s NPPC and the ERISA minimum contributions since 1995. The following two pages are workpapers of Company witness Falkner illustrating Avista ' s pro forma penslon adj ustments As depicted by the graphs, the contributions between 1995-2001 were consistently under $4 million. 2002 , Avista s contributions began trending rapidly upward. My investigation of Avista ' s pension contribution history focused on reasons for this upward trend other than poor market performance ci ted by Company wi tness Falkner (Falkner direct, pages 24 -25) During my review I noticed that the actuarial assumption for future rate of return on assets was lowered from 9% in 2001 to 8% in 2002.Anytime an assumption is changed during a test year , it raises suspicions.The effect of the impact of this assumption change is shown on Exhibi t No. 121, page 2 and is approximately $1.35 million in 2002 and $1.56 million in 2003.At the time of the assumption change, the Plan average actual return Slnce 1995 had been approximately percent.In 2003, the Plan experienced a weighted average CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH, D. STAFF (Di) 10 1160 return of approximately 24.5%.Though Avista changed the actuarial assumption for the test year and increased FAS penSlon expense, I do not believe it was an attempt by the Company to manipulate the expense or game the system. believe the change of the rate of return assumption was the result of short-term uncertainty in the equities market. This reasoning, however, violates the process in which one determines actuarial assumptions.Actuarial Standard of Practice No. 27 written by the Pension Committee of the Actuarial Standards Board states that in determining long- term rate of return assumptions, one should look at expected long-term returns and not give undue weight to recent past history. To change the rate of return assumption because of poor market performance ignores the fact that the markets have historically always trended back toward their long-term averages.Many companles were compelled to reduce their assumed returns during recent years, but these changes are premature given that the markets have historically always rebounded. Because the Net Periodic Pension Cost increased by approximately $10 million over a three-year period, and the change in assumptions accounted for only approximately $1.5 million of that increase, it was the downturn in equity markets between 2000-2002 that created the dramatic CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLI SH , D. STAFF (Di) 11 1161 lncrease.I do not believe it is appropriate for ratepayers to bear the burden of increased rates to cover pension expense that is created by a short-term downward trend in the market. That said, I believe this assumption change lssue is not the most important pension concern in this proceeding.The primary issue before the Commission involves the use of the ERISA required mlnlffium expense for rate recovery and not the Net Periodic Pension Cost. Why do you support the use of the ERISA required mlnlmum expense in this case? I support the ERISA mlnlmum contribution because the funding calculation method uses a smoothed value of plan assets.A smoothed value recognizes gains and losses on plan investments over a five-year period.While the market losses of 2000-2002 are phased into this calculation , so are the market gains of 2003.In contrast, FAS 87 expense accounts for market gains and losses in the year that they occurred.During periods of market volatility, the FAS 87 expense has the potential to fluctuate because it completely captures the galns or losses of a specific year. The ERISA minimum contribution should remain more consistent because only 20% of current market gains or losses are factored into the calculation together with 20% of each of the four previous years ' gains CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH , D. STAFF (Di) 12 1162 and losses.Thus, from a consistency standpoint the ERISA required minimum contribution is the most reasonable. Allowing Avista to recover more than the ERISA minimum contribution may cause over-recovery of pension costs paid and would not be reasonable. Has this Commission ever approved a penSlon expense other than NPPC 87 for ratemaking purposes? Just recently the Commission issued OrderYes. No. 29505 in Case No. IPC-03-13 in which the utility was allowed to collect only its cash contribution under ERISA as the pension expense included for rate recovery.The ERISA required mlnlmum contribution had been $0.00 for many years and was expected to remain $0.00 for quite some time. It was this expense level that was included in rates in Order No. 29505 at 21. 