20040416Volume XIII Part II.pdf

JEREMIAH HEALY
produced as a witness at the instance of United Water
Idaho, having been first duly sworn , was examined and
testified as follows:
BY MR. MILLER:
DIRECT EXAMINATION
Mr. Healy, could you state your name and
spell your last name for the record, please?
CSB REPORTING
Wilder, Idaho
My name is Jeremiah Healy, H-e-a-
And by whom are you employed?
COMMISSIONER KJELLANDER:Is your mic on?
THE WITNESS:It is now.I I m sorry.
My name is Jeremiah Healy, H-e-a-
employed by United Water Idaho as coordinator of planning
Did you previously have occasion to
submit to the Commission prefiled rebuttal testimony
consisting of six pages?
Yes, I did.
If I asked you the questions that are
contained in that prefiled testimony would your answers
and rates.
BY MR. MILLER:
be the same?
2279 HEALY (Di-Reb)
United Water Idaho83676
Yes.
And are the answers contained therein true
and correct to the best of your knowledge?
Yes, they are.
And as I understand it there were no
exhibits accompanying your testimony; is that correct?
That's correct.
MR. MILLER:Wi th that, Madame Chairman,
we would ask that the direct rebuttal , or the rebuttal
testimony of Mr. Jeremiah Healy be spread on the record
as if read in full and would tender Mr. Healy for
cross-examination.
COMMISSIONER SMITH:If there I s no
objection , we will spread the testimony across the record
as if read in full.
(The following prefiled rebuttal testimony of
Mr. Jeremiah Healy is spread upon the record.
CSB REPORTING
Wilder , Idaho
2280 HEALY (Di-Reb)
United Water Idaho83676
Please state your name and business
address.
Jeremiah J. Healy; 8248 West Victory Road,
Boise, ID 83709.
By whom are you employed and in what
capacity?
I am employed by United Water Idaho Inc.
UWID" or "the Company ) in the capacity of Coordinator
of Planning and Rates.
How long have you been employed by United
Water Idaho?
I have been employed by United Water Idaho
and United Water Management and Services Company since
February 1980.
Briefly described your responsibilities
during your tenure.
As a Staff Accountant with the Central
Region Office in Harrisburg, Pennsylvania until April
1982 I performed general accounting, prepared federal and
state tax returns and public utility commission annual
reports. In May of 1982 I became an Internal Auditor
responsible for conducting financial and special audits
on regulated and non-regulated subsidiaries. From
September 1985 until December 1989 I was Accounting
Supervisor for United Water Idaho. In this capacity,
2281 Healy United Water Idaho Ine.
Page 1
was responsible for accounting and planning functions. In
January 1990 I became Financial Coordinator responsible
for accounting, budgeting and strategic planning for five
water and/or wastewater utilities. From August 1993 until
October 1994 I was Director of Rates at United Water
Management and Services Company. In this capacity
prepared rate filings for various utility subsidiaries.
In November 1994 I assumed my current position.
What is your educational background?
2282 Healy, Re
Uni ted Water Idaho Ine.Page la
I was granted a Bachelor of Science degree
with a major in accounting from the University of South
Carolina in May 1977.
Before what regulatory commissions have
you appeared and presented presented expert testimony?
I have testified in various proceedings
before the Idaho Public Utilities Commission and I have
submitted written testimony before the regulatory
bodies in Illinois and Arkansas.
Please describe United Water I s interest in
this proceeding.
uni ted provides domestic water service to
approximately 74,000 customers in and around the City of
Boise. All of United I s customers are also in Idaho
Power I S service territory. In order to operate its
electric motors for supply, boosting and distribution
purposes, United Water purchases signif icant quanti ties
of electric power, primarily under Idaho Power I s Schedule
, Large General Service and Primary Service. For the
calendar year ending December , 2003 United Water spent
over $1.5 million on energy purchases from Idaho Power
utilizing approximately 35 million kWh at about 130
separate points of delivery.
What is the purpose of your testimony?
As noted above, electric power expense is
2283 Healy, ReUni ted Water Idaho Ine.
Page 2
a measurable part of United I s cost of providing service
to its customers, and these costs, of course, must be
recovered from its customers. It is United Water I
practice to take reasonable steps to minimize the costs
it must pass on to its customers. In particular United is
concerned that its electric rates, and consequently the
rates United
2284 Healy, ReUnited Water Idaho Ine.
Page 2
must charge its customers, include a subsidy to the
irrigation class of customers from which United I
customers receive no benefit. Accordingly
will address the issue of subsidy to the irrigation
class. United believes the parties have adequately
addressed the many other issues in this case, and I
express no opinion on those other issues.
What is the magnitude of the subsidy
burden to United Water and its customers?
Under Idaho Power I s cost of service
analysis Schedule 9 customers would receive a 9.57%
increase over current rates, based solely on cost of
service. Idaho Power's proposal for continuation of the
largest part of the subsidy by capping the irrigation
class increase at 25% results in a 15.04% rate increase
to Schedule (Gale Exhibit Pgs. 2 and 5). Rates for
Schedule 9 customers are 5.4 % higher than they should be,
absent the subsidy, under Idaho Power s proposal.
Additionally, of the $25.6 million subsidy identified by
Idaho Power, the burden falls heaviest on the residential
class ($12 100,000) and then most heavily on Schedule 9
($5,900,000). United's residential customers are paying
for the subsidy first through their electric rates and
then again through their water rates, which include
United I S electric power costs.
2285 Healy, ReUni ted Water Idaho Ine.
Page 3
Is perpetuation of the irrigation subsidy
in the public interest?
No. I agree with Dr. Power I s Testimony
(Pg. 23 -25) which demonstrates that the subsidy unfairly
burdens all other customers without any measurable
public interest benefit.
Does Idaho Power propose any mechanism to
mitigate the subsidy over time?
2286 Healy, Re
Uni ted Water Idaho Ine.
Page 3
Other than an implication that the issue
can again be addressed in subsequent rate cases, the
Company does not have any proposal.
Has a case-by-case re-litigation of the
subsidy issue been successful in the past?
No. In response to discovery requests,
Idaho Power identified the following percentage increases
necessary in irrigation class rates to eliminate the
irrigation deficiency in prior cases:
185 Case 59.96%
265A Case 31.16%
94-Case 26.16%
(IPCo Answer to AARP Request No. 18).
In the present case the percentage increase necessary to
eliminate the irrigation deficiency is 67%. The problem
has worsened, not improved , over time. The repeated
re-litigation of this issue, in addition to consuming
party resources in each case, has not worked and it does
not appear likely to work in the future.
Are there other approaches to this problem
other than re-examination of the subsidy in each rate
proceeding?
Yes. Several parties in this case have
proposed systematic approaches for a structured
phase-down of the subsidy over time, independent of
2287 Healy, Re
Uni ted Water Idaho Ine.
Page 4
subsequent rate proceedings.
Could you summarize those approaches?
2288 Healy, ReUni ted Water Idaho Ine.
Page 4a
Yes. AARP proposes annual upward
adjustments to the irrigation over a five year period, to
accumulate increased revenue to other classes and to
return those revenues to the other classes at the time of
the annual power cost adj ustment .(Powers Testimony,
Pg. 25-26).
Kroeger recommends moving Irrigation one-third of
the way to full cost of service in three steps over three
years and reducing other classes on an equal percentage
basis in each of the three years.(Higgins Testimony
Pg. 6).
The Department of Energy proposes that the
Irrigation class receive an increase twice as large as
the overall average system increase, although it is
not clear to me whether DOE is proposing further
adj ustments .(Goins Testimony Pg. 19).
Micron proposes that all non-irrigation rate classes
rates be set equal to the respective costs of service
immediately; that irrigation rates increase by 18.6% and
that Idaho power establish a deferred accounting
mechanism, or Subsidy Account, that is cleared over five
or more years through annual increases to the irrigation
class.(peseau Testimony Pg. 25-26).
What is your general impression of the
above testimony?
2289 Healy, ReUni ted Water Idaho Ine.
Page 5
general matter,for perhaps the first
time,there strong consensus among most
non-lrrigation classes for systematic approach
some way phase out the subsidy. Combined, the Residential
Class, Schedule 9, Micron and DOE are burdened with $19.
million of the $25.6 million subsidy. Put differently,
75% ($19 .lm/$25. 6m) of customer classes burdened by the
subsidy favor systematic efforts to remove it.
2290 Healy, ReUnited Water Idaho Ine.
Page Sa
Of the proposals you have summarized
above , do you favor one over the others?
Uni ted recommends that the Commission give
serious consideration to Dr. Peseau ' s approach.
What are the advantages of that approach?
It has the advantage of immediately
freeing the other customers classes from the burden of
the subsidy while phasing-up rates to the irrigation
class over a manageable period through the regulatory
asset mechanism and Idaho Power is kept whole during the
transition.
Does this conclude your Rebuttal
Testimony?
Yes it does.
2291 Healy, ReUnited Water Idaho Ine.
Page 6
(The following proceedings were had in open
hearing.
COMMISSIONER SMITH:Questions?Does the
Staff have questions?
Company?
MR. STUTZMAN:No questions.
BY MR. KLINE:
COMMISSIONER SMITH:Mr. Budge.
MR. BUDGE:No questions.
COMMISSIONER SMITH:How about the
MR. KLINE:Questions.
CROSS-EXAMINATION
Mr. Healy, in your rebuttal testimony you
talk about the irrigation subsidy; do you not?
Yes, I do.
How do you
- -
how are you defining subsidy
in your testimony?
CSB REPORTING
Wilder, Idaho
I believe I would define it similar to
what Mr. Goins defined it as.As a , you know , the
irrigation class being quite far below their cost of
service with every other class being above their cost of
service to compensate for that.
In referring to your use of the term
2292 HEALY (X-Reb)
Uni ted Water Idaho83676
subsidy then , in your opinion is it Idaho Power that I s
creating the subsidy or is it the rates that are set by
this Commission for Idaho Power that are creating the
subsidy?
My opinion would be it is the rates as set
by the Commission that are creating the subsidy.
Ul timately that creates the subsidy.
Thank you.On page 6 of your testimony
you make a recommendation that the Commission strongly
consider - - yeah , United recommends the Commission
strongly consider adopting Dr. Peseau I s approach
addressing the subsidy that you ve described; is that
right?
Yes, it is.
Do you believe that a regulatory
commission can make a determination in a general revenue
requirement proceeding, that a utility is entitled to
earn additional revenue and then not fund that revenue by
deferring the revenue for collection in rates at a later
time?
Deferring the revenue with a proper return
on that deferral in my opinion doesn I t seriously harm the
utility with a -- along with a systematic plan to deal
with the subsidy.
Let me follow up on that a little bit.
CSB REPORTING
Wilder, Idaho
2293 HEALY (X-Reb)
Uni ted Water Idaho83676
Assume for me that a utility constructs additional
revenues to respond to a summer peak , some kind of a
treatment plant or something to resolve - - respond to
summer peak.Do you believe the Commission has the
authority to defer that revenue that I s attributable to
those additional facilities for collection and rates in
future years?
Well , my
- -
if I understand your question
Mr. Kline, I would disagree with that.I would prefer
that the investment be recognized and the revenues
matched with that investment right away.However , 11
not sure I see the connection between the treatment Dr.
Peseau has recommended and the case of a treatment plant
or large facility.
Well, I guess what I'm inquiring is what
limitation is there on the Commission I s ability to defer
revenues?Let I S suppose that a commission authorizes a
revenue requirement for a piece of equipment that you
were going to install.Instead of giving you the money
in your rates to pursue that piece of equipment they
defer it.You I re okay withCreate a regulatory asset.
that?
As a general rule I would not be okay with
that.United Water participated and intervened in this
case, obviously, in the interest of our customers
CSB REPORTING
Wilder , Idaho
2294 HEALY (X-Reb)
United Water Idaho83676
noticing that the irrigation subsidy has lasted for many
years and has not been addressed directly as has already
been mentioned today at least four of the intervenors
have put forth plans to address the subsidy
systematically in one way or another , and Idaho Power
or excuse me, United Water feels that Dr. Peseau ' s plan
is reasonable.But if not Dr. Peseau I s plan several of
the other approaches are reasonable as well in that some
systematic approach to tighten up the customer classes
towards their respective cost of service would be better
than no systematic approach.
Again , looking at the proposal Dr. Peseau
has made and you recommend that the Commission consider,
assuming that it would
- -
assuming that the Commission
decided to defer the collection of revenues, what do you
recommend are the carrying costs the utility should
impose on this deferred amount?
As I understand what Dr. Peseau has
recommended, the rate of return.
