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Home My WebLink About20040415Volume VI.pdfBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION ORIGINAL IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO INCREASE ITS INTERIM AND BASE RATES AND CHARGES FOR ELECTRIC SERVI CE . ) CASE NO. IPC-O3- Idaho Public Utllnle$ CommissIon 0ffI0e of the SecretarY 'RECEIVED APR 1 5 2004 Boise, Idaho BEFORE (~rVf~~ COMMISSIONER MARSHA SMITH (Presiding) COMMISSIONER PAUL KJELLANDER COMMISSIONER DENNIS HANSEN PLACE:Commission Hearing Room 472 West Washington Boise, Idaho ii. ,'~ 1f: ~I: !!: DATE:March 29, 2004 VOLUME VI - Pages ~45 - 546 ;i~ . - ~Y-- "'" ,."'" :t~~8\~ff*1~~~":L0.f~?i~~~;~$~J~~~ili;~iI~l1flft:" " ',' ."Illi::~' ,'""'M'","""""'~- ""-",,, ~., , CSB'REpORTING Constance S.Bucy, CSR No. 187 17688 Allendale Road * Wilder, Idaho 83676 (208) 890-5198 *(208) 337-4807 Email csb~spro.net "-,, -_ u..... - -..---~---'-- ,., ' For the Staff:Lisa Nordstrom, Esq. and Weldon Stutzman, Esq. Deputy Attorney Generals 472 West Washington Bo is e , Idaho 83 72 0 - 0 074 Barton L. Kline, Esq. and Monica B. Moen, Esq. Idaho Power Company Post Office Box 70 Boise , Idaho 83707 -0070 RICHARDSON & 0 I LEARY by Peter J. Richardson, Esq. Post Office Box 1849Eagle, Idaho 83616 RACINE , OLSEN , NYE , BUDGE & BAILEY by Randall C. Budge, Esq. Post Office Box 1391 Pocatello, Idaho 83204-1391 Lawrence A. Gollomp, Esq. Assistant General Counsel U. S. Department of Energy 1000 Independence Ave., SWWashington, DC 20585 McDEVITT & MILLER by Dean J. Miller, Esq. Post Office Box 2564 Boise , Idaho 83701 William M. Eddie Advocates for the West Post Office Box 1612Boise, Idaho 83701 GIVENS PURSLEY LLP by Conley E. Ward, Esq. Post Office Box 2720 Boise, Idaho 83701-2720 For Idaho Power Company: For Industrial Customers of Idaho Power: For Idaho Irrigation Pumpers Association: For The United States Department of Energy: For United Water Idaho Inc: For NW Energy Coalition: For Micron Technology, Inc. CSB REPORTING Wilder , Idaho 83676 APPEARANCES , .......,.........--.. ....-.......,..- ,, , ,......, , , ......,.. ,..,.. -.. WITNESS EXAMINATION BY Mr. Kline (Direct) Prefiled Direct TestimonyMr. Purdy (Cross)Mr. Ward (Cross)Mr. Richardson (Cross)Mr. Budge (Cross)Mr. Stutzman (Cross) Commissioner Hansen Commissioner Smith Mr. Kl ine (Direct) Prefiled Direct Testimony Ms. Nordstrom (Cross)Mr. Richardson (Cross)Mr. Ward (Cross) Commissioner Hansen Commissioner Smith Mr. Kline (Redirect) Mr. Kline (Direct) Prefiled Direct Testimony Ms. Nordstrom (Cross)Mr. Ward (Cross) Commissioner Smith Mr. Kline (Redirect) PAGE 351 354 396 405 406 410 426 428 436 440 443 485 488 502 504 506 508 510 513 534 538 543 545 J. LaMont Keen ( I daho Power) Dennis C. Gribble (Idaho Power) Lori Smi (Idaho Power) CSB REPORTING Wilder , Idaho 83676 INDEX NUMBER DESCRIPTION FOR IDAHO POWER COMPANY: PAGE Premarked Premarked Premarked Premarked Premarked Premar ked Premarked Premarked Premarked Premarked Premarked Premarked Premarked Operation and Maintenance Expenses from 1993 through 2002 12. 13. 14. 15. 16. 17. 18. 19. 20. Relicensing Tasks Flow Chart Hells Canyon Relicensing Costs Idaho Power Company Capital Expenditures 2001-2006 Standard & Poors Financial Ratio Benchmarks Capital Structure Embedded Cost of Long-Term Debt Embedded Cost of Preferred Stock 2003 Supporting Schedules Deductions for Operating Expenses Annualizing Adjustments to Operating Expenses and Ratebase Known and Measurable Adj ustments to Operating Expenses and Ratebase Additional Ratebase and Other Expense Adj ustments CSB REPORTING Wilder, Idaho 83676 EXHIBITS E X H I B T S (Continued) PAGE 492 497 499 NUMBER DESCRIPTION FOR THE INDUSTRIAL CUSTOMERS OF IDAHO POWER: 213. Ragen MacKenzie, Pacific NW Analyst Opinion, February 25, 2002 Identified 214. Moody s Investors Service , Global Credit Research , Opinion Update 20 Jun 2003 Identified 215. Standard & Poor I S IDACORP & Unit Identified Ratings Affirmed; Outlook Revised to Stable CSB REPORTING Wilder, Idaho 83676 EXHIBITS BOISE , IDAHO, MONDAY, MARCH 29,2004 9:30 A. M. COMMISSIONER SMITH:Good morning, ladies and gentlemen.This is the time and place set for a public hearing in Idaho Public Utilities Commission Case No. IPC-03-, further identified as in the matter of the application of Idaho Power Company for authority to increase its interim and base rates and charges for electric service. We'll begin this morning by taking the appearances of the parties and we'll start with the Applicant. MR. KLINE:Thank you, Commissioner Smith. Appearing on behalf of Idaho Power are Bart Kline and Monica Moen. COMMISSIONER SMITH:And for the Idaho Irrigation Pumpers. MR. BUDGE:Randy Budge on behalf of the Idaho Irrigation Pumpers Association. COMMISSIONER SMITH:And Staff. MR. STUTZMAN:Thank you , Madam Chairman. Weldon Stutzman and Lisa Nordstrom on behalf of Commission Staff. COMMISSIONER SMITH:Okay, Industrial CSB REPORTING Wilder , Idaho 345 COLLOQUY83676 Customers. MR. RI CHARD SON :Thank you Madam Chairman.Peter Richardson of the firm Richardson & 0' Leary on behalf of the Industrial Customers of Idaho Power. COMMISSIONER SMITH:And United Water. MR. MILLER:Thank you , Madam Chairman. Dean J. Miller of the firm McDevitt & Miller for United Water Idaho. COMMISSIONER SMITH:I think that wi work if you I re sure it's on.Mr. Ward. MR. WARD:Conley Ward of the firm Givens Pursley for Micron. COMMISSIONER SMITH:Mr. Gollomp. MR . GOLLOMP:Good morning, Chairman Smi th .Lawrence A. Gollomp on behalf of the Department of Energy representing the Federal Executive Agencies. COMMISSIONER SMITH:Welcome to Idaho. Mr. Purdy. MR. PURDY:Madam Chair , Brad Purdy appearing on behalf of two clients , AARP and the Communi ty Action Partnership Association of Idaho. COMMISSIONER SMITH:Thank you. MR. EDDIE:Good morning.William Eddie here on behalf of Northwest Energy Coalition. CSB REPORTING Wilder , Idaho 346 COLLOQUY83676 COMMISSIONER SMITH:Okay, according to my list, that only leaves Mr. Kursz on behalf of Kroger. appears that Mr. Kursz is not making an appearance today, so are there any preliminary matters to come before the Commission?Mr. Stutzman. MR. STUTZMAN Yes, Madam Chairman. COMMISSIONER SMITH:Mr. Stutzman. MR. STUTZMAN:Thank you.Staff would like to make a motion regarding one adjustment to the PCA calculation.In direct testimony, an Idaho Power witness proposed four adjustments to update the PCA computations. Staff in testimony agreed with three of the updates , but disagreed with the Company I s proposed change to the expense adjustment rate for growth , the EARG, component of the PCA calculation. In a rebuttal filing, the Company witness recommended that a separate proceeding to address this limited issue could be an efficient way to resolve the dispute and I don I t believe any other witness discussed the EARG in prefiled testimony.Staff agrees that a separate proceeding may be an efficient and productive way of deal ing wi th an adj ustment to the growth expense piece of the PCA. At this point there is a significant difference in the proposals made by Staff and the CSB REPORTING Wilder, Idaho 347 COLLOQUY83676 Company, but I believe both parties agree that there may be some merit in the other's position or at least that there is merit in continuing discussions.In addition, a separate proceeding would provide an opportunity for other interested parties to weigh in , so Staff I s motion is that the Commission approve the Company I recommendation for a separate proceeding for the parties to discuss the expense adjustment rate for the growth piece of the PCA calculation.That would remove the issue from this case and at least on that point simplify the issues and the testimony that would otherwise need to be presented. COMMISSIONER SMITH:Is there any response from the other parties to the motion of Staff? Mr. Kline. MR. KLINE:Madam Chairman , yes , I guess since it was our witness that proposed the bifurcation I'll go on the record as saying that we join in the motion. COMMISSIONER SMITH:Mr. Gollomp. MR . GOLLOMP:Chairman Smith , we would support pursuing this matter outside the record of this proceeding, whether it's a separate proceeding or an informal workshop, but I think it should be addressed. COMMISSIONER SMITH:Okay, there appearing CSB REPORTING Wilder , Idaho 348 COLLOQUY83676 to be no contention regarding the motion and the Commission appearing to agree , also , the motion will be granted. MR. STUTZMAN Thank you. COMMI S S lONER SMI TH :I guess whether we need a proceeding or whether you're going to do it in some kind of prehearing conference or workshop forum just advise us how easy you think that might be.Just how much process do you want? MR. STUTZMAN Well , we haven I t discussed , but I think COMMISSIONER SMITH:Right, let me know when you do. MR. KLINE:We will do that. COMMISSIONER SMITH:All right , then , I believe, Mr. Kline, if that's the only preliminary matter , we I re ready for your witness. MR. KLINE:Thank you, Madam Chairman. Idaho Power's first witness is LaMont Keen. MR. WARD:Madam Chair , while he's taking the stand , I wonder if we could get an order of witnesses estimate from Idaho Power. COMMISSIONER SMITH:Well , Mr. Ward according to the e-mail that I thought everybody got MR. KLINE:I did send it out fairly late CSB REPORTING Wilder, Idaho 349 COLLOQUY83676 on Friday, so it I s possible that not all parties received it.It would be our intention to, of course , call Mr. Keen as our first witness , and if you look at the exhibi t numbering, that will tell you what our intended order of witnesses will be. Mr. Avera who would have been the second wi tness won I t be able to testify until tomorrow, so we would like to put him on first thing tomorrow and then there is one other change that we needed to propose and that is Mr. Prescott , the Company I s vice president for power supply, filed some rebuttal testimony, but he will not be able to be here next week and so we'd like to have Mr. Prescott present his rebuttal testimony and we III kind of sandwich him in as a part of our direct case, kind of where it works for everybody, so that I s the order. MR. WARD:Okay, thank you. COMMISSIONER SMITH:Then in case the parties are wondering, depending on how fast the Company I s direct goes, if it exceeds my wildest expectations , we I ve asked the Industrial Customers to have their witnesses ready for Wednesday.We have set aside this Thursday and Friday for out-of-town witnesses of the intervenors who seem to be bringing people from out of town and needed a date certain , except for CSB REPORTING Wilder , Idaho 350 COLLOQUY83676 Mr. Ralph Cavanagh who I think will appear a week from today, so that's as much as I know about how it I s going to go until we see how much time this all takes , okay? J. LAMONT KEEN produced as a witness at the instance of the Idaho Power Company, having been first duly sworn, was examined and testified as follows: BY MR.KLINE: record? Company? DIRECT EXAMINATION Could you please state your name for the Yes , my name is J. LaMont Keen. And what is your position at Idaho Power of Idaho Power Company. I I m president and chief operating officer And in October of 2003, Idaho Power filed its application in this case and with that application you filed 29 pages of direct testimony and four exhibits; is that correct? CSB REPORTING Wilder , Idaho That's correct. And do you have any corrections that you 351 KEEN (Di) Idaho Power Company83676 need to make to your testimony that was filed in October? I do.I have three changes.The first occurs on page 3 of my direct testimony, line 6 and in that sentence , I I m referring to the date of IPC Order 94-5 and I have it concluded on January 1st.That should be January 31st.The second change is page line 9 , and in that I m referring to streamflows on the Dalles and it states they only averaged 68 percent of average and that should be 84 percent of average. filed testimony in the general and the interim.Somehow it was correct in the interim and not in the general. Then the final change is on line 5 of page 15 and in that area 11 m referring to the exhibit I did on the Company's operating and maintenance expenses for 1 through 2003 and on line 5 between "actual" and operating," I should insert the word "other" to indicate that it did not include power supply expenses. COMMISSIONER KJELLANDER:Mr. Keen , could you repeat where the actual change is where you insert the word "other"? THE WITNESS:It I S on line 5 between the words "actual" and "operating.It should be our actual other operating and maintenance expenses.No further changes. CSB REPORTING Wilder , Idaho 352 KEEN (Di) Idaho Power Company83676 BY MR. KLINE:All right , with that Mr. Keen, if I were to ask you the same questions that were contained in your prefiled direct testimony today, would your answers be the same? Yes. MR. KLINE:Madam Chairman , with that, I would request that Mr. Keen I s direct testimony be spread on the record as if read in its entirety and that Exhibits 1 through 4 be marked for identification. COMMISSIONER SMITH:If there I s no objection , it is so ordered. (The following prefiled direct testimony of Mr. Keen is spread upon the record. CSB REPORTING Wilder, Idaho 353 KEEN (Di) Idaho Power Company83676 Please state your name and business address. My name is J. LaMont Keen and my business address is 1221 West Idaho Street, Boise, Idaho 83702. What is your position at Idaho Power Company? I am the President and Chief Operating Officer. What is your educational background? I graduated magna cum laude in 1974 from the College of Idaho in Caldwell , Idaho now called Albertson College of Idaho , receiving a Bachelor of Business Administration Degree in Accounting.In 1994 I completed the Advanced Management Program at the Harvard Uni versi ty Graduate School of Business.I have also attended many utility management-training programs , including the Stone & Webster Utility Management Development Program , the University of Idaho Public Utilities Executive I s Course and the Edison Electric Institute Executive Leadership Program. Please outline your business experience. I have worked in the electric utility industry at Idaho Power Company for nearly 30 years, beginning my employment in 1974 in the accounting department. advanced through several accounting, analyst and management positions and in July 1988, I was promoted to Controller.In November 1991 I was appointed to Vice President of Finance and Chief Financial Officer and 354 KEEN, DI Idaho Power Company served in that capacity until March of 1999 when I was also given responsibility for all of the administrative areas of the Company as Senior Vice President of Administration and Chief Financial Officer.In March of 2002 , I was appointed President and Chief Operating Officer where I have responsibility for the Company I operating units.I either have or have had responsibili ty for virtually all aspects of the Company operations at some point in my career. What are your duties as President and Chief Operating Officer of Idaho Power Company? I am responsible for the general oversight of all the utility operations including all power supply and delivery activities. What is the purpose of your testimony? As Idaho Power Company I s president, I am testifying as to policy matters related to the Company filing of this request for general rate relief. Specifically, I will address the events and circumstances that led to this rate application , including an overview of significant events , both regulatory and otherwise, that have occurred over the last decade; the impact of ten years of growth on our utility system; the Company' stewardship of the system during the recent difficult period; the increasing emphasis on system reliability; 355 KEEN , DI Idaho Power Company the critical demand for investments in infrastructure; and the cash flow 356 KEEN , DI Idaho Power Company and earnings implications to the Company of managing through all of the above. Please describe the Company's last general rate increase in Idaho. The Company's last general rate case, Case No. IPC-94-5, concluded on January 31 , 1995 when the Idaho Public Utilities Commission (IPUC or the Commission) issued Order No. 25880 authorizing Idaho Power to increase its rates by $17 177 048 or 4.19 percent. that case, the rate of return on common equity was established at 11 percent with an overall rate of return at 9.199 percent.Permanent rate changes were implemented on February 1, 1995. Shortly following the conclusion of Case No. IPC-94-, the Company completed its upgrade of the Twin Falls hydroelectric power plant and filed an application with the Commission to supplement the results of Order No. 25880 with rate impacts of the new production facilities. The Commission issued a bench ruling that allowed Idaho Power to increase its revenue requirement by $3,759,695 or .88 percent , to include the Twin Falls upgrade on August 14 , 1995.On November 13, 1995, Order No. 26236 reaffirmed the Commission I s bench ruling. Please describe the rate moratorium entered 357 KEEN , DI Idaho Power Company into following the last general rate case. On October 20, 1995 , in Order No. 26216 , the 358 KEEN, DI Idaho Power Company Commission approved a rate moratorium and stability of earnings stipulation between various intervenor parties, the Staff of the Commission, and Idaho Power Company. The stipulation provided that in the period from 1995 through 1999 , any time the Company's return on equity (ROE) fell below 11.5 percent , the Company would be allowed to amortize an additional amount of Accumulated Deferred Investment Tax Credits (ADITC) in order to increase earnings back to the 11.5 percent level.I f the Company's ROE exceeded 11.75 percent, the Company would refund (revenue share) 50 percent of the excess earnings to the benefit of its Idaho customers.The stipulation also provided that Base Rates would not change prior to January 1 , 2000.Because of improved operating conditions, including hydro availability, the Company never had to use ADITC to supplement earnings during the moratorium.On the other hand , Idaho Power's customers were able to experience the benefits of revenue sharing during the years 1996, 1997 , 1998 , and 1999.The total benefit shared with the Idaho retail customers was approximately $28 million. Has the corporate structure changed at Idaho Power during the last ten years? Yes.On October 1, 1998 , with the formation of IDACORP, Inc., the Company became a part of a holding 359 KEEN, DI Idaho Power Company company structure.IDACORP , Inc. serves as the parent of Idaho Power Company, a regulated utility, as well as a number of unregulated subsidiaries.The purpose in forming IDACORP , Inc. was two-fold.First, the structure allowed Idaho Power to continue as a regulated utility just as it had for the past 82 years.At the same time, the creation of a holding company enabled present and future non-regulated business units to compete for business in the non-regulated arena without saddling the regulated utility with the capital requirements and risks of those ventures. The move to a holding company structure followed approval by multiple regulators including the Idaho Commission in Order No. 27348 issued on January 29, 1998 in Case No. IPC-97-11. Following the rate moratorium , what impact did the Western energy crisis have on Idaho Power? By the summer of 2001 , the West was in the grip of the nation's worst energy crisis. Increases in the price for natural gas, an increasingly important fuel for thermal generation of electricity in California, combined with the 2000-2001 water conditions that were among the lowest ever recorded in the Pacific Northwest region according to the U. s. Department of 360 KEEN , DI Idaho Power Company Agricul ture, created further upward pressure on wholesale prices emanating from the California market.Compared with the first quarter 2000, wholesale power prices for 2001 peak period transactions in the Pacific Northwest rose by almost a factor of ten , from an average of $25 per megawatt-hour to $240 per megawatt-hour as measured by the Dow-Jones Mid-Columbia Index.Price spikes took place on the hourly spot market that resulted in the price of electricity exceeding $1000 for short periods of time. Idaho Power's operations were also adversely affected by the tremendous increase in prices for purchased power , increased demand , and reduced hydroelectric generation.This particular combination of economic and natural phenomena produced substantial increases in costs to supply power to customers not only in Idaho Power I s service territory but also across the west.Large and small utilities throughout the west were filing for double digit rate increases on multiple occasions during the 18 -month energy crisis.Idaho Power was no exception as its annual PCA rate applications increased to record amounts. Please describe the severity of the current Idaho drought. Drought is of particular concern to a 361 KEEN , DI Idaho Power Company hydro-based utility.Reductions in the region's already limi ted 362 KEEN , DI Idaho Power Company water supply for extended periods of time can produce devastating impacts in terms of reduced hydro-generation availability and correlating higher energy costs. Drought is also a "creeping phenomenon" making its onset and end difficult to determine.The effects of drought accumulate slowly over a considerable period of time and may linger for years after the termination of the event. Current water supply conditions for Idaho demonstrate the reality of this phenomenon. At its peak , the 2000 drought was as severe as any of the maj or droughts of the last 40 years as measured by temperature and moisture.This exceptionally dry summer resul ted in low soil moisture entering into the winter. Precipitation was much below normal over most of the Pacific Northwest during the fall and winter of 2000-2001 and hydrologically, the evolving 2001 drought appeared to be similar in magnitude to the 1977 drought of record based on streamflow and reservoir levels. In 2001, the water supply outlook for the state of Idaho remained much below normal and continued to be one of the lowest years on record.May 2001 runoff was estimated to be the second or third lowest on record for many sites across the state.Snowpack for the same period remained low at 30 to 55 percent of average across Idaho. The severity of the 2001 drought was further exacerbated by the ongoing 363 KEEN , DI Idaho Power Company California power problems, one result of which was that the Federal System reservoirs were drafted to some of their lowest levels ever. In 2002 and 2003, the entire Columbia River Basin experienced drought conditions.The Columbia River at The Dalles, Oregon, is a commonly used reference point to gauge flows in the Columbia River in the Pacific Northwest.In 2002 and 2003, the April through August flows at The Dalles averaged only 84 percent of average. These low flows significantly reduced the amount of surplus energy available for the Company to purchase. In 2003, the creeping drought phenomenon continues. Over the past four years , the April through July inflow to Brownlee Reservoir has averaged about 60 percent of the 1960 through 2003 average.Even more telling, in southern Idaho the April through July flows at Swan Falls Dam have declined to 46 percent of average.In July 2003, the flow at Swan Falls Dam was at the lowest level recorded by either the USGS or Idaho Power.In response to these low flows, the Idaho Department of Water Resources was prepared to take the extreme measure of actually curtailing junior upstream surface water diversions. What effect does a severe drought have on the Company? During drought, Idaho Power must rely more 364 KEEN , DI Idaho Power Company heavily on purchased power to meet system loads , usually at higher market prices due to supply scarcity.At the same time, there are obviously less "surpluses" to sell to offset increased market purchases.The result is upward pressure on the Company I s power supply costs. How did the combination of drought and high market prices impact the Company's PCA requests. Because Idaho Power relies predominantly upon hydroelectric generation to serve its load , the Company' actual costs of providing electricity can vary dramatically from year to year depending on changes in streamflow and market prices.In recognition of the fluctuating power supply costs associated with variable hydroelectric generation , the Commission approved a "Power Cost Adjustment"(PCA) mechanism for Idaho Power in 1993. During the years that the PCA has been in effect, there have been both annual credits and surcharges.However, as a result of the Western energy crisis and drought conditions, the Company's PCA application in 2001 was the largest amount ever requested.Following extended hearings, the Commission authorized the bulk of the $227.4 million requested under the PCA mechani sm.The following year the Company I S PCA filing was even greater.The issues were complex and 365 KEEN, DI Idaho Power Company required a careful balance between public policy concerns and the need to achieve just , fair and reasonable rates for 366 KEEN, DI Idaho Power Company recovering excess power costs. As it did in 2001 , the Commission disallowed a portion of the jurisdictional power supply-related costs contained in the 2002 PCA filing. How did the Company view these PCA orders? Al though the Company was concerned to see disallowances emerge in the PCA , it generally viewed both the 2001 and 2002 Commission decisions as a signal that the Company was operating within the guidelines established by the IPUC and consistent with ratemaking concepts of the PCA.The decisions also lent valuable support to the Company during deteriorating financial circumstances. Please describe Idaho Power I s most recent PCA filing. During the 2002-2003 PCA period, wholesale energy prices had returned to pre-energy crisis levels. However, Idaho Power continued to be impacted by diminished precipitation levels and the resultant reduction in hydroelectric generation.On April 14, 2003, the Company filed a request to implement its annual PCA that would reduce overall rates by over 18 percent. On May 13, 2003, the Commission approved the Company' application.Despi te the decrease, rate levels are still more than $80 million above Base Rate levels.wi th more 367 KEEN , DI Idaho Power Company normal snow pack and current prices, another PCA decrease could occur next spring. 