2 .Depreciation Expense Please explain Staff's position on the Company proposed depreciation expense. During the course of it's audi t, Staff noticed that the depreciation rates the Company proposed were significantly higher than rates more recently approved by this Commission.The Company has used a depreciation study from 1997 , which Staff believes may be outdated. Did you compare the depreciation rates proposed by Avista to other states that Avista operates in? CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH, D. STAFF (Di) 13 1163 Yes, I compared Avista ' s depreciation rates currently in place in Idaho to the rates that were recently approved by the Washington Utilities and Transportation Commission in Docket No. UE-991606.The rates approved in that docket were stipulated to by all parties. Why are different depreciation rates used in different states? Calculating depreciation rates is very similar to calculating pension expense.The calculations are based on numerous assumptions, such as remalnlng life, salvage value and removal costs.Though the formulas are qui te precise, the resul t is only as good as the assumptions.Therefore, two different depreciation experts could calculate different depreciation rates.However, logic dictates that plant in Idaho will not depreciate faster than the same plant in Washington. What is Staff's depreciation expense proposal for the Company in this case? Staff proposes that the Commission adopt the same depreciation rates that are effective in Washington.The result of this adjustment decreases Idaho s electric revenue requirement by approximately $676,000. How does Staff's proposed overall depreciation rates compare to Idaho s other large utilities? Staff's proposed composite depreciation rate for CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D. STAFF (Di) 14 1164 Avista s electric utility is 2.47 % This amount reasonable and within the range of other utilities currently operating in Idaho. Has the Company expressed its willingness to accept the same depreciation rates in effect in Washington for use in Idaho? Yes.In a meeting on June 2 , 2004, the Company gave a verbal agreement to accept Washington rates in Idaho as a means of mi t iga t ing the overall rate lncrease and for consistency of depreciation rates between states. 3 .Income Tax Please explain Staff's posi tion regarding lncome tax expense and deferred income tax. At issue is the Company s change in methodology whe~ accounting for income taxes.Due to recent changes by the Internal Revenue Service , certain plant and inventory that once were' required to be capitalized can now be expensed and deducted.In following the IRS's new allowable methodology, Avista calculated the amount of previously capitalized plant and inventory and deducted those amounts in a single year, resul ting in a windfall benef i t to the Company. Does Staff approve of this change in methodology? Staff believes that the Company prudentlyYes. applied for approval to change its methodology and receive CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLI SH , D. STAFF (Di) 15 1165 the benefits that accompanied that change.Since the Company is using a 2002 test year with pro forma adjustments, and the tax benefit was received in 2003, Staff believes it is appropriate to make a pro forma adj ustment to reflect deferred income tax.Inclusion of the deferred income tax as a pro forma adj ustment to rate base allows customers to receive a portion of this benefit now since the tax expense will increase and the deferred tax balance will decrease in the future as the timing difference turns around. Is the Company proposlng to keep this benefit for shareholders? The Company normalized the benefit and to that extent, ratepayers would have received the proper benefi t had this windfall occurred prior to the test year.For this reason deferred income tax is pro formed in Staff' proposal. Please explain normalization. Normalization is a distinct method of reflecting income tax expense ln a regulatory environment.Using this method, all lncome tax costs related to items in a current period will be computed, whether paid in the current year or paid in a later year.This normalization method creates a deferred income tax expense and the associated accumulated deferred income tax liability is subtracted CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D. STAFF (Di) 16 1166 from rate base.The rate base reduction provides the benefit currently to customers.However, these timing differences will reverse in the future, and at some point the tax expense deductions will turn around and taxes will increase causing customer rates to increase.Without Staff's pro forma adjustment, customers would pay too much in rates for taxes over time. Are customers golng to pay higher rates because of this accounting change? Wi thout Staff's proposed adj ustment, yes.Part of the rates paid by prior and current customers included an amount for income tax expense.The Company recal cul a ted its reduced income tax expense for prior years and collected the refund, so customer