All right.And that I s your understanding
of Dr. Peseau ' s testimony that he I s recommending that the
utilities overall rate of return be allowed as the
carrying charge for the deferred balance?
That is my understanding.
And you 'd agree with that?
CSB REPORTING
Wilder , Idaho
2295 HEALY (X-Reb)
United Water Idaho83676
I don I t have an issue with that.
Would anything less than that be a good
idea?
I haven I t given that question great
consideration.I would, in my position , I would advocate
that the rate of return would be the correct rate to
apply to the deferral.
Mr. Healy, in reading your testimony and
some of the testimony of some of the other parties here
who are advocating some kind of a mechanism of various
stripes to address the rate , the irrigation subsidy
issue , I I m reminded of something.Do you recall in the
last presidential election Al Gore I s lockbox?
Well , what he was proposing was that there
would be a lockbox in which social security or medicare
or something, I wasn I t sure exactly what funds, these
funds would be placed in a lockbox.And the reason for
that was that you had to discipline the federal
government.You couldn I t allow the federal government to
exercise any discretion with these monies you just had to
take away that discretion.And it certainly seems to me
that these proposals that we're hearing sound like a
lockbox that would take away the Commission I s discretion
put some discipl ine on the Commission.Would you agree
that that I s what you re trying to do with some of these
CSB REPORTING
Wilder , Idaho
2296 HEALY (X-Reb)
Uni ted Water Idaho83676
proposal s?
I wouldn I t characterize it that way.
believe in the range of proposals that are out there to,
quote unquote, systematically deal with the irrigators
subsidy, that there is a large amount of room for
discretion to be exercised by the Commission in how
quickly they would
- -
they would design that subsidy to
be eliminated.
United Water s position would certainly be
we would not
- -
we I re not advocating an extremely harsh
treatment of one class of customers.In fact, several of
the deferral proposals , I believe , begin with rate
increases for the irrigators that are below Idaho Power I
proposal.There are proposals that stretch five years,
there are proposals that stretch ten years.I think the
proposals provide a reasonable amount of discretion for
the Commission to, should they adopt some type of
systematic approach , to be sensitive in that approach to
the needs of the irrigators.To give them time, like the
schedule 19 and time-of-use issue, give them time to get
used to the new rates, to assess the impact of the new
rates, and perhaps change their practices to adapt to the
new rates.
MR. KLINE:That I S all the questions
have.
CSB REPORTING
Wilder, Idaho
2297 HEALY (X-Reb)
Uni ted Water Idaho83676
COMMISSIONER SMITH:Thank you,
Mr. Kline.
Are there questions from the
Commissioners?Nor I.
Do we have redirect , Mr. Miller?
MR. MILLER:Just I think one or two
questions.
REDIRECT EXAMINATION
BY MR. MILLER:
Mr. Healy, in your experience,
particularly with your accounting background, is deferral
accounting a necessarily difficult , or complex , or
unusual accounting method with respect to utility
account ing?
In my experience, no.United Water has in
fact currently a deferral going on of Idaho Power I S 2000
- - well , actually Idaho Power's PCA over and above what
United Power was granted in our 2000 rate case as a way
to keep United Water whole.The deferral accounting is
not particularly difficult.I think that Idaho Power is
certainly sophisticated enough to handle any accounting
issues that arise as a result of a deferred revenue
treatment.
And just one other question to touch on
CSB REPORTING
Wilder , Idaho
2298 HEALY (Di-Reb)
Uni ted Water Idaho83676
something that you mentioned.Is United Water supporting
a proposal that is intended to cause harm to any other
class?
No.Idaho or United Water I s basic
premise , I mean, we have - - we're going to end up here
with a pie.And we I re talking about how the pie is
allocated.Our interest is that the pie be allocated
fairly.Our opinion is that the irrigation subsidy needs
to be dealt with in a systematic but prudent way so as
not to penalize a class of customers, but to deal with
the subsidy issue in a very straightforward and
systematic manner and make progress between now and Idaho
Power I S next rate case, which as we know , may be several
years away, may be ten years away.
All right.
MR. MILLER:Thank you, Madame Chairman.
Those are all my questions.And I wonder in Mr. Healy
could be excused finally?
COMMISSIONER SMITH:If there I s no
objection , we will thank Mr. Healy and -- wait a minute.
Commissioner Hansen has a question.
CSB REPORTING
Wilder , Idaho
2299 HEALY (Di-Reb)
United Water Idaho83676
EXAMINATION
BY COMMISSIONER HANSEN:
I I m sorry.I'd just like to know , with
Uni ted Water , with your company do you have any problems
properly allocating your cost of service for each class
of customer though that have one inch lines, or half inch
lines, or different sizes, do you feel like your company
then allocates those properly to each class and there'
no subsidy at all?
I can honestly not say that.Idaho
Power s cost of service is quite a bit more complicated
than United Water'However, as you know , United Water
has one rate structure that applies to all classes of
customers.So at least up to this point in time we, the
Commission , the Company, have not decided to distinguish
between classes of customers and their usage
characteristics.
I would not be surprised if in an upcoming
United Water cases those distinctions begin to be made.
So I guess to answer your question, I would say probably
right now United Water s allocation of costs is not
perfect.Al though by its very nature it is an art not a
science.But we have a ways to go and I expect we will
move closer to some cost of service base for customers
CSB REPORTING
Wilder , Idaho
2300 HEAL Y ( Com - Reb)
Uni ted Water Idaho83676
with different usage characteristics.
COMMISSIONER SMITH:Thank you, Mr. Healy,
and you may be excused.
(The witness left the stand.
COMMISSIONER SMITH:We'll now go to Mr.
Purdy's witness , Dr. Power.
Thank you.MR. PURDY:AARP calls Dr.
Thomas Michael Power.
MR. BUDGE:Madame Chairman, I apologize
for interrupting but while Dr. --
COMMISSIONER SMITH:Certainly, Mr. Budge.
MR. BUDGE:Perhaps while Dr. Power is
getting ready.I wonder, strictly for the record , if I
might have a standing obj ection as a matter of courtesy
to the rather general reference to irrigation subsidy
which has become somewhat pervasive in this proceeding.
I thought of making such an obj ection earlier and didn'
but it's been repeated so extensively it's almost become
gospel by repetition.And certainly the obj ection
relates to the reference to that term outside of the
context of the particular cost -of - service methodology
being proposed.
Certainly the Company and others propose
cost -of - service methodologies that seem to indicate or
create the existence of what has been characterized as an
CSB REPORTING
Wilder , Idaho
2301 COLLOQUY
83676
irrigation subsidy.But in the questioning, including
some of my own , it becomes very general in the context of
the rates established by Idaho Power Company.And, in
fact, those rates have been established by tariffs
approved by this Commission.And irrigators have paid
those in full with no other contribution or subsidy.
So to that extent there is no irrigation
subsidy in our belief, and nor do we accept this
cost -of - service methodology.But rather than get into
ongoing obj ections to the proceedings, I think if the
Commission would simply
- -
or the Chair would simply
accommodate me and allow me to have a standing obj ection
to that reference to an irrigation subsidy outside of the
context of referring to a particular cost-of-service
methodology it would somewhat alleviate my concerns.
COMMISSIONER SMITH:Does any other party
wish to be heard on this request?
MR. PURDY:I do, Madame Chair.
COMMISSIONER SMITH:Mr. Purdy.
MR. PURDY:Solely for the reason that
this obj ection is just now being made before Dr. Powers'
testimony, if the Commission were to grant Mr. Budge'
request and make it retroactive so it applies to all
wi tnesses who have testified , and will testify, I think
that would be fair.Aside from that I don I t oppose his
CSB REPORTING
Wilder , Idaho
2302 COLLOQUY
83676
obj ection.
COMMISSIONER SMITH:Anyone else wish to
be heard?Well I guess , Mr. Budge , our only surprise is
we haven I t head from your earl ier.So we will note for
the record that Mr. Budge had on obj ection from the
beginning, and it continues with the use of the term
irrigation subsidy outside the context of a particular
cost allocation study or methodology.
MR. BUDGE:Thank you, Madame Chair.
Again , I apologize for any interruption to Dr. Power.
THOMAS MI CHAEL POWER,
produced as a witness at the instance of AARP, having
been first duly sworn , was examined and testified as
follows:
DIRECT EXAMINATION
BY MR. PURDY:
Would you please state and spell your
name, Dr. Power?
My name is Thomas Michael Power
e-r.
And what is your business address?
Economics Department, Uni versi ty of
Montana, Missoula , Montana, 29812.But I should add that
CSB REPORTING
Wilder, Idaho
POWER (Di)
AARP
2303
83676
m testifying here on behal f of AARP as an independent
consultant not on behalf of the University of Montana.
Thank you.And you have previously
prefiled with this Commission, in this proceeding, direct
testimony; is that right?
Yes.
And that testimony, is it fair to
characterize it as 37 pages of direct with an additional
Appendix A and B attached for a total of 59 pages?
Yes.
You put some of your testimony into
appendices for convenience purposes?
Yes.
All right.You have exhibits;that
right?
I do not.
All right.Do you have any correct ions
any of the testimony whether it I S in the original portion
or the appendix?
Yes.There's several typographical errors
that I don t think affect the meaning of the testimony.
But on page 30 at line 17 there is a typographical error
that is confusing.As it's stated now it says that the
initial block should be 600 kilowatt hours.That should
read 400 as is indicated on that page and the next two
CSB REPORTING
Wilder , Idaho
POWER (Di)
AARP
2304
83676
pages.
So is it
- -
is that a philosophical change
on your part or would you characteri ze it as a typo?
No.It was just a typographical error
that three or four of us didn't catch.
All right.Aside from that, that
typographical correction, if I were to ask you the same
questions as contained in your prefiled direct testimony
today, would your answers be the same?
They woul d .
All right.
MR. PURDY:Madame Chair , with that
correction , then I ask that the direct testimony of Dr.
Power be spread upon the record as if read.
COMMISSIONER SMITH:If there s no
objection, it is so ordered.
(The following prefiled direct testimony
of Dr. Thomas Power is spread upon the record.
CSB REPORTING
Wilder, Idaho
2305 POWER (Di)
AARP83676
1. Introduction and Summary
Please identify yourself for the record.
My name is Thomas Michael Power. I am Professor
of Economics and Chairman of the Economics Department at
the University of Montana, Missoula, Montana, 59812.
Have you testified as an expert witness before
this and other commissions in the past?
Yes. I have testified before this Commission on
numerous occasions since 1978 including testimony in the
last Idaho Power Company general rate case. I have
attached Appendix B to this testimony that discusses my
professional experience and expertise.
What topics will your testimony cover?
I will focus on those aspects of IPC' s cost of
service study and its proposed rate design that
inappropriately burden the residential class and conflict
with good public energy policy.
Could you please summarize your conclusions on
IPC cost of service and rate design?
Yes. Let me simply list the conclusions
supported by the body of my testimony here:
One of the basic principles guiding IPC' s
rate design is the assumed need to collect fixed costs by
levying fixed charges. Neither business nor economic
principles support such a strategy.Businesses regularly
2306 Power: Direct P. 1
AARP
and appropriately collect fixed costs on the basis of
customers I use of the services those businesses provide.
2307 Power: Direct P. la
AARP
ii. Collecting fixed costs in fixed charges
conflicts with the cost of service principles this
Commission has used for decades. That "principle" would
lead all of the capital costs associated with
hydroelectric generation and base-load generation to be
collected in either demand charges or customer charges.
iii.Utilities tend to favor high fixed
charges not because of any economic principle but because
of their private interests: Such charges stabilize their
cash flow in the face of loads that fluctuate with
weather. Such charges also allow the reduction of usage
charges and allow a variety of promotional pricing
policies for the most price sensitive customers.
iv.IPC seeks to classify over 36 percent of
the costs of distribution system lines and transformers
as "customer costs." Customer costs are costs that vary
wi th the number of customers , but IPC makes no effort to
demonstrate that these distribution costs vary in this
way.
The allocation of significant part the
distribution system costs on a per customer basis and the
remainder on the basis peak demand effectively charges
small users twice for the use of the distribution system.
