Attch 5_IPCE9813_StaffComments.doc

BRAD PURDY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]

Street Address for Express Mail:
472 W WASHINGTON
BOISE ID 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO INCLUDE IN ITS PCA PROJECTION METHOD, COMMENCING WITH THE COMPANYS 1999 PCA FILING, RECENT EXPENDITURES FOR QF POWER PURCHASE CONTRACTS.
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CASE NO. IPCE9813

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its attorney of record, Brad Purdy, Deputy Attorney General, and in response to Order No. 27854 issued on December 31, 1998, submits the following comments.

BACKGROUND
On November 2, 1998, Idaho Power Company (Company) filed an Application with the Idaho Public Utilities Commission to revise its Power Cost Adjustment (PCA) mechanism. The revision requested by Idaho Power Company would update the power cost projection formula to include changes in PURPA contract costs that have occurred since the Companys last general rate case, Case No. IPC-E-94-5.

STAFF ANALYSIS
Staffs comments in this case are divided into two parts. Staff will first address an error in the way PCA true-up calculations are currently done that has become apparent in the review of the Companys current filing. Second, Staff will address the PCA projection formula. This is the appropriate sequence since the true-up error correction affects the correction of the PCA projection formula.
PCA True-up Calculation
As a result of reviewing the Companys filing it has become apparent to Staff that changes in PURPA QF contract costs are passed through the PCA true-up mechanism to customers at 100 percent while only 90 percent of the associated power supply benefits are passed back to customers through the true-up mechanism. Associated power supply benefits are reductions in system fuel costs and/or reductions in system purchased power costs and/or increases in system non-firm sales revenues. Staff believes that it was not the intent of the Commission to create this mismatch when the PCA was established. The Commission set the recovery of increased QF costs at 100 percent to reflect the fact that the Company was required by law to purchase this energy. It set the recovery of changes in other power supply costs at 90 percent to provide the Company an additional incentive to manage those costs. The case that established Idaho Powers PCA mechanism was largely about changes in power supply costs associated with water conditions. It is Staffs belief that the potential for large amounts of unrecovered ratepayer benefits due to the previously described mismatch was overlooked when the PCA was established.
Fixing the mismatch is simple. The remaining 10 percent of the benefits should be calculated and added back in the true-up calculation. This is demonstrated on Attachment A with four lines added in the QF Deferral section and enclosed in a box for emphasis. This is a hypothetical example demonstrating what the true-up calculations from the most recent PCA filing would look like with the Staff proposed change added. This change causes the PCA true-up calculations to capture an additional 10 percent of the estimated power supply benefits associated with increased QF energy. This 10 percent when combined with the 90 percent of QF benefits that are already captured in the PCA true-up calculation provides a fair balance to the 100 percent of QF costs also captured there.

The Companys quantification of additional normalized QF cost since the last general rate case is $17,768,080 per year. This represents a 52 percent increase in QF costs. The associated increase in normalized QF energy since the last general rate case is 255,813 MWh per year which represents a 45 percent increase in QF energy. The estimated power supply benefit of the increased QF generation is $4,308,000 per year and the 10 percent that is not currently captured in PCA true-up calculations is approximately $430,000. Idahos jurisdictional share of that amount is approximately $365,000.
PCA Projection Formula
Once the true-up spreadsheet is corrected as described above, the PCA projection formula can be designed. The goal of the projection formula should be to project the Companys power supply costs such that the end of year true-up is minimized. The projection formula consists of three parts. First, a regression equation that relates power supply costs to April through July streamflow runoff volumes into Brownlee Reservoir. This is the only part that has been allowed to vary in PCA projections to date. The second part of the PCA projection formula is the expected cost of QF contracts in the coming year. In all PCA filings to date, QF costs have simply been projected at their normalized base level even when it was known that they had increased substantially and that the increase would require a substantial end of year true-up. Third, projected power supply costs associated with FMC second block power are removed because FMC second block power is excluded from PCA treatment by Commission order.
I am proposing two changes in the QF contract cost projection portion of the formula. First, that the cost projection include the net cost of known QF contract changes since the base was established and second, that 100 percent of net cost differences be projected to be passed back to ratepayers. This is consistent with my previous recommendation that QF costs and benefits be trued-up at 100 percent. Costs and benefits of additional QF generation are to be captured in the projection as a net cost, costs less benefits. Attachment B is a hypothetical example, again taken from the Companys last PCA filing, which demonstrates these calculations.

The bottom half of Attachment B calculates the Net Cost of Additional QF Energy and adds it to Base QF contract costs to obtain Forecast QF Contract Costs. Forecast QF Contract Costs are carried to the upper portion of the page where they become the QF Contracts Forecast. The remainder of the calculations on the upper half of the page determine the PCA forecast Energy Rate with 100 percent of QF Contract net costs forecast to be passed to ratepayers and 90 percent of other power supply projections of cost to be passed to ratepayers.
Company Proposal versus Staff Proposal
Staffs proposal differs from the Companys in two material ways. The Companys filing contains no proposal to change the PCA true-up mechanism. By not changing the true-up mechanism, the PCA will continue to include 100 percent of increased PURPA costs and only 90 percent of the associated power supply benefits. Staff proposes to change the PCA true-up mechanism such that 100 percent of the power supply benefits associated with increased QF costs are captured along with 100 percent of the increased QF costs.
The Companys proposal for the projection is to include the total increase in QF costs, without any offsetting benefits, and to further project that 90 percent of those costs will be passed back to customers. By so doing the Companys proposal overstates the expected net costs actually captured in the true-up and causes a true-up difference which is carried into the following year. Staff proposes to project increased QF net costs and to further project the recovery of those costs at the 100 percent level which is consistent with the way that Staff proposes these costs be treated in the true-up calculation.

STAFF RECOMMENDATION
At the present time the PCA true-up mechanism captures 100 percent of additional QF costs incurred since the QF base was established in the Companys last general rate case but only 90 percent of the associated power supply benefits. Staff recommends that the Commission revise the PCA true-up calculations such that 100 percent of the power supply benefits associated with changes from base QF energy amounts are captured to partially offset 100 percent of the associated costs that are currently being captured. This can be done in the true-up in a two step process. The first step is to recover 90 percent of the benefits. The existing calculations already do this, therefore, no changes are needed. The second step recovers the remaining 10 percent of benefits. In order to accomplish this the four lines contained in the box on Attachment A must be added to the current true-up calculation.

Staff also recommends revision to the projection method used in the PCA. Staff recommends that differences in net costs, costs less benefits, between base and expected actual QF conditions be projected and passed on to customers at the 100 percent level. Attachment B to these comments demonstrates these calculations.
Staff further recommends that these PCA changes be implemented at the beginning of the next PCA year which is April 1, 1999.

Respectfully submitted this day of January 1999.

_______________________________
Brad Purdy
Deputy Attorney General

Technical Staff: Keith Hessing

BP:KH:jo\umisc\comments\ipce9813.bp

STAFF COMMENTS 5 January 14, 1999