ANDERSON--PCA TESTIMONY.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION )
OF IDAHO POWER COMPANY FOR A )
REFUNDABLE EMERGENCY ENERGY ) CASE NO. IPC-E-01-07
CHARGE FOR THE RECOVERY OF )
EXTRAORDINARY POWER SUPPLY )
EXPENSES. )
)
)
IN THE MATTER OF THE IDAHO POWER )
COMPANY APPLICATION FOR AUTHORITY )
TO IMPLEMENT A POWER COST ) CASE NO. IPC-E-01-11
ADJUSTMENT(PCA)RATE FOR ELECTRIC )
SERVICE FROM MAY 1, 2001 THROUGH )
MAY 15, 2002. )
)

IDAHO POWER COMPANY

DIRECT TESTIMONY

OF

Darrel T. Anderson

Q. Please state your name, business address and present occupation.
A. My name is Darrel T. Anderson and my business address is 1221 West Idaho Street, Boise, Idaho. I am Vice President of Finance and Treasurer of Idaho Power Company. I am also Vice President of Finance and Treasurer for IDACORP.
Q. What is your educational background?
A. I graduated from Oregon State University with a Bachelor of Science Degree in Accounting and Finance in 1979. I am a licensed CPA in the state of Oregon (#4312 inactive). Before joining Idaho Power Company in 1996, I was the Chief Financial Officer of Sisters of Saint Mary of Oregon. Prior to joining the Sisters of Saint Mary of Oregon I was a senior manager of Audit Services for Deloitte & Touche and was a firm-designated specialist in electric and gas utility operations. I left Deloitte & Touche in 1995.
Q. When did you come to Idaho Power and what positions have you held at Idaho Power?
A. I joined Idaho Power in 1996 as a Controller in the Finance Department. In 1998, I moved to Lacey, WA, where I served as Executive Vice President of Finance and Operations at Applied Power Corporation, a subsidiary of IDACORP. In April 1999 I became Idaho Power Company’s Vice President of Finance and Treasurer. In this capacity I am responsible for all aspects of financial and treasury management.
Q. Are you a member of the Risk Management Committee (RMC)?
A. Yes, I am the chairperson of the RMC. In this capacity I am responsible for conducting the meetings, managing the agenda and recording the minutes of the meetings.
Q. When was RMC formed?
A. The RMC was originally formed in 1996 in response to the Company’s decision to enter into the non-regulated speculative commodity trading business.
Q. What is the purpose of the RMC?
A. The purpose of the RMC is to maintain general oversight over all commodity trading and financial risk management operations. The committee consists of officers of Idaho Power Company and IDACORP. The committee meets as required to review exposure reports, profit and loss reports, credit and trading limits, and trading strategies and objectives. As noted previously, the origination of the committee was a direct result of the Company’s decision to participate in the non-regulated speculative commodity energy trading business. Prior to the formation of the committee, there was no formal oversight group of the power supply activities of Idaho Power Company other than that of the management personnel responsible for the unit’s activities. Over a period of time it became evident that some of the same risks and issues that were associated with the non-regulated speculative trading activities were also evident on the regulated side of the business. In 1999 the RMC began to expand its role to look at issues surrounding the supply and demand side of the Company’s regulated business. During the period between 1999 and June 2001, the business practices related to the review of the regulated operations evolved. Process improvements have been focused on the gathering and summarizing of relevant data that impacts the operating system, including supply and demand requirements, market price data, risk mitigating products, and potential hedging strategies.
Q. Please discuss the procedures that the RMC follows when reviewing the energy requirements for Idaho Power Company system operations.
A. The RMC reviews operating proposals prepared by Idaho Power Company personnel. The proposals include assumptions for supply and demand requirements based on data available at that time. Based on the results of this data, the collective experience of the committee members, other pertinent internal and external data, and an in-depth discussion between committee members, decisions are made to determine the need to buy or sell energy. Numerous factors are considered in coming to these decisions including weather, expected load requirements, current snowpack, transmission availability, pricing and the overall system portfolio position. When it is determined that an action is required, a recommendation is made by a committee member and put to the entire RMC for a vote. A majority is required to confirm a transaction. Once a decision has been reached, the traders that would consummate the transactions are notified either by written hard copy memo or by e-mail. Historically, the notification includes the following: (a) the volume, (b) the time period of the transaction and, (c) other relevant instructions such as price ranges, and/or time periods to complete the purchase.
Q. Explain the circumstances surrounding what the Commission in Order No. 28722 characterizes as the “November transaction.”
A. The “November transaction” refers to an entry in the minute records that indicates the approval of a purchase transaction in the amount of 75 MW for the month of January 2001 at a price that is subject to the judgment of the head trader.
Q. Describe the events surrounding the “November transaction.”
A. The RMC, at its meeting on November 21, 2000, reviewed a proposal that indicated a net long position of 1,300 MW through the balance of the 2000-2001 Power Cost Adjustment (PCA) year. The proposal indicated a net short position during this period of 80 MW and 63 MW for the months of December 2000 and January 2001 respectively. The RMC reviewed various factors affecting the Company’s position in its portfolio and initially concluded that a hedge of up to 75 MW for January 2001 should be considered, with price subject to the discretion of the head trader. In further discussions at the same meeting, a number of additional factors were discussed that are noted below:
(a) The proposal presented at the meeting indicated a surplus position during the balance of the year, which when considered on a portfolio basis for the system, indicated adequate length overall for the system.
(b) The pricing for January 2001 was in the $150-$170 per MWh range at the time of the meeting which when compared to historical amounts for January 1999 and January 2000, (ranged between approximately $15 and $25 for the respective periods) was 6-10 times recent historical prices.
(c) The initial snowpack reports for the 2001 water year indicated snowpack conditions that were on track with or slightly below normal conditions. The November snowpack numbers are very early returns and are not necessarily conclusive as to the type of water flow that can be achieved in the forward months.