Because the " customer component" can handle 85 percent of
the average residential customer's load, a substantial
2308 Power: Direct P. 2
AARP
additional allocation on the basis of residential load is
inappropriate. Adjustments to solve this double-charge
problem effectively lead back to a pure demand allocator.
vi.IPC's assertion that the proposed $10 per
month customer charge is modest compared to the $25 per
month charge the cost of service analysis indicates is
appropriate is based on an error. In calculating the $25
charge IPC divides all
2309 Power: Direct P. 2a
AARP
distribution costs by the number of customers even though
IPC itself classifies most of them as demand costs.
vii.IPC's "collect fixed costs in fixed
charges" principle could justify a monthly customer
charge close to $50 and an energy charge of 1.2 cents per
kwh.That would be an irrational outcome when IPC is
currently facing full marginal costs expressed in kwh
terms of 9 cents during the summer.
viii.The distribution system does not only
provide peak hour services. It also provides a variety of
valuable services to customers throughout the year. The
fact that these services are not peak-load-related does
not mean by default that they are customer-related.
xi.IPC I s cost of service analysis shows that
the rates paid by the irrigation class are so low
compared to irrigation class costs that a huge revenue
deficit exists. About 40 percent of the rate increase IPC
proposes for the residential class is associated with the
residential class paying part of the irrigation class'
costs. This led IPC to raise the rate increase to the
residential class from 13 to 19 percent. This large
irrigation revenue gap has existed for at least 20 years.
I recommend that the Commission find a way to assure that
it is systematically closed over a reasonable time period
and not allowed to burden other customers for another 20
2310 Power: Direct P. 3
AARP
years.
Rate design should focus on getting price
signals correct. Given the high and rising marginal and
incremental costs associated with providing electrical
service, this means that rate design should focus on the
usage charges, not the fixed monthly charges.
xi.IPC I S proposal to introduce seasonal and
time-of-use rates can
2311 Power: Direct P. 3a
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improve the accuracy of the usage charges that customers
face. For demand-metered customers, better balancing
demand and energy charges to reflect relative peak
capacity and energy costs is also appropriate.
xii.IPC is incorrect in assuming that because
the residential class is not demand metered, demand costs
cannot be conveyed to residential customers and might as
well be collected in the fixed monthly charge. There is a
high correlation between energy usage and peak demand.
For that reason , high energy charges can effectively
convey the high costs of peak usage.
Higher summer kWh charges for theXlll.
residential customers are not the only or necessarily the
best way to convey the higher costs of peak load use.
Residential peak loads come in the winter when IPC' s
marginal costs are also high. The proposed summer rates
do nothing to confront customers with the costs
associated with winter peak usage.
xiv.A block rate structure that provides an
ini tial block of electricity at a low rate and then
charges a higher rate for all usage in excess of that
initial block is also a seasonal rate in the sense that
during high consumption seasons, summer and winter , more
of the load moves into the higher tail-block and is
billed at the higher rate.
2312 Power: Direct P. 4
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xv.Such a blocked rate design combined with a
low monthly customer charge would benefit the vast
maj ori ty of residential customers compared to IPC I
proposed rate design.It is also likely to protect
households with relatively lower levels of consumption
including those on low and fixed incomes.
2313 Power: Direct P. 4a
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The Allocation of Fixed Costs on a Per Customer Basis
IPC witness John Gale has indicated that IPC I
cost-based approach" to rate design "has led to rate
design proposals that better align fixed costs with fixed
prices and variable costs with variable prices.(Page 13
at Is there any economic principle that indicates
that fixed costs should be collected in fixed charges?
A. Absolutely not.All businesses have fixed costs.
Most businesses do not try to cover those fixed costs
with fixed charges.
Consider large retail stores and shopping centers.
They have to provide extensive parking, floor space, and
personnel to handle peak demands for their services.
Those stores could charge a parking fee and an entry fee
to each customer and could charge higher fees on peak
days and peak hours. But almost none do that, quite the
opposite. Often when you have to pay to park in private
parking facilities, the stores will pay your parking
costs for you as long as you make almost any purchase.
They certainly do not charge entry fees to their stores.
They include those fixed costs in the charges they make
to customers and those charges tend to be proportional to
the purchases that the customers make.
Very few businesses collect their fixed costs
2314 Power: Direct P. 5
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through fixed charges unrelated to usage. Competitive
markets, in general , simply do not allow them to do that.
Instead, businesses have to collect their fixed costs in
usage-related charges. This is not a sign of market
failure or inefficiency.
How does IPC use the fixed costs should be
collected through fixed charges " principle in this case?
2315 Power: Direct P. 5a
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As Mr. Gale says: "The emphasis on moving fixed
and variable prices to be more reflective of fixed and
variable costs led to the Company s proposals to increase
the monthly service charge for residential and small
general service customers.(Page 13 at
It was IPC' s application of this incorrect
principle " that led to its proposed quadrupling of the
monthly customer charge for residential customers.
Do utilities have a history of favoring the
type of fixed charges competitive firms rarely can
impose?
Yes. In the past, electric utili ties have
tended to favor classifying as many of their costs as
possible as "capacity" or "customer" costs. They have
pursued the type of "fixed-variable " division of costs
Mr. Gale proposes in this case, where energy costs are
defined as those that vary with usage in the short run
and all other costs are either capacity or customer
costs. This approach has two advantages from the
utility's perspective. First, it allows the utility to
seek to recover as large a part of its costs as possible
in relatively fixed and reliable charges. This stabilizes
utility revenues. Second , it allows the utility to pursue
a variety of promotional ventures. With low estimates of
marginal energy costs , the utility can justify very low
2316 Power: Direct P. 6
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rates to customers who expand their energy usage while
burdening those customers whose use is less flexible with
high charges.
The point is that utilities might have a private
interest in distorting cost analysis in a particular
direction, towards low energy charges and high fixed
charges. Regulators need to be vigilant in resisting this
tendency when it conflicts with the public interest.
Has this Commission resisted efforts to collect
all fixed costs as demand
2317 Power: Direct P. 6a
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or customer charges?
Yes. That is clear in the cost of service
approach that this Commission has approved for use by
Although most of the costs associated withIPC.
hydroelectric and coal-fired generation are fixed , this
Commission has not approved the collection of all of
those fixed costs on the basis of class contribution to
the annual coincident peak load. Instead this Commission
has recognized that many of the fixed costs associated
with generation are incurred in order to produce energy.
Burning coal in the open or letting water run downstream
does not generate electric energy. Huge amounts of
capital must be used to transform that natural energy
into useful electric energy. That is the reason that the
system load factor is used to classify the majority of
the fixed costs associated with generation as energy
costs, not capacity costs.
This Commission has also rej ected the use of class
contributions to a single annual peak as the basis for
allocating the fixed costs that are classified as
capacity costs. Rather than loads at a single hour on a
single day dictating the allocation of capacity costs , a
weighted average of the twelve monthly coincident peaks
is used. In addition , for most customers, it is the peak
usage during each month that determines the demand
2318 Power: Direct P. 7
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charges that are due, not peak usage at one hour during
the year.Both of these decisions by the Commission turn
the demand allocation and charges into a type of usage
charge as opposed to a fixed charge.
Mr. Gale appears to characterize demand charges
as fixed charges. Is this a correct description of demand
charges?
Mr. Gale explains the proposed quadrupling of
the residential monthly customer charge in the following
way: "Since (residential) customers are not demand
2319 Power: Direct P. 7a
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metered, the service charge is the only fixed rate
component available to adj ust and thus becomes more
important as a tool for fixed cost recovery.(Page 13 at
13 )
This is a doubly confusing assertion.Demand
charges are a usage-related charge; they are tied to a
customer I S peak usage during a particular time period.
Like energy charges, demand charges are tied to the
customer's pattern of use.
Second, simply because a customer is not demand
metered, it does not mean that the only appropriate way
to collect peak demand costs is through a per customer
charge. Such an approach has no cost-based logic to it.
Customer costs are costs that vary primarily with
the number of customers served. Stated differently, they
are costs that could be avoided if a customer ceased
taking service.That is the cost causal principle behind
customer costs. That definition is parallel to energy
costs that focus on the costs associated with expanding
the energy producing capacity of the system or demand
costs that focus on expanding the capacity of the system
to meet peak loads.
If demand costs cannot be billed directly to
residential customers because demand meters are not
cost-effective for loads that small , there is no logic to
2320 Power: Direct P. 8
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concluding that the obvious way to collect those demand
costs is through a customer charge.To the extent that
residential peak usage tends to track residential energy
usage, collecting those charges through the energy charge
might be quite appropriate from a cost casual point of
view.
You seem to be implying that IPC is proposing
to collect demand costs through a customer charge.IPC
says that it is seeking to collect distribution costs
that are not demand-related through a fixed monthly
service charge.Aren t you misstating
2321 Power: Direct P. 8a
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IPC's position?
I don t think so. Ms. Brilz in her cost of
service study calculates a monthly " customer service
charge" of almost $25. That calculation explicitly
invol ves collecting all distribution demand charges on a
per customer basis.(Exhibit 38, 39, 41 , 42, Excel spread
sheet at K3 0 0) It is this high "monthly service charge"
figure that both she and Mr. Gale cite as indicating that
the proposed increase in the monthly charge from $2.51 to
$10 is just the first step in closing a huge gap between
fixed costs and fixed charges.As Ms. Brilz says in
justifying the quadrupling of the customer charge: "The
$10.00 Service Charge represents approximately 40 percent
of the cost-of-service result on $24.61 shown at line 300
on page 1 of Exhibit No. 42.(Page 36 at
It is important to understand that the $24.61 is not
a cost of service result. It explicitly takes costs that
even IPC classifies as demand-related and collects them
as a customer cost.
Has IPC' s "fixed costs should be collected
through fixed monthly charges" principle been applied
correctly in IPC' s calculation of a $25 monthly customer
charge?
No. Inexplicably, IPC has under calculated the
monthly customer charge that this "principle" calls for.
2322 Power: Direct P. 9
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Although IPC divided all distribution demand-related
costs by the number of customers, it failed to do the
same to the fixed demand related costs associated with
electric production and transmission. Since these, too,
are fixed costs that cannot be collected through a demand
charge from residential customers, the logic of the $25
calculation would demand that production and transmission
demand charges also be collected in this fashion.Mr.
Brilz I s Exhibit No. 42 suggest that doing so would add
another $13.50 per month to the monthly charge, bringing
it to over $38 per month.
2323 Power: Direct P. 9a
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There is no more logic to collecting distribution
demand-related costs in a monthly customer charge than
there is to collecting production and transmission
demand-related costs in this manner.
A $38 per month fixed charge is not the limit of
what one could calculate.IPC faces significant overhead
costs that are difficult to associate with customer
usage. All of them could be treated as "fixed overhead
Then there are the fixed costs of productioncosts. "
that this Commission has characterized as energy-related.
Those fixed costs also could be collected on a per
customer basis.Under IPC' s "principles," the only costs
that are clearly legitimate to collect in the residential
kWh usage charge are the variable fuel and purchased
energy costs. These represent about a fifth of the total
residential revenue requirement.Such a "principled"
approach would lead to a monthly customer charge of about
$50 and a kWh charge of cents.
This may sound like a gross exaggeration , but some
utilities that have stayed focused on revenue stability
and the promotion of electric usage have implemented rate
designs that are not far removed from this model.
What are your obj ections to basing residential
and small commercial electric rates on a fixed-variable
cost approach?
2324 Power: Direct P. 10
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Such an approach has no economic logic to it
since it ignores cost causality and focuses merely on
whether a cost is fixed or varies in the short term with
usage. The reason that the fixed costs were incurred in
the first place simply gets ignored. Such an approach is
not a cost of service approach since cost causality is
largely ignored.
From an energy policy point of view, unless one
believes that the long run
2325 Power: Direct P. 10a
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incremental cost electric energy and will remain
very low such priclng policy will give grossly
distorted price signals.Since some the maj or costs
associated with producing electric energy are the fixed
investment costs associated with the generating
facili ties, focusing only on the variable costs can be
very misleading. Hydroelectric , base load
thermal-electric, wind-electric , etc. have very low or
zero fuel costs, but that does not mean that they produce
electricity at near zero economic cost. Cost allocations
and rate design that seriously distort price signals and
encourage inefficient consumption behavior are very
costly in the longer term.
Do IPC I S estimates of the incremental costs of
electricity suggest that additional electric supplies
will be available in the future at very low cost?
No. The marginal cost study that IPC prepared
for this rate case estimates total marginal energy,
capaci ty, and transmission costs for the summer months in
the 8.7 to 9.2 cents per kwh range and 6.3 - 6.6 cent range
for the peak winter months.(I have used monthly system
load factors to convert the monthly generation and
transmission marginal capacity costs to a kWh basis.
(IPC Response to Idaho Irrigation Pumpers Association
Second production Request, No. 30.
2326 Power: Direct P. 11
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IPC I s 2002 Integrated Resource Plan and the
preliminary figures being developed for the 2004
Integrated Resource Plan both indicate future incremental
costs of supply in the 4 to 8 cent per kWh range on a
levelized, life-cycle cost basis. Depending on the fuel
source, fuel costs would represent a quarter to
two-thirds of those costs.(2002 IRP, Tables 11 and 12;
2004 IRP Advisory Council December 18 , 2003 presentation
pp. 66-67.