368 KEEN , DI lOa Idaho Power Company You previously discussed the impact of the Western energy crisis on the Company.Now , please elaborate on the Western energy crisis I s impact on the Company s PCA. When the PCA was first developed in 1992 and implemented in 1993 , no one anticipated the types of market prices and volatility that occurred in 2000 and 2001. At its inception , based on historical data, the anticipated power supply expense volatility was approximately $116 million from best to worst condition. During the western energy crisis , Idaho Power's power supply expenses were $204 million over those in Base Rates in 2001 and $337 million over base in 2002.The two years in combination were $541 million above base with the Company's shareholders absorbing over $127 million of that total amount.As a result , Idaho Power' customers and shareholders both bore substantial power supply costs that were of a magnitude not contemplated at the PCA' s inception.The shareholders burden came from both the sharing mechanism and from disallowances in the 2001 and 2002 PCA orders. What is your impression of the PCA? I believe that the PCA is a fair ratemaking mechanism that has recently been stress-tested under 369 KEEN , DI Idaho Power Company extreme conditions.Two of the attributes that have helped the mechanism stand the test of time are the true up and the sharing provision.The true up provides a means for actual 370 KEEN , DI 11a Idaho Power Company costs to be ultimately accounted for and included.The sharing provision ensures that the interests of both the Company and its customers are aligned on each transaction. Since your Company has received significant . 6 cost recovery through the PCA in recent years, why do you need to file a general rate application? The PCA only addresses the portion of the Company I s total annual revenue requirement that corresponds to the variable cost of supplying energy to Idaho retail customers.The power supply expenses that flow through the PCA are normally limited to fuel for thermal plant operations and purchased power.The PCA mechanism also subtracts surplus sales revenues from these expenses.The sheer magnitude of the power supply expenses in recent years placed their ratemaking treatment at a higher regulatory priority than the pursuit of general rate relief.The Company not only had to prioritize its requests before the Commission, but recognize rate impacts to customers as well. Accordingly, the Company chose to postpone filing for general rate relief.Now in 2003, with the PCA component of our rates beginning to drop, other increasing expenses and new investments need to be brought before the Commission for inclusion in Base Rates. 371 KEEN, DI Idaho Power Company How has the Company s investment in electric plant grown since the last general rate case? 372 KEEN, DI 12a Idaho Power Company Since 1993, the test year for the last general rate case , the Company's investment in electric plant has grown by $856 million from nearly $2.32 billion to slightly over $3.17 billion.The $856 million represents a 10-year 37 percent increase in Company investment in electric plant on behalf of our customers.Put in annual terms, Company investment in electric plant has grown at about 3.2 percent per year since the last general rate case. Of the $856 million of additional investment in electric plant, please detail the growth in investment for generation , transmission , and distribution facilities. In the last ten years, the Company has invested $156 million for generation additions and upgrades.The most recent generation plant addition was the Danskin gas-fired generation plant located in Mountain Home.The investment in the Danskin generation facility was approximately $50 million.In the same period of time the Company has invested $198 million toward the construction of transmission facilities and $366 million toward the construction of distribution facilities.The most recent investment in transmission facilities included in this application is the $19.4 million Brownlee-Oxbow 230 kv transmission upgrade.The 373 KEEN, DI Idaho Power Company remaining $136 million of investment growth is attributable to general and other plant items. 374 KEEN , DI 13a Idaho Power Company Please describe the growth in Company expenses associated with operating and maintaining a $3.2 billion system. The expenses associated with operating and maintaining a $3.2 billion system today have grown to about $540 million per year from the $412 million needed to operate and maintain a $2.3 billion system in 1994. The $128 million growth in expenses represents a 31 percent increase in expenses from levels established years ago.Put in annual terms , Company expenses have grown at about 2.7 percent per year since 1993. Please describe the growth in Company revenues over the same 10-year period of time. Since the last general rate case , Company test year operating revenues have grown only 13 percent compared to the 37 percent growth in investment and the 31 percent growth in expenses.Clearly, growth has not paid for itself.The incremental costs of adding, operating and maintaining generation , transmission and distribution plant are greater than the embedded costs associated with generation , transmission and distribution plant that have been the basis of Company rates over the last ten years. How has Idaho Power managed through this growth? While both inflation and customer growth 375 KEEN , DI Idaho Power Company impact our expense level, the Company has actually been able to keep expenses well below the combined growth rate of inflation plus customer growth.I have had Exhibi No.1 prepared to demonstrate these relationships over time.Exhibit No.1 tracks the actual other operating and maintenance (O&M) expenses from 1993 through 2002 and includes the 2003 O&M expenses that are part of the Company's general rate request.Exhibit No.1 also tracks the 1993 O&M expenses over the same time period escalated by the combined impacts of inflation and customer growth. What is the current condition of Idaho Power' distribution system? The system has been expanded to absorb the growth of the past decade.As noted before, over 40 percent of the Company I s investment during this period has gone into the distribution system , yet many of the Company's distribution stations and lines are at or near capacity.During this time , we have worked diligently to improve operating efficiencies and utilization.However there is little room to withstand additional growth wi thout new construction. Please describe the operating capacity situation with the Company's distribution feeders. The utilization of assets , or loading levels 376 KEEN , DI Idaho Power Company on feeders , has increased significantly.The peak load per distribution feeder in 1987 averaged 4.9 megawatts. Today, this has increased to 7.0 megawatts. Approximately one half of the retail load is served by feeders operating near their full capacity at peak load. The Company has carefully prioritized and scheduled the construction of new facilities while relying heavily on our experienced workforce to manage and operate the system wi th these reduced margins. How is the Company managing new growth on its distribution system? The Company has continued to manage substations and feeder loadings to meet growth through selective distribution capacity increases and the use of better load data acquisition systems.This has allowed the Company to utilize much of the reserve capacity once available.However, further reductions in reserve capacity would likely reduce reliability and service quality to our customers.Consequently, additional growth will require new facilities be added to the system at full marginal cost , rather than being able to leverage existing capacity in the system at the old embedded cost. The Company has 377 KEEN, DI Idaho Power Company identified over $400 million in growth-related sub-transmission , substation , and distribution infrastructure additions required prior to 2010.This does not include the ongoing costs of maintaining or replacing existing facilities. Since the last rate case, has Idaho Power Company invested in 230 kilovolt and above transmission facilities? Yes.Contrary to reports of other utilities not investing in transmission infrastructure, Idaho Power has invested in backbone transmission facilities both to serve load and to improve service reliability.Since 1996 , Idaho Power peak load has grown 526 megawatts. a part of an over-all strategy to meet this load growth the Company has undertaken several backbone transmission proj ects : Brownlee-Ontario-Caldwell 230 kv Project $30. Boise Bench-Locust 230 kV $ 5. 7M Brownlee 230 kV Bus Reconfiguration $ 6. 2M Boise Bench 230 kV Bus Reconfiguration $ 7. 7M Brownlee-Oxbow #2 230 kV Project $19. Goshen 345 kV Series Capacitor $ 5. 7M Locust-Caldwell 230 kv Project $19. The Brownlee-Oxbow #2 proj ect and the Goshen proj ect will be completed in May 2004.The Locust-Caldwell Project 378 KEEN, DI I daho Power Company is scheduled for completion in October 2004.On a dollar per kilowatts of capacity basis these proj ects cost about $180 per kilowatt. What are the drivers for this transmission investment? Other than the Goshen proj ect, which was done primarily for reliability purposes, the recent additions just mentioned were focused on maximizing the capacity of existing facilities.In other words, the Company has focused on making relatively small incremental improvements that increase the capacity of the system without having to resort to building significant long distance transmission lines.Fewer and fewer of these optimizing opportunities remain.Future transmission additions will likely be driven by the location of the load growth and where resource additions are developed. What are the transmission implications for the next ten years? A significant portion of the Company s load growth is occurring in Ada and Canyon counties.The next ten years will require continuing transmission system facili ty improvements in this area. Toward the end of this time horizon , the existing bulk transmission system serving the Treasure Valley area (Ontario to Mountain Home) will reach its maximum present 379 KEEN , DI I daho Power Company capabilities and major transmission additions from the Northwest and/or areas east of Midpoint may become necessary. Based on recent experience, how will the cost of these new transmission facilities compare to previous transmission construction costs? These future backbone expenditures will likely cost twice the previous expenditures for a comparable amount of load growth , about $400 per kilowatt or on average $20 million per year. What resource scenario was used in deriving these cost estimates? As mentioned earlier , a key driver for transmission expansion is the location of future generating resources.The estimate of future backbone transmission expenditures assumes the Company will be able to construct or acquire local gas-fired combustion turbine additions in the next few years.Other resource strategies (wind , coal, etc.) may require significant transmission distances and would result in greater transmission expenditures. Will the recent east coast blackout have an impact on Idaho Power's transmission development? The effects of the August 14, 2003 blackout on the east coast are not known at this time.One possible 380 KEEN, DI Idaho Power Company effect is a nationwide change in reliability standards; 381 KEEN , DI 19a Idaho Power Company could dramatically alter or advance transmission system expansion of the Idaho Power system and throughout the Western Interconnection. How has the Company s resource planning changed over the last ten years? Prior to the Western energy crisis, we planned on median water conditions and assumed that energy would be available at reasonable prices in the wholesale market in below normal water years.Today our generation planning philosophy includes reducing market dependence and building resources as required under the 2002 Integrated Resource Plan (IRP).During the 2002 IRP process, public input supported this planning philosophy which is based upon more stringent criteria for both loads and resources. How does this new generation resource planning philosophy impact costs? By using a less than median water planning criteria the need for additional resources will be accelerated.This applies to both peaking as well as base load facilities. Please describe the Company s current generating resources strategy. Idaho Power will have to acquire a variety of resources throughout the coming years to meet its growing load requirement. The Company has recently 382 KEEN , DI Idaho Power Company notified Mountain View Power (MVP) that it is the successful bidder in the Company's most recent Request for Proposal for a generating resource.Once completed, MVP will transfer the plant to Idaho Power ownership. Idaho Power has decided to name this plant the Bennett Mountain Power Plant.The Bennett Mountain Power Plant will provide approximately 160 MW of peaking capacity. The Bennett Mountain Power Plant project will satisfy a portion of a portfolio of resources to be acquired to meet the 2002 IRP objectives.The Company has filed with the Idaho Commission for a Certificate of Convenience and Necessity for the Bennett Mountain Power Plant.In its application , Idaho Power has provided a commitment estimate of $54 million for the generation portion of the proj ect, which is scheduled for completion in April 2005. The results of the 2004 IRP will likely show addi tional resource needs in the near future. What is the current condition of the Company jointly owned coal-fired resources? As the demand for electricity has grown and the drought continues, we have relied heavily on our jointly owned coal-fired resources.These facilities were constructed in the 1970s through the early 1980s. they 383 KEEN , DI I daho Power Company age , they are in constant need of upgrading and rehabili tation.New environmental regulations have also added capital and maintenance requirements. anticipate increased capital and O&M costs for these facilities in order to keep them reliable and compliant. What is the status of the Company's relicensing efforts? Utilities throughout the country have licenses to operate hydropower proj ects to generate electricity. These licenses are granted by the Federal Energy Regulatory Commission (FERC).Licenses are usually granted for 30 to 50 years and define how hydropower proj ects may be operated for power generation as well as other measures that benefit the public.Idaho Power owns and operates 17 hydropower proj ects on the Snake River. By 2010, licenses will expire for eight Company proj ects affecting 12 different power-producing facilities.The Company has already applied, or is preparing to apply for a new license on each proj ect.Exhibit No.2 outlines the Relicensing Tasks Flow Chart for each proj ect their various stages of the FERC relicensing process. would like to highlight the investment the Company has made in just one of these proj ects in particular, the Hells Canyon Complex. On July 18, 2003, Idaho Power filed a formal 384 KEEN, DI Idaho Power Company application with the FERC to relicense the Company I three-dam Hells Canyon hydroelectric proj ect.The Hells Canyon Complex is the largest of Idaho Power's 17 hydroelectric proj ects on the Snake River.Currently, over 420,000 customers rely on this complex for power as it produces nearly two-thirds of the hydroelectric generation and 40% of the total generation of the Company in an average water year.The final relicensing application consisted of 36,OOO-pages and was the culmination of nearly a decade of studies conducted by the company, focused on fish, wildlife, plants , water quality, recreation and cultural resources.Idaho Power conducted over 100 studies and ultimately the application process cost Idaho Power more than $50 million. The application also includes $324 million worth of new and continuing mitigation efforts to offset present and future environmental impacts resulting from the operation of the facility.These mitigation efforts, referred to as protection , mitigation, and enhancement (PM&E) measures include Water Use and Quality, Fish and Mollusc Resources, Wildlife Resources, Botanical Resources, CuI tural Resources , Aesthetic Resources and Recreation Resources. As the Relicensing Tasks Flow Chart shows , the Company began work on the Hells Canyon relicensing effort 385 KEEN , DI Idaho Power Company in early 1993.In September 2002 Idaho Power submitted a OOO-page draft license application to the FERC and 386 KEEN , DI 23a Idaho Power Company hundreds of stakeholders who constituted the Collaborative Team.The Company accepted over 4 500 written comments on its draft application through January 2003.Comments from the different respondents were addressed and included in the final new license application filed in July 2003.The FERC is planning to begin their National Environmental Protection Act process for the Hells Canyon proj ect, with scoping meetings scheduled for the third week of November 2003 followed by requests for additional information in December 2003. The Company expects to incur consultation and compliance costs through 2008 followed by actual Article Compliance costs (once the FERC has issued a new license) that will continue well on in to the next decade.Exhibi t No. charts the Hells Canyon relicensing expenses incurred to date and the expected costs through 2010 at which time the Company will have spent approximately $100 million. What is the financial condition of Idaho Power Company? The current financial situation has developed over a period of years.In 1999 , the Company I short-term debt was $20 million , internal cash generation was at 114 percent, and we were experiencing sales growth in our service area. In 2000, the combination of drought and energy 387 KEEN, DI Idaho Power Company crisis that I spoke of earlier built up a huge PCA deferral 388 KEEN, DI 24a Idaho Power Company and caused us to file our annual PCA earlier than usual. As described previously, the IPUC ultimately approved most of the 2000-2001 PCA in two parts - - $168 million in May of 2001 and another $59 million in October of 2001. PCA disallowances of $11 million were written off in October of 2001.During 2000, capital expenditures increased to $132 million, while short-term debt rose to almost $60 million and internal cash generation fell to 42 percent. By 2001 Idaho Power Company's regulated earnings per share had dropped to $. 60 per share.2001 was characterized by industry turmoil and continued Idaho drought.The Perfect Storm" occurred with the combination of high market prices, lower-than-average stream flows, and higher demand.The PCA deferrals again grew , this time from the combined effects of the load reduction programs for the Astaris Special Contract and the irrigation customers.The un-recovered portion of the PCA costs absorbed by shareholders reached $76 million.Operating cash flow for Idaho Power was a negative $59.6 million.The short-term debt balance skyrocketed to $282 million.2001 construction costs increased to $157 million , including $49 million for the Danskin Power Plant.Net working capital declined from 2000 to 2001 by $156 million.Utility operating income 389 KEEN , DI Idaho Power Company was also down from 2000 to 2001 by $79 million primarily due to the PCA absorption. 390 KEEN , DI 25a Idaho Power Company Idaho Power's earnings in 2002 were $2.24 per share, but these were heavily supported by a one-time $.92 income benefi t related to a tax method change.Without it , the utility operation would not have earned enough to cover its dividend payment in 2002. In 2003 the power supply costs finally began to drop leading to a rate decrease of 18 percent.However, customer growth and reliability requirements continue to drive the need for investment in transmission and distribution infrastructure. What are the implications of the current financial situation? The Company needs to fund its operating and maintenance programs at adequate levels and needs to make addi tional investments in infrastructure to ensure continued high quality and reliable service for our customers.Looking forward , the capital expenditures are expected to remain high for the foreseeable future. The cash flow situation has been precarious over the last several years.Utility earnings did not cover the dividend payment in 2001 and would not have covered the payment in 2002 except for the tax method change. Did Idaho Power I s Board of Directors (the Board) recently vote to reduce the common stock dividend? Yes.The Board voted on September 18 , 2003 391 KEEN, DI Idaho Power Company to reduce the total common stock dividend payment for the next quarter from $17 815,652 to $11 493,969 , a reduction of $6 321 683.This resulted in a reduction in the IDACORP , Inc. annual dividend from $1.86 per share to $1.20 per share. Why did the Board take this action? Idaho Power needs to strengthen its overall financial position so that it will be able to fund Idaho Power s $675 million , three-year capital expenditure program for the years 2004 through 2006.Reducing the dividend will improve cash flow and help maintain a strong credit rating while balancing the level of borrowing necessary to meet the growing capital requirements. How does the $675 million of estimated capital expenditures over the next three years compare with the capi tal expenditures for the most recent three years? The Company's capital expenditures for the years 2001 through 2003 are expected to total $427 million.The forecasted growth of $675 million lS a 58 percent increase.I had Exhibi t No.4 prepared to show the Company I s actual/estimated capital expenditures for 2001 through 2006.Actual values have been included through July of 2003. Q. How does the Board's decision relate to the Company's request for rate relief? 