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-
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(Di)HARMS, P
STAFF
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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-
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(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-
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(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
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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-
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(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-
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(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
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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-
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(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.
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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.
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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-
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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-
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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-
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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?
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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.
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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-
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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
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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-
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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
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(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-
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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-
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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-
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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-
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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.
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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.
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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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.
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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.
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