Does IPC recognize that the incremental costs
of serving its customers in
2327 Power: Direct P. lla
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the present and in the future will exceed the embedded
costs?
Yes. IPC President and CEO, J. Lamont Keen, in
his prefiled direct testimony said: "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.(Page 16 at 16)
In this setting, it is important to find ways of
signaling to customers the higher incremental costs
associated with providing them with the electric services
they seek. Those price signals need to take a form to
which customers can respond by modifying their
electricity usage behavior. IPC' s proposals for seasonal
and time-of -use rates move in this direction. Efforts to
increase fixed monthly charges that customers can do
nothing to avoid while at the same time reducing usage
charges are a move in the wrong direction.
3. The Calculation of a "Customer Portion" of the
Distribution System
IPC has calculated that 36.25 percent of the
costs of distribution lines and transformers are
2328 Power: Direct P. 12
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customer-related" and should be allocated on the basis
of the number of customers being served.What data does
IPC provide to indicate that these are customer-related
costs?
None.IPC does not even attempt to make such
an argument. Instead it again makes a type of
"fixed-variable" argument.IPC estimates what the
minimal load is that is always on its system. It does
this by analyzing its load duration curve. It labels
2329 Power: Direct P. 12a
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this minimal load that is always present its fixed"
load. It compares this to its peak load and labels the
difference its "variable" load.The minimal load is
36.25 percent of the peak load and therefore IPC
concludes, 36.25 percent of the distribution lines and
transformers should be labeled " customer costs " and
allocated on a per customer basis.(Bril z page 9 at 18;
Brilz Work Papers, pages 10-11)
Because it has been able to label this level of
demand as "fixed," IPC seems to believe that the costs
associated with it are not demand-related.It is hard to
follow the logic here. In the short run all of the
distribution costs are "fixed," not just this portion. In
addition, if the load were constant at what is now 36.25%
of peak level , distribution lines and transformers would
still have to be sized to meet that load and put in place
at considerable cost. This portion of distribution system
is no different than any other portion of the
distribution system. Both are designed to deliver
electrici ty to customers.
Why do you not find this approach to defining a
customer component" of the distribution system
convincing?
The analysis has nothing to do with analyzing
the part of distribution system costs that vary directly
2330 Power: Direct P. 13
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with the number of customers. A causal connection with
the number of customers is never explored. This approach
would also lead to over a third of the costs associated
with generation and transmission to be classified as
IPC used its load duration curve tocustomer costs.
identify the minimum load regularly put on its system.
IPC needs only 36.25 percent of its total electric
capaci ty to meet those loads. IPC uses only 36.25 percent
of its transmission capacity to meet those loads. In that
sense 36.25 percent of IPC's generation and transmission
capacity are also "fixed." That, following IPC's logic,
would justify allocating those costs on a per
2331 Power: Direct P. 13a
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customer basis. In general, all investments that serve
IPC's base load would be classified as customer costs if
this approach were taken.
Is this IPC approach to identifying a "customer
component" of the distribution costs a variation of a
minimum system" approach to distribution costs?
IPC may have something like that in mind, but
it has not provided any evidence that it has conducted
such an analysis.That is not how the 36.25 percent
figure was calculated. Just as important, 36.25 percent
is not a "minimum distribution system.The entire
residential class is the source of only 35.8 percent of
the load on the distribution system. In that sense, this
customer component II of the distribution system could
serve the entire residential load. 36.25 percent of total
load represents over 1 400 megawatts of capacity. Some
utilities are no larger than this.
Are there other conceptual problems with the
way IPC has applied this "demand-customer " division of
distribution costs?
IPC I S approach places an unreasonableYes.
double cost burden on those classes of customers whose
loads are relatively small.
Please explain the double cost burden that
customer component" of distribution costs causesIPC'
2332 Power: Direct P. 14
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for smaller customers.
The 36.25 percent of the distribution system
that IPC labels customer-related is obviously capable of
serving a substantial part of average distribution load.
For customers with relatively light loads, that part of
the distribution system is capable of serving almost
their entire load.
The average load per customer across all classes at
the primary system level is 7.4 kW.IPC I S "minimum
system " is capable of serving 36.25 percent of that load
2333 Power: Direct P. 14a
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67 kW. But the average residential load is only 3.
kW.(at theFor that reason, IPC I S "minimum system"
primary level) can serve 84.5 percent of residential
customers I loads. For non-residential customers, the
average load is 29 kW.IPC's "minimum system " is capable
of serving only 9 percent of those loads.
The double charging of residential customers comes
from this difference in the share of class loads the
minimum system " is capable of carrying.When I
allocates responsibility for the "non-customer" component
of the distribution system on the basis of demand (63.
percent of the system costs), IPC does not take into
account the part of each class's load that is already
being met by the minimum system. Even though only 15.
percent of the residential customers ' loads still need to
be served by the primary distribution system but 91
percent of the other customers' loads still have to be
served, IPC implicitly assumes that an equal percentage
of all classes I loads remain to be served. As a result,
the residential customers are asked to pay for the
distribution system serving their "minimum loads" again.
This leads residential customers to be double charged for
the loads served by the "minimum system " a completely
unacceptable result.
Is this a widely recognized problem with the
2334 Power: Direct P. 15
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approach that IPC has taken?
The NARUC "Electric Utility CostYes.
Allocation Manual" that IPC cites as its guide
specifically warns about this problem:
"Cost analysts disagree on how much of the demand
costs should be allocated to customers when the
minimum-size distribution method is used to classify
distribution plant. When using this distribution method,
the analyst must be aware that the minimum-size
distribution equipment has a certain load-carrying
capability, which can
2335 Power: Direct P. 15a
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be viewed as a demand-related cost.
"When allocating distribution costs determined by
the minimum-size method, some cost analysts will argue
that some customer classes can receive a disproportionate
share of demand costs. Their rationale is that customers
are allocated a share of distribution costs classified as
demand- related. Then those customers receive a second
layer of demand costs that have been mislabeled customer
costs because the minimum-size method was used to
classify those costs.(Page 95)
Can this double charging of customer classes
with small average loads be avoided?
Yes. What needs to be done to avoid this double
assignment is to subtract from the distribution demand
allocation that part of the load that can be served by
the minimum distribution system. This would substantially
reduce the distribution peak load allocator for the
residential class.In fact, given that IPC calculated
its "minimum system " as a percentage of total load, it
would carry the allocation back to what one would get if
a purely demand-based allocation had been used in the
first place. That is, accounting for the load the minimum
system is capable of carrying would make IPC I S approach
pointless.The correct way to allocate distribution
system costs is simply to use the demand allocator.
2336 Power: Direct P. 16
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But is it not true that some of the
distribution costs do not vary directly with the level of
demand and therefore are not really demand-related costs?
Yes and no.The distribution system , like the
entire electrical system, is capital intensive and
therefore involves large amounts of fixed costs. But
fixed costs are not customer costs.Those fixed costs
are incurred in the pursuit of a broad variety of
2337 Power: Direct P. 16a
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obj ecti ves and the amount of fixed costs incurred vary
due to a wide variety of circumstances. It is true that
the current peak loads on the distribution system do not
explain all of the costs associated with the current
system. In that sense, one could argue that some of those
costs do not vary primarily with current peak loads.
If current peak loads do not explain some of
the costs of an electric distribution system, what other
design criteria help explain those costs?
Among the most important are the following:
The location and density of customers.
The topography, geology, and character of
surface occupation.
The desire to have a resilient and stable
system that can continue to provide service under a
variety of possible contingencies.
The economies of scale at the time the
distribution system is built or upgraded.
The expectation that profits can be earned
on volumes of electricity sold to the customer.
How does the location and density of customers
affect the costs of the distribution system?
The closer the customers are located to the
company s transmission system, the lower are the
distribution costs. The more densely settled the
2338 Power: Direct P. 17
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customers are, the lower the costs since poles and
transformers can be more intensely utilized and few miles
of line have to be strung.
What role does topography, pat terns of surface
occupancy, and geological conditions play in determining
the costs of the distribution system?
2339 Power: Direct P. 17a
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It is cheapest to set poles and string
conductors on flat, unoccupied terrain with firm but
easily excavated under-surface materials. When the area
is already densely settled and used, the cost of building
lines rises. When there are many river or stream
crossings or steep changes in topography, the costs will
also be higher. When the poles or underground cable has
to be set in bedrock or unstable material, the costs are
going to be higher.
How does the pursuit of a resilient and stable
distribution system affect the costs of the distribution
system?
Distribution systems in densely settled areas
are planned so that the loss of one particular line to a
particular area or unusual load conditions do result in
customers losing service or the quality of service
declining. In densely settled areas the utility seeks to
construct a network with sufficient reserve capacity so
that it can meet a variety of potential contingencies.
This increases the quality and reliability of service.
These are valuable attributes of electric service that
can be obtained only through larger distribution system
investments. These are also services that are provided to
customers throughout the year , not just at time of system
peak.
2340 Power: Direct P. 18
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How does the existence of maj or economies of
scale in the capacity of a distribution system at the
time it is constructed or upgraded affect the
relationship between current peak load and costs?
Because additional increments of capacity can
be had at very low incremental costs, excess capacity is
regularly built into the distribution system. The
carrying costs of that excess capacity are lower than
frequent upgrades. As a result, there often is not a
close relationship between current loads, the capacity of
the system,
2341 Power: Direct P. 18a
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and the costs that system.
Why did you mention above the fact that the
pursui t of profitable volumes sales may lead the
utility to incur additional distribution system costs?
Because that is in fact the over-riding
"design " criteria. The distribution system is extended
and the costs associated with that extension are incurred
in the pursuit of profitable sales. That is the causal
force driving the utility to take on those costs.
What is the point of listing all of these
determinants of distribution costs?
To underline the fact that it is not just one
design criteria, e.g. meeting the peak hour load, that
determines distribution system costs. There are many
other determinants that have little or nothing to do with
peak hour loads. In that sense IPC is correct: One cannot
show that all of these costs are tied only to peak
demand. IPC is also correct that many of these costs are
incurred simply in order to stand ready to serve
customers throughout the year. From that, however, IPC
jumps to the false conclusion that a substantial portion
of these costs is "customer costs.We know that that
not the case. Even IPC does not attempt to show that
these costs vary with the number of customers. Knowing
that the costs of the distribution system were incurred
2342 Power: Direct P. 19
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so that customers can receive energy and meet their peak
loads throughout the year simply points out that these
investments were made to sell customers electricity and
the costs associated with serving this market should be
met, as most other businesses meet them, through usage
charges, not per customer charges.
Has the Commission in the past commented on the
conceptual weakness of IPC' s efforts to categorize a
significant part of the distribution system as "customer
2343 Power: Direct P. 19a
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costs" ?
Yes, 17 years ago in the 1987 IPC general rate
case (U-I006-265A) , the Commission's order (Order No.
1984) commented as follows:
... (T) he parties attempted to break down
distribution-related costs into demand-related,
energy-related and customer- related costs._. The division
of costs into these three components is weakest and least
relevant for distribution plant.Simply put,
distribution-related costs do not neatly fall into any of
these categories to the exclusion of the others.
Formulas and conventions separating them are nothing more
than that--formulas and conventions.The W12CPs
reasonably partition these costs among the customer
classes even though their attempt to force costs into
demand-related, energy-related or customer-related
components is largely meaningless.(Section II9B) (3) .
IPC's efforts to describe over 36 percent of the
distribution system costs as "customer costs" are still
"largely meaningless.
What is your recommendation on the allocation
of distribution costs?
Ideally, they should be allocated on the basis
of a mix of energy and demand. As a practical matter they
can be appropriately allocated on a demand basis. IPC' s
2344 Power: Direct P. 20
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per customer allocation of a significant part of the
costs of the distribution system should be rej ected.
Following the logic in your discussion above of
the allocation of the costs associated with the
distribution system, could not the same argument be made
for the allocation of transmission costs on the basis of
a mix of energy and demand?
Absolutely.In the last two IPC general rate
case I have made exactly that argument. I still feel that
a careful analysis of the cost-causal logic those costs
provides
2345 Power: Direct P. 2
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a strong technical justification for allocating
transmission in a manner similar to the current
allocation of production plant.Appendix A to this
testimony presents that analysis again.
Why have you put that material to an Appendix?
Al though I still find that analysis technically
correct, this Commission has not found it persuasive in
previous rate cases. In order to focus on other issues of
importance to residential customers, I have chosen not to
emphasize transmission allocation.
Why then did you include Appendix A at all?