392 KEEN , DI Idaho Power Company The Board recognized the need to generate more cash to invest in the utility infrastructure and strengthen the balance sheet.Accordingly, the Board decided to pay the owners less through the common stock di vidend.In a similar fashion, timely rate relief also strongly supports increased cash flow and a stronger balance sheet with its corresponding enhanced credit worthiness. As president of Idaho Power , where is your focus? My focus is the full restoration of Idaho Power as a preeminent fully integrated utility with the financial viability to successfully meet our customers needs both now and in the future. What progress have you made? In my view , we have made remarkable progress, particularly considering what we have been through in recent years.The Company has managed through the energy crisis and ongoing prolonged drought, taken steps to meet our customers I needs and reduce risks to them going forward, and made difficult decisions to maintain credit quality and financial flexibility.Running an efficient quality utility is our priority and, as detailed in Ms. Fullen's testimony, customers are recognizing our efforts.I also believe that we have made some strides 393 KEEN , DI Idaho Power Company in the area of demand-side management (DSM).Ms. Fullen I S testimony notes 394 KEEN , DI 28a Idaho Power Company our senior management support in the DSM area.I affirm her testimony. What is your opinion of the Company's rate application? Based upon the growth we have encountered over the last ten years, sound management through the energy crisis and ongoing drought conditions , and the system needs going forward , I believe the Company I s request for general rate relief is fair, just, and reasonable. Does this conclude your direct testimony in this case? Yes, it does. 395 KEEN, DI I daho Power Company (The following proceedings were had in open hearing. MR. KLINE:And with that , Mr. Keen would be available for cross-examination. COMMISSIONER SMITH:Mr. Eddie, do you have questions for Mr. Keen? MR. EDDIE:Not at this time. COMMISSIONER SMITH:Mr. Purdy. Mr. Purdy:I have just a couple, Madam Chair. CROS S - EXAMINA TI ON BY MR. PURDY: Mr. Keen , if you would please turn to page - - beginning on page 3 of your direct examination. Okay. The testimony there , to generally characteri ze your testimony there, it seems that you have identified a number of ways in which Idaho Power has minimized the need to file for a general rate increase in the last 10 to 15 years or so; is that a fair characterization? I think in that section I I m kind of recanting the history of decisions at that point in time CSB REPORTING Wilder , Idaho 396 KEEN (X) Idaho Power Company83676 but certainly, my testimony, I do point out that believe we I ve been a good stewart over that time frame. And when you say you ve been a good stewart, by that, do you mean you have not filed for a general rate increase? That we haven't filed for a general rate lncrease and that we managed our costs well; hence, my exhibit that I have in there indicating if you compare our other operating and maintenance expenses, for example, versus a combination of inflation and customer growth, we came in well below that combination. Would you agree with me that from Idaho Power's perspective, filing a general rate case is a costly, time-consuming process? Yes. It's not exactly popular with your ratepayers, is it? No. All right; so there is an incentive always, of course, for Idaho Power to avoid filing a general rate case whenever possible? Well , to avoid the impacts on our customers, we manage the Company just as effectively as we can to avoid doing that.There does come times when we have to come in here due to capital investments and CSB REPORTING Wilder, Idaho 397 KEEN (X) Idaho Power Company83676 operating cost increases and ask for an adjustment, but yes , we would prefer not to. And would that explain why - - do you recall the Company I s filing for rate base inclusion of the Milner and the Swan Falls upgrade projects? I would say generally, but not specifically. Do you recall whether those filings were in the form of a general rate case filing or something of a more limited nature? ask that? wi tness. Now, much of your testimony m sorry, I don't. Who would be the appropriate witness to I believe Mr. Gale would be the proper Thank you. relates to the devastating effects that the drought and the California energy crisis had on the Company.I f you need a page reference , that's found generally beginning on page 5.My question to you, doesn I t the PCA largely insulate Idaho Power's rate - - shareholders , rather , from these types of events? Well , it certainly has a mitigating impact on us , primarily in Idaho where the maj ori ty of those costs are passed on to our customers.What happened in CSB REPORTING Wilder , Idaho 398 KEEN (X) Idaho Power Company83676 the 2000 through 1 02 energy crisis , however , was the magni tude of those costs was so large it was something neither contemplated, I think, by our customers or certainly by the Company, so the part of the costs that were absorbed by the Company were very substantial in that time frame and I I m not sure I have the reference in my testimony, but I point out just how much that was somewhere. While you're looking that up, what is the sharing ratio with respect to the PCA? In Idaho it I s 90 percent to the customer 10 percent to the Company. Okay, and I I m going to refer you to page , if you need a reference.Don't you testify there that at least one of the reasons that Idaho Power has filed this general rate case is because the PCA rate adjustments have dropped to what I think you characterized as a pre-crisis normal level? One of our motivations in the timing of our filing was to try to avoid pancaking of adjustments to the extent we could, which we had a significant reduction in PCA rates last year.We I re hopeful there will be another one in the spring this year, so we timed our general rate case filing to hopefully go into effect as some of the PCA adjustments were rolling off. CSB REPORTING Wilder, Idaho 399 KEEN (X) Idaho Power Company83676 Now , you testify, again, your reference is page 25, that Idaho Power's earnings per share dropped in CSB REPORTING Wilder , Idaho 2001 due to a number of , I guess you could say, unique events that you list there.Do you recall that Yes, I do. Okay.Now , these events have essentially testimony? passed, have they not? Certainly the ones - - well , I would say partially the ones related to power supply costs in that our water conditions are improved and the wholesale market prices are not as high as they were in that time frame; still undergoing pressures with regard to plant investment and operating expense increases. I I m sorry, I didn't hear the last part. I said we're still undergoing pressures due to additional capital investment and operating expense increases. Has the Company's earnings per share grown , yes. By how much? I bel ieve I have in here.It was $0.61 in 2001 and I believe it was $1.45 in 2003. And the Company did in fact issue a since 2001? 400 KEEN (X) Idaho Power Company83676 dividend just recently, did it not? The Company reduced its dividend in the fall, but it did grant the reduced dividend here recently. Has the Company routinely been able to make its dividend payment over, say, the past five years? We made our dividend payments even at times when we weren I t earning our dividend payments and to position the Company to make the capital investments we foresee needing on our system and as a reflection that our earning capability was not covering the dividend in most of the last few years, the dividend was reduced, I believe, at the November board meeting. Now , finally, on page 28 you testify that one reason for Idaho Power s board I s decision to file this general rate case is, and I'm going to quote you here,to generate more cash to invest in the utility infrastructure and strengthen the balance sheet.Do you agree that that I s a fair quote of your testimony? MR. KLINE:What page reference was that? MR. PURDY:Tha ti s page 28. MR. KLINE:I see it.At the top? MR. PURDY:Yes. THE WITNESS:That's correct. CSB REPORTING Wilder , Idaho 401 KEEN (X) Idaho Power Company83676 BY MR. PURDY:Okay; so I want to clarify what you mean by that.Does the investment in infrastructure that you I re referring to , is that for some of the upcoming capital improvements and investments that you've testified about, the various generation and transmission upgrades and construction proj ects? Yeah , it's both the ones that we' already made, really, wel ve enhanced our capital program beginning in 2003, forecast that to continue in 2004 105 and ' 0 6 .If you look at the last few years , this industry has been under intense scrutiny from the rating agencies to go forth and make the level of capital investment we foresee the need to make on behalf of our customers.We had to have more internal cash generation. That can come two ways: partly by reduction of the dividend and then we're over here asking for a rate increase, which is the sentence that follows the first one in that section. So to strengthen the balance sheet and amass the funds necessary to invest in the Company I infrastructure, are you - - I guess the concern I have is it seems like you re collecting in advance monies that ultimately would need to be reviewed by the Commission under traditional rate basing criteria. That I S not what I intended.Wha t I' CSB REPORTING Wilder, Idaho 402 KEEN (X) Idaho Power Company83676 trying to say is that we need the financial strength to be able to attract the capital to make those investments. If we are not financially strong, if we don I t have adequate cash flows, if we do not obtain adequate and timely rate relief , the rating agencies will simply reduce our credit ratings.We will not be able to go out and get the capital that I've indicated in here we expect we need in the next three years. With limited exceptions in the annualizing and known and measurable adj ustments , we are not asking for any return on those investments that we see over that time frame.We're simply indicating that that is on the horizon for us and we have to be financially strong to be able to pull it off. Income from ratepayers is not the only means by which the Company finances large capital projects, is it, Mr. Keen? It's not necessary -- no, it I S one of the ways in which we finance it, but that ongoing revenue stream is the fate the financial community relies upon to loan us the funds or issue the equity to us to be able to raise that capital. How is Idaho Power situated currently with respect to the financial community?Has there been a change in your rating recently? CSB REPORTING Wilder , Idaho 403 KEEN (X) Idaho Power Company83676 As we sit today, and I think it's a function of the fact that we had the PCA mechanism and some difficult decisions that IDACORP and Idaho Power made , we sit here with strong credit ratings , reasonable cash flows.They I re adversely impacted by the ongoing drought conditions and our need for rate relief, but think we are positioned that if we get a return to normal water at some point in the future and some adequate and timely rate relief that we will be able to raise the money we need to spend over the next three years. Incl uding by going out into the markets and borrowing money? Certainly, we I 11 have to go into the capi tal markets for part of those funds. When will Idaho Power file its next general rate case? There's a lot of facets to that, so I don I t know that I can give you one answer to it.Partly it depends upon the outcome of this proceeding and it would also depend upon whether we actually are able to make the level of capital investment that I indicate in my testimony.If we do make that level of capital investment, it probably means we cannot stay away for a long period of time.Maybe aI can t say exactly when. couple of years we would have to be back. CSB REPORTING Wilder , Idaho 404 KEEN (X) Idaho Power Company83676 You indicate that the Company will complete its Hells Canyon relicensing project in 2010, is that the kind of time frame you I re looking at for filing your next general rate case? very much. I would anticipate sooner that that. BY MR. WARD: MR. PURDY:That I S all I have.Thank you COMMISSIONER SMITH:Thank you , Mr. Purdy. Mr. Gollomp. MR. GOLLOMP:No questions. COMMISSIONER SMITH:Mr. Ward. MR. WARD:Just one, I think. CROSS-EXAMINATION Mr. Keen , you testified generally about load growth on the Idaho Power system , is that growth CSB REPORTING Wilder, Idaho continuing today, meaning from the time you prepared your testimony to today as we sit here in these hearings? It has.Our customer count continues to move along at a pace in the two-and-a-half to three percent growth annually. MR. WARD:Thank you.That I S all I have. COMMISSIONER SMITH:I take that as a no. 405 KEEN (X) I daho Power Company83676 Mr. Richardson. MR. RICHARDSON:Thank you, Madam Chairman. CROSS -EXAMINATION BY MR. RI CHARDSON : Mr. Keen, at the bottom of page 5, you note that increases in natural gas prices and low water condi tions caused upward pressure on the energy markets in December of 2001.Now , would you agree that water and natural gas are probably two of the most volatile inputs into the cost of producing electricity in terms of costs? Well , they certainly vary.I don I t know that I could correlate the two , but I would stipulate that they both do vary over time. And you would agree that they ve been pretty volatile in terms of availability and cost, haven t they? Well , the difficulty I'm having with your question is water has done that over a long period of time for us.It varies extremely from one year to the next.Natural gas has had a rough patch the last few years.I can't testify to what it I S been over a longer CSB REPORTING Wilder , Idaho 406 KEEN (X) Idaho Power Company83676 time frame. So just generally given the extreme volatility of water and the recent volatility of natural gas , do you think it's prudent for the Company to continue to plan to build gas-fired power plants? I think it is to a degree.If you look at our generating fleet today, it I S primarily hydroelectric enhanced by coal-fired generating facilities.Wi th the Danskin plant and the addition of the plant planned for Mountain Home, those two additions will be well less than 10 percent of our total generation.I do not think that I S a disproportionately large allocation to gas in our generating fleet and you'll actually have Mr. Prescott on the stand here a little later and he could speak to that more eloquently than I, but I do think there would be an upper limit as to how much natural gas we could add without introducing additional volatility to our generating base. Could you speak a little closer to the microphone?It's a little difficult to hear you back here. Okay. At page 6, line 18 of your testimony, you note that the energy crisis lasted 18 months.Would you specify which 18 months you're referring to? CSB REPORTING Wilder, Idaho 407 KEEN (X) Idaho Power Company83676 I III need just a minute to give myself the context of where I was then.I think I'm referring primarily to the last half of 2000 and then 2001. So that would be July 2000 through December 2001? Right. You also state at that point in your testimony that Idaho Power I S PCA applications increased to record amounts.Isn't it true that your PCA recoveries from the ratepayers also increased to record amounts? Yes, they did. At the bottom of page 10, you talk about snow pack impact on the PCA , can you provide us with a current update as to your prognosis on the snow pack at this point in time? The last number I've seen as of the end of last week was about 85 percent of normal.I don't have a current estimate of the River Forecasting Services runoff forecast. You mentioned that the Company has to make significant transmission investments in the coming years to meet system peak load demands.In fact , at page 19, you predict that future transmission investment will cost roughly twice what it has cost in the recent past. CSB REPORTING Wilder , Idaho 408 KEEN (X) Idaho Power Company83676 you know whether this Commission includes transmission costs in its avoided cost rate regulation for QFs? I do not. Has the Company done a study of the amount of QF resources that are potentially available to it in the Treasure Valley? I don't know that I could speak directly to a study, but I believe that QFs as a resource are included in the integrated planning process and the 2004 IRP is underway and I would assume it would be considered along with all of the other options as a resource potential for Idaho Power Company. The question was specific to the Treasure Valley. And the answer is I don I t know. Given that the Company is so capacity constrained in getting power to the Treasure Valley, has the Company considered asking the Commission to increase its avoided cost rate for proj ects located in the Treasure Valley in order to bring some of those potential QF resources on line? Not to my knowledge. Now , the timing of this general rate case coincides with the timing of this coming PCA rate change; correct? CSB REPORTING Wilder, Idaho 409 KEEN (X) Idaho Power Company83676 Yes. And is it possible that the PCA rate reduction might be sufficient to offset the general rate increase? It's a possibility.I t depends on what the Commission ultimately determines as a general rate CSB REPORTING Wilder, Idaho case and it depends on how significant the reduction is. I think we were probably more optimistic 12 months ago than we are today with regard to the size of the reduction in the PCA in this next adjustment. MR. RI CHARDSON :Thank you, Mr. Keen. Madam Chairman , that concludes my questions. Mr. Richardson. COMMISSIONER SMITH:Thank you BY MR. BUDGE: Mr. Budge. MR. BUDGE:Thank you, Madam Chairman. CROSS - EXAMINATION Mr. Keen, you testified beginning on page 13 that the Company has made a lot of investment COMMISSIONER KJELLANDER:Mr. Budge , your microphone. MR. BUDGE:Excuse me , let me start over. 410 KEEN (X) Idaho Power Company83676 BY MR. BUDGE:Mr. Keen, you testified, I believe, beginning on about page 13 of your testimony that the Company had made considerable expenditures in new electric plant which I believe you stated totaled $856 million since 1993 , and then you go on in the next page, 14 , and you testify about the growth of expenses as well , which I think you characterized to be about 2. percent per year since 1993 and with that background, wanted to ask you, would you agree that one of the most important ratemaking policy issues the Commission has to deal with in this case is to decide how and which customers should be responsible for paying the costs associated for new load growth? Certainly, the rate allocation is a significant issue that the Commission has to opine on. And looking also at the rate allocation issue, would you also agree that perhaps one of the more significant issues the Commission will have to deal with is whether the costs of new growth should be allocated to the customers that in fact are causing that growth? Could you repeat that, Randy? Yes.Would you agree a significant problem that the Commission is going to have to grapple with is which customers pay for these costs associated with meeting the new load growth? CSB REPORTING Wilder , Idaho 411 KEEN (X) Idaho Power Company83676 Certainly. And I think an lssue that relates to that would be what I s been characterized as a subsidy of the irrigation class and it appears to be a significant issue as to whether or not they are moved towards cost of service and how fast that move occurs over time.Would you basically agree that that I s a fundamental issue that will have to be decided here? Certainly, that I s an issue in the case and others on our group can probably speak to that more eloquently than I , but I understand it I S a function of usage of the system at peak periods, part of that by new growth and part of that by existing customers and then it I S how you allocate those costs across the customer classes. As I understand your testimony moving over to page 27 , you talk about what you call a Company capital expenditure program and you indicate there that during this - - under this particular program in 19 or 2004 through 2006, the Company expects to spend, like, $675 million; is that correct? That I S correct. And is my understanding correct that the basic reason or need for those expenditures is to construct a new plant and distribution , transmission and CSB REPORTING Wilder , Idaho 412 KEEN (X) Idaho Power Company83676 the like that the Company anticipates will be necessary to meet this new growth? It's multi-faceted.Partly it's that, partly it's maintaining our hydro facilities that we have today, not necessarily expansion of those, but maintaining the right to keep operating those through the hydro relicensing process.We have an aging thermal fleet that is needing a lot of care and feeding at this point in time.It's been leaned on hard over the years. It's getting old, 20 to 30 years , it's requiring significant capital investments, and then partly it is related to growth on the system , new customers and so forth and the cost to connect them to the system and upgrade the grid to accommodate their usage. And it's true, isn't it, that the Company has made somewhat of a policy decision that they intend to construct new plant and be less reliant on the market than perhaps in the past to avoid the situation like occurred when we had the energy crisis in 2000 and 2001? Tha t 's correct.One of the changes, positive changes, I believe, for cost management in the future has been the change in the planning criteria from strictly median water planning to what they call the 70th percentile planning for loads and resources. CSB REPORTING Wilder , Idaho 413 KEEN (X) Idaho Power Company83676 As a matter of ratemaking policy, does Idaho Power Company believe that rates should be set in a manner that fairly allocate costs to those customers that are causing the growth which is fueling the need for new capital expenditures? MR. KLINE:Madam Chairman , I'm going to obj ect.I think that question goes well beyond the scope of Mr. Keen's direct testimony and there certainly are other Idaho Power witnesses who could address that more specific question better. COMMISSIONER SMITH:Mr. Budge. MR. BUDGE:But he is the policy witness for the Company and the Company has certainly embarked upon a new change in its cost of service methodology that comes up with new allocators, the effect of which is to push considerable costs on the irrigation class that doesn't grow during the summer and so I think I' entitled to pursue some leading questions to address this particular policy shift. COMMISSIONER SMITH:As long as you talking policy and not details or Company strategy or numbers, I will allow it. MR. BUDGE:Thank you. BY MR. BUDGE:So as a matter of - - would you like that repeated , LaMont? CSB REPORTING Wilder, Idaho 414 KEEN (X) Idaho Power Company83676 I think I have the general understanding and as a policy position , we believe the costs should be fairly allocated across the customer classes.Now , I' not the expert to determine how that's done.I think that I S partially a function of new growth , but it I S also partially a function of just when customers' loads occur vis-vis the Company's ability to generate, so it's a mul ti - faceted combination that determines which customers are creating costs on the system and again , I don't have the background to give you the technical response, but, obviously, we want them allocated fairly, primarily with the cost basis.I think you see that in the testimony that we filed now.We think costs should at least be a starting point for the discussion of how you allocate rates across customer classes. So in this case, if I understand the Company s filing correctly, there are really three or four classes of customers that are showing the greatest growth and fueling the need for new capital expenditures, isn't that correct:basically the Schedule 9, general service; Schedule 1 , residential; and Schedule 19 , large power services? Well, again -- MR. KLINE:I was going to obj ect , but my witness moves a lot faster than I do sometimes.I think CSB REPORTING Wilder , Idaho 415 KEEN (X) I daho Power Company83676 we're definitely going into that realm of detail that you cautioned Mr. Budge with. COMMISSIONER SMITH:And I agree. MR. BUDGE:I'll move a little bit differently, then. BY MR. BUDGE:Do you expect the future growth that you testified about to basically come from the same customer classes that have experienced the considerable growth over the last 10 years? I think as we forecast our customer additions, we primarily expect those to be in the residential and small commercial areas, but again , those are not the only factors that drive the need for the capital program.We have a hydro fleet we want to relicense.It underscores the service to all of our customers and we have a thermal fleet that is in need of capital additions and operation and maintenance costs that again apply to all customer classes, so it's not just the 10 000 residential customers we add each year that are driving that level of capital expenditure. wi th respect to the - - some of the new