GRIBBLE--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

DENNIS C. GRIBBLE

Q. Please state your name, business address and present occupation.
A. My name is Dennis C. Gribble and my business address is 1221 West Idaho Street, Boise, Idaho. I am employed by Idaho Power Company as Assistant Treasurer.
Q. What is your educational background?
A. I graduated in 1975 from Boise State University, Boise, Idaho, receiving a Bachelor of Business Administration degree in Economics. In 1978, I graduated from Boise State University, Boise, Idaho, with a Master in Business Administration. In 1989, I completed the University of Idaho's Public Utilities Executive Course in Moscow, Idaho. I have also attended numerous seminars and conferences on accounting and finance issues related to the utility industry. I am a Certified Cash Manager.
Q. Would you please describe your business experience with Idaho Power Company?
A. In 1979, I was employed by Idaho Power Company and assigned to the Systems Development Department as an Associate Systems Analyst. In June 1982, I transferred to the Finance and Reporting Services Department as a Business Analyst. In June 1986, I was promoted to a Business Analyst Supervisor. In March 1991, I was promoted to Manager of Financial Services. In January 1992, I was promoted to Manager of Corporate Accounting and Reporting. In 1996, I was promoted to Controller–Financial Services and in May 1999 I was promoted to my current position as Assistant Treasurer.
Q. What are your duties as Assistant Treasurer?
A. The Assistant Treasurer assists in setting the treasury department strategic goals, objectives, and budgets. Among my duties I oversee the direct financial planning, procurement, investment of funds for Idaho Power, and supervision of corporate liquidity management.
Q. What is the purpose of your testimony?
A. I will be addressing the cash flow implications to the Company of deferring costs incurred in one period for recovery in future periods. Also, my testimony will discuss the financial implications resulting from a regulatory authority denying recovery of all or a portion of costs, which the Company believed had previously been approved by the same regulatory authority for deferral and recovery in a future period.
Q. What is the effect of denying all or a portion of costs deferred for recovery in a future period?
A. Current expenditures granted deferral for future recovery under accounting guidelines must be immediately recognized as an expense in the period that recovery is denied. Such an event could have a significant negative financial impact on the net income and cash liquidity of the Company.
Q. How has the Company financed the purchase of wholesale power acquired to serve its Idaho retail load for the period May 15, 2000 through February 28, 2001?
A. The Company has financed the purchase of wholesale power for its Idaho retail load during this period by utilizing its short-term borrowing capacity via the issuance of commercial paper.
Q. How does the Company record the financial transaction of issuing commercial paper used to pay for this wholesale power?
A. The cash proceeds received from these short-term loans are used to pay for the wholesale purchased power costs. These short-term loans are recorded as a liability on the Company’s balance sheet, indicating a claim on the Company by the creditors investing in its commercial paper.
Q. How did the Company plan to pay for these short-terms loans?
A. The Company planned to pay these short-term loans primarily from increased revenue as a result of the Power Cost Adjustment (PCA) in its Idaho jurisdiction.
Q. Does the Company record the purchase of wholesale purchased power under Generally Accepted Accounting Principles (GAAP)?
A. Yes. However, it is important to distinguish between the recording of these transactions under GAAP, the cash payments for wholesale purchased power, and the subsequent recovery of that cash. When the Company incurs wholesale purchased power costs to supply power to its Idaho retail customers, these transactions are classified as expenses (subtractions) in the financial reporting of net income, unless as I will discuss later, there is a regulatory order modifying this process. Typically the Company would have a cash inflow (revenues) available to offset these wholesale purchased power costs (expenses) in the period the purchase occurs. Regardless of the Company’s sources and timing of cash inflows, GAAP requires the Company to record an expense for the cost of wholesale power purchased in the period it occurs. Only if granted a special accounting order from the participating regulatory agency, will the Company be allowed to defer expenses for recovery in a future period. As an example, under GAAP the Company is required to immediately recognize the purchase of wholesale power as an expense, even though the cash inflows to the Company may not offset these expenses in the period the expense was incurred. Since this mismatch of expense recognition and cash flow typically places negative financial pressure on regulated utilities, regulatory authorities can issue an accounting order that allows the Company under GAAP to defer expense recognition from the period in which the expense was incurred for recovery in a future period. The accounting order issued by the regulatory authority must also provide an assurance of funding of the deferred expense. The Company’s current PCA in its Idaho jurisdiction is an example of such an accounting order that allows the Company treatment of power supply expenses differently than other entities not subject to regulation.