As I say at the beginning of Appendix A, I
expect other parties to be trying to persuade the
Commission to change the cost of service allocations in
ways that may burden residential customers. The point of
the Appendix is to remind the Commission that persuasive
arguments can be made to shift allocations in a direction
that would be more beneficial to residential customers.
4. The Burden of the Irrigation Class on Other Customers
What is your concern about the way in which IPC
proposes to handle the revenue deficiency associated with
the irrigation class?
IPC I s cost of service analysis indicates that
the irrigation class should face a $40.5 million increase
2346 Power: Direct P. 21
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in rates. Almost 50 percent of the $85.6 million total
rate increase that IPC seeks should be coming from the
irrigation class.IPC, however , proposes to collect only
$15.million of their $40.5 million revenue deficiency
from the irrigators. The rest of the increase the cost of
service study indicates should come from
2347 Power: Direct P. 21a
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that class would come, instead, from other customers.
How would this affect the residential class?
About half of the irrigation revenue deficiency
that is not collected from the irrigation class would be
collected from the residential class, an additional $12.
million.This $12.1 million increase to residential
customers associated with the irrigation class I s revenue
deficiency would be on top of the $28.7 million increase
IPC's cost of service study indicates is due from the
residential class. Thus, IPC I S proposed revenue spread
boosts the rate increase to residential customers by over
42 percent.Instead of facing a 13.5 percent rate
increase, residential customers would face a 19 percent
increase.
This appears to be a particularly extreme additional
burden to put on residential customers.
Is this a new problem with respect to the
irrigation class?
No.Twenty years ago, in 1982 , IPC' s cost of
service study indicated that irrigation rates should have
been increased 60 percent or $25 million. In 2003 dollars
this would be a $47.75 million increase.The current IPC
cost of service study indicates that gap is still $40.
million and that a 67.1 percent increase is still
required.
2348 Power: Direct P. 22
AARP
In 1982 IPC was seeking a larger system increase
(26.3 percent) than it is seeking in the current rate
case (17.7 percent) If the irrigation deficit is
expressed in terms of the increase required over and
above the system-wide increase sought, the deficiency gap
has grown from 47.5 to 57 percent of irrigation rates.
It would appear that some fairly dramatic steps need
to be taken to systematically close this very large gap.
If only a small step is taken and IPC does not come back
in with another general rate case for ten years, this
substantial burden on
2349 Power: Direct P. 22a
AARP
residential and other customers could continue for
another 20 years.
Do you believe that the cost of service
analysis should be used mechanically to determine each
class s revenue requirements?
Certainly not.I agree with this Commission
long-standing position that cost of service analysis is
just the starting point for determining class revenue
requirements. Reflecting cost responsibility is one
important objective in rate design, but customer impact
and rate stability are also important considerations.
However , this Commission has usually tried to move
systematically to close very large revenue deficiencies
rather than let them continue or grow. My concern is with
the size of the burden on residential customers and the
likelihood that it could continue indefinitely.
Can the burden being carried by residential and
other customers associated with the low rates irrigators
pay be justified in economic development terms? By
keeping irrigation rates low , is the agricultural sector
stimulated and the rest of the economy encouraged to
expand, benefiting all workers and businesses?
No. Cross-subsidization of one type of business
by all residences and other businesses cannot have that
sort of effect."Robbing Peter to pay Paul" is not a
2350 Power: Direct P. 23
AARP
viable economic development strategy. Shifting purchasing
power from residential customers to irrigators reduces
the expenditures the households can make in local
businesses, depressing the local economy. In addition,
all other businesses are burdened by higher costs so that
one type of business, the irrigators, can have lower
costs. That discourages business expansion across the
board, depressing the economy, not stimulating it.
But in rural areas, where irrigated agriculture
is a more dominant part of
2351 Power: Direct P. 23a
AARP
the local economy, don't lower irrigation costs stimulate
the local economy?
That is unlikely. "Rural" no longer means
agricultural." Most rural residents are not irrigators.
Most rural businesses are not irrigated farms. The rural
economy lS increasingly diverse and non-agricultural. The
economic connection between the rural economy and
agricul ture has increasingly reversed so that the
di versi ty in the non-agricultural local economy,
including the urban economies within commuting distance,
supports farm families rather than the other way around.
Farm and ranch families increasingly supplement their
household income and stay engaged in agriculture by
taking jobs in the non-agricultural sectors of the
surrounding economy. In that sense, promoting the
non-agricultural economy is crucial to the survival of
family farms and ranches.
Is it likely that the problem of the revenue
deficiency of the irrigation class will solve itself over
time?
The relative importance of the summer peakNo.
seems very likely to continue to grow on IPC' s system.
IPC has emphasized in its testimony, serving this growing
peak summer load is going to require large investments in
production, transmission, and distribution that are
2352 Power: Direct P. 24
AARP
focused on the summer load. As IPC has pointed out, the
incremental costs are going to be larger than the
embedded costs as gas-fired peaking units are used to
supplement the relatively inexpensive hydroelectric power
and base-load coal-fired generation.Market prices of
electricity at time of peak summer demand are also likely
to be high since the region to the south and west is also
summer-peaking.When the costs associated with upgrading
generation , transmission , and distribution to continue to
meet the summer peak are added to future cost of service
2353 Power: Direct P. 24a
AARP
analyses, the cost assignments to the irrigation class
are certain to continue to rise.
What do you recommend the Commission do about
the irrigation class revenue deficiency?
Since I do not know what this Commission will
determine the ultimate IPC system-wide revenue deficiency
is, let me phrase the revenue deficiency in terms of the
gap relative to the overall system deficiency. That gap
is 42 percent.IPC proposes a 25 percent rate increase
for the irrigation class. That would be a 6.2 percent
increase relative to the overall increase. If IPC has
general rate cases every five years , as opposed to the 10
years since the last general rate case , it would take 35
years to close the gap. That would be a much faster rate
of closure than the zero closure over the last 20 years.
But such a rate of closure would burden all other
customers and the south Idaho economy for a third of a
century. I do not believe that is reasonable.
I would propose that the tariff approved in this
case set an irrigation rate that adjusts upward annually
over the next five years.Since any pragmatic person
would have to admit that cost of service analyses have a
wide range of uncertainty and error associated with them
let us assume that IPC I s cost of service study is
accurate to only within plus or minus 33%.That would
2354 Power: Direct P. 25
AARP
suggest that we could only be confident that the
irrigation class revenue increase over and above the
system increase should be between somewhere in the 28 to
56 percent range. If we choose the lower bound to be
conservati ve, the increase to irrigators over and above
whatever the overall increase is should ultimately be 28
percent. IPC proposes to increase irrigators' rates 6.
percent on top of the system-wide increase. That would
leave a 20.5 percent deficit if the target is an ultimate
28 percent increase for irrigators.
2355 Power: Direct P. 25a
AARP
If the tariff indicated an irrigation rate that
increased 4 percent each year over the next five years
and was accompanied by an accounting order that allowed
these increased revenues to accumulate and be returned to
all other classes of customers at the time of the annual
power cost adj ustment, the gap in irrigation rates could
be systematically closed in a reasonable period of time.
The point is to find a way to systematically close a
significant part of this gap in a way that is neither
sudden nor disruptive but assures that a good part of it
is closed in the near future.
III. Rate Design Issues
IPC's objectives in this case for the
residential class is to move more of the costs to the
customer charge and keep the only usage charge the
residential customers face, the kilowatt hour charge,
relatively low. Does that make sense from the point of
view of public energy policy?
No. As IPC's President and Chief Executive
Officer has pointed out, incremental costs exceed
embedded costs on the IPC system and with ongoing growth
that is driving costs and rates upward. In that setting,
rather than scaling back the rates that can encourage
2356 Power: Direct P. 26
AARP
consumers to modify their electricity usage patterns , it
is more important than ever to accurately convey to
customers the costs associated with their electricity use
in a way that encourages them to modify that usage.
The point is not to penalize unavoidable electricity
use but to provide an economic incentive that encourages
electricity users to look for cost effective ways of
2357 Power: Direct P. 26a
AARP
reducing their usage , thus helping their families and IPC
to avoid the high and rising incremental costs.
In what way is shifting more of IPC' s costs to
fixed monthly charges incompatible with improving price
signals?
Shifting more costs to fixed monthly charges is
appropriate only if one thinks that current usage charges
are too high and are irrationally discouraging the use of
electrici ty. I f one were to bel ieve that encouraging
increased electricity use is good public policy, then it
would be appropriate to adopt IPC I S rate design proposals
since IPC explicitly does propose changing rate design so
that energy charges can be kept lower.
Aren t you distorting what IPC is proposing?
IPC is shifting costs to fixed monthly charges for the
residential and small commercial class only because, as
it says, there is no other way to collect these fixed
costs.
IPC is mistaken in that assertion. As discussed
above , there is no principle whatsoever , either economic
or business , that says that fixed costs should be
collected in fixed charges. It is true that residential
and small commercial customers are not demand-metered
because such meters at this point are not cost effective.
But that does not mean that usage-related costs such as
2358 Power: Direct P. 27
AARP
demand costs cannot be conveyed to them.
There is a high correlation between peak demand and
energy usage.As one of these moves up or down , the
other tends to follow.The correlation , of course, is
not perfect, but it is high.For instance, the
correlation between the highest monthly coincident peak
and average load on the IPC system over the last 12 years
has been 70 percent.(IPC Response to AARP Request 14)
More relevant to the residential class,
2359 Power: Direct P. 27a
AARP
for the test year the correlation between monthly
coincident demands and energy usage was 81 percent.
This high correlation between energy use and peak
demand indicates that IPC is not helpless in conveying to
customers the costs associated with peak demands.
Conveying the information through high energy charges at
the time of peak demand can be effective.That certainly
would be more effective than reducing usage charges while
boosting charges that are unrelated to usage. The latter
strategy can do absolutely nothing to convey information
about the high costs of peak demand use; it can only
undermine the communication of that crucial information.
Do you support IPC I S proposals to increase
demand charges to better reflect the costs associated
with peak demand?
Yes. For those customers that are demand
metered , adjusting demand and energy charges to better
reflect the relative importance of those two types of
usage makes sense.
Do you support IPC' s proposals to make use of
seasonal and time -of -use pricing?
Yes. That is one way to convey crucial
information about how the costs associated with
electrical use varies over the day and over the year.
Is the type of rate design that IPC proposes
2360 Power: Direct P. 28
AARP
for the residential class the only way to convey
information about the high marginal costs associated with
electricity use?
No. As pointed out above , IPC's proposal to
increase the fixed monthly customer charge actually tends
to reduce usage charges and thus encourage electric
2361 Power: Direct P. 28a
AARP
usage. IPC has said that that is a conscious part of its
rate design. From a public policy point of view that
makes no sense.
Even IPC' s proposed seasonal rates for residential
customers are problematic.Residential loads peak during
the winter. The residential peak load during the summer
is 16 percent below its winter peak and the energy usage
in the peak summer month is 30 percent below the highest
winter month usage. Not surprising, marginal supply costs
are high not only during the summer but also during the
winter. Two of the winter months (along with three of the
summer months) are part of the Weighted 12 Coincident
Peak. Marginal energy costs are as high or higher in
December and January as they are in June, one of the peak
summer months.
IPC's proposals for seasonal rates ignore the impact
of winter peak loads. Combined with the impact of shifts
in costs to fixed customer chargers, energy rates during
the winter peak periods are reduced in relative terms.
Encouraging electricity use during an important peak
period by setting the rates low is not a good idea.
Is IPC actually proposing to lower residential
winter rates?
That will depend on the overall rate increase
this Commission authorizes. If we use IPC I s full revenue
2362 Power: Direct P. 29
AARP
request as a reference point , the existing rate structure
(a $2.51 monthly service charge and a non-seasonal rate)
would lead to a kwh charge of 5.92 cents for the
residential class.For the winter heating season
however , I PC proposes a 4. 91 cent charge.
How could this be avoided?
Instead of exclusively using higher summer
rates and fixed charges and effectively reducing winter
rates, blocked rates could be used for the residential
class.
2363 Power: Direct P. 29a
AARP
Blocked rates that offered a modest initial block at a
low rate but then charged a higher rate for consumption
above that level would automatically be seasonal rates.
In all seasons of the year when residential consumption
increased, more consumption would be billed at the higher
tail-block rate.In that sense, the higher marginal cost
would be conveyed during both summer and winter peak
seasons.
Could you provide an example tied to the
residential revenue requirement in this case?
Yes. In the following example I have used IPC' s
residential revenue requirement for illustrative purposes
even though I do not support either the allocation of
costs to the residential class nor the overall revenue
increase IPC is seeking.