allocation methodologies the Company has proposed in this case , is my understanding correct that this is the first time the Company has come into a rate case and proposed an allocation methodology, the weighted 12CP , that has CSB REPORTING Wilder , Idaho 416 KEEN (X) Idaho Power Company83676 zero for an allocator in several months? MR. KLINE:Obj ection , beyond the scope. COMMISSIONER SMITH:Sustained. BY MR. BUDGE:Well , has the Company made a policy decision to allocate more costs to those customers who use during the peak summer months, the three peak summer months, and the two winter peak months in this case than has been allocated in past cases due to the use of new methodologies? MR. KLINE:Again, I'm going to obj ect, Madam Chairman , for this reason:Mr. Gale has explicitly identified in his testimony that he is the case manager and the policy witness for ratemaking policy.s the right witness to ask these questions. COMMISSIONER SMITH:Mr. Budge? MR. BUDGE:I I d like to be heard on that. This is a policy decision that the Company has made to present a cost methodology that they have never before presented , it's never been adopted by this Commission for Idaho Power or any other utility that I know and it' clearly shifting costs that forces an allocation to irrigators that's much higher than has ever happened and that is a change in policy by the Company. It is a change in what this Commission has adopted and I think as the policy witness, Mr. Keen ought CSB REPORTING Wilder , Idaho 417 KEEN (X) Idaho Power Company83676 to be able to testify, if he knows, what is driving this change in policy, because it appears that we've got a shift that we want to favor urban customers over rural customers and if he has knowledge of that particular policy change , it seems fair that I would be able to ask him as the policy witness. COMMISSIONER SMITH:Would you care to respond , Mr. Kline? MR. KLINE:I believe that the correct witness for the level of detail of ratemaking policy that Mr. Budge is asking about is clearly Mr. Gale. addresses it in detail in his testimony.Thi s is the COO of the Company.His level of expertise in those details, you wouldn t expect him to have that. COMMISSIONER SMITH:Well, I I m going to allow you to inquire, Mr. Budge, but it sounds to me like they have an additional policy witness who is also designated as a policy witness. Thank you.I III try toMR. BUDGE: reserve most of this for Mr. Gale and I III try to limit the policy issues. BY MR. BUDGE:Do you want me to repeat that? Please. I think my general question was, has Idaho CSB REPORTING Wilder , Idaho 418 KEEN (X) Idaho Power Company83676 Power made a policy decision in coming up with this new allocation methodology to try to weigh more costs for allocation purposes to those customers who use during the peak months as opposed to the non-peak months? To the extent I was involved in the rate case strategy related to costs, all we discussed was we wanted the rates to be based as a cost basis at least as a starting point and that we wanted to have some emphasis on fixed cost recovery as we went into the rate case. How that was done, you re going to have to ask Mr. Gale or others.I really don t have any knowledge of the history or the specific technique. From a policy perspective, we have three intervenors in this case, Micron through Dr. Peseau , AARP through Mr. Powers , and Kroger through Mr. Higgins, who all are advocating a systematic and rather rapid movement of the irrigators to their cost of service, are you generally aware of that? Yes, I've read the testimony. While Mr. Gale in his rebuttal testimony tried to point out that this Commission in the past has historically considered many factors in setting rates, but one of those that he mentioned was rate shock , do you generally recall that rebuttal testimony? Yes , I read Mr. Gale's testimony. CSB REPORTING Wilder , Idaho 419 KEEN (X) Idaho Power Company83676 Does the Company believe that as a matter of policy this Commission should consider a number of factors in addition to cost of service in setting rates? I think the answer to that is yes, as indicated in Mr. Gale's testimony and again , I can affirm his testimony.I really can't give you much specific beyond that. So you would agree that rate shock is an appropriate consideration from a policy perspective? I think as Mr. Gale indicated in his testimony, cost is a starting point and then there are other considerations, so I guess the answer to that is yes , rate shock is one of those factors. Does Idaho Power agree as a matter of policy that it's also significant to consider economic impacts on a particular class of customers if that rate change would have significant effects on the class economi call y? Again , I affirm Mr. Gale I s testimony and I think he makes some reference in that regard, but he would be the better one to respond to that. But aside from Mr. Gale I s testimony on that, would you agree as a matter of sound ratemaking policy from Idaho Power's perspective that it is CSB REPORTING Wilder , Idaho 420 KEEN (X) Idaho Power Company83676 significant to look to economic factors? Well , I did understand in this case that we were not asking to move the irrigation class to full cost recovery and I endorse that decision. In this case, the Company has basically said due to rate shock and other reasons that the increase to the irrigation class should be limited to about 25 percent. Tha t 'correct. Do you recall that? Tha t 'my understanding as well. Can you tell what factors were being considered in arriving at that 25 percent? I cannot. You weren't involved in that process? No. Do you expect that there will be a policy of Idaho Power Company going forward of proposing significant moves of the irrigation class towards cost of service? I think our intent , again , is to move all customer classes toward cost of service, so I can t say for sure what we'll do in the next rate case, but being consistent , I assume we would try to move that class somewhat closer to cost of service. CSB REPORTING Wilder , Idaho 421 KEEN (X) I daho Power Company83676 Has this policy changed in this case from recent cases; in other words, is there going to be more of a desire of the Company to move towards cost of service-based rates in the future than had been in the past? Again , Mr. Gale could handle it more directly, but it's my understanding that's been our fundamental premise for years and that the last rate case took a step in that direction as well , so if that's not the case , then I'm misinformed. Are you aware of any study that the Company done to try to assess the economic impact on the irrigators of moving them towards the full cost of service which would be a 62 percent increase? m not aware of a study, no. Does the Company contemplate in the future as we move forward with this succession of rate cases that's anticipated that the economic impacts to the irrigators will be assessed in any way? Again , Mr. Gale is probably the one to give you the more direct answer , but I think there were multiple factors that he indicated in the Company' request in this case and I assume they would be treated similarly going forward. Now , I understand you weren't sure how the CSB REPORTING Wilder , Idaho 422 KEEN (X) Idaho Power Company83676 25 percent was arrived at, so those are questions should take up with Mr. Gale? That I S correct. Has the Company developed a policy with respect to who should pay for new underground lines? Not that I'm aware of , other than above a certain level , the customer shares in that cost and otherwise, they are rolled in with costs of the system like every other expenditure. I just noted a recent filing earlier this year by the Company that appeared to arise out of a dispute with the City of Eagle over who pays for underground lines, are you familiar with that? I am aware of the dispute with the City of Eagle.You I re talking about transmission lines in that case and it's been our philosophy that we do not do underground transmission lines unless they are paid for by a customer. Have you seen wi thin the Company increased pressures from cities like the City of Eagle who want their lines underground rather than overhead? I would say to a limited degree, yes. In this proceeding the irrigators through their witness Mr. Yankel have advocated a separate proceeding to thoroughly investigate cost of service CSB REPORTING Wilder , Idaho 423 KEEN (X) Idaho Power Company83676 issues, is the Company willing to participate in such a proceeding if the Commission were to find that' appropriate? If the Commission makes that decision obviously, we would participate in that in good faith. That's not the proposal in Mr. Gale's rebuttal testimony. As a matter of policy, does the Company have a desire and objective to undertake action in other forms that would increase the amount of water flowing in the Snake River? I think our policy at this point is primarily focused on trying to maintain our water rights with others trying to extract additional. I know recently the Company intervened and actively participates in proceedings before the Idaho Department of Water Resources which seeks to curtail ground water pumping to provide additional flows to spring users in the Hagerman area, are you generally aware of the Company s participation? m generally aware , yes. Is that part of the Company I s policy and obj ecti ve to maintain river flows , that they chose to participate in actions that would call out or curtail ground water pumpers? CSB REPORTING Wilder , Idaho 424 KEEN (X) Idaho Power Company83676 At a policy level what we're trying to do is preserve our rights at our hydro facilities for the benefit of all of our customers.As we see others taking actions that would deplete our flow rights at our hydro facilities, it is our obligation to our customers to defend those water rights, because absent that , we will see reduced production at our hydro facilities and we'll be back here trying to rate base new facilities to take their place , and on that area if you have anything specific, we do have Mr. Prescott as a witness and he' far more familiar with our water rights actions than I am. Well , if the Company has a policy and obj ecti ve to pursue in other forms acti vi ty to maintain or increase the flows of the river at the expense of irrigation pumpers, would that be consistent with new ratemaking policies in this case that would raise the rates of irrigators, perhaps threaten their long-term viability? The premise of your question is that we' doing something at the expense of the irrigation pumpers and all we re trying to do is preserve the rights that are dated back many years that are senior to other rights and I think that I s what typically happens when a senior water right is challenged , the one who has that right CSB REPORTING Wilder , Idaho 425 KEEN (X) Idaho Power Company83676 defends it.We've been through this before in the State of Idaho.We have the Swan Falls agreement that sets back to 1984 , sets out we have minimum flow-out rights at certain places and it's our obligation to our customers to defend those. So are you saying there's not really a correlation between that type of a water policy and a policy being advocated to move customers towards their cost of service in an aggressive fashion? They were made independently.There's no connection in my mind between those two. MR. BUDGE:Thank you very much , Mr. Keen. No further questions. COMMISSIONER SMITH:Thank you , Mr. Budge. Mr. S t u t zman . MR. STUTZMAN:Thank you Madam Chairman. CROSS-EXAMINATION BY MR. STUTZMAN Mr. Keen , I'd like to clarify a point on your testimony about the effect of the PCA. Okay. At page 11 , you note that the Company CSB REPORTING Wilder , Idaho 426 KEEN (X) Idaho Power Company83676 power supply expenses for the years 2001 and 2002 were $541 million above base expense and that the Company shareholders absorbed 127 million of that total; is that your testimony? Yes, it is. And I think at lines 18 and 19 you explain where that came from.You say that the shareholders' burden came from both the sharing mechanism and from disallowances in the 2001 and 2002 PCA Orders; is that right? That's correct. When you talk about the sharing mechanism you re talking about the 10 percent of the costs that the Company absorbs under the PCA; is that correct? That's correct. So under that part of the PCA , the Company would have absorbed approximately 54 million of the 541 million? m trying to follow your math. Ten percent of 541 million? Yeah , the 541 would be the 90 percent reduced by whatever was disallowed, so that would be let's j list say, 80 percent of some larger number , so I' not sure I can get to the 54 million. Okay, do you know what the level of CSB REPORTING Wilder , Idaho 427 KEEN (X) Idaho Power Company83676 disallowances were in the 2001 and 2002 PCA Orders? I don't know that I have those detailed here, but we had disallowances in both of those cases. Would you accept, subj ect to check , that it was approximately $10.5 million total for the two years? That seems too low to me. MR. STUTZMAN:All right , thank you. That's all the questions I have. COMMISSIONER SMITH:Thank you Mr. S t u t zman . Do we have questions from the Commission? Commissioner Hansen. COMMISSIONER HANSEN:I have a couple of questions.First, I'll turn my mike on. EXAMINATION BY COMMISSIONER HANSEN: On page 14 , lines 17 and 18 , you state, Clearly, growth has not paid for itself. Do you find that, where you made that statement? Yes, I do. For some of the growth you I re referring to as not paying for itself , is that residential CSB REPORTING Wilder , Idaho 428 KEEN (Com) Idaho Power Company83676 customers? I think I I m referring to, in a general sense, all of the 856 million or whatever we made , the new revenues generated by those investments did not produce enough return for us to cover those investments and not have to be in here seeking a rate increase , so residential would be a subset of that , but it I S not necessarily the driver.I didn't dissect it to that degree. I understand that.Okay, pertaining to hookup costs for the residential customer , are the hookup fees for residential customers covering the Company' costs or is that being subsidized by rates? I honestly don't know the answer to that. If it wasn t being covered , the costs of hookups were not being covered, by the residential customer , then would you agree that all the other customers or residential customers would be subsidizing that hookup; is that correct? m not that familiar with the hookup fees, Commissioner.I think the point here is that they are connected at incremental costs and the rates they pay are based on embedded costs, so as long as the incremental cost of adding new customers is greater than the embedded cost included in rates , even if they consume CSB REPORTING Wilder , Idaho 429 KEEN (Com) Idaho Power Company83676 at the same rate as the existing customers, we will not recover in revenues enough to pay for the new investment. m just not that familiar with the hookup rules.Again that I s where maybe Mr. Gale could be more helpful. Okay, just one other question and maybe you can refer it to another , but if it wasnl t covering the cost , if the hookup fee , would you then say that the Company, it would be your policy to come before this Commission with a case or even in this case and be asking to increase those hookup costs to cover that? The premise is that the hookup fee to date does not cover the cost of connecting the customer? Yes. I don t know that historically it's been the policy of the Commission to treat new customers different than existing customers, but I think we do have connection fees that are based upon some method , cost allocation method, that attempt to recover that to a given level.I just don't understand the mechanics of well enough, Commissioner , to give you a very articulate answer. But just a policy philosophy, I mean, you would agree somebody hooking up today is going to pay much more than somebody that hooked up in 1950 or 1960, wouldn't you? CSB REPORTING Wilder , Idaho 430 KEEN (Com) Idaho Power Company83676 Certainly. So you would naturally, I mean , there nothing sacred about increasing that if you see that it isn't being covered, would it? If you are talking about impact fee kinds of things that other service providers have added, I don't know that we have contemplated those, but certainly could if it's the Commission's direction to us. Thank you.One other topic that I'd like to just ask you about and this is a pol icy subj ect , but it comes up in other hearings and we get a lot of comments on it and it I S in regard to the bonuses received by employees of Idaho Power and I I d like to ask you , are you responsible for determining the bonuses that senior officers, officers and level 1 and 2 managers receive? The compensation committee of the board of directors actually sets the criteria that officers and senior managers have to achieve.Certainly, there's a management recommendation to that , but I'm not directly involved in that human resources function with the CEO, but a recommendation goes to the compensation committee of the board as to what the criteria would have to be achieved.They determine whether they like that or they modify it and then that becomes the goals for the Company's officers and senior managers for that next year CSB REPORTING Wilder , Idaho 431 KEEN (Com) Idaho Power Company83676 or period of years in some cases. I'd like to have you refer to Alden Holm I Exhibit 105, if we could get you a copy of that exhibit. MR. KLINE:It may take a little while. (Pause in proceedings. MR. KLINE:Which one is it, Commissioner Hansen? COMMISSIONER HANSEN:It's page 1 of Exhibit 105 of Mr. Holm. (Mr. Kl ine approached the witness. THE WITNESS:Okay, I have that. BY COMMISSIONER HANSEN:Okay, my question would be, and I don't know if you're the person I need to ask, but I was curious as I looked at this, why would officers and senior officers get a 60 to 80 percent bonus in the year 2002 when electricity rates were high for the ratepayers , but in 2003 , the PCA drops the rate around 18 percent to the ratepayers and these two groups are receiving no bonuses , could you tell me why there would be such a drastic change from 2002 to the 2003 test year? My recollection is that the payment that was made in 2002 for 2001 was based upon earnings goals at the IDACORP level, so even though it was a difficult year for Idaho Power Company, that the Company, that CSB REPORTING Wilder , Idaho 432 KEEN (Com)I daho Power Company83676 IDACORP as a whole met its goals and officers were paid. In 2002 , the goals were more specific directly to Idaho Power Company and even though some of those were earned in 2002, the officers elected not to receive bonuses for that year because of the financial condition of the Company. So then are you telling me if I was to look at 2002 , the payment of those bonuses, that - - I'd ask this question , does any of the bonus money come from Idaho Power's earnings or are you telling me it's all I DACORP? For 2000 - - what year are you looking at again? m looking at the second to the last line, the year 2001 , paYment year 2002 , and I'm asking the question, does any of the bonus money come from Idaho Power s earnings? Certainly, we had earnings that year and that contributed to the total IDACORP earnings for the year. So it does come -- so it does have an effect on the Company s earnings, these bonuses do? The bonuses contributed to the total. don't think that any provision for bonuses to officers is included in this filing.Perhaps Mr. Gale or someone CSB REPORTING Wilder , Idaho 433 KEEN (Com) Idaho Power Company83676 could -- You're right, it's not included in this filing, but the question I'm asking because we hear so many comments and the ratepayers are so concerned about Idaho Power Company paying huge amounts of bonuses to employees and the question I I m asking is, does any of the bonus money, if we were to audit and go back and look 2001 and 2002 and we look at the 60 percent and percent bonuses that the officers and senior officers received, I'd like to know , does any of that money come from Idaho Power's earnings? Can I get back to you on that?I honestly don't know , Commissioner.I understand the question and we'll get you the response and it could be from Idaho Power and it could be a question , too , whether it's above or below the line and I'm just not sure on that to give you an answer at the moment. So you I re really not sure, then , the effect that the bonuses have on the Company's earnings, you 'd have to check on that? Well , they affect - - again , we re golng back a couple of years here.I know they affected the IDACORP earnings.m not sure what effect they had on Idaho Power s earnings. I'd appreciate if we'd get that back. CSB REPORTING Wilder , Idaho 434 KEEN (Com) I daho Power Company83676 guess the reason I ask these comments or go there is that we do receive a lot of comments at hearings as well as written comments and the ratepayer is very concerned when they see a huge bonus, a six figure bonus, going to an employee that is coming from their rates and I think they re entitled to know whether it is or isn't and I think that can have a big perception on the support of the Company for a rate increase, so that's why I was coming with that. Thank you.That's all the questions have. That's well taken and we'll get you that answer.Could I give you one follow-on , though? Sure. For executive compensation , not only in our Company, but across the country, there has been a move to have a significant piece of that pay at risk , so even though salaries for executives are large , they are compared with a peer group and only a portion of the salary is the base salary and then the annual and long-term incentives are added on to get to a peer target.I know that's how they work for Idaho Power Company and I think that's how they work for most companies. Now , it's my understanding all we asked CSB REPORTING Wilder , Idaho 435 KEEN (Com) Idaho Power Company83676 for was the base salary, which in my particular case is about 45 percent of my peer target, so even if we do pay me a bonus, if we don't ask for it through recovery from the ratepayers , they're actually getting 45 percent of what my peers doing the same job get paid for this position, so we III follow up on your question , but I think we I ve tried to be careful not to unduly burden our customers with high compensation for executives. COMMISSIONER HANSEN.Thank you very much. COMMISSIONER SMITH:Yes , Mr. Keen , but you get to live here and have this wonderful Commission. THE WITNESS:And they re both a nice advantage. EXAMINATION BY COMMISSIONER SMITH: I would like a clarification on one of your answers to Commissioner Hansen.You said that in the plan year 2001 , payment year 2002 that some of these categories of people declined their bonus.Coul d you clarify which categories it was? It's the year 2003, I'm looking at the very last line , for the year 2002 that was paid in 2003, CSB REPORTING Wilder , Idaho 436 KEEN (Com) Idaho Power Company83676 the officers and the CEO actually earned a substantial part of their bonus based on the earnings of the Company, but declined to take it. officers? But in the payment year 2002 , they So that's the zeros -- That's the zeros. - - for the CEO, senior officers and Yes. actually got those bonuses in the percentages shown? I didn't prepare the chart, but assuming the chart is correct, bonuses were paid. Thanks.I just had one other question. In your response to some of the questions asked this morning, you stated that you thought it would be, I'll just paraphrase, tell me if I'm correct, it would be prudent for Idaho Power to look into having more gas generation because that would actually provide diversity in a system that historically has been predominantly hydro. What I meant to say, and maybe I garbled it, is that I think some component of our generating fleet being gas-fired generation makes sense and to date I do not think that is excessive because it's well less than 10 percent of our total generation.I do think CSB REPORTING Wilder , Idaho 437 KEEN (Com) Idaho Power Company83676 there's an upper limit that you go to with gas, and at that point you introduce additional volatility on top of an already fairly volatile generating fleet, so I do think there is an upper limit and I can't tell you what that is today.I don I t think we're there , but we have to be guarded going forward that we not become too dependent on gas because