rates were higher than necessary in past years.However, Staff is not trying to recapture past customer overpayments, but rather prevent customers from having to pay twice when the timing differences reverse themselves.Changes in the deferred income tax account will reflect these differences. What do you propose to ensure that customers are not harmed by future tax increases resul ting from this methodology change? Avista has normalized the 2003 tax methodology change that resul ted in a windfall.Therefore, tax expense after 2003 will be properly reflected in the deferred CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH , D. STAFF (Di) 17 1167 lncome tax balance and future tax expense.Howeve r , the 2002 test year does not reflect normalization of the 2003 tax methodology change going forward. Therefore, Staff has increased the Idaho electric jurisdictional portion of the Company s deferred income tax balance, thus reducing total rate base by $9,966 000.This incorporates the pro forma effect of the tax methodology change in the 2002 rate base. Staff Exhibi t No. 122 shows the adj ustment amounts as calculated by the Company and provided to Staff in response to Product ion Request No. 218.The net effect of this adjustment on the Idaho electric revenue requirement is a reduction of $1 442 000. Legal Expenses Please describe Exhibi t No. 123. Exhibit No. 123 is a list of legal expenses that Staff proposes to remove from the electric test year expens e s .Line 1 of Exhibit No. 123 removes $14 035 from the test year for legal expenses allocated to Idaho for the operations of Avista Labs.These expenses were incurred by the subsidiary and should be directly assigned to that subsidiary.Line 2 removes $1 326 from the test year legal expenses allocated to Idaho related to the operations Avista Communications.Again , these expenses were incurred by the subsidiary and should be directly assigned to that subsidiary. CASE NOS. AVU-E- 04 -l/AVU-G- 04-06/21/04 1168 ENGLISH , D. STAFF (Di) 18 Line 3 of Exhibi t No. 123 removes from the test year $74 363 in legal expenses allocated to Idaho that the Company incurred during the bankruptcy proceedings of Enron Corp.Though these expenses were prudently incurred , they were an extraordinary expense that the Company will not incur beyond the test year.Therefore, Staff has removed Idaho s jurisdictional allocation of these expenses. Line 4 of Exhibi t No. 123 removes from the test year $478,980 in legal expenses related to the Federal Energy Regulatory Commission (FERC) investigation into electrici ty trading practices.Again, though the Company may have prudently incurred these expenses, the investigation has been completed and these expenses are not likely to recur beyond 2003. Please explain the FERC investigation and why these expenses should not be included in customers ' rates. In February 2002 , the FERC initiated a fact- finding investigation of potential manipulation of electric and natural gas prices by Avista Corp. and its affiliate Avista Energy in the California energy markets.The FERC was specifically interested in whether or not Avista Corp. and any of its affiliates participated in trading strategies that were similar to those practiced by Enron. Avista incurred significant legal expenses defending itself and allocated $478,980 to Idaho s electric jurisdiction. CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH , D. STAFF (Di) 19 1169 In April of 2004, after filing its Application with this Commission to increase base rates , Avista Corporation received notice from the Federal Energy Regulatory Commission that its investigation into any alleged improprieties committed by Avista Corporation and its affiliates had been concluded.The Federal Energy Regulatory Commission cleared Avista of any wrongdoing. Given that these activities should not be associated with the normal provision of electrici ty and should not recur in the future, Staff has removed these expenses on the grounds that. they are non-recurring.However, the Company revenue requirement still includes a substantial level of other legal expenses for Idaho s electric jurisdiction. Miscellaneous Expenses Please explain Exhibi t No. 124. Exhibit No. 124 lists several miscellaneous expenses discovered during Staff's audit that Staff believes are inappropriately charged to ratepayers.These expenses include such items as Christmas and Fourth of July parties for employees, and contributions to various charities and social organizations that promote the Company s public image or should be allocated to affiliates. The largest single expense item on the list is expenses incurred by Avista Corporation pertaining to CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLI SH, D. STAFF (Di) 20 1170 corporate strategy.A review of this report indicated that approximately 75% of the report dealt with non-regulated operations