An initial 400 kwh per month block of electricity
could be priced at a rate 25 percent lower than the price
for consumption above that level.In the following rate
design I have increased the monthly customer charge from
$2.51 to $3.00. I will discuss this change later.With
that monthly customer charge the appropriate rates for
the initial and tail block would be:
Customer Charge:$3.
Initial 400 kwh block:834 cents per kwh
All other kwh:445 cents per kwh
2364 Power: Direct P. 30
AARP
This rate design can be compared with that proposed by
IPC:
Customer Charge:$10.
Non-Summer Rate:910 cents per kwh
Non-Summer Rate:138 cents per kwh
Note that the tail-block rate I propose is almost the
same as (5 percent higher than) the
2365 Power: Direct P. 30a
AARP
summer rate proposed by IPC. In that sense, it gives the
same marginal supply cost information during both summer
and winter peaks that IPC proposes only for the summer
period.
In addition to conveying the high costs of
electric consumption during both the summer and winter
period, what other advantages are there to such a blocked
rate?
Such a rate provides rate relief to customers
wi th modest levels of consumption. In effect, it provides
a modest block of electricity at a reduced rate.
Customers whose consumption stays within or close to this
block face lower rates. Those whose consumption stretches
beyond that block pay higher rates. The further beyond
the initial block consumption goes, the greater the
impact on the customer s bill.
This will provide some rate relief for smaller
households and those who cannot afford larger homes and
more electric using appliances. I would expect it would
benefit , for instance, senior citizens and many
low- income households.
Why do you mention low-income households? Do
not some of them have large families living in relatively
low quality structures that use large quantities of
electrici ty?
2366 Power: Direct P. 31
AARP
Some low- income households certainly can be
characterized in that way. But, in general , low and fixed
income households consume less electricity, just as they
consume less of most other goods. They live in smaller
homes and apartments; they have a smaller stock of
electric-using appliances; and they have to "pinch their
pennies" more.
Over the last three decades I have reviewed dozens
of studies on the link between income and electric
consumption. I have yet to find a study showing that
lower
2367 Power: Direct P. 31a
AARP
income households , in general , consumed more electricity
than higher income households. This includes older
1981-1983 vintage, analyses of income-electric
consumption patterns on IPC' s system and in Idaho as a
whole. Disproportionately raising the bills of smaller
residential customers will place an increased burden on
those least able to pay for basic utility service: those
with low and fixed incomes. This is important and
relevant information when considering the impact of rates
on customers.
But do not the consumption patterns of IPC' s
LIEAP customers indicate high levels of consumption by
low-income households?
The IPC LIEAP customer consumption data
provided in response to Commission Staff Request 40 does
indicate high levels of electric consumption for the
September 2002-May 2003 period.Several things should be
kept in mind when drawing inferences from this LIEAP data
for all low and fixed income households.
First , LIEAP customers represent both the lowest
income customers IPC has and are likely to be the highest
energy consuming low income households. LIEAP customers
until recently, had to have incomes below 125 percent of
poverty.The sel f - selection process for the LIEAP
program that provides support in paying utility bills is
2368 Power: Direct P. 32
AARP
likely to attract those low-income households with the
highest utility bills , i.e. those with unusually high
electric usage. In that sense the LIEAP households may
not be a good sample of all low and fixed income
households.
Second, at least in Montana , LIEAP program
participants are a relatively small sample of the
LIEAP-qualified population. In Montana only 25 to 30
percent of LIEAP-qualified households seek utility bill
relief through LIEAP. Despite more than a decade of
efforts to boost the participation rate through utility
and private outreach efforts, the
2369 Power: Direct P. 32a
AARP
participation rate has not increased.
Third , most low income and fixed income households
do not think of themselves as living in poverty and/or do
not meet the federal guidelines to be so classified. The
low income population stretches well beyond the federal
poverty classification.
The IPC LIEAP customer consumption data should be
taken seriously.The high electric consumption levels it
documents highlights the need for expanded low-income
weatherization and bill payment assistance programs to do
something permanent about these high levels of energy
consumpt ion.
At the same time , until there is a lot more study
that confirms that IPC' s low and fixed income households
contradict decades of evidence that low and fixed income
households use less energy than high lncome households,
this data should not be used against a blocked rate
design that allows multiple public policy objectives to
be pursued simultaneously.
In your proposed rate design above , you have
raised the monthly customer charge from $2.51 to $3.00.
Why did you propose that?
Given that I believe that it is far more
important to have usage charges that reflect the expected
higher incremental costs of the present and future , I do
2370 Power: Direct P. 33
AARP
not really believe that there is any reason to raise the
customer charge. However, the customer charge has not
been increased for 10 years and a case could be made to
increase it to reflect some of the effects of inflation.
In addition , the appropriate definition of customer
costs is those costs that could be avoided if the
customer ceased to take service. That would include those
meter reading and billing functions that actually vary
wi th the number of customers. Some of
2371 Power: Direct P. 33a
AARP
the meter reading and billing costs are relatively fixed.
A meter reader has to walk by a residence whether or not
the customer is taking service and there are fixed
overhead costs associated with the customer accounting
function. A $3.00 a month charge would cover about 70
percent of the meter reading and customer account costs
that IPC calculates. That would appear to be a reasonable
reflection of the variable part of those costs. Given
that there is no urgency to carefully convey such
customer costs since they do not affect customer behavior
and by lowering usage charges may encourage inefficient
customer behavior , there is no need to get the monthly
customer charge exactly right.
What would be the impact of your rate design
proposals compared to the rate design that is currently
in place but adj usted to meet the revenue requirement IPC
seeks in this case?
That is indicated in the following table.
Across the entire year , about two-thirds of all
residential bills would be lower , all those bills less
than 1 126 kwh per month.
2372 Power: Direct P. 34
AARP
Comparison of Current IPC Rate Design and AARP Proposal
Consumption Current IPC AARP Difference
Level Rate Design Proposal AARP-Current IPC
(kwh/mo)($/mo)($/mo)($/mo)
200 $14.$12.$1.
400 $26.$22.$3.
600 $38.$35.23 $2.
700 $43.$41.$2.
800 $49.$48.$1.
000 $61.$61.$0.
200 $73.$73.$0.40
1 ,400 $85.$86.$1.46
600 $97.$99.$2.
800 $109.$112.$3.
000 $120.$125.46 $4.
500 $150.41 $157.$7.
000 $179.$189.$9.
500 $209.$222.$12.
000 $239.$254.$15.21
500 $268.$286.$17.
000 $298.$318.$20.
What would be the impact of your rate design
proposals compared to the rate design proposed by IPC?
Again, accepting for illustrative purposes
IPC I S overall revenue target and its allocation of costs
to the residential class, the next table compares the
relative impacts of AARP I s and IPC' s rate design
proposals on customers with different levels of
consumption.
During the non-summer period a little more than half
2373 Power: Direct P. 35
AARP
----'-'
~C'
--'-'
co"-C"C'"C-
-'-",-."..,'-"'-
of residential bills would be lower and a little less
than half would be higher.The lower the level of
electric consumption , the more beneficial the rate design
is to a residential customer. It is the upper half of
residential consumers , those with monthly non- summer
consumption above 876 kwh who would face higher bills.
Those customers are responsible for three-quarters of the
residential non- summer energy use.
During the winter heating season , November through
March , slightly less than
2374 Power: Direct P. 35a
AARP
half of the bills would be lower under this rate design.
During the summer , almost all residential bills
would be lower even though all customers who consume more
than 400 kwh per month would face tail-block rates higher
than those proposed by IPC.Eighty percent of summer
bills containing 96 percent of residential consumption
would face such higher rates.
Comparison of IPC and AARP Rate Design Proposals
Consumption IPC Proposal AARP Proposal Difference: AARP-I PC
Level Summer Non-Summer Summer Non-Summer Summer Non-Summer(kwh/mo)($/mo)($/mo)($/mo)($/mo)($/mo)($/mo)
200 $22.$19.$12.$12.$9.$7.400 $34.$29.$22.$22.$12.$7.
600 $46.$39.46 $35.$35.23 $11.$4.
700 $52.$44.$41.$41.$11.$2.800 $59.$49.$48.$48.$10.$1.000 $71.$59.$61.$61.$10.$1.200 $83.$68.$73.$73.$9.$4.400 $95.$78.$86.$86.-$9.$8.600 $108.$88.$99.$99.-$8.$11.800 $120.48 $98.$112.$112.$7.$14.
000 $132.$108.$125.46 $125.46 $7.$17.500 $163.$132.$157.$157.$5.$24.000 $194.$157.$189.$189.$4.$32.500 $224.$181.$222.$222.$2.$40.29000$255.$206.40 $254.$254.$1.$47.500 $286.$230.$286.$286.$0.40 $55.000 $316.$255.$318.$318.$1.$63.
Are you not afraid that the lower rates for the
initial block will encourage additional consumption
during peak periods?
No. Only 4 percent of residential energy is
sold in the 18 percent of bills that stay within the 400
kwh block. That is , almost 96 percent of the residential
2375 Power: Direct P. 36
AARP
,- --
energy sales are on bills where the customer faces the
higher tail-block rate. In that sense, the vast maj ori ty
of consumption is given the right price signal.
2376 Power: Direct P. 36a
AARP
Does this conclude your prefiled direct
Yes, it does.
testimony?
2377 Power: Direct P. 37
AARP
open hearing.
(The following proceedings were had in
MR. PURDY:And I have no additional
direct.
COMMISSIONER SMITH:Okay.Questions for
Dr. Power.Mr. Eddie?
MR. EDDIE:, thank you.
Mr. Budge.
COMMISSIONER SMITH:Mr. Gollomp?
BY MR. BUDGE:
MR. GOLLOMP: No.
COMMISSIONER SMITH:Mr. Ward , Mr. Miller.
MR. BUDGE:Thank you.
CROSS -EXAMINATION
Dr. Power , if I understand your testimony
correctly you advocate, on behalf of your client, a
complete elimination of the so-called irrigation subsidy
that exists wi thin the context of the cost -of - service
studies; is that right?
No.That's not right.I explicitly say
that any cost-of-service analysis has some significant
CSB REPORTING
Wilder , Idaho
This commission , and most other
commissions have never applied them dollar for dollar.
margin of error.
2378 POWER (X)
AARP83676
So I begin by throwing out a third of the measured
difference relative to the cost-of-service analysis that
the Company has carried out.And then propose that the
remaining two-thirds be closed.
And your proposal is to move that
remaining two-thirds to cost of service or what would
then be cost of service over a period of five years; is
that correct?
Yes.
And does the effect of that, if
understand correctly from your testimony, that the rates
to the residential customers that you I re here to testify
for, would then diminish from about 19 percent that the
Company recommended down to 13 and a half percent?
Well , since a third
- -
if the gap
- -
the revenue gap measured by the Company s cost -of - service
analysis were completely closed then it could go from 19
percent to, I think it's 14.3 or 14.4 percent.Since all
of the gap isn I t going to be removed it wouldn I t fall
that far.
Well, I thought your recommendation in
this case was that the rate that you proposed as increase
for the residential customers would be 13 and a half
percent rather than the 19 the Company proposed.Wasn I t
that your conclusion?
CSB REPORTING
Wilder , Idaho
2379 POWER (X)
AARP83676
No.No.What I said was in my discussion
of the size of the revenue gap, was that the Company
cost-of-service analysis and its rate design proposal let
rates that the rate increase that otherwise would have
gone to the residential class to rise from around
percent to 19 percent.I simply pointed that out as a
measure of the size of the revenue deficiency.
In my proposal I don't
- -
I did not
recommend that the gap be entirely closed.And therefore
we would not be moving all the way back.
And the fact that you recommend that the
one-third leeway from cost of service be issued as
recognition of the -- recognition of cost-of-service
methodology is somewhat of an art and not a science?
Yes.
And do you agree that from a public policy
perspective , that other factors are appropriate for this
Commission to consider in setting rates in addition to
cost -of - service studies?
Absolutely.
And would you agree that rate shock is one
of those considerations?
Yes.Which is why I and other witnesses
have proposed phasing in the rate increase over time.
And I believe you've suggested that the
CSB REPORTING
Wilder , Idaho
2380 POWER (X)
AARP83676
phase-in would amount to about a 13 and a half percent
increase per year to the irrigation class?
It's a significant increase per year , yes.
So a year-to-year increase of 13 and a
half percent, whatever the exact amount is , if I'm off
somewhat, would satisfy any concerns you have about rate
shock?
Yes.In this context , absolutely.
been testifying in cases dealing with revenue deficiency
that's the measure vis-a-vis of the irrigation class for
20 years.And the size of that gap has remained very
large.