the price does vary and sometimes runs wi th power prices. And it may not be available and there may not be transportation available? Those are certainly issues as well. COMMISSIONER SMITH:Okay, thank you. Do you have redirect, Mr. Kline? MR. KLINE:, I don't believe we do. COMMISSIONER SMITH:It's a good answer. I think we'll take a ten-minute break.Actually, we 'll couldn't back at 10 till. MR. MILLER:Madam Chairman? COMMISSIONER SMITH:Mr. Miller. MR. MILLER:As you're doing that -- COMMISSIONER SMITH:Mr. Miller , we can hear you. MR. MILLER:It's a small matter.I was just asking if I could be excused from the requirement of continuous attendance and I would formally for the record CSB REPORTING Wilder, Idaho 438 KEEN (Com) Idaho Power Company83676 waive my right to be present during all the proceedings and waive my right to cross-examine witnesses who testify when I'm not here. COMMISSIONER SMITH:And given the fact that you are representing a regulated entity, we'd be CSB REPORTING Wilder , Idaho pleased to excuse you so that they don't have this added MR. MILLER:This will not appear in expense. COMMISSIONER SMITH:Thank you.You' rates. MR. MILLER:Thank you. excused. THE WITNESS:Commissioner Smith, am al so excused? COMMISSIONER SMITH:We just hate to let you go , but I think , yeah , I think they re done with you. THE WITNESS:All right, thank you. on the record. next witness. (The witness left the stand. (Recess. ) COMMISSIONER SMITH:Okay, we I 11 go back Mr. Kline, I think we're ready for your MR. KLINE:Yes , Idaho Power would call 439 KEEN (Com) Idaho Power Company83676 Dennis Gribble. DENNIS C. GRIBBLE produced as a witness at the instance of the Idaho Power CSB REPORTING Wilder , Idaho Company, having been first duly sworn , was examined and testified as follows: DIRECT EXAMINATION Mr. Gribble , would you please state your BY MR. KLINE: full name, please? Dennis C. Gribble. Mr. Gribble , what is your position at Idaho Power Company? m the assistant treasurer. And with the application that Idaho Power filed in this case in October of 2003, you prefiled 27 pages of direct testimony and Exhibits 12 through 15 at that time; is that correct? That's correct. Mr. Gribble , do you have any additions or corrections that you need to make to your testimony? I have no correct ions.I have one addition that I'd like to announce at this time.The 440 GRIBBLE (Di) Idaho Power Company83676 Company did MR. WARD:m still having trouble hearing. COMMISSIONER SMITH:Okay, we're working on that.Can we go at ease for a minute and why don I you just read something? (Pause in proceedings. COMMISSIONER SMITH:We'll go back on the record. BY MR. KLINE:I believe, Mr. Gribble , you were about to advise the parties as to some additional information that you had received. Yes.The Company had an 8 percent first mortgage bond that was due on March 15th and we refinanced that bond effective last Friday and the new rate, coupon rate , for that particular bond is 5. percent with an all effective cost of 5.605 percent , so in the original cost of capital , that particular bond that was due on March 15th, 2004 , was refinanced going from 8 percent down to 5.5 percent. Thank you.You did not have any corrections to your testimony as prefiled; is that correct? No, there is none. So with that, Mr. Gribble, if I were to CSB REPORTING Wilder , Idaho 441 GRIBBLE (Di) Idaho Power Company83676 ask you the same questions that were set out in your prefiled direct testimony, would your answers today be the same? Yes, they would. MR. KLINE:With that , Madam Chairman , I would request that Mr. Gribble's testimony be spread on the record , prefiled direct testimony be spread on the record, as if read in its entirety and I would request that Mr. Gribble I s Exhibits 12 through 15 be marked. COMMISSIONER SMITH:Without objection , it is so ordered. (The following prefiled direct testimony of Mr. Dennis Gribble is spread upon the record. CSB REPORTING Wilder , Idaho 442 GRIBBLE (Di) Idaho Power Company83676 Would you state your name , address and present occupation? 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. What is your educational background? 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 Uni versi ty, 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 Treasury Professional. Would you please describe your business experience with Idaho Power Company? I joined Idaho Power Company in 1979.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 443 GRIBBLE , DI Idaho Power Company Controller-Financial Services and in May 1999 I was promoted 444 GRIBBLE, DI Idaho Power Company to my current position as Assistant Treasurer. In the course of my duties with Idaho Power Company, I have presented testimony to the Idaho Public Utilities Commission and the Oregon Public Utility Commission. What are your duties as Assistant Treasurer as they relate to the current proceeding? I oversee the direct financial planning, procurement, and investment of funds for Idaho Power , as well as supervise corporate liquidity management. What are your financial activities and responsibilities with respect to Idaho Power Company? My acti vi ties and responsibilities include various aspects of all the Company s financings and other financial matters.With respect to long-term financings - sale of bonds , preferred stock , and common stock - my activities include development of financial plans with senior officers , meeting with representatives of investment banking firms that are interested in underwriting our securities, discussions with rating agencies, assisting in preparation of financial material including Registration Statements filed with the Securities and Exchange Commission , representing the Company at information meetings for investment banking firms , reviewing recommendations on bids received relati ve to the Company I S financings and recommendingdisposition of net proceeds. With respect to 445 GRIBBLE , DI Idaho Power Company short-term financings , these activities and responsibilities include negotiation of lines of credit wi th commercial banks and arranging for the sale of commercial paper. Are you in continual communication with members of the financial community? Yes.I am in constant contact with individuals representing investment and commercial banking firms, rating agencies , insurance companies, institutional investment firms , and other organi zations interested in publicly traded securities , that actively follow IDACORP and Idaho Power Company.In association with the Chief Financial Officer and the Director of Investor Relations my responsibilities include keeping these persons informed of the Company s financial condition , arranging meetings with these people and Idaho Power's senior executive management, and visiting with financial representatives in their respective offices.These members of the investment community have followed the electric utility industry for an extended period of time and have a great deal of expertise in the financial problems and prospects of utilities. Through my continual contact with the financial communi ty, and review of investment banking analytical reports and articles issued by these firms, I am able to 446 GRIBBLE , DI Idaho Power Company keep informed on trends, interest rates, financing costs security ratings , and other financial developments in the 447 GRIBBLE, DI Idaho Power Company public utility industry. Are you a member of any professional societies or associations? Yes.I am a member of the Association for Financial Professionals (AFP) and the Institute of Management Accountants (IMA). Through information received from attendance at conferences and seminars of these and other utility professional groups such as the Edison Electric Institute , I am able to gain additional insights into the financial developments affecting Idaho Power Company as well as the electric utility industry. What is the purpose of your testimony in this proceeding? I am sponsoring testimony as to the point estimate for Idaho Power Company's rate of return on common equity, the embedded cost of long-term debt and preferred stock , the use of an estimated year-end 2003 capi tal structure , and the resultant overall cost of capi tal to be used in these proceedings. What exhibits are you sponsoring? I am sponsoring Exhibits numbered 12 through 15. What is the point estimate you recommend for the rate of return on common equity for Idaho Power Company? 448 GRIBBLE , DI Idaho Power Company As I will discuss in further detail later in my testimony, I have selected 11.2 percent as a reasonable cost of equity for the Company, which falls at the mid-point of Mr. Avera I s recommended cost of equity range for Idaho Power Company of 10.6 to 11.percent.The 11.2 percent is also the minimum required fair rate of return considering the Company I s overall management efforts throughout these last ten years as discussed by Mr. Keen and Ms. Fullen in their testimony, as well as the Company s efforts to economically refinance outstanding debt and preferred stock securities in recent years. What is the overall cost of capital for Idaho Power Company? Based on an estimated year-end 2003 capital structure provided to me by Ms. Smith, the embedded cost of debt and preferred stock presented in my testimony, and incorporating the 11.2 percent cost of equity, the resultant overall cost of capital for Idaho Power Company is 8.334 percent. Mr. Avera indicates that his 10.6 to 11. percent recommended cost of equity range does not include any additional basis points as an incentive to the Company for its stewardship of the system and overall management efforts described by Mr. Keen and Ms. Fullen 449 GRIBBLE, DI Idaho Power Company nor for the Company's efforts to economically refinance its securities. 450 GRIBBLE, DI Idaho Power Company What effect does this have on your 11.2 percent point estimate for the rate of return on the Company's common equi ty? If the Commission selects a cost of equity value that is less than the mid-point of the recommended cost of Mr. Avera's recommended equity range , then the Company will be penalized since the cost of equity range derived by Mr. Avera does not include any such reward. Mr. Avera indicates in his testimony that Idaho Power , when compared to the Western electric utility industry and its selected comparable peer group, has a greater share of specific risk. Do you agree with this conclusion? Yes.Financial analysts, bond rating agencies, regulators, and other commentators in the financial press continue to chronicle the increasing volatility of change and risk in the western electric utility industry.The Company, not unlike the majority of the industry, also faces the prevalence of change and uncertainty.Most observers agree that individual companies tend to have increasingly less and less control of both the pace and magni tude of this change and uncertainty.In addition to the impact of the general electric utility industry risk Idaho Power Company faces very specific risks. 451 GRIBBLE , DI Idaho Power Company What risks are specific to Idaho Power Company? The following are risks that the investing public view as specific to Idaho Power Company:(1) a predominately hydroelectric generating base subj ect the vagaries of weather , water , and a volatile wholesale power supply market in the Western United States and specifically the Northwest,(2) the renewal of federal licenses for its hydroelectric proj ects, namely the Hells Canyon Complex which provides 40 percent of the Company' total generating capacity, and (3) the ability to recover significant capital investment required for present and growing electrical requirements and service reliability for its customers. Can you elaborate as to the nature of Idaho Power Company s risks? Yes.I will provide additional detail on each specific risk and also provide the financial investing communities perspective relative to that risk.Allyson Rodgers , an equity analyst formerly with Ragen McKenzie (Pacific Northwest Research), succinctly states these specific risks in her May 7 , 2003 research report (pg. 6); "We believe primary risks to IDACORP' s ability to return to a more normal earnings range include continued slow economic activity, weather, including hydro conditions, and unfavorable regulatory action at the 452 GRIBBLE , DI Idaho Power Company state or federal level. Please describe the risks specific to a predominately hydroelectric generating base subj ect the vagaries of weather and water. Idaho Power Company and its customers have long enjoyed the benefits of a hydroelectric based utility. However , because of the heavy reliance on hydroelectric generation , the Company's operations and resulting financial condition can be significantly impacted by low water conditions.Reduced hydroelectric generation resul ting from below normal water flows, compels the Company to use more expensive thermal generation and/or purchased power to meet the electrical needs of its customers.Al though the Idaho Public Utili ties Commission (IPUC) grants recovery for the maj ori ty of extraordinary purchased power costs through the Company' Power Cost Adjustment Mechanism (PCA) , the recovery is less than 100 percent , is on a deferred basis, and is subj ect to the regulatory process.Generally, the investment community views the PCA mechanism as a positive since it does allow for recovery of the majority of excess net power supply costs.As a result of the 2000-2001 California energy crisis and four years of Northwest drought conditions , the last three PCA rate proceedings (i., 2001 , 2002 , and 2003) have resulted in 453 GRIBBLE, DI Idaho Power Company unprecedented increased net power supply costs.Al though originally conceived as a fair 454 GRIBBLE, DI Idaho Power Company sharing mechanism , the Idaho jurisdictional 10 percent portion of the recent PCA proceedings borne by the Company s shareholders has had a devastating impact on the earnings capability of the Company.Unl ike the more familiar fuel cost adj ustment mechanisms (for gas utilities) that recover 100 percent of the changes in base fuel costs, the Company s PCA mechanism is viewed by the investment community as more risky as a result of this sharing feature.The firm of Ragen MacKenzie reported this impact in its February 25, 2002 IDACORP Inc. research report (pg. 6); "IDACORP estimates that Idaho Power Company's earnings (2002) would have been $1.45 higher ($1.27 negative impact from excess power costs not included in the PCA adjustment and a write-off of $0.18 for excess power costs) without the negative impact of higher power costs. Please describe the risks specific to the renewal of federal licenses for its hydroelectric proj ects , namely the Hells Canyon Complex that provides 40 percent of the Company's total generating capacity. Idaho Power Company is the only investor-owned electric utility in the United States with 57 percent of its generation derived from hydro generating facilities under normal water conditions.Wi th such a large portion of the Company I s generation resources based on hydro 455 GRIBBLE , DI Idaho Power Company facilities, a negative economic impact resulting from renewing the Federal licenses of these facilities could have a significant financial impact on the Company and the prices its consumers pay for electricity.As part of this process , the Company has and will file applications with the Federal Energy Regulatory Commission (FERC) for new licenses on 92 percent of its hydro generating capacity. Once an application is filed, the time frame to actually receive an order from the FERC is unknown. The combination of an unknown time frame to receive a new license along with a financial impact that is difficult to quantify, lays the foundation for a potentially large financial risk unique to the Company.The He 11 s Canyon generating facilities comprised of Hells Canyon , Oxbow and Brownlee make up 68 percent of the Company's hydro generation capacity and 40 percent of its total generation capacity. The Hells Canyon license application was filed in July of 2003.This process moves at an extremely deliberate pace due to the large number of interested parties involved in evaluating the appl ication.This makes the likelihood of a new Hells Canyon facilities license being issued in 2005 remote. In these types of delayed situations, historically the Company has been given an annual license renewal (under the existing old license) until the formal new license is 456 GRIBBLE, DI Idaho Power Company issued.This delay further reinforces the ambiguity of the ultimate financial impact.For any particular generating facility, 457 GRIBBLE , DI 10a Idaho Power Company the worst possible outcome would be the loss of the license to a competing party.Along with the uncertainty as to the eventual receipt of licenses and the costs involved in preparing for the license applications, costs of protection, mitigation and enhancement of natural resources (PME' s) related to these projects are also difficult to quantify.The potential financial magnitude of these PME' s and their effect on the Company's low cost hydrogeneration resources, threaten the financial stability of a company the size of Idaho Power and the ul timate rates it must charge its customers.These amounts will vary between each facility, but in all cases they can be significant due to lost capacity, less generation at a higher cost, and the decreased ability of the Company to time and control water flows.If the Company cannot generate when it is most advantageous for the system, then some of the economic value of the generation has been lost, even if the amount of total generation does not change.Kevin Rose, an analyst with Moody s Investor Services notes in his June 20 , 2003 Opinion update on Idaho Power Company (Pg. 2); What Could Change the Rating - DOWN....., Significant increases in relicensing costs and/or stringent operational constraints imposed as part of the license renewal process.... 458 GRIBBLE , DI Idaho Power Company In addition to the hydro relicensing risk, the Company continually faces significant capital , operating and 459 GRIBBLE , DI 11a Idaho Power Company other costs associated with compliance with current environmental statutes, rules and regulations. These costs may be even higher in the future as a result of among other factors, changes in legislation and enforcement policies and the potential additional requirements imposed in connection with the relicensing of the Company's hydroelectric proj ects . Why do you say that a volatile wholesale power supply market in the Western United States and specifically the Northwest is specific to Idaho Power Company? The recent California energy crlS1S and its unprecedented effects on the prices in the wholesale energy markets coupled with persistent drought in the Northwest have specifically impacted the Company.These impacts are; first, and as noted above, reduced access to the Company's low cost hydroelectric generation , second increased reliance on the Company s thermal based generating resources , and lastly, the heightened exposure to volatile wholesale energy prices when the Company must rely on the wholesale energy market to meet native load requirements.When the Company is unable to utilize its hydro resources, it must next turn to the wholesale markets or its own thermal based resources.Typically pricing and availability will determine these decisions. 460 GRIBBLE , DI Idaho Power Company Over the last several years , the Company's thermal fleet has been required to supply a large amount of the resource deficit since the wholesale energy market prices were extremely high and hydro availability was low. Although these thermal resources have been there when dispatched, these thermal resources are aging and are requiring increased capital and O&M expenditures just to maintain availability.As the reliability of these thermal resources diminishes , either as a result of age or over-utilization, the Company is further at the mercy of a volatile western and northwest energy market. Philip C. Adams , Bane One Capital Markets, Inc., describes this situation in his December 12 , 2002 Update and New Issue Review (Pg. 2)," Challenges: IPC is on its third consecutive year of below-average water availabil i ty for hydroelectric power.Its reliance on purchased power remains higher than normal, forcing IPC to fund purchases in anticipation of rate relief.IPC relies heavily on hydroelectric power for it generating needs and can experience a negative impact from adverse weather , such as a low snow pack in the mountains above IPC reservoirs, or low precipitation levels.As demand outstrips hydroelectric capacity, more expensive coal and diesel facil i ties , along with purchased power , are needed to make up the difference. 461 GRIBBLE , DI Idaho Power Company Please describe the risks specific to the Company s ability to recover significant capital investment 462 GRIBBLE , DI 13a Idaho Power Company required for present and growing electrical requirements and service reliability for its customers. As the Company s system ages and customer electrical requirements increase , additional investment is required to meet reliability standards and the addi tional demand on its electrical infrastructure.The Company's latest forecast requires construction budgets of $150 million in 2003; this budget will rise to $675 million over the next three years.Recovery of these investments introduces an element of risk since; first the need for the Company s to attract capital , and second, recovery of these investments will be on a deferred basis and subj ect to the regulatory process. Kevin Rose , Moody I s Investors Services , identifies one of the Company's key credit challenges in his June 20, 2003 Opinion Update as; "General rate increase needed to recover costs of customer growth , additional capacity needs and expansion of T&D system. What is the status of Idaho Power Company' bond ratings? The following are the current First Mortgage Bond (FMB), Preferred Stock , Commercial Paper (CP-short term debt), and Rating Outlook ratings for Idaho Power Company: 463 GRIBBLE , DI Idaho Power Company Moody'Fi tch General Corporate Rating No Rating FMB' 464 GRIBBLE , DI 14a Idaho Power Company Preferred Baa2 BBB BBB+ Outlook Negati ve Stable Stable Have the Company ratings been under pressure in recent years? Yes.Al though the bond ratings for the Company's first mortgage bonds have remained intact, the ratings on its preferred stock were changed due to a rating agency philosophy that replaced preferred stock ratings with a debt like standard.Accordingly, S&P has changed its rating on the Company's short term debt from I to A-, Moody's has the Company on a Negative Rating Outlook , and S&P has moved the Company from a Positive to a Stable Outlook.Moody's reasoned as follows; "IPC' s rating outlook is negative as the utility continues to cope with difficult power supply markets in the region and prepares to seek a base rate increase to bolster utility returns and cash flow.Affiliate transaction issues with FERC and the IPUC have been largely resolved wi thout undue cost , although certain internal compliance assessments still need to be completed.Swami Ven Kataroman , Standard & Poor , in his October 3 , 2003 update, states:"Standard & Poor's now expects that ratios will only meet expectations for the ' A-' rating and may even be slightly weaker in the interim , as Idaho 465 GRIBBLE , DI Idaho Power Company Power continues to recover deferred power costs and face poor 466 GRIBBLE , DI 15a Idaho Power Company water conditions in the Snake River and lower than expected sales.The Company s S&P financial measurement benchmarks reflect the financial pressure the Company faces in maintaining its current ratings. What are the principal financial measurement ratio benchmarks used by Standard and Poor'(S&P)? The first benchmark is the funds from operations (FFO) as a percent of average total debt.The second principal benchmark is FFO interest coverage. Pre-tax cash interest coverage is the third benchmark. The fourth benchmark used by Standard and Poor's is the ratio of total debt to total capital.In the first three benchmarks higher scores are better, while in the fourth benchmark, a lower score is better.These obj ect i ve measurements are but one set of tools that Standard & Poor s use in determining the ultimate credit rating for a company.Other factors that standard and Poor' considers are management credibility and track record, forecasts provided by management, and general overall judgment by the rating agency committees. What are the Standard and Poor's electric utility financial ratio benchmarks? The Standard and Poor's electric utility financial ratio benchmarks are set forth in Exhibit No. 12. How does Idaho Power Company's current (12 467 GRIBBLE, DI Idaho Power Company months ended June 30, 2003) S&P financial ratio benchmarks compare with the mid-point ratio benchmarks for an "A" rated electric utility with a level 4 business risk position (the Company's current risk position) The resulting ratios are as follows: IPCo FFO/total debt (%) 24.30.5%-24. FFO interest coverage (x)5x-70x Pretax interest coverage (x)0x-2. OOx Total debt/total capital (%) 52.43.0%-49. What do the Company's current financial benchmark ratios indicate regarding the Company' financial condition? Using a strict analytical approach , the FFO/total debt ratio of 24.4 percent would warrant a high "BBB" rating, the FFO interest coverage of 6. 