of Avista Corporation.Staff also reviewed the minutes of the Board of Directors meetings to evaluate the percentage of the Board's time spent discussing non- regulated operations for this report.Staff believes that corporate strategy benefits all subsidiaries of Avista Corp, regulated and non-regulated alike.Therefore, Staff has allocated 75% of these expenses to affiliates. Does this conclude your testimony regarding Avista Corporation s Application to increase its base rates for electrici ty in Idaho? Yes. GAS SECTION Pension Expense Did Staff make any adjustments to pension expense for Idaho s gas jurisdiction? Avista included an adjustment increase ofYes. $1 70,068 for Idaho gas operations that reflects the use the 2004 estimated Net Periodic Pension Cost.Based on the arguments previously mentioned in Section 1 of my electric testimony, Staff has adjusted the Company s proposed 2004 estimated $14 million pension expense to the 2003 ERISA required minimum contribution of $8,694 685.This equates to an Idaho gas jurisdiction amount of $320,409.The CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLISH, D. STAFF (Di) 21 11 71 effect of this adjustment reduces the Idaho gas revenue requirement by approximately $214 000. 2 .Depreciation Expense Please explain Staff's adjustment to depreciation expense for Idaho s gas jurisdiction. As I discussed in Section 2 of my electric testimony, the Company has accepted rates in other states that are significantly less than those rates booked in Idaho.By applying the rates approved in Washington State to Idaho s gas jurisdiction, the proposed revenue requirement is reduced by $44 000. . . Income Tax Did Staff take issue wi th the treatment of the income tax methodology change and pro form the associated deferred income taxes in this case for Idaho s gas jurisdiction? The recent change in methodology discussedYes. ln Section 3 of my electric testimony also applies to gas plant and inventory.Again, because the test year in this proceeding is 2002 , and the tax methodology change was made in 2003, there is a timing difference making a pro forma adjustment necessary for customers to receive any portion of this tax benefit in this case.Staff has pro formed the change in the deferred income tax amount in rate base to reflect known and measurable changes in deferred taxes and CASE NOS. AVU-04-1/AVU-04- 06/21/04 ENGLI SH , D. STAFF (Di) 22 1172 therefore capture this tax change on a golng forward basis. Staff's adj ustment to the deferred tax balance reduces Idaho s gas jurisdictional rate base by $2 639,000. The net effect this adjustment has on revenue requirement is a reduction of $382 000.Exhibit No. 125 prepared by Avista ln response to Production Request No. 218 illustrates the calculation for this adj ustment. Legal Expenses Does Staff take exception to any legal expenses proposed to be recovered from Idaho gas customers in this proceeding? During the course of our audit, StaffYes. discovered several legal expenses that should have been directly assigned to affiliates or were for extraordinary events that will not recur , similar to the arguments listed in Section 4 of my electric testimony.Specifically, Staff discovered $16 537 in legal fees allocated to Idaho s gas jurisdiction related to the bankruptcy filing of Enron Corporation.Other legal fees removed from test year expenses were $3,136 and $303 incurred by Avista Labs and Avista Communications respectively but were allocated to Idaho s gas jurisdiction.These expenses and the total adj ustment are shown in Exhibi t No. 126.This adj ustment reduces the Idaho gas revenue requirement by $19,976. CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D. STAFF (Di) 23 11 73 Miscellaneous Expenses Do you have any other adj ustrnents to Idaho s gas jurisdiction? There were several miscellaneous expensesYes. pertaining to the promotion of corporate image , holiday lunches and charitable organizations that Staff believes were mistakenly included above-the-line.These expense reductions are listed in Exhibi t No. 127 and reduce Idaho gas revenue requirement by $110 650. Does this conclude your direct testimony in this proceeding? Yes, it does. CASE NOS. AVU-04-1/AVU-04-06/21/04 ENGLISH , D. STAFF (Di) 24 1174 (The following proceedings were had in open hearing. (Staff Exhibit Nos. 121 through 127 having been premarked for identification , were admitted into evidence. MS. NORDSTROM:Tender this witness for cross-examination. COMM IS S IONER KJELLANDER:Mr. Purdy. MR . PURDY:No questions.Thank you. COMMI S S IONER KJELLANDER:Mr. Cox. MR . COX:No questions.Thank you. COMM IS S lONER KJELLANDER:Mr. Ward. MR . WARD:No questions. COMMISSIONER KJELLANDER:Mr. Meyer. CROS S - EXAMINA T I ON BY MR. MEYER: Good morning.The subj ect I d like to discuss with you is pensions and your adjustment. I thought so. Yes, based on ERISA. In regard to pensions, arenl t you suggesting that the Commission deviate from FAS 87 as a methodology and essentially accept an ERISA calculation? 