My feeling is that it I s time to do
something serious and systematic about it.And I think
providing - - if the Commission were to decide that a
ten-year phase-in was more appropriate I'm not sure that
would bother me.But I think we need to do something
systematically.And that appeals to rate shock are not
very believable at this point after the irrigators have
successfully avoided facing the music for 20 or 25 years.
In other words, what you re saying is
over the past 20 or 25 years the Commission has chose not
to put great emphasis on cost -of - service studies but
instead looked to a number of other policy factors.And
your testimony now is that the Company should give much
CSB REPORTING
Wilder , Idaho
2381 POWER (X)
AARP83676
greater emphasis to cost -of - service studies, although not
moving to true cost of service , but greater emphasis to
that and less to the policy decisions of the past that
led us to the gap that we now face?
Well , I'm not sure that the policy
decisions have ever been made clear or articulated.As I
recall the Commission has, in each of those decisions,
has said that it is raising irrigation rates
disproportionately and it intends to continue to raise
them to close the gap.
So its indication of what it intended to
, indicated a belief that cost of service should play
very significant role.What happened as a result of long
periods of time between rate cases, is that the gap
either did not decrease very much , or actually increased.
And so the Commission I s commitment to implementing over
time cost of service, wasn t realized because of the time
gap between rate cases.The gap grew larger , more
difficult to deal with.And I'm just suggesting that now
is the time to make sure that the intent to make use of
cost of service as one of the important elements in rate
design be systematically implemented.
Would you agree that it is important as a
matter of policy for commissions to consider in making
their decision consistency with previous decisions?
CSB REPORTING
Wilder, Idaho
2382 POWER (X)
AARP83676
that a factor that a commission should generally consider
in a rate making contex , t being consistent with the
proceedings of the past?
Not if conditions have fundamentally
changed.I think that would be a purely bizarre and
perverse public policy objective.
Is it true that you didn't do any economic
study of what your systematic proposal to move the
irrigators toward the cost of service would have upon
that class of customers or the rural agricultural
communi ty as a whole from an economic standpoint?
That's not true.No.ve spent my
entire professional life studying the economy of the
rural West and
Excuse me.Let me rephrase that question.
I didn't ask about a study of the West.Have you made
any economic studies of the impact on the irrigation
class, of the irrigation economy in Idaho, that might
result from the proposed systematic move for cost of
service that you propose in this case?Have you studied
that issue?
I have studied that issue.
Okay.And what - - I don I t see that in any
of your testimony.
No.I was -- I was specifically speaking
CSB REPORTING
Wilder , Idaho
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to the cost of service and the issues being raised in
this particular case.
Have you made a study as to what point in
time , as far as rate increases, a certain percent of the
irrigation class may no longer be able to function and
may go out of business?I think you can answer yes or
no if you did such a study.
I 1 m - - I don I t want to sound like Bill
Clinton and say it depends on what you mean by a study.
COMMISSIONER SMITH:There I S nothing wrong
with that.
THE WITNESS:If what you I re asking me is
in making my recommendation I was ignorant as to what the
potential impact
BY MR. BUDGE:
No.That's not what --
- -
that this rate increase would be on the
irrigation class, the answer is no.ve paid a lot of
attention to the impact of electric rates and other costs
on agriculture on south Idaho and the Mountain West.
That wasn I t my question at all.
My question was have you made a specific
study of the irrigation class in Idaho as to what the
economic impact might be on that class of the rate
increase of 13 and a half percent per year that you
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recommended in this case be systematically applied each
of the next five years?
No.I have not studied Idaho Power'
irrigation customers specifically.
Thank you.Now , let me ask you a
hypothetical question.
Let's assume we move the irrigation class
towards full cost of service under your systematic
approach , and Idaho Power continues to embark upon the
capi tal improvement program that they've presented in
this case which involves expenditure of a lot of funds
for new plants and embark upon a series of new rate cases
that continue to increase the cost of all customers as
well as this particular class disproportionately.Let'
assume hypothetically the irrigation class goes away, or
substantially goes away down the road five , or six , or
seven years simply due to economic infeasibility.Okay?
Will you accept the hypothetical proposed so far?
No.I don't believe that but I'll accept
it as a hypothetical.
m just saying will you accept it for
purposes of the hypothetical questions I'm going to ask?
All right.
Would you still be advocating at that
point in time when we come before this commission the use
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of a weighted 12CP with zero allocators in all but five
months on behalf of your customers, residential
customers?
As my testimony indicates, especially the
appendix A , the reason I have not emphasized
cost-of -service analysis in this particular case is that
the choice of different approaches to allocating cost
does not make a huge difference to the residential class
or senior citizen on behalf of whom I'm appearing her.
If that were to change, and the residential class was
facing what appeared to be an unfair, unreasonable,
disproportionate increase in rates, I would have a lot to
say about the choice of cost -of - service methods.
, even though you approved a weighted
12CP methodology, the Company s proposed methodology, you
didn't dispute in your testimony and accepted it; did you
not?
No.I just
- -
I think I say two or three
times that I'm using it only as a point of reference.
don I t think that there s any reasonable cost -of - service
analysis that could be proposed.And I haven't seen one
over the years that doesn I t suggest that there s a
revenue deficiency vis-a-vis the irrigation class.
Let I S continue with my hypothetical.
Let I S say the irrigators go away and I don t know if
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you've analyzed the summer load that the irrigators
substantially contribute to, but let's assume without
getting into the numbers that the summer peak that Idaho
Power now experiences, where three of the five months are
weighted, the other two being December, November and
December , that summer peak is now eliminated and
believe the IRP would seem to indicate that it then may
shift to November, December, January, and February, and
perhaps March.And under that type of a weighted 12CP
would you agree that a lot of the cost of growth in the
future would then be passed upon to those particular
customers who use heavily in those months?
Well , I don'I don't expect Idaho Power
Company to ever become primarily a winter-peaking
utility.
That wasnlt my question.I think my
question was , if in fact that occurred as a result of the
elimination of the --
If that occurred.
Would in fact we not then be weighting
heavily and allocating costs to those particular
customers who use heavily in those new peak five months
which would be primarily the winter months?
Hypothetically yes.Practically what will
happen is that the peaks will get more evenly weighted.
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As my testimony makes clear, I think Idaho Power is
understating the importance of providing price signals to
residential customers and other customers who use
electrici ty during the winter.So, yes, it would shift
the allocator towards the non-summer months.In fact,
that's not going to be the outcome.
And assuming also if the irrigators were
gone , and under the Company s proposed rate schedule
think Exhibit 44, reflects that the irrigators under the
rates proposed would be contributing 75 million dollars a
year , approximately the same as the rate increase the
Company s requested here, those revenues would then have
to be made up from those customers who remain on the
system; is that true?
It would be made up by the new customers
coming onto the system that would rapidly make use of the
energy and capacity that the irrigators are currently
using.
And one of those new customers if the
growth in the next ten years continues as the growth in
the past ten years would primarily be the residential
customers; isn't that true?
That is one of the classes of customers
that would help pay the costs.Whether that would lead
to a disproportionate increase to that class of customers
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isn't clear to me at all.
And so would you think if the residential
customers were faced with successive annual 13 and a half
or so percent increases per year, that wouldn t then be
considered rate shock to that class?
Idaho Power and this Commission would
never have allowed a gap between the residential class
and everybody else of that size to develop.There's no
other class of customers that has the cultural and
poli tical clout that the irrigators have.That just
isn't a realistic hypothetical.
Turn to page 23 of your testimony, if you
would, please.
And beginning at the bottom of page 23 and
continuing at the top of page 24 you make a statement
that's quite surprising coming from an economist.And
you state that in the rural areas where irrigated
agricultural is more dominant that you don't think it'
likely that lower irrigation costs have stimulated the
local economy.Do I understand yourIs that correct?
testimony that you don't believe that lower irrigation
costs have stimulated the economy in rural areas of
Idaho?
That's not what I say here.
Well, your answer is, that is not likely.
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Do you mean something different?
No.Give me the line again.
Well, line 23 on page 23, you ask yourself
this question.But in the rural areas where irrigated
agricul ture is a more dominant part of the local economy,
don't lower irrigation costs stimulate the local economy.
And your answer is, that is not - - that is unlikely.
Right.What I'm referring to is the
current situation.The idea that one can stimulate the
economy by taking money from one group of citizens and
giving it to another , that that's an economic development
strategy, is something that I don I t think is supported by
professional economists working in the field of economic
development.
So you're not saying that the lower rates
irrigators have enj oyed in the past have not provided
stimulation to the rural economy?
Absolutely not.Similarly lower rates to
FMC or other large industrial customers in the past,
aluminum companies for instance in the Pacific Northwest
may at one point, almost certainly at one point did
stimulate the local economy.Whether continuing those
subsidies when the - - after the economy had changed, and
one has a more diversified less frontier-like economy in
place, whether maintaining those subsidies continues to
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stimulate the economic or burden the economy is the issue
that I I m dealing with at this point in my testimony.
I believe you live, according to your
testimony, in Missoula, Montana?
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Yes.
Have you ever lived in Idaho?
No.I have not.
Did you fly or drive here?
I flew here.
Have you ever driven here?
Yes.
And did you drive through southern Idaho?
Yes.
Did you drive through Blackfoot and get
off the freeway and go through Blackfoot?
ve driven dozens, if not a hundred times
through southern Idaho.
Got off the freeway?
Yes.
Have you been in American Falls?
Yes, I have.
Aberdeen?
ve stayed in American Falls.ve gone
hiking in the area.
Have you been through Burley and Jerome
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and Rupert?
Absolutely.
And you re able to say with a straight
face on page 24, line 3, that the rural economy is
excuse me, most rural businesses are not irrigated farms?
In --
What are these businesses that you were
referring to that are not irrigated farms?
COMMISSIONER SMITH:Mr. Budge, would you
please let the witness answer one question before you
charge of f on another?
That was a poor lead- in.MR. BUDGE:
apologize.
If you take Jerome asTHE WITNESS:
typical of southern Idaho, then I think you can
absolutely conclude that irrigated agriculture is about
the only show going on.
I f instead you look at Canyon County, or
you look at Twin Falls County, or you look at Ada County,
the three counties that have the largest number of
irrigated agricultural operations, you get a dramatically
different picture of what the south Idaho economy looks
like.
BY MR. BUDGE:
You mention Twin Falls, which I find
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curious.Is not the number one growth industry in Twin
Falls the dairy industry?
It has become so, yes.
When you drive along the freeway do you
see some pretty big dairy farms there?
Yes.
Do you suppose that the hay that those
cattle eat are from irrigated farms?
Certainly.
Is that one of the
- -
when you say most
businesses are not irrigated farms I'm just wondering
what is the businesses that you I re seeing?
You don't - - the idea that one can study
the economy by driving along a road and looking at what
one sees on the landscape is the equivalent of analyzing
the economy by staring into the rearview mirror.From
that point of view western Montana is 100 percent timber
or 90 percent timber with a sliver of agriculture aimed
in.Because when you look around all you see is timbered
mountains.When you look around a good part of
southeastern Montana , or southern Idaho, all you see on
the landscape are agricultural operations.You might
then conclude that there I s nothing else going on here.
When you look at the economic statistics as to where
people earn their income, where people are employed, when
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you look at the actual data on the sources of income and
employment for people, you get a dramatically different
picture.
Let me ask you as an economist following
tha t 1 ine of thought , have you in fact made, in arriving
at some of these conclusions that agriculture is not
important , have you made any attempt to analyze how many
acres in southern Idaho under the Idaho Power system are
under sprinkler irrigation at this point in time?
MR. PURDY:m not sure
COMMISSIONER SMITH:Mr. Purdy.
I obj ect to that.MR. PURDY:
mischaracterizes his statement or his testimony as
suggesting that agriculture is not important.He never
said that.
COMMISSIONER SMITH:Mr. Budge.
MR. BUDGE:That seems to be what he
saying.s testifying that the rural economy is
increasingly diverse and non-agricultural.And he s an
economist.I ought toHe I S saying it I S not a big deal.
be able to ask him as a lead- in question as to what type
of annual revenue is generated from the farm economy that
he believes is not significant.
COMMISSIONER SMITH:I think that your
question is entirely appropriate.I do think that you
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mischaracterized his testimony.
MR. BUDGE:Okay.Let me go into that
other 1 ine then.
BY MR. BUDGE:
Have you made a determination of the
amount of income that is generated on an annual basis
from the agricultural economy in southern Idaho in
irrigation?
I don I t want to be technical.Wha t do you
mean by income?Income to Idaho Power , income to the
operators?