Q. What effect did these factors have on the RMC deliberations?
A. These factors combined to make the committee reconsider its decision in the same meeting and conclude that the original transaction should not be considered at this time based on the factors I have just discussed.
Q. Did prices rise significantly after the November meeting indicating the “November transaction” should have been consummated.
A. Given the benefit of hindsight and therefore knowing about the anticipated December cold spell, the “Siberian Express”, and the “California energy crisis,” along with the resultant run up in prices in the region, the Company may have reconsidered its decision to hedge the deficits in January 2001. I say possibly, because being short in a given period may not be detrimental to the overall results, because a run-up in prices when a company is in an overall long position could be of a larger benefit to the organization than covering a short position for a particular month. For example, if the Company elects to cover a specific short position, it in effect increases the entities overall long position and will correspondingly increase the Company’s overall risk to falling market price changes. Subsequent to the meeting on November 21, 2000, the Company entered into another transaction that supports the above philosophy when it sold some of the First Quarter 2001 length and purchased Third Quarter 2001, thereby locking in a spread between these prices for the benefit of the retail customers. This transaction was executed during the week of November 30, 2000. Had the positions reflected significant portfolio shortages for the First Quarter 2001, this transaction would not have been completed.
Q. Given the above discussion, what is your explanation of what happened in the documentation process of the November 21, 2000 meeting?
A. As chairperson of the RMC, I was also responsible for taking the minutes of the meetings. In this capacity, I took hand notes and then later recorded the minutes in typed form. In this instance, I recorded the discussions of the request to hedge the position but did not record the subsequent reversal of the decision. As noted earlier, the RMC process has evolved over time and the minute entries did not go through a formalized approval process by the committee. Had this review process been in place, the error in the minutes would have been noted and corrected and we would not have an issue related to this item.
Q. In addition to the discussions that took place at the RMC meeting is there any other indication that this issue is nothing more than an error in the recording of the RMC minutes?
A. Yes. In addition to the discussions that took place at the RMC meeting there was a follow-up process that allowed for a check and balance when a formal decision was made. The traders would not execute a transaction without some form of written authorization (either written memo or e-mail) from myself or Rich Riazzi, Senior Vice President of Marketing and Generation. The head trader also followed up with me when a trade had been approved by the RMC to ensure that the terms of the transaction were what had been approved. Consistent with the ultimate decision of the RMC, no transaction was executed for this item by the traders.
Q. In your opinion is it reasonable to penalize the Company $7,976,701 for an error in the recording of the RMC minutes?
A. No.
Q. Please explain why the RMC did not engage in more hedging of power supply costs in November and December of 2000, and January and February of 2001.
A. I would first point out that prior to the time period referred to, the Company had been proactive in hedging system requirements to the benefit of the Idaho retail customer. I have previously described the conditions that existed in November. Looking beyond November, there were a number of issues that created a period of uncertainty in the regional energy markets. The “California energy crisis,” the threat of a “Siberian Express”, a cold spell in December that did not materialize, and a gradually declining water situation, all put heavy pressure on regional energy prices.
Q. Did water conditions play a significant role during this period?
A. Yes. With regard to the water situation, Idaho Power Company is predominately a hydro-based utility and therefore heavily reliant on precipitation and snowfall in our region. The snowpack generally accumulates during the water year period between November and March. In a normal year we can expect up to 60 percent of our generation to come from hydro resources. As we monitored the snowpack accumulation during this period, the Company closely analyzed its power supply position to determine the need and cost to hedge potential shortfalls, since regional prices were already very high. The RMC looked at the overall power supply position to determine the needs of the Company and it was not until mid-January and early February 2001 that it became evident that normal or near normal snowpack accumulation was not likely to materialize in 2001. However, even then the full extent of the drought was not known. Given the available information, the Company took measures to begin mitigating the lack of precipitation in our region. These measures eventually included both demand and supply options as alternatives to market purchases. Because of the planning (and sometimes approval) time required to develop the mitigation measures, these measures could not be implemented until after February 28, 2001. The measures that were instituted are well documented. For example, load reduction programs, energy purchases, the institution of additional temporary generating resources, and conservation advertising.
Q. In your opinion, were the power supply activities of the Company reasonable and prudent for the period November and December of 2000 and January and February of 2001?
A. Yes. Because the Company is a predominantly hydro-based system, it is subject to the variations of weather much more so than a thermal-based system. The benefit of hydro can also become the detriment due to the accumulation or lack of accumulation of snowpack and precipitation. As I have already discussed, with regional energy prices already at levels that had never been experienced before, and with an uncertain water situation, I believe that the actions of the Company in light of the circumstances as we found them were reasonable and prudent. Once the Company had knowledge that snowpack would be low and that prices for power supply were not going to decline, the Company took active measures in the form of both supply and demand side actions to reduce the Company’s power supply costs. Those actions could not be implemented until after February 2001.
Q. Does that complete your testimony?
A. Yes.

ANDERSON, DI 6
Idaho Power Company