1175 HEDRI CK COURT REPORTING P. O. BOX 578 , BOISE , ID 83701 ENGLISH (X)Staff Yes, that I s correct.I believe that the ERISA calculation is more suitable for regulatory proceedings. Has the FAS 87 methodology been accepted by this Company or was it approved as recently as 1999 by this Commission? It was , and it was also rej ected as recently just two months ago. That brings us up to date. On page 5 , line 7 through 15 of your direct , you argue that the actual return on investment for pension plan assets is not known and measurable, and, therefore, the change to an eight percent ROA - - or , return on asset - - assumption should be rej ected.Is that correct? Though your conclusion may be correct, I think you re kind of mischaracterizing my testimony.What 11 stating on page 5 is that the Company was using a 2004 estimate for pension expense which increased assets by a 3.88 percent during 2004.The 2004 investment return is not known and measurable , so I proposed to use something that was a little more known and measurable from the end of the year 2003 actuarial reports. But as we then move forward in your testimony, at page 7 , you explain the ERISA calculation.Are assumptions utilized in your ERISA calculation? Assumptions are utilized in all pension 1176 HEDRI CK COURT REPORTING O. BOX 578, BOISE , ID 83701 ENGLISH (X)Staff calculations. And are saying with any degree of confidence that those assumptions in your ERISA calculation are known and measurable? Well, the assumptions used in the ERISA calculation are definitely estimates by the nature of the meaning of the word " assumptions," but they are the same assumptions that the Company is using in their FAS 87 pension expense. Now , if you turn to page 9, lines 6 through 20 -- I m sorry, was that I m sorry, page 9, lines 6 through 20, there I s discussion about assumptions, is there not, and don t you testify at line 17 , page 9, that, quote, The calculation methodologies consist of using inaccurate data and speculative assumptions and running them through an overly precise formula to produce a cost calculation? Yeah, that happens to be the nature of actuarial work. And then you continue on: Therefore , there is no accurate contribution value and we are forced to rely on a number that is produced by the calculations? That is correct. And then without belaboring this, you go on to 1177 HEDRICK COURT REPORTING P. O. BOX 578, BOISE, ID 83701 ENGLISH (X) Staff say: Given this speculative nature of penslon contributions, I believe it is wise for the Commission to reserve some discretion in determining amounts to be recovered through rates based on the individual facts and circumstances of each case. Is that correct? That is correct.And if you would ike to use a six-year average on pension expense , I would support that too. Now , when you - - when you re testifying that the calculation methodologies consist of using inaccurate data and speculative assumptions, I gather there that you were speaking more broadly in terms of both the FAS 87 and the ERISA? Tha t is correct.Again , that I s the whole nature of actuarial work. At page 10 , isn t your rationale from movlng away from the previously authorized FAS 87 methodology and to an ERISA calculation based, at least in part , on the relative size of the Company I s rate request? , that I s not correct.I may have mentioned that given the size of the rate request, that the Company should be doing things to mitigate that to decrease the impact that it has on its customers, but that is certainly not the main argument that I I m trying to make in my testimony. The Company I s net request - - and I I m not 1178 HEDRICK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 ENGLISH (X)Staff suggesting this as de minimis by any means - - but the net request as per rebuttal is about 8.6 percent overall.Isn't that true? I m sorry? The Company I S lncrease in revenue requirement on a net basis is about 8.6 percent as proposed through our rebuttal case? Well , I don I t really look at the net numbers. believe the increase is actually a gross of about 16 percent and that would be phased in over two years, so to artificially claim that there I s a net increase of 8.6 for one single year just doesn t seem to be representationally fai thful. But just in terms of the call it the arithmetic if you will , Staff I s recommended proposal on a net basis again is about 2.4 percent? I m sorry, I didn t hear your number. 