Q. Has the current PCA helped minimize the timing differences for the period (May 15, 2000 through February 28, 2001) you have referenced above?
A. Yes. Again, the PCA is based upon an accounting order granted by the Idaho Public Utilities Commission (IPUC) authorizing the Company to defer 90% of the Idaho retail jurisdiction’s extraordinary wholesale purchased power costs. The 90% of the Idaho jurisdiction is equivalent to approximately 75% of the total system extraordinary wholesale purchased power costs. This deferral authorizes the Company under GAAP to defer these expenses in essentially a holding account for future recovery. Each year, the Company then files the PCA with the IPUC for recovery of these deferred expenses. When the IPUC grants recovery, Idaho retail rates are then adjusted to recover the necessary cash expended for the deferred wholesale purchase power expenditures.
Q. What would be the financial implications to the Company if it did not have the PCA?
A. Unless the Company is granted a special accounting order such as the PCA, the Company could incur negative financial results and cash liquidity pressure due to the mismatch of immediate expense recognition (such as wholesale purchased power costs), and the cash inflow (revenues) necessary to support those expenditures.
Q. Has there been any discussions with the Company’s outside auditor or the Financial Accounting Standards Board (FASB) regarding the ability of regulated utilities to defer expenditures incurred in a current period to a future period?
A. Yes. Deferral accounting for regulated utilities falls primarily under the Statement of Financial Accounting Standards No. 71 (SFAS 71). SFAS 71 states, “For a number of reasons, revenues intended to cover some costs are provided either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, this Statement requires companies to capitalize those costs. If current recovery is provided for costs that are expected to be incurred in the future, this Statement requires companies to recognize those current receipts as liabilities”. SFAS 71 also indicates that, “Rate actions of a regulator can reduce or eliminate the value of an asset. If a regulator excludes all or a part of a cost from allowable costs and it is not probable that the cost will be included as an allowable cost in a future period, the cost cannot be expected to result in future revenue through the rate-making process. Accordingly, the carrying amount of any related asset shall be reduced to the extent that the asset has been impaired”. As SFAS 71 demonstrates, the major concern for the Company’s outside auditor and in general the accounting profession, is in validating the recoverability of costs that have been authorized for recovery in a later period (deferred). To the extent a regulator’s authorization for deferral is denied, GAAP would require the immediate expense recognition of those costs for financial reporting purposes.
Q. What would be the financial effect to the Company if costs it believed had been deferred by a regulatory authority for recovery in a future period were then subsequently denied by the same regulatory authority?
A. Under GAAP, those costs deferred for future recovery would be immediately recognized as an expense in the period that recovery was denied by the regulator. Such an event would place a significant downward impact on the net income of the Company for financial reporting purposes. Likewise, the Company would not have recovered the necessary cash to offset the expenses incurred, and would face negative financial pressure on its cash liquidity.
Q. Please describe the accounting entries if the Company is not permitted to recover the $59 million of deferred power supply costs.
A. The $59 million of deferred power supply costs are currently recorded on the Company’s books in Account 182.3 – Regulatory Assets. If not permitted recovery of these deferred expenses, the Company would be required under GAAP to credit $59 million to Account 182.3 – Regulatory Assets (to eliminate the deferral status) and debit $59 million to Account 557 – Other Power Production Expense (to record the expense). The resultant financial impact is a reduction of $59 million, shown as an expense to the Company’s income statement, in the financial reporting period that corresponds with the denial to recover the $59 million of deferred power supply costs.
Q. Does this conclude your testimony?
A. Yes.

GRIBBLE, DI 9
Idaho Power Company