70x would yield a high "AA" rating (this ratio will decline however, due to the recent reductions in PCA recovery) , the Pretax interest coverage of 2., would produce a high "BB" rating, and the Total debt/total capital ratio of 52.9 percent , would score a "BBB" rating.Rating agency analysts must and do take into account qualitative aspects of a company, but a literal interpretation of these quantitative financial benchmark results would suggest a downgrade from the Company I s current " 468 GRIBBLE, DI Idaho Power Company rating. What are the implications to the Company of increasingly more stringent risk assessments by rating agencies and the Company's current financial benchmark ratios? Without adequate rate relief and more normal water conditions, it is uncertain as to how long the Company can maintain an "A" rating.Al though many Investor-Owned Utilities (IOU's) find a "BBB" or "BBB+ acceptable , the Company believes that maintaining a strong "A" rating is essential.The Company mus maintain its ability to attract capital in the ultra-competitive investing environment.Idaho Power is not a large electric utility and when matched against other utility investment opportunities, the Company lacks the benefit of broad investment analyst coverage.Unless a strong single "A" rating is maintained; the absence of broad investment analyst coverage and the small size of the Company could prove to great an obstacle for the Company to overcome in its efforts to raise capital. "BBB" rating for the Company would mean a 50-55 basis point annual increase on newly issued long-term debt and prevent the Company from accessing the low-cost short-term commercial paper (CP) market.wi thout access to the CP market , the Company will pay an added 70- 469 GRIBBLE, DI I daho Power Company basis points for short-term debt.In simple terms, a strong "A" rating is critical for Idaho Power to maintain its independence and attract lower 470 GRIBBLE, DI 18a Idaho Power Company cost capital as the Company enters into a period of substantial investment requirements. Is Idaho Power also affected by rating agencies imputing debt onto its balance sheet due to purchased power contracts? Yes.Like other electric utilities, when the Company adds to its rate base, it must use some portion of shareholder equity to fund the investment.The Company must maintain its equity component above a certain level as it continues this investment process. Or as the debt levels increase , the Company will face the threat of a bond downgrading.Conversely, when the Company enters into contracts for purchased power , an obligation that is not reflected in its financial statement , an increase in equity to maintain credit quality is not automatic.This lack of required equity funding as an offset to the debt-like obligation of purchase power contracts, results in an off balance sheet risk. For financial commitments that do not appear on the balance sheet, financial analysts and rating agencies impute the debt and interest equivalents on the financial statements of the Company to achieve a more accurate picture of the risk associated with their investment. The added equity needed to offset this imputed debt and interest represents the effect that long-term purchase 471 GRIBBLE , DI Idaho Power Company power commitments have on the cost of capital. Any increase in the long-term obligation of a utility related to its capacity and energy resources will have to be backed by an appropriate amount of equity in the eyes of the investment community. In their testimony, Mr. Keen and Ms. Fullen describe Company and management efforts in the areas of stewardship of the system , customer service , and demand-side management.I s there anything in the area of financing activity that you feel deserves similar recogni tion? Yes. In addition to the areas discussed in detail by Mr. Keen , the Company has taken numerous opportuni ties to refund various issues of both long-term debt and preferred stock on a cost effective basis. This has resulted in significantly lower embedded costs than would otherwise have been the case.At the last Idaho general rate case, the Company's overall cost of debt capital was 8.024 percent and the effective cost of preferred stock was 6.083 percent.As will be shown later in my testimony, the Company's current cost of debt capi tal is 5.983 percent and the effective cost of preferred stock is 6.534 percent.The primary driver for the small increase in the effective cost of preferred stock was the removal of the $50 million variable rate 472 GRIBBLE , DI Idaho Power Company auction preferred stock that was redeemed in August 2002. This redemption was due to a different preferred stock rating criteria that placed added pressure 473 GRIBBLE , DI 20a Idaho Power Company on the ability of this market to avoid a failed auction process.The resulting financing efforts by the Company are reflected by the overall cost of capital at the last Idaho general rate case of 9.199 percent being reduced to the current cost of capital of 8.334 percent that is proposed in this filing. Would you please comment on page 1 of Exhibit No. 13? Page 1 of Exhibit No. 13 details the calculation of the Idaho Power Company capital structure for long-term debt, preferred stock, and common equity balance resulting from the Company's estimated year end 2003 capital structure as provided to me by Ms. Smith. Earlier in your testimony you indicated that you have used an estimated 2003 financial result in arri ving at the overall cost of capital for the Company. Why have you selected this particular capital structure? The estimated year end 2003 financial results as provided to me by Ms. Smith reflect the Company's best estimate at this time of the 2003 year-end capital structure.The Commission can update the capital structure to incorporate known and measurable changes as this ~roceeding progresses to reflect an actual year-end 2003 capital structure.Mr. Avera , in his testimony, has indicated that the capital structure submitted on page 1 474 GRIBBLE , DI Idaho Power Company of my Exhibit No. 13 is reasonable and is consistent with comparable companies in the industry. The capital structure presented on page 1 of Exhibi t No. 13 incorporates changes to the Company' normal financial reporting of its capital structure. Could you please discuss the rationale for the variance? For financial reporting purposes the American Falls Bond Guarantee and the Milner Dam Note Guarantee are included in the long-term debt portion of the capital structure.For ratemaking purposes the interest costs associated with both the American Falls and the Milner debt securities are covered as operating and maintenance O&M") expenses.Even with these exclusions , the capi tal structure presented in my Exhibit No. 13 is reasonable in light of industry and rating agency cri teria. Would you please comment on page 1 of Exhibit No. 14? Page 1 of Exhibit No. 14 details the calculation of the embedded cost of debt used in the estimated year-end 2003 capital structure.The embedded cost of debt is 5.983 percent. Does the Company utilize variable rate securities in its long-term capitalization? Yes , the Company currently utilizes several 475 GRIBBLE , DI Idaho Power Company variable rate securities in its long-term capitalization. These securities are the County of Sweetwater Variable Rate Series 1996B ($24.2 million), and 1996C ($24. million) Pollution Control Bonds, and the Port of Morrow Variable Rate Pollution Control Bonds ($4.36 million) Also , the Company intends to refinance its $49.8 million 30 percent Humboldt County Pollution Control Revenue bonds in October, 2003 by issuing new $49.8 million of variable rate bonds.These securities are listed on lines 12 , 13 , 14 , and 15 of page 1 on Exhibit No. 14. Would you please describe the variable rate nature of these variable rate pollution control bonds? These variable rate pollution control bonds although considered long-term securities, have features that allow the Company to take advantage of rates applicable to short term securities.The County of Sweetwater Pollution Control Variable Rate Bonds Series B and C (Bridger Variable Rate Bonds) reset the interest rate on a daily basis.The Port of Morrow Pollution Control Variable Rate Bonds (Boardman Variable Rate Bonds) reset the interest rate on a weekly basis.The proposed Humboldt Pollution Control Revenue Bonds (Valmy Variable Rate Bonds) will reset their interest rate every 35 days.The Bridger Variable Rate Bonds daily rate interest rate is determined each business day by a 476 GRIBBLE , DI Idaho Power Company Remarketing Agent by examining tax-exempt obligations comparable to the Bridger Variable Bonds known 477 GRIBBLE , DI 23a Idaho Power Company to have been priced or traded under the then-prevailing market conditions that would be the lowest rate which would enable the Remarketing Agent to sell the Bridger Variable Rate Bonds.Likewise , on a weekly basis the Boardman Variable Rate Bonds weekly interest rate is determined the first day of a weekly period by a Remarketing Agent by examining tax-exempt obligations comparable to the Boardman Variable Bonds known to have been priced or traded under the then-prevailing market conditions that would be the lowest rate which would enable the Remarketing Agent to sell the Boardman Variable Rate Bonds.The new Valmy Variable Rate Bonds are designed to reset their interest rate every 35 days via a dutch auction process (lowest bid received by an Auction Agent that covers the bonds outstanding) to reflect the current market conditions. Please comment on the derivation of the effective cost of the interest rates for the Pollution Control Bonds listed on lines 12 , 13 , 14 , and 15 on page 1 of Exhibit No. 14? Page 2 of Exhibit No. 14 is a chart that depicts the Bond Market Association (BMA) Municipal Swap Index for the last 10 years.The BMA Municipal Swap Index , produced by Municipal Market Data (MMD) , is day high-grade market index comprised of tax-exempt 478 GRIBBLE , DI Idaho Power Company Variable Rate Demand Obligations (VRDO' s) from MMD' extensi ve database. 479 GRIBBLE , DI 24a Idaho Power Company The Index was created in response to industry participants' demand for a short-term index to accurately reflect activity in the VRDO market. In 1991 , The Bond Market Association established a Market Index Subcommittee to analyze the need for such an index , and determined a solution.MMD worked closely with The Bond Market Association to determine appropriate criteria on which to base the index.Issuers , investment bankers and other market participants need an efficient way to monitor the market on a regular basis.The index provides a consistent , superior means of tracking market movements as they occur. Pages 3, 4 , 5, and 6 of Exhibit No. 14 show the Company's spreads (difference of the Company s actual variable rate, plus or minus, when compared to the BMA Municipal Swap Index) over the BMA Municipal Swap Index for the Bridger Variable Rate Bonds and the Boardman Variable Rate Bonds since the life of these bonds, plus an estimate for the Valmy Variable Rate Bonds. In light of the volatility in short-term interest rates , I determined that an average of the 10 year BMA Municipal Swap Index , plus an average of the Company' spreads since the inception of these variable rate bonds, should be used in calculating the cost of these securi ties.This is a conservative approach in that, 480 GRIBBLE , DI Idaho Power Company there are a significantly larger amount of data points at the low end of 481 GRIBBLE, DI 25a Idaho Power Company the 10-year cycle and the trough covers a relatively high percentage of this cycle. The average of the 10 BMA Municipal Swap Index percent,the average Company spreads for the Bridger Variable Rate Bond Series 07%the Bridger Variable Rate Bond Series - . 12%the Boardman Variable Rate Bond is .94%, and the Valmy Variable Rate Bonds is .61% (includes amortization of call premium, spread over BMA index , broker dealer fees , and insurance costs) .The resulting coupon rates used for these variable rate securities are: Bridger Variable Rate Bond Series B 2. 97% Bridger Variable Rate Bond Series C - 2.92% Boardman Variable Rate Bond - 3.98% Valmy Variable Rate Bond is - 3.65% Would you please comment on Exhibit No. IS? Exhibit No. 15 details the calculation of the embedded cost of preferred stock used in the forecasted 2003 capital structure.The embedded cost of preferred stock is 6.534 percent. What is the overall weighted cost of capital when you incorporate the respective costs? The overall weighted cost of capital for revenue requirement purposes in this proceeding is 8.334 percent.This is based on a s. 993 percent embedded cost 482 GRIBBLE, DI Idaho Power Company of debt; a 6.534 percent embedded cost of preferred stock; and the 483 GRIBBLE , DI 26a Idaho Power Company 11.2 percent rate of return on common equity. Does this conclude your direct testimony in Yes , it does. this case? 484 GRIBBLE , DI Idaho Power Company (The following proceedings were had in open hearing. MR. KLINE:And with that , Mr. Gribble is available for cross-examination. COMMISSIONER SMITH:Thank you.Ms. Nordstrom , do you have questions? MS. NORDSTROM:I do.Thank you, Madam Chair. CROSS - EXAMINATION BY MS. NORDSTROM: Mr. Gribble, good morning. Hi. On page 12 , lines 21 through 23 of Ms. Smith's direct testimony, she discussed a known and measurable adj ustment to reflect the forecasted increased cost associated with the American Falls Falling Water payments. Okay. Is this the same as the American Falls bond guarantee discussed on page 22 of your testimony? Yes , it is. What interest rate was used to forecast the interest expense? CSB REPORTING Wilder , Idaho 485 GRIBBLE (X) Idaho Power Company83676 In my testimony? Yes. In my testimony,the actual interest rate - - I mean , I didn I t actually testify to that particular interest rate.We provided that interest rate to Ms. Smith to calculate the known and measurable adj ustment . Who provided that to her? Our area , my area. Does it sound reasonable that the interest rate was 4.12 percent? CSB REPORTING Wilder, Idaho That sounds about right , yes. Have interest rates increased in 2004? No, they have pretty much stayed the Is it true that the average interest rate has been 3.3 percent since their issuance Subj ect to check , I would accept that. On pages 5 and 6 of your testimony, you reference the overall management efforts to economically refinance outstanding debt and deferred stock.Would you agree that the prudent management and business decisions dictate reducing financing costs whenever possible if they can be done so at a reasonable cost? same. on these bonds April 2000? 486 GRIBBLE (X) Idaho Power Company83676 Absolutely.That's just good business for both the shareowners and ratepayers. Isn't it true that when financing costs are reduced , actual earnings level are higher than they would be absent refinancing? Tha t 's correct. On page 6, beginning on line 12 , you indicate that the Company's recommended cost of equity range does not include any additional basis points as an incenti ve to the Company for efforts to economically refinance its securities.Are you indicating that a reward on allowed equity return is required as an incentive for Idaho Power to make prudent management and business decisions to refinance? , I think what I'm saying is looking at Mr. Avera's cost of equity range and choosing the midpoint of that that any type of adjustment to that for a benefit of actions such as beneficial refinancing would make sense to add on to that midpoint. MR. KLINE:Staff has no further questions. COMMISSIONER SMITH:Thank you. Mr. Budge. MR. BUDGE:No questions. COMMISSIONER SMITH:Mr. Richardson. CSB REPORTING Wilder , Idaho 487 GRIBBLE (X) Idaho Power Company83676 MR. RICHARDSON:Thank you, Madam Chairman. CROSS-EXAMINATION BY MR. RI CHARDSON : Mr. Gribble , you state at page following up on Ms. Nordstrom's questions, you state at page 6 of your testimony that if Idaho Power is not given the midpoint of Dr. Avera's ROE recommendation that the Commission will have penalized the Company because it did not include a reward; correct? That's correct. And this reward is for an incentive for the Company for its stewardship of its system , overall management efforts and for economically refinancing securi ties; correct? That's correct. m sort of reminded of my son's junior soccer where it was appropriate at the end of the season for just showing up, is the Company's concept of being deserving of a reward is that it has done something above and beyond the call of duty or does it have to show up and do what is expected of any well-managed utility in order to have earned a reward? CSB REPORTING Wilder , Idaho 488 GRIBBLE (X) Idaho Power Company83676 Well , I feel like that from the utility' standpoint , we need to be prudent , especially in my area in managing the cost of capital and the only way we can be rewarded for doing extraordinary work in that type of area would be through the return on equity. You used the word "penalized" and when think of the word penalty, I think of things like fines or forfeiture or even j ail time.When you use the word penalty," is it your position that if this Commission sets your rate of return at what it finds to be your true cost of equity with no bonus reward the Company will actually be penalized? Well , I think from a return standpoint that we're entitled to a fair rate of return and that anything less than that fair rate of return would, in essence , penal i ze the shareowner. On page 7 , beginning at line 4 , you reference what you call the risks that are specific to Idaho Power.When you use the word "specific " do you mean risks that are unique to Idaho Power or are you speaking generically about the risks of the electric utility industry? Specific to Idaho Power. And of those specific to Idaho Power risks, you reference things like volatile wholesale power CSB REPORTING Wilder , Idaho 489 GRIBBLE (X) Idaho Power Company83676 supply market, is that unique to Idaho Power? Well , in the context of that first point there , I think it's based upon the fact that we' predominantly a hydroelectric generating base that' subject to a volatile wholesale power supply market. Obviously, the volatile wholesale power supply market is throughout the Western U. S., but because Idaho Power is predominantly hydroelectric , it has much more subjectivity to that volatility of that particular market. So that phrase of your answer should be read with the qualifier that you're only speaking about those risks because of the hydroelectric component of your system? I think the primary risk in that particular statement is the fact that we're predominantly hydroelectric, that's correct. And then another unique to Idaho Power risk that you identify is the ability to recover significant capital investment.That's unique to Idaho Power? That's not unique to Idaho Power.That' simply utilities in general during phases of construction.I think what's unique to that is that this happens to be a point in time for Idaho Power where we CSB REPORTING Wilder , Idaho 490 GRIBBLE (X)I daho Power Company83676 are trying to or where we are incurring significant capital expenditures for aging hydro plants and thermal facilities and other resource needs. On page 9 of your testimony, you state that the Company's PCA is viewed by the investment community as more risky as a result of its sharing feature , and then you quote a Ms. MacKenzie in a research report on Idaho Power discussing your earnings estimates. Don't analysts like Ms. MacKenzie actually view the PCA as a good thing? Most analysts , in fact, every analyst that m aware of , do realize that a PCA is a very good risk mitigation from the standpoint of power supply costs. What's unusual is the fact that there is a sharing mechanism that at points in time , as we experienced in 2001 and 2002 , that sharing mechanism really does have a devastating effect on the shareowner and the investment communi ty, so , yes , most PCAs or most analysts do see the PCA as a way to mitigate risk , but on the other side of , there is a huge risk in terms of the 10 percent sharing side of it. In fact, doesn't Ms. MacKenzie end up saying in the report that " It's fortunate that Idaho Power has a PCA" She may have.Do you have a specific CSB REPORTING Wilder , Idaho 491 GRIBBLE (X) Idaho Power Company83676 place? I do. Madam Chairman , I'd like to hand out what I would like to be marked as Exhibit 213. COMMISSIONER SMITH:All right. (Industrial Customers of Idaho Power Exhibit No. 213 was marked for identification. (Dr. Reading distributing documents. BY MR. RICHARDSON:For the record, Exhibit 213 is labeled Ragen MacKenzie, Pacific Northwest Research , IDACORP , INC. on the front.It's paginated two ways.One is handwritten pagination on the lower right-hand corner beginning with page 6 and then on the interior in the center , the document is printed with a page 2 , so when I ask you about pagination of this document, I'll be referring to the printed pagination number starting with page 1 on the first page. Are you familiar with this report? Yes, I have read it. And this document was provided by you in your workpapers in this testimony; is that correct? That's correct. Would you turn to page 4 , or going by the handwri t ten pagination page 9 , of Exhibit 213 and read for us the first two sentences of the first paragraph? CSB REPORTING Wilder , Idaho 492 GRIBBLE (X) Idaho Power Company83676 Is this under the deferred charges and recovery of excess power costs? Correct , the first two sentences in that paragraph. In 2001 Idaho Power faced drought volatile wholesale prices , and heavier load requirements due to colder-than-normal weather. Fortunately, Idaho Power put into place a number of years ago a purchase cost adjustment (PCA) mechanism that allows the Company to adjust the price of power embedded in its rate structure on an annual basis. Doesn't it sound like Ms. MacKenzie is actually breathing a sigh of relief that you have a PCA in place? As I mentioned before, most analysts do view the PCA as a very supportive mechanism in terms of risk mitigation.I would , I guess in that same report, I would point over on page 6 of that report in the middle paragraph in which it states that IDACORP estimates that Idaho Power Company's earnings would have been $1. higher ($1.27 negative impact from excess power costs not included in the PCA adjustment and a write-off of $0. for excess power costs); so I think that demonstrates that analysts do view the PCA as a very supportive mechanism , but they do have a concern when it comes to CSB REPORTING Wilder , Idaho 493 GRIBBLE (X) Idaho Power Company83676 the sharing mechanism and the impact that could have on the financials of the Company. On page 6 where you just referred to that you read that the earnings would have been $1.45 higher ($1.27 negative impact from excess power supply costs not included in the PCA adjustment and a write-off of $0. for excess power supply costs), is that $0.18 related to the PCA sharing? m not familiar 100 percent with the $0.18.suspect has to do wi th the lost revenue issue that part i cuI ar PCA hearing. Well you provided these numbers to Ragen MacKenzie , did you not? Well , the Company provided it to them. can't verify the actual calculation of that. All right.The next sentence there reads Idaho Power , on a normalized basis, should earn about $2.00 per share," do you see that? Yes , I do. And isn't it true that in 2002 , Idaho Power - - IDACORP actually earned $2.24 a share - - Idaho Power , excuse me? I mean, subject without checking