2 .4 percent? On a net basis? Yeah. Increase? Yeah. I don t believe that I s correct.Again , I very rarely look at net and Fair enough.Lastly, in this area, you argue that the appropriate pension expense amount should be 1179 HEDRICK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 ENGLI SH (X)Staff determined by the mlnlmum amount the Company was legally required to contribute to the plan versus the FAS 87 expense level.Correct? Tha t is correct.There are several di f f erences between the ERISA calculation and the FAS expense that bel ieve the - - any customers would be penal i zed by paying more than the ERISA minimum contribution. Would you agree that the minimum contribution the amount, almost by definition , that a Company must fund in order to avoid a funding deficiency? Yes, that would be the defini tion , as stated in Internal Revenue Code 412. And would you agree that prior to 2002 Avista made the minimum required contribution to the plan? That is correct. And would you agree that starting in 2002 , and based on expectations of higher annual required minimum contributions for the next several years, Avista contributed more than the minimum in order to essentially smooth out future cash outlays? I would accept your statement , yes. And that was designed to achieve a fully-funded plan over time.Correct? Well , that apparently seems to be what their intent ion was according to Mr. Falkner's rebut tal , al though I 1180 HEDRICK COURT REPORTING P. O. BOX 578, BOISE, ID 83701 ENGLISH (X)Staff disagree with it. Don I t you propose though a reduct ion of the Company I S proposed pension expense amount from 14 million to 7 million based on your understanding of the minimum contribution for 2003? That is correct. Isnl t it true, however , that the 2003 minimum amount was only determined in 2003 at that level after Avista had already contributed more than the minimum required amount in 2002? That may be true, but I would say to that, according to Mr. Falkner I s rebuttal testimony, that they had made that contribution to achieve a fully-funded plan over time. I think what I s being misunderstood there is that, over time, all pension plans should become fully funded given performance of the investments in the plan , which anytime an investment return in the plan is greater than that of the return on asset assumption , your plan is gradually becoming more and more fully funded.So I do believe that additional $4.5 million funded by Avista into the pension plan was extremely premature. Well , but if the Company had not - - if the Company had not contributed more than the minimum amount in 2002, wouldn t the minimum contribution requirement for 2003? 1181 HEDRICK COURT REPORTING P. o. BOX 578, BOISE , ID 83701 ENGLISH (X)Staff have been $14 million? That I s the amount that Mr. Falkner states in his rebuttal testimony. And aside from quarrels over the logic, that I s the ari thmetic.That would have been the minimum requirement. Correct? Well , I couldn t tell you that that would be the arithmetic because any pension calculation is extremely convoluted and done either with mass numbers of Excel spreadsheets or computer software, so -- MR . MEYER:That I S all I have.Thank you. COMMISSIONER KJELLANDER:Thank you. Were there any questions from members of the Commission? COMMISSIONER SMITH:Jus t one. COMMISSIONER KJELLANDER:Commissioner Smith. EXAMINATION BY COMMISSIONER SMITH: Yes, Mr. English , looking at Exhibit 124, you stated in your testimony at page 21 that the single largest item deal t wi th the corporate strategy.Was this that Bain and Company that I s under Other Miscellaneous? Sorry.You I re referring to Legal Expenses, 1182 HEDRI CK COURT REPORTING P. O. BOX 578 , BOISE , ID 83701 ENGLISH (Com)Staff Certain Miscellaneous Expenses. That is correct, I believe. For the $1.1 million? Correct. And then the Avista summer picnic was $29 , OOO? I believe that was the Idaho jurisdiction amount. That number was given to us by Avista. Then what I s the column that says Electric? Let me find my exhibit before I answer any more questions. That I S a good idea. , yeah , there is a Total Transaction column and there I S a Electric column. So what is the Electric column? This Electric column is these transactions were based on a total Company-wide basis, and the Electric column that percentage that has to do with electric utilities. And then down below , as you see, there is a allocated factor to Idaho, which this one I m looking at is on line 40 - - 48, which is 35.44 percent.That takes the entire Avista Electric amount and then allocates 35 percent of that to Idaho. Under the Other Miscellaneous, I don t see an allocation under that. Those numbers were given to us by Avista as 1183 HEDRICK COURT REPORTING P. o. BOX 578, BOISE, ID 83701 ENGLISH (Com)Staff Idaho I S - - as Idaho I s electric jurisdiction portion. So some numbers that we asked for were given to us on a total system basis and some of those were given to us on an Idaho electric basis. So the Avista summer picnic, $29,246 was Idaho only? No, I am sorry.I disagree.The Idaho is actually 7 391.The 29,000 is a system-wide number. COMMISSIONER SMITH:Thank you.That I S all I