that number , I think that's probably correct.I mean , I think on a normalized basis that she's referring to I don' CSB REPORTING Wilder, Idaho 494 GRIBBLE (X) Idaho Power Company83676 think would include the same type of numbers that developed the $2.24 you're referring to in 2002. But you would agree , subj ect to check that Idaho Power actually earned $2.24 in 2002? Subj ect to check, sure. And also subject to check , isn't it also true that IDACORP earned $1.63 in 2002? Subj ect to check. $1.63 per share, so from those facts subj ect to check , I assume we can conclude that the unregulated portion of IDACORP actually lost $0.61 per share in 2002? Yes. So isn't it true, then , that Idaho Power is making the money for IDACORP while in fact the unregulated businesses in which IDACORP was engaged in was putting downward pressure on IDACORP' s earnings? Could you repeat that question , again please? Isn't it true , then , that Idaho Power is making the money for IDACORP while in fact it is the unregulated businesses in which IDACORP was engaged that is putting a downward pressure on earnings per share? MR. KLINE:Which year?m sorry. MR. RICHARDSON:For 2002. CSB REPORTING Wilder , Idaho 495 GRIBBLE (X) Idaho Power Company83676 THE WITNESS:For 2002 , I think from a Ii teral standpoint , I think that I s a correct statement. I think you would have to go back and look at the actual earnings quality that was in the 2002 numbers for Idaho Power to make sure on a normalized basis that those things are correctly correlated. BY MR. RI CHARDSON:Turning to page 7 of Ms. MacKenzie I s report , or page 12 if you're using the handwritten pagination , in the conclusion paragraph , I underscored a sentence , would you read that sentence for , please? In the conclusion paragraph? Correct. As for Idaho Power Company, we believe operates in a favorable regulatory environment in Idaho and , due to the PCA mechanism put into place , has avoided some of the financial crises that have been a result of volatile power prices in the region. Now , on page 9 of your testimony, you state that the PCA has had a devastating impact on the earnings capability of the Company.That phrase never appears anywhere in Ms. MacKenzie's report , does it? In not what I just read right here , but I think the connotation of my testimony, again , is referring to the sharing portion of the PCA mechanism and CSB REPORTING Wilder , Idaho 496 GRIBBLE (X) Idaho Power Company83676 not to what Ms. MacKenzie is referring to on page 12 of your handou t . A little later in your testimony you refer to a report by a Mr. Rose regarding potential relicensing costs for Hells Canyon.While you were reading his report - - I'm going to ask you to take a look at it. Madam Chairman , I'd like to hand out an exhibit that would like marked as Exhibit 214. COMMISSIONER SMITH:All right. (Industrial Customers of Idaho Power Exhibit No. 214 was marked for identification. MR. RI CHARDSON :For the record , Exhibit 214 is a three-page document , the top of which reads Idaho Power , Moody's Investor Service.It's dated June , 2003.It also is paginated in two different ways and that's because these were taken from Mr. Gribble' workpapers and the lower right-hand pagination is paginated for the workpaper set, it begins at 18 going through 19 and 20.The top pagination is from the original document, page 1 of 3, 2 of 3 , et cetera. (Dr. Reading distributing documents. BY MR. RICHARDSON:Do you have a copy of 214 in front of you , Mr. Gribble? Yes , I do. Are you familiar with this document? CSB REPORTING Wilder , Idaho 497 GRIBBLE (X) Idaho Power Company83676 Yes.This was, again , provided within my workpapers. So where you were reading Mr. Rose I s report here and identifying potential relicensing costs for Hells Canyon , did you happen to notice his comments on the PCA? m sure I did.I guess which particular area? Are you aware that he actually identified the PCA as one of Idaho Power's credit strengths along with its good regulatory relations? Uh-huh , I do. And that I s on page 2 of that document. page 15 and over to the top of page 16 of your direct testimony, you quote from Standard & Poor's and you say according to Standard & Poor', they now expect that ratios will only meet expectations for the A minus rating and may even be slightly weaker in the interim, as Idaho Power continues to recover deferred power costs and face poor water conditions in the Snake River and lower than expected sales, do you see that? Yes , I do. MR. RICHARDSON:I have one more exhibi t , with your indulgence, that I would like marked as Exhibit 215. CSB REPORTING Wilder , Idaho 498 GRIBBLE (X) Idaho Power Company83676 COMMISSIONER SMITH:Okay. (Industrial Customers of Idaho Power Exhibit No. 215 was marked for identification. (Dr. Reading distributing documents. MR. RI CHARDSON:Exhibit 215 is also dually paginated with page 1 in the printed portion or page 27 in the lower right-hand corner and it is a four-page document.The top of Exhibit 215 reads Gribble , Dennis , Standard & Poor's is pleased to provide ongoing service to the investment community, IDACORP and Unit Ratings Affirmed; Outlook Revised to Stable. BY MR. RICHARDSON:Do you have a copy of Exhibit 215 with you? Yes, I do. Are you familiar with that document? Yes , I've seen this document. And that was provided by you in your workpapers? Tha t 's correct. Now , before we get back to your testimony about Standard & Poor's expects that ratios will only meet expectations , et cetera , that appears on the first page of that document and that paragraph is actually circled and I assume you circled that? Yes, that's what I used for the quote CSB REPORTING Wilder , Idaho 499 GRIBBLE (X) Idaho Power Company83676 within my direct testimony. Would you read the paragraph immediately following that quote? Starting with the word "however"? Correct , and "however" is followed by the sentence you circled , so yes, that's what I would like you to read. Just the first sentence? , the whole paragraph.It's only two sentences long. Okay.However , the exit from the energy trading business, the change from an average to a 70th percentile resource planning for load and water flows, and the 35 percent dividend reduction announced on September 18, 2003 , serve to strengthen IDACORP' s credit profile.IDACORP'S business profile has improved to a 4 from a 5 on a 10 -point scale , where 1 is the least risky. Idaho Power's business profile is also a 4. And then one more sentence, just read the next sentence for us , please. The ratings on IDACORP and Idaho Power reflect the consistent, credit friendly regulatory environment in Idaho and competi ti ve rates and production costs. " So despite the fact that you choose to CSB REPORTING Wilder , Idaho 500 GRIBBLE (X) Idaho Power Company83676 selectively quote some rather pessimistic passages from these reports, there's actually quite a bit of posi ti ve news regarding Idaho Power and its risk profile, isn't there? Well, I think you have to take the whole report into its situation.I mean , there are aspects of Idaho Power's credit profile and risk profile that have certainly changed.Obviously, the movement from IDACORP Energy and the wind-down of IDACORP Energy from a rating agency standpoint is a reduction in the credit risk of IDACORP .Certainly, from Idaho Power's standpoint, the PCA mechanism does in both S&P and Moody's, does give a risk mitigation to some of the purchased power costs , but again ! I think in both S&P and Moody's you will find phrases within there that talk about the sharing mechanism and the impact that potentially can have on Idaho Power and eventually IDACORP.The other part of is the ratios that were talked about from S&P.Those are ratios that are precariously close to moving to a credit downgrade for the Company. In the spirit of taking these reports and contacts, then , as whole documents, is that why you chose just to quote the pessimistic language and not the positive language? MR. KLINE:m going to object.I think CSB REPORTING Wilder , Idaho 501 GRIBBLE (X) Idaho Power Company83676 that I S an argumentative question. MR. RICHARDSON:I'll withdraw the question , Madam Chairman.That's all I have.Thank you. COMMISSIONER SMITH:Thank you, Mr. Richardson. Mr. Ward. MR. WARD:Madam Chair , I do have a question or two , but I have a bit of a difficulty which is probably of my own making, it's very obvious to me that I have different pagination in my copy of the filing than everybody else and I assume that's probably because -- COMMISSIONER SMITH:Let's go off the record. (Off the record discussion. COMMISSIONER SMITH:We'll go back on the record and, Mr. Ward , just do the best you can. MR. WARD:Thank you , Madam Chair. CROSS -EXAMINATION BY MR. WARD: Mr. Gribble , you didn I t conduct an independent analysis of the cost of equity, did you? CSB REPORTING Wilder, Idaho 502 GRIBBLE (X) Idaho Power Company83676 Mr. Avera. , I did not.That was done by And you simply selected the midpoint of the range of costs of equity that he gave you; is that CSB REPORTING Wilder , Idaho That's correct. true? And does it follow , then, that if his ranges were to be revised and moved either up or down that your point recommendation would also change? I think I'd have to fully understand why he would make that recommendation that it go down.As of this point in time , I don't see that happening. But your recommendation is based solely on his recommended ranges isn't that true? We used Mr. Avera as the technical ROE wi tness in this case, that's correct. Doesn't it follow logically, then, that change s your recommendation would have to change if his yes. I f we were to agree wi th hi s range, then MR. WARD:That's all I have. COMMISSIONER SMITH:Thank you. Mr. Gollomp. MR. GOLLOMP:No questions. 503 GRIBBLE (X) I daho Power Company83676 COMMISSIONER SMITH:Mr. Purdy. MR. PURDY:I have none.Thank you. COMMISSIONER SMITH:Mr. Eddi e . MR. EDDIE:None.Thank you. COMMISSIONER SMITH:Do we have questions from the Commission?Commissioner Hansen. EXAMINATION BY COMMISSIONER HANSEN: I'd 1 ike to go back to page 9 where Mr. Richardson referred to about you referring on lines 6 through 8 , you discuss the PCA and you say that it' viewed by the investment community as more risky as a resul t of this sharing feature, and I guess my question would be to you , can you name other electricity utilities with PCAs that eliminate all the fuel cost risk from the shareholders? I don't have any specific ones for you directly, but I think the connotation here is if you have a gas-producing fuel adjustment clause or something that's more in the range of that type of fuel source typically, they get up closer to 100 percent of the recovery of excess power costs.It's when you have a si tuation where fuel , which being basically water for CSB REPORTING Wilder , Idaho 504 GRIBBLE (Com) Idaho Power Company83676 hydro , is shared that you start to see a derivation away from a typical , say, fuel cost adj ustment clause. So if I understand you correctly, you' saying you really don't know of another electricity utility that would not have a sharing? m aware of utilities that do have adj ustment clauses.I can't give you a specific example of one right now. Would you know what the average percent of sharing would be with the utilities that have this PCA mechanism in place?I mean , is 10 percent on the high end of the average of the utility companies in this sharing or are some greater than 10 or where does that fall? I really haven't performed an analysis to say that yes, there is a certain correlation between that.I think what I'm giving you is an investor perspective , that from an investor's standpoint when they look at utilities that do have purchase power cost adjustment clauses or fuel cost adjustment clauses that are more closely to 100 percent, they view that as less risky than utilities that have something less than that with a sharing mechanism , so I don't have a specific example I can give you , but from an investor' standpoint , that's the way they look at this from a risk CSB REPORTING Wilder , Idaho 505 GRIBBLE (Com) Idaho Power Company83676 standpoint. COMMISSIONER HANSEN:I believe that's all I have. EXAMINATION BY COMMISSIONER SMITH: Mr. Gribble , I guess Commissioner Hansen has asked some of my questions and I would be interested to know if there are electric utilities like Idaho Power who enj oy a power cost adjustment mechanism and I guess you were with the Company at the time this was adopted? Yes. And did you have any part in that? I was part of the technical group that helped formulate that , but nothing in terms of sponsoring testimony or so on at that time. Any idea how many years the Commission had to push the Company before they finally thought that was a good idea? I can't tell you. And when it was adopted, what did you think it was going to cover mostly?Hydro variations or something else? Primarily hydro variations, but also the CSB REPORTING Wilder , Idaho 506 GRIBBLE (Com) Idaho Power Company83676 QF purchases. Okay, hydro and QF purchases.Do you think anyone ever imagined that the PCA was intended to recover costs from the wholesale market that went from an average of 40 to $60.00 a megawatt-hour to an average of $350 a megawatt-hour? I don't think anyone envisioned that particular price scenario, no. And if there weren I t a sharing portion in the PCA, what would be the incentive for the Company? Well , the incentive for the Company is because if you go back prior to 1993 when we didn't have the PCA and you had drought conditions , then it becomes that the Company bears the entire risk of that excess purchased power cost , there's no doubt about that. If you had a PCA, but there was no sharing mechanism , would the Company's incentive then be to spend and recover, spend and recover? I mean , I can't answer that question directly.I mean , I think from a prudently-managed Company standpoint, you know , I know the philosophy of Idaho Power is not to take that philosophy. COMMISSIONER SMITH:Thank you.Those are all my questions. Do we have redirect, Mr. Kline? CSB REPORTING Wilder , Idaho 507 GRIBBLE (Com) Idaho Power Company83676 MR. KLINE:I do have a few redirect questions, Madam Chairman. REDIRECT EXAMINATION BY MR. KLINE: In response to a question from Mr. Richardson regarding the 2002 earnings, isn't it true that the 2002 earnings of the Company included a one-time $0.92 tax method change benefit? That's correct. And also in response to a question from Mr. Richardson , in your view , has Idaho Power Company done more than just show up for a trophy in managing its financial affairs? Very much so. Along that same line, are you generally familiar with the costs of debt of other regional utilities? Generally. How does Idaho Power compare on a general basis? On a general basis , Idaho Power's cost of capital is significantly lower. So we did more than just show up? CSB REPORTING Wilder , Idaho 508 GRIBBLE (Di) Idaho Power Company83676 Yes , we did. In response to a question from Mr. Ward isn't it true in developing your recommendations in this CSB REPORTING Wilder , Idaho case that you conferred with Mr. Avera throughout the development of those recommendations? That's correct. And if - - and then I guess in response to a question from Mr. Hansen , Commissioner Hansen regarding other utilities with PCAs, wouldn't you agree wi th me that Idaho Power is probably unique with respect to other electric utili ties because of its hydroelectric Yes. si tuation? Isn't that probably the biggest driver for why people look at the PCA sharing mechanism with some degree of concern? and Mr. Gribble. next witness. Lori Smith. Yes , definitely. MR. KLINE:Tha t 's a 11 I have. COMMISSIONER SMITH:Thank you , Mr. Kl ine , (The witness left the stand. COMMISSIONER SMITH:We're ready for your MR. KLINE:Idaho Power's next witness is 509 GRIBBLE (Di) Idaho Power Company83676 LORI SMITH, produced as a witness at the instance of the Idaho Power Company, having been first duly sworn , was examined and testified as follows: BY MR.KLINE: record? Power? risk. DIRECT EXAMINATION Would you please state your name for the My name is Lori Smith. And what is your position with Idaho m the director of strategic analysis and And Ms. Smith , when the Company filed its application in this case , you prefiled 15 pages of direct CSB REPORTING Wilder , Idaho testimony and Exhibits 16 through 20; is that correct? Yes. And do you have any additions or corrections that you need to make to your prefiled direct Yes, I have a handful of corrections. Why don't you go ahead and identify those. Okay, beginning on page 5 , line 18 , the testimony? 510 SMITH (Di) Idaho Power Company83676 Capi tal proj ect spending from April through December should be May through December, and then on page 12 , I had a couple of numbering problems that I'll fix for all three pages, line 5 , the statement consisting of 5 pages should be consisting of 6 pages , and then on page 13, ine 3 page 4 should be page 5 of Exhibi 19,and on line page 4 should be page 5 of Exhibi 19,and then towards the end of that sentence page or page should be page 6 , and my final correction , line 11 says depreciation revenue , that should be depreciation reserve. Does that complete the corrections to your testimony? Yes. wi th those corrections in place Ms. Smith, if I were to ask you the same questions that are contained in your prefiled direct testimony today, would your answers be the same? Yes. MR. KLINE:With that, Madam Chairman , I would request that Ms. Smith's testimony be spread on the record as if read in its entirety and that Exhibits 16 through 20 be marked for identification. COMMISSIONER SMITH:With no objection , it is so ordered. CSB REPORTING Wilder , Idaho 511 SMITH (Di) I daho Power Company83676 (The following prefiled direct testimony of Ms. Lori Smith is spread upon the record. CSB REPORTING Wilder , Idaho 512 SMITH (Di) Idaho Power Company83676 Would you please state your name , business address , and present occupation? My name is Lori Smith and my business address is 1221 West Idaho Street , Boise , Idaho.I am employed by Idaho Power Company as Director of Strategic Analysis and Risk Management. What is your educational background? I graduated in 1983 from Boise State Uni versi ty, Boise , Idaho, receiving a Bachelor of Business Administration degree in Information Sciences. In 1999, I was awarded the designation of Chartered Financial Analyst.I have also attended numerous seminars and conferences related to utility accounting, corporate finance and risk related topics. Would you please outline your business experience? From 1983 to 1986 , I was employed by Idaho Power Company and assigned to the Materials Management Department.From 1986 to 1994 , I served as a Financial Accountant and later as a Budget Accountant.I was promoted to Business Analyst in 1994.In 1996, I was promoted to Strategic Analysis Team Leader.In 2000 , I was named Director of Strategic Analysis.In 2003 , I was promoted to my current position as Director of Strategic Analysis and Risk Management. 513 SMITH , DI Idaho Power Company What are your duties as Director of Strategic Analysis and Risk Management? I manage and conduct strategic analysis, corporate budgeting and administration financial support, and risk management.Strategic Analysis has the responsibili ty to maintain ongoing financial forecasts, prepare monthly subsidiary accounting, prepare annual service level agreements and develop methodology, perform intercompany accounting and reconciliation , prepare and perform due diligence activities, and develop capital raising strategies. Corporate Budgeting and Reporting has the responsibility to coordinate financial support for Idaho Power's administrative areas , prepare monthly variance reporting, and monitor corporate spending and budgets. Corporate Risk Management has the responsibility of implementing risk management tools related to credit risk , market risk , and operational risk for the utility along with exploring and implementing hedging strategies. What is the purpose of your testimony in this proceeding? The purpose of my testimony is to present the test year financial information for the twelve-month period ended December 31 , 2003 , to present the adjustments which have been included to annualize certain 514 SMITH , DI Idaho Power Company 2003 operating expenses and rate base items , and to quantify and support certain known and measurable changes to the Company's operating statement and rate base. Will you be supporting any of the normalizing adjustments to the 2003 test year? No.Mr. Obenchain will address the normalizing adjustments to sales and revenues and Mr. Said will address the normalization of power supply costs. How was the information for 2003 prepared? For the 2003 general rate case filing, the system financial information was prepared using six months actual and six months estimated information.The 2003 Operations and Maintenance Budget and the 2003 Construction Budget were the basis for this process.The 2003 test year combined January through June actual data with forecast information for July through December.The forecast process started with actual information through April 2003 and then rebudgeted all the non-normalized components for the time period May through December 2003. The additional components related to operating expenses and rate base include the annualizing adjustments to operating expenses and rate base, the known and measurable changes to operating expenses and rate base, and the additional rate base and expense adjustments are detailed in my exhibits. 