have. COMMISSIONER KJELLANDER:Any further questions from members of the Commission? I f not, we re ready for redirect. MS. NORDSTROM:Thank you. REDIRECT EXAMINATION BY MS. NORDSTROM: Mr. English, during cross-examination , Avista talked about using an average pension expense.Does Staff obj ect to using an averaging method when calculating pension expense? Well , under the ERISA method - - and I need to clarify the difference between ERISA and FAS 87.When we refer to FAS 87 , we re referring only to an expense which is just a 1184 HEDRI CK COURT REPORTING O. BOX 578, BOISE , ID 83701 ENGLISH (Di)Staff number that is booked on the - - recorded on the Company I s financial statements.The ERISA contribution , or the ERISA calculation , is an actual contribution , and that is an actual that the Company has to contribute to the plan or the amount that the Company does contribute to the plan.So when I refer to "ERISA " I'm referring to a contribution.When I refer to "FAS 8 7 ," I'm referring to an expense. The Company I s actuarial cost method used under the ERISA calculation is a projected unit credit method which does use an asset smoothing mechanism in there where the earnings and losses of any given year are spread out over a five-year period, so it uses this smoothed asset value when determining the proj ected benefit obligation in the future. Under FAS 87, it is mandated that a pro rata unit credit actuarial cost method is used, and that method does not allow for the smoothing of assets.So when Mr. Falkner stated that their Company uses this averaging method, he was, in a way, correct when he I s referring to the contribution method but he was incorrect when he was referring to FAS 87 by using that smoothed averaging affect. Your cross-examination testimony also discussed return on asset assumptions that were used in your various calculations.What was the average actual return on assets that the Company is putting forth in this case? The Company is requesting a return on asset 1185 HEDRICK COURT REPORTING O. BOX 578, BOISE , ID 83701 ENGLISH (Di)Staff assumption of eight percent. And to clarify, what is Staff recommending? What Staff is actually recommending, that we use the ERISA contribution method.However , in my testimony, when we looked at their FAS 87 contribution , we did note that their return on asset assumption was reduced from nine percent to eight percent. Did Staff at any time round up the actual return on assets? Yes.There was some confusion in my testimony and Mr. Falkner I s rebuttal.Mr. Falkner states that I rounded up from 9.22 to 10 percent, but at the time the actuarial assumption was changed , the assets -- which was for the 2002 planning year - - the calculation was made on January 1st of 2002, so just the average of the return on assets through 2001 was actually 9.91 percent, and that was the number that was rounded to 10. Thank you. MS. NORDSTROM:No further questions. COMMISSIONER KJELLANDER:Thank you. And thank you, Mr. English , for your testimony, and you are excused. (The wi tness left the stand. COMMI S S lONER KJELLANDER:And at this point we I 11 take about a 15-minute break, and we I 11 be back to conclude 1186 HEDRI CK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 ENGLISH (Di)Staff with Staff I S witnesses. (Recess. COMMISSIONER KJELLANDER:All right, we re ready to go back on the record and, Mr. Woodbury, we re ready for your next wi tness. MR. WOODBURY:Thank you, Mr. Cha i rman .Staff would call Rick Sterling to the stand. RICK STERLING, produced as a wi tness at the instance of Staff , being first duly sworn , was examined and testified as follows: DIRECT EXAMINATION BY MR. WOODBURY: name,spe 11 Mr. Sterling, will you please state your full your last name for the record? Rick Sterling, S-L- I -N - And for whom do you work and in what capacity? I work for the Idaho Public Utilities Commission as a Staff englneer. And in that capaci ty, did you have occasion to prefile direct testimony in this case consisting of 36 pages, and four exhibits, 128 through 131? Yes. 1187 HEDRICK COURT REPORTING O. BOX 578 , BOISE , ID 83701 STERLING (Di)Staff And have you had the opportuni ty to review that testimony and those exhibi ts prlor to this hearing? Yes , I have. And is it necessary to make any changes or corrections? No. If I were to ask you the questions set forth in the testimony, would your answers be the same? Yes , they would. MR. WOODBURY:Mr. Chairman , I I d ask that the testimony be spread on the record as if read, and the Exhibits 128 through 131 identified. COMMISSIONER KJELLANDER:Thank you, Mr. Woodbury.wi thout obj ection , we would spread the testimony across the record as if read, and admit Exhibit 128 through 131. (The following prefiled direct testimony of Mr. Sterling is spread upon the record. 1188 HEDRI CK COURT REPORTING P. O. BOX 578, BOISE , ID 83701 STERLING (Di)Staff