515 SMITH , DI Idaho Power Company What were the forecasted components to the test year? The forecasted components include the following items:(2) other revenues(1) other operating revenues and expenses (3) operation and maintenpnce expenses,(4 ) property insurance expense (5) regulatory expenses (6 ) depreciation and amortization expense,(7) taxes other than income (8 )Idaho Energy Resources Company rate base and income statement,(9) electric plant in service and related items (10) materials and supplies (11) deferred conservation programs (12) other deferred programs,(13 ) deferred income taxes (14) customer advances for construction , and (15) deductions from operating and maintenance expenses. Please summarize the test year adjustments. After the initial 2003 test year information was compiled, the 2003 operating and maintenance expenses were reduced by standard ratemaking adj ustments, followed by annualizing adj ustments , known and measurable adjustments , and other adjustments.The additional components included in this filing for ,annualizing adjustments to operating expenses and rate base are adjustments for payroll , property and liability insurance , depreciation , depreciation reserve , and annualized major plant additions and their associated 516 SMITH , DI Idaho Power Company impacts.The additional components for known and measurable changes to operating expenses and rate base are salary 517 SMITH , DI Idaho Power Company structure , employee incentives, pension service cost property and liability insurance , depreciation depreciation reserve , American Falls interest , maj or plant additions known to occur through May 2004 and their associated impacts, and a reduction to operating expense for non-reoccurring prescription expenses related to 2002.The May 2004 cutoff for major plant additions was given to me by Mr. Gale. How was the forecast method determined? In preparation for the split test year methodology, the Finance Department , in consultation with various other Company departments, developed the methodology used to prepare the forecast portion of the case.Each area developed the methodology to estimate the remaining six months of 2003 starting with the approved 2003 budgets.A rebudget process was begun to reflect the projected expenditures for both Operating and Maintenance (O&M) and Capital proj ect spending from May through December.The Idaho Power Company business units were asked to provide updates to the original 2003 O&M and Capital Budgets as we reviewed our work priorities through to the end of 2003.Addi tionally, the business units were requested to identify major plant additions that would close to plant Account 101 through May of 2004.Each Company cost center reviewed their expected 518 SMITH , DI Idaho Power Company expenditures for new positions and payroll-related items including benefit expense.Each cost center also reviewed proj ect timing for both O&M-related proj ects and construction- related proj ects , and any other known changes to planned work for the remainder of the year. This information was then compiled to produce a May through December restatement of all O&M and Capital budget items. The case is prepared with January through June actuals combined with the results from the process above to produce the 2003 results.A variety of methodologies were identified that best fit the component being forecasted including meetings with cost center managers updated estimates for timing of proj ects which were reflected in our proj ections, comparisons to prior years actuals, analysis of historical data including five years of history where applicable, and inclusion of any updated expenditures that were not known during the annual budgeting cycle. Would you please describe Exhibit No. 16? Exhibi t No. 16 is a compilation of the Company s supporting schedules for the twelve months ended December 31 , 2003.Page 1 of Exhibit No. 16 sets forth the development of the Other Operating Revenues (Accounts 451, 454 , and 456) for the 2003 test year. 519 SMITH , DI Idaho Power Company Page 2 of Exhibi t 16 shows the Other Revenues (Account 415) and Expenses (Account 416) for the year 2003.The 2003 operating and maintenance expenses, by FERC accounts , appear on pages 3 through 6 of 520 SMITH, DI Idaho Power Company Exhibit No.16. Would Exhibit No.16? Page reflects the detail of Account 924 you please describe pages 7 through 12 of Property Insurance Expense.Page 8 reflects expense for Account 928, Regulatory Commission Expense.Pages 9 and 10 show total depreciation and amortization expense by plant account.Page 11 shows the Prairie Power acquisition amortization adjustment for gains and losses. Page 12 shows the detail of the Taxes Other Than Income Taxes. Would you please describe page 13 of Exhibit No. 16? Page 13 of Exhibit No. 16 develops the net earnings from IERCo that are added to the booked operating income for ratemaking purposes. How does the Company treat IERCo' s earnings and investment for ratemaking purposes? The primary purpose of IERCo is to mine coal which provides fuel for the Jim Bridger thermal power plant in Wyoming.Consistent with prior Commission orders the Company treats IERCo' s coal operations part its utility operation and accordingly adds the current year I ERCo earnings to electric operating income and the investment in IERCo to the net electric rate 521 SMITH , DI Idaho Power Company base.Accordingly, I have deducted the interest income on notes 522 SMITH, DI Idaho Power Company receivable from Idaho Power Company (line 10, page 13 of Exhibit No. 16) and I have deducted notes payable to IERCo in determining the Company's net investment in IERCo to be included in the rate base (Line 14 , page 22 of Exhibit No. 16). Why have you made these adjustments to IERCo' s earnings and rate base in this proceeding? I have made adjustments to reduce IERCo' s rate base for notes payable of $5,909 558 and the associated interest income adjustment of $78,613 to allow IERCo' s rate base and earnings to reflect only the cash required to fund IERCo operations for the year 2003.If IERCo were to use these funds to make a distribution of earnings to the Company, or if the Company were to actually fold IERCo into its own operations , the result would be the same as presented herein. Would you please describe the data contained on pages 14 through 22 of Exhibit No. 16? Pages 14 through 22 of Exhibit No. 16 reflect the development of all the components applicable to the combined system rate base of the Company for the year 2003.Page 14 of Exhibit No. 16 reflects the balance by month and the thirteen month average of Electric Plant in Service (Account 101).Page 15 of Exhibit No. 16 reflects the balance by month and the thirteen-month 523 SMITH , DI Idaho Power Company average of Accumulated Provision for Depreciation (Account 108).Page 16 of Exhibit No. 16 reflects the balance by month and the thirteen month average of Accumulated Provision for Amortization (Account 111). Page 17 of Exhibit No. 16 reflects the balance by month and the thirteen-month average of Materials and Supplies (Accounts 154 and 163) .Page 18 and Page 19 of Exhibit No. 16 reflect the balance of the Company s Conservation and Other Deferred Programs.For these programs the Company includes the December 31 , 2003 ending balance in rate base consistent with prior orders of this Commission.Page 20 of Exhibit No. 16 reflects the balance at the beginning and end of 2003 and the average balance for Accumulated Deferred Income Taxes (Accounts 190, 2 82 , and 2 83) .Page 21 of Exhibit No. 16 reflects the balance by month and the thirteen-month average of Customer Advances for Construction (Account 252).Page 22 of Exhibit No. 16 reflects the balance by month and the thirteen-month average of the rate base components for IERCo, consistent with prior orders of this Commission. What adjustments have you made to the 2003 information for ratemaking purposes? After the initial 2003 test year information was compiled , the 2003 operating and maintenance expenses 524 SMITH, DI Idaho Power Company were reduced by standard ratemaking adj ustments , followed by annualizing adjustments , known and measurable adj ustments, 525 SMITH, DI Idaho Power Company and other adj ustments .The additional components included in this filing for annualizing adjustments to operating expenses and rate base are adjustments for payroll , property and liability insurance, depreciation depreciation reserve, and annualized maj or plant additions and their associated impacts.The additional components for known and measurable adjustments to operating expenses and rate base are salary structure, employee incentives , pension service cost , property and liability insurance , depreciation, depreciation reserve, American Falls interest , major plant additions known to occur through May 2004 and their associated impacts , and a reduction to operating expense for non-reoccurring prescription expenses related to 2002.The May 2004 cutoff for maj or plant additions was given to me by Mr. Gale.Lastly, I have made certain other adj ustments to operating expense and rate base that are primarily related to specific regulatory treatment of these items. Have you prepared or supervised the preparation of exhibits detailing these adjustments to the books and records of the Company for the year 2003? Yes.I have supervised the preparation of Exhibi t Nos. 17 through 20, which reflect certain adjustments to the 2003 results of operation and rate base. 526 SMITH , DI Idaho Power Company Would you please describe Exhibit No. 17? Exhibi t No.7 reflects the detailed support 527 SMITH, DI 10a Idaho Power Company of deductions from the operation and maintenance expense of the Company for certain general advertising, memberships , and contributions.This adj ustment has been made by the Company to comply with prior orders of this Commission.The adjustments shown on Exhibit No. 17 are reflected on page 1 and page 2 of Exhibit No.1 7. Would you please describe Exhibit No. 18? Exhibit No. 18 , consisting of 4 pages, reflects the detailed support for annualizing adjustments to the 2003 operating expenses and the rate base of the Company. These adj ustments reflect changes to certain expense and rate base items as if they had been in existence for a full year or to year-end 2003 levels , whichever is applicable.Items adjusted to year-end levels include an increase in operating payroll of $2,913,244 and property and liability insurance expense of $384 583. The total annualizing adjustment shown on page 1 of Exhibi t No. 18, 1 ine 3 amount s to an increase to operating expense of $3,297 826.The computations for the amounts are shown on page 2 of Exhibit No. 18.Page 3 shows the annualized impacts of major plant additions for production and transmission assets.The net annualizing adjustment to rate base is $19 779 389.The related changes to Depreciation Expenses, Depreciation Reserve , Property Tax , and Insurance Expense are shown on 528 SMITH, DI Idaho Power Company line 7 of Exhibit No. 18.Page 4 , lines 3 and 4 , details by maj or asset group the change to Depreciation Expense (Account 403) and Depreciation Reserve (Account 108). Would you please describe Exhibit No. 19? Exhibi t No. 19, consisting of 6 pages, reflects the detailed support for certain known and measurable adj ustments to expenses and rate base that have occurred subsequent to year-end 2003.A summary of the various adjustments is shown on page 1 of Exhibit No. 19. Would you please describe the known and measurable adjustments that were made to the annualized 2003 results of operations? Line 1 , page 1 of Exhibit No. 19 is the normalized annual employee incentive expense of 114 821.Line 2 , page 1 is an increase to Operating Pension Expense of $2 170 163 to reflect service costs for 2003, which is more representative of pension costs going forward.Line 3, page 1 is a $280 107 reduction related to 2002 Prescription Expenses booked in 2003. Line 4 , page 1 shows the operating payroll adjustment of 241 595 to estimate the Company's general wage adj ustment for 2004.Line 5 , page 1 reflects the increased costs associated with American Falls Falling Water payments.Line 6 , page 1 reflects an increase to operating expense for premium increases for 2004. 529 SMITH , DI Idaho Power Company The computation and detail supporting the amount shown on page 1 of Exhibi t No. 19 are shown on pages 2 through 3 of Exhibi t No. 19. Page 5 of Exhibi t No. 19 shows the known and measurable impacts of major plant additions for transmission assets that will be in service through May 2004.The known and measurable adjustment to rate base is $18,388 690.The changes to Depreciation Expense, Depreciation Reserve, Property Tax , and Insurance Expense are shown on line 5 , page 5 of Exhibit No. 19 (Account 403) .Page 6 details by maj or asset group the change to Depreciation Expense (Account 403) and Depreciation Reserve (Account 108). Would you please explain Exhibit No.2 O? Exhibi t No.2 0 consisting of one page reflects additional adjustments to rate base or operating expense resulting from charges to Account 101 , Electric Plant in Service, Account 108, Accumulated Provision for Depreciation , Account 114 , Electric Plant Acquisition Adjustments, Account 115, Accumulated Provision for Amortization of Electric Plant Acquisition Adjustments Account 182., Other Regulatory Assets , Account 165 Prepayments , Account 454 , Other Operating Revenue and Account 928, Regulatory Commission Expense. Would you please describe the adj ustments to 530 SMITH , DI Idaho Power Company rate base, operating revenues and operating expenses on Exhibit No.2 O? 531 SMITH , DI 13a Idaho Power Company Exhibit No. 20 , line 1 details the unamortized portion of extraordinary costs associated with increased security measures implemented on company property since September 11, 2001.The amortization is included in 2003 operating expense and will be amortized over the next five years per IPUC Order No. 28975. Line 2 details an increase to operating expense to recover intervenor funding paid to the Land and Water Fund of the Rockies per IPUC Order 28927.Lines 3 through 5 show the unamortized portion of the Electric Plant Acquisition Adjustment associated with the Prairie Power Rural Electric Cooperative purchase in July 1992.Line 6 reflects an increase to Other Operating Revenue for pole attachment revenues to be received in January 2004 that applies to service to be provided in December 2003. Lines 7 and 8 reflect rate base adjustments directly offsetting prior entries to Account 101, Electric Plant in Service and Account 108, Accumulated Provision for Depreciation made during 2003.Statement of Financial Accounting Standard 143 (SFAS 143) implemented in January 2003 requires specific accounting for Asset Retirement Obligations.SFAS 143 has no revenue requirement impact in this case.Line 10 reflects the balance of Account 165320 Prepaid Pension Expense after deducting service costs for 2003. 532 SMITH , DI Idaho Power Company Are all the data and their adjustments made to your exhibits and supporting schedules calculated on a total system basis? Yes. Does this conclude your direct testimony in this case? Yes , it does. 533 SMITH, DI Idaho Power Company (The following proceedings were had in open hearing. MR. KLINE:And with that order, Ms. Smith is available for cross -examination. COMMISSIONER SMITH:All right, Mr. Eddie. MR . EDD IE:No questions. COMMISSIONER SMITH:Mr. Purdy. MR. PURDY:None from me.Thanks. COMMISSIONER SMITH:Mr. Gollomp. MR . GOLLOMP:No questions. MR. WARD:May I go last? COMMISSIONER SMITH:Yes, you may. COMMISSIONER SMITH:Mr. Richardson. MR. RICHARDSON:I have no questions Madam Chair. COMMISSIONER SMITH:Mr. Budge. MR. BUDGE:No questions. COMMISSIONER SMITH:Ms. Nordstrom. CROSS - EXAMINATION BY MS. NORDSTROM: Good morning. Good morning. general question did the Company use CSB REPORTING Wilder , Idaho 534 SMITH (X) Idaho Power Company83676 a 13 -month average rate base from December 2002 through December 2003 in its application? Yes , we did based on our forecasted methodology. Isn't it true that the Bridger rewind proj ect was actually in service and included in rate base incrementally over the last four months of 2003 as portions of the proj ect were completed? Yes , we did estimate that that proj ect would be completed towards the end of the year. Isn't it true that the Brownlee-Oxbow transmission proj ect was actually in service and included in rate base for December 2003? Yes, that's true. On page 11 of your testimony, you indicated that the annualizing adjustment increases the 13-month average rate base to reflect the inclusion of the Bridger rewind project and the Brownlee-Oxbow transmission proj ect as if they were in service the whole year.Is the Company asking the Commission to adopt a rate base amount that values these two proj ects at year-end levels? The Company is asking the Commission to follow prior orders in which we submit our rate base as a 13 -month average , so we made adj ustments to create those CSB REPORTING Wilder , Idaho 535 SMITH (X) Idaho Power Company83676 assets as if they were in for 13 months. On page 14 , lines 22 through 24 of your testimony, you referred to an adj ustment to rate base for prepaid pension expense.Has the Company prepaid or contributed cash for pension since 1995? Yes have. In what amounts? don'have those numbers with me. That's something that we could provide. Isn't it true that just over $3 million in pension expense has been included in rates each year since the last rate case? I believe that is true. Referring to your Exhibit No. 18, page line 2 , you list the Company's insurance annualizing adj ustment, but the Company makes no further reference to this adjustment in the Company's rebuttal.Are you familiar with the Staff's proposal to use actual 2003 insurance expenses rather than the Company's budgeted numbers? Am I familiar with their proposal in their rebuttal to do that? Are you familiar with Staff's proposal and Staff's recommendation? Yes. CSB REPORTING Wilder , Idaho 536 SMITH (X) Idaho Power Company83676 Does the Company obj ect to Staff' adj ustment? As we submitted our 2003 test year , we took a look at the insurance expense and annualized that number as of December 2003 , so I would submit that we would still support this annualizing adjustment for insurance. Using the forecasted numbers or using Using the forecasted numbers. Not the actual numbers? That's correct. Why not use the actual numbers? Well , we filed a test year based on a methodology that we submitted in my direct testimony and we believe the actuals for 2003 is a validation of that test year that we filed. If the projected numbers are updated for purposes other than just a forecast to bring it up to actuals, why not use the actual numbers if they are in existence? Well , because of the methodology that we filed our test year on.I guess what I'm saying is that the 2003 test year that we filed , a split year the Company is still standing by and the 2003 actuals will validate that cost of service and that rate base that CSB REPORTING Wilder , Idaho 537 SMITH (X) Idaho Power Company83676 actually came in in 2003. Are the Company's forecasted numbers supposed to be more accurate than the actual numbers? , I don't think they are more accurate or less accurate.They were an estimate at a point in time when we put together our case to be filed in October of 2003. But to the extent that the forecast is not validated, wouldn't you agree that the actuals should be used? , I wouldn't agree. MS. NORDSTROM:Thank you.Staff has no further questions. COMMI S S lONER SMI TH :Mr. Budge, do you have questions? MR. BUDGE:No questions. COMMISSIONER SMITH:Do you still want to wait, Mr. Ward? MR. WARD:We'll try. CROSS -EXAMINATION BY MR. WARD: I have to follow up on that last answer wasn I t the Company's representation throughout this case CSB REPORTING Wilder , Idaho 538 SMITH (X) Idaho Power Company83676 that it had filed six months of actual and six months of proj ected and that the proj ected or estimated numbers would be trued up and replaced by actuals? No, I don't believe that's true. So if we have actual numbers that disagree wi th your proj ections or estimates, you would have us use the estimates instead? Well , when we look at how we prepare a rate case, we normalize several different items including sales and revenue, purchased power, for example , and then we have our operating expenses that we would look to support the costs of the Company, including the known and measurables and the annualizing adjustments that we've submitted in prior Commission orders - - prior proceedings, I should say, so it's just a representation of what we believe the costs to be of the Company. But don't we as a normal course of business use actual numbers unless we have an identified reason for normalizing or adjusting those numbers? Yes, we do in an actual test year.We did not use an actual test year in 2003. Could you tell me just generally what category of data has not been adjusted to actual? I am not familiar with all of the CSB REPORTING Wilder , Idaho 539 SMITH (X) Idaho Power Company83676 adjustments that have been made to the actuals -- to the estimates I mean, excuse me.I would probably ask Mr. Gale to answer that question. Okay.Now , if you look at your Exhibit , do you have that in front of you? I do. As I understand it, Exhibit 18 is the summary - - begins with a summary of annualizing adj ustments that you have made and then contains detail about those adj ustments is that correct? Yes , uh-huh. Now , when you annualize an adjustment , you bring it up to a year-end level; isn't that true? What we do is we take a look at the December number , so in our test year for 2003, this was our December estimate , those estimates are then multiplied by 12 and then the difference between what we filed and what the annualizing adjustment would reflect is what we would include as an annualizing adjustment. Okay, and let me ask again , basically, doesn't that annualization process bring the, in this case , the expenses up to a year-end level? To a December level , yes. Now , after the annualizing adjustments, your Exhibit 19 contains a list of known and measurable CSB REPORTING Wilder, Idaho 540 SMITH (X) Idaho Power Company83676 changes , does it not? Yes. And that's presented in the same format; that is, the summary is the first page and then the detail thereafter? Yes. And you have , it appears to me , six known and measurable adj ustments. That's correct. through 2003. And they ran through May 30th of 2004? Our operating expense adjustments only ran The 2004 salary structure adjustment would have been an anticipated 2004 estimate and property and liability insurance would have been a 2004. Okay; so 4 and 6 are 2004? Yes. Now , were you here when Mr. Keen testified Yes , I was. And did you hear him acknowledge that Idaho Power's customer growth is continuing at about a CSB REPORTING Wilder , Idaho two-and-a-half to three percent a year pace? Yes. And if you annualize expenses up to well , let me back up.How did you develop the revenues this morning? 541 SMITH (X)I daho Power Company83676 for this test year? I did not develop the revenues for the Those were normal i zed by Mr. Obenchain. All right, but they are 13 -month averages m probably not the best witness to ask Did anyone annualize - - do you know if the Company annualized the revenues in the same manner that CSB REPORTING Wilder , Idaho they did the expenses? , I do not believe they're done in the Again , Mr. Obenchain is - - the normalized sales and revenue are in his direct testimony. I understand.Let me ask you this without test year. trying to belabor the revenue issue:If you bring expenses up to year-end levels and use average revenues at a time when the Company is growing and its revenue is growing, don I t you create a mismatch for test year No, I don't believe you create a mismatch because the expenses and the rate base , the revenues are calculated to cover those items, so I don't believe that we create a mismatch. But aren't those revenues that we're using in this case derived from the sequential results month by are they not? that of. same manner. purposes? 542 SMITH (X) Idaho Power Company83676 month , that is, starting with January and going on through the end of the year? I don't understand your question. Let me ask it this way:What's the proper match of expenses for the revenues that are derived for January of the test year?Is it January expenses or some other expense item? I apologize , but I don't know if we go month by month on our revenue calculation , so again , I' going to have to refer to Mr. Obenchain. MR. WARD:Okay.All right , well, I'll take it up with Mr. Obenchain. Thank you, Madam Chair.That's all I have. COMMISSIONER SMITH:Thank you, Mr. Ward. Do we have questions from the Commission? Did I get all the way around?I did. Let's see, where did my question go? EXAMINATION BY COMMISSIONER SMITH: On Exhibi t 18 , you were asked a couple of questions about line No., property and liability insurance , and if I understand your answer correctly, the CSB REPORTING Wilder , Idaho 543 SMITH (Com) Idaho Power Company83676 number here your forecasted number. Tha t 'correct. And do you have the 2003 actual number now? For 2004? , 2003. 2003 , yes. And what is that number? I don't have that number with me.We can get that for you. Okay.How long will that take?Where is that? MR. KLINE:Who has it? THE WITNESS:Darrel can get it. MR. KLINE:Yes, we can get that and we can get it to you right after lunch. COMMISSIONER SMITH:Wha t 's wrong wi th right now? We can be at ease. (Pause in proceedings. THE WITNESS:Actually, I do have it with me.I apologize. COMMISSIONER SMITH:We can go back on the record. BY COMMISSIONER SMITH:And you have the CSB REPORTING Wilder , Idaho 544 SMITH (Com) Idaho Power Company83676 actual 2003 number? Yes, it's 295,602. 295,6 -- 02. - - 02 , but you're still contending that the correct number to use in this case is 384,583? That's correct. And your reasoning for that is because the Company built these numbers as a whole? split test year. Yes.I mean , we submitted a forecasted That's what my direct testimony is based on and that is what I'm supporting here today. Well , if the Commission decides to support the actual numbers instead of the way you built your CSB REPORTING case, does that mean you have to throw out all the I would hope not. numbers? COMMISSIONER SMITH:Okay, thank you. BY MR. KLINE: Mr. Kline. REDIRECT EXAMINATION One question , Ms. Smith.Taken as a whole , is the Company's -- do the actual figures that to 545 SMITH (Di) Idaho Power Company date we have in the case or that we have come up with are they substantially different than the estimated numbers that we used in the rate base? Taken as a whole , I think the operating expenses in the actuals, and I don I t profess to know all of the details of the actuals, but taken as a whole , I think they're very close.On the rate base and adjusted rate base , I think they're extremely close. In fact, that would validate the Company' approach in this case , would it not? Yes. MR. KLINE:Tha t 's a 11 I have. COMMISSIONER SMITH:Thank you , Mr. Kline and thank you , Ms. Smith , and I believe she can be excused. MR. KLINE:That would be great. (The witness left the stand. COMMISSIONER SMITH:The Commission has a previously scheduled decision meeting at 1: 00 p. m., so it's my intent to reconvene at 1: 30. (Noon recess. CSB REPORTING 546 SMITH (Di) Idaho Power Company