Excuse me.Let me be more specific.What
is the amount of revenue generated from agricultural
crops which would be dairy, potatoes , graln , beets , and
the like?
ve looked at that number.That is not
the way in which the relative importance of agriculture
in a local economy would be measured, however.The total
sales volume includes a significant amount of
double-counting and counting of income which does not
circulate wi thin the local economy.
My question was simply if you've looked at
it to know what the number is?
I have looked at it.And I don I t - - can I
tell you what the number is sitting here without anything
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in front of me?No.It will be a big number.
How big is it in the state compared to
other industries?
It's - - I assume where you're going is
that agriculture is the state's largest industry or some
such thing as that.It absolutely, posi ti vely is not.
If it's not, where does it rank in
industry?
It ranks well down in the list when one
looks at manufacturing in the aggregate , when one looks
for certain, you know , at service industries in the
aggregate.When one looks at where people earn their
income, where they make their living, what it is that
keeps the Idaho economy going, Idaho is not an
agricul tural economy.
And as an economist is there a multiplier
effect that is typically applied to determine the
economic impact of revenue generated from a particular
industry?In other words, when the farmers sell their
crop they buy fertilizer, and gas , and equipment, and
vehicles.How does that multiplier effect impact the
rest of the economy that relies upon the income from the
farm economy?Do you have a number of the multiplier
effect that you use?
It depends on the geographic area.
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you re looking at a small rural area the multiplier is
likely to be quite small , less than two.I f you I re
looking at a larger geographic area that includes the
trade centers that service the small towns and supply the
small towns, you 'll get a multiplier that's larger, two
and a half.If you have a large trade center like Boise,
it could be as high as three.
When you make the statement on page 24
line 7 and 8, you make the statement that farm and ranch
families increasingly supplement their household income
and stay engaged in agriculture by taking jobs in the
non-agricultural sectors.Is that an indicator to you
that at least for those particular farmers that they must
supplement the income from the farm in order to stay in
business and keep the farm?
No.Those - - that data on the percentage
of farm operators and farm operator families who work off
the farm is gathered through the Census of Agriculture.
And is , as part of that data gathering process farm
operators are asked why they work off the farm.Why farm
family members work off the farm.And it's only a small
minori ty that say they do it in order to pay the bills
associated with agriculture.Most of them explain that
they do it for a variety of reasons including they have
other occupations, professional skills that they want to
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deploy.Secondly, they have financial obj ecti ves that
can't be pursued while being solely a farmer.So the
explanation provided is rarely that that's the only way
in which they can pay the farm bills.
So you I re referring to the so-called hobby
farmers?
They I re not hobby farmers.No.Even the
largest of our farm operations derive a significant part
of the household income from non- farm sources.Tens of
thousand of dollars from non-farm sources.It's very
unusual , it's only a minority of farm operations in south
Idaho where the operator and family members work only on
the farm.So these are not hobby operations at all.
These are operations that deploy $500 000 to a million
dollars in assets in terms of land, in terms of
equipment , in terms of buildings.
Can you refer me to the source of
information that you rely upon as the basis for that
conclusion?
The US Department of AgricultureYes.
Census of Agriculture which provides data for you county
by county, in fact town by town.
And what's the one you re referring to
now?
1997.Although the 2002 data is just
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starting to be released.
Do you have that available?
No.I don t have it with me.
Thank you.Just one other question.
Have you, in this case , taken any look at
the load growth of Micron as a customer?
One of the witnesses provided a graph
showing that.
And I think that graph , if I recall right,
would show that Micron s growth over the last ten years
exceeds substantially 100 percent in each of the months
in which they operate.And in this case the Company I
proposed that they receive an increase of something like
8 percent.Less than half of the jurisdictional average.
Would that pause you, sir , as an economist
- -
or cause
you as an economist to pause as to whether it would be
fair for a customer that grows at that magnitude to pay
half of what the jurisdictional average is?
Customers, as an economist, I would have
to say that customers, absent other public policy
concerns, should pay as close to the cost associated with
providing them with service as possible.And that should
be done in an obj ecti ve sort of fashion.The
cost-of-service analysis that the Company provided , which
I assume the Company has some confidence in , indicates
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that even less of an increase , that Micron ought to face
even less of an increase.
To label, to suggest
- -
as an economist do
I have a problem with that?We rarely tax people orNo.
set the electric rates on the basis of whose load is
growing or decreasing.That would be an interesting idea
that I think is worth exploring but that I s not, in
general, how we set rates.We usually are enthusiastic
about businesses that are succeeding and expanding and we
don't target them for special burdens because of that
success.
MR. BUDGE:Thank you very much.
appreciate your testimony.Thank you.
COMMISSIONER SMITH:Does Staff have any
questions for Dr. Power?
MR. STUTZMAN:Just a point of
clarification , if I may.
CROSS - EXAMINATION
BY MR. STUTZMAN:
Dr. Power, I got confused about the
amount of the rate increase that you re proposing be
applied to irrigators over the next five years.
m looking at the top of page 26 of your
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testimony.
Yes.
You indicate that the proposed rate should
be 4 percent each year in order to close the gap.
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that the amount that you re proposing rather than 13 and
Yes.
Thank you.
MR. STUTZMAN:Tha ti s a 11 I have.
MR. EDDIE:Madame Chair , could I
interpose one quick question?
COMMISSIONER SMITH:Mr. Eddi e .
a hal f percent?
CROSS -EXAMINATION
Dr. Power , I'm not sure if you were
COMMISSIONER SMITH:As long as it I S
MR. EDDIE:It will be quick.
BY MR. EDDIE:
I I m not sure if you were here earlier when
Ms. Hirsh was on the stand, but are you familiar with a
BY MR. EDDIE:
here --
really cross.
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study by Mr. Roger D. Colton entitled Energy Consumption
and Expenditures by Low-Income Customers?
Yes.
Would you agree with Ms. Hirsh that that
is a generally reliable indication of usage patterns by
low-income customers?
Absolutely.It's drawing on publicly
available date, most of it gathered by government
agencies.
MR. EDDIE:Very good.Thank you.
COMMISSIONER SMITH:Mr. Kl ine, does the
Company have questions for Dr. Power?
MR. KLINE:Just a couple.
CROSS - EXAMINATION
BY MR.KLINE:
Again would Dr.Power,I I d direct you
the top of page your testimony.just want
talk a little bit about the mechanics of the phase-
proposal that you ve made in this case for closing the
gap --
Yes.
- -
of the other class revenue deficiency
gap.You indicate that as a part of your proposal there
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be an accounting order from the Commission that would
allow these increased revenues to be accumulated and
build up a balance.I I m assuming that you would also
believe that the Company should be allowed to earn a
return on that accumulated balance?
The Company should be allowed to earn a
return on any revenues that belong to it.What I had in
mind was collecting revenues that didn't belong to the
Company but belonged to other customers that would be
used to reduce the rates to other customer classes.
Whether in that context the utility should be allowed to
earn a return is unclear to me.
But it wasn't your anticipation that that
would be the case with this proposal, wouldn I t need to?
No.
Okay.And I think in response to Mr.
Budge's last question you indicated that certainly
between classes cost of service was something that you
believed in as an economist; is that correct?
Yes.
Do you feel the same way about intraclass
- -
for purposes wi thin a - - customers wi thin a class
there also ought to be - - cost of service ought to be
considered?
Yes.There s always a - - do a benefit
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cost analysis, I guess, as to whether getting more
detailed and breaking things into smaller groups or
refining the rate design leads to more confusion and
perception of inequity than it corrects problems.But I
think that I s how we come up with the class of customers
we have.We start as United Water was saying, you start
with one undifferentiated class , you try to just make
changes in components of the rate design.You go as far
as you can with that, when that doesn I t work anymore you
then maybe start creating rate classes, so.
You would want to avoid having some
customers in a class subsidizing the rates of other
customers in the same class?
Unless there are other important public
pol icy obj ecti ves, some of which are indirectly at issue
in this case for low-income customers and concern with
low- income customers.Some utilities, I understand that
apparently is not possible for the utility to act
- -
this Commission to approve low- income discounts , but many
utilities in the western United States and elsewhere in
the United States do have low-income discounts.Those
clearly represent , by the very label , a
cross-subsidization from often other residential
customers because they re often entirely funded wi thin
the residential class for lower income customers.
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there are public policy obj ecti ves that may lead to rate
design that deviates from what the mechanical cost of
service would indicate was appropriate.
MR. KLINE:That I S all the questions I I
Thank you.got.
COMMISSIONER SMITH:Thank you , Mr. Kline.
Do we have questions from the Commission?
Well , I've got some.
EXAMINA T I ON
BY COMMISSIONER SMITH:
I guess I I m glad that we finally have a
witness who pointed out the historical place of the
irrigation community in Idaho culture and politics.And
keeping that in mind, what if the Commission decided to
throw out 50 percent instead of 30?
I think that that's certainly a call that
the Commission can make.And when and if there I s a rate
case parties will be in here urging you to modify that.
I would , I guess I would urge that
actually, I'll take that back.I was going to say
would urge that there be a more complete airing of what
take to be largely folk economics that seems to be
forming the judgment about what the irrigation class can
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and cannot afford to pay.And whether in fact, burdening
every other group of customers , burdening every other
part of the economy, is somehow good for the south Idaho
economy.On its face I can't believe that you 'll be able
to find an economist who would believe that that could be
the case.
But I think it would be good to have a
more complete airing of some of the assumptions or
hypothesis that are buried in a lot of what I s being said
about the adaptability of the irrigation class to changes
in rates , the role of the irrigation class in the south
Idaho economy, et cetera.I think it would help inform
the Commission to have some of that discussed directly in
front of it.
No doubt.I guess I have a question and
you can just tell me if it's something you haven
considered.One of the concerns I had about the
irrigation class is that it includes everybody from the
guy who owns five or ten acres , throws a little pump in a
ditch three months of the year; to the guy who irrigates
thousands of acres with deep wells and pivots.And it
just seems incomprehensible to me that those two are
imposing the same kind of costs and should be in the same
class and get the same rates.Do you ever think about
that?
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Well , I looked at that because AARP was
concerned, as I think most citizens especially south
Idaho folks are, about the impact of the - - you know, the
possible rate increase to irrigators the impact that will
have on them regardless of whether they feel it will have
a big impact on the economy.You know , there I s a feeling
that that would be a pretty shocking thing to do.
they asked me to look at whether it would be possible to
have some sort of blocked rate for those smaller
customers.And I didn t put a lot of time in it, but
there is an incredible di versi ty.There s almost two
order of magnitude.I think it's almost a 90-fold
difference in usage just based on the chart that the
Company produced in terms of impact on different sizes
customers.If you look at the smallest and the largest
there I S a huge, huge difference in consumption.And when
you look at the Census of Agriculture data on the
different sizes of irrigated operations one sees exactly
the same sort of thing.
So I think there is the possibility that one
could try and design an irrigation rate that tried to
protect smaller operations.It's not unusual for
citizens to make a distinction between a straightforward
commercial operation that's being conducted , with good
purpose, to make money.But they re doing this with
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their capital simply because that's offering a good
return right now and there's no more commitment on the
rest of the citizenry to that type of business as to some
other part of the business, the distinction between that
and true family farms, small operations.
What I pointed out to AARP was that some of the
larger operations are truly family farms.You know, that
-- they in fact primarily involve a family devoting its
resources and, you know , the labor power of most of its
family members to conduct an irrigated operation.They
may have millions of dollars of capital committed,
to other people it may look 1 ike a big business, but by
any definition of a family farm, they re not some large
sprawling large corporate operation using migrant
workers.They're a straightforward family unit that is
successfully, in a very difficult world, operating an
irrigated agriculture.
So one could make a distinction between
different sizes of operations.But I don't think that
the distinction would get at what AARP was asking me to
get at; could we protect family farms.Coul d we make a
distinction between them and more commercial or corporate
operations.And my answer to them, looking, you know
just spending a day or two looking at the data was, I
didn't think that could be done.
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Okay.On other item.As you may be aware
the Staff person , Schunke, also proposed a block rate
structure.Only his first block was , I think , 800
kilowatt hours.And I tried to press him on that but he
ultimately decided he liked his 800 number.
So I guess I'm wondering about your 400
number and how closely wedded you are to 400 and is maybe
800 the right number , or something between?
No.I think 800 only works because the
Staff is recommending a very modest revenue requirement
increase.That if the revenue requirement increase was
substantially larger than that, the 800 block would not
work.
In addition, as one of the rebuttal
wi tnesses , it may have been Idaho Power , pointed out, it
significantly mutes the price signal that's being
provided to a substantial number of residential customers
during the summer because so many of them would operate
entirely within the 800 block.
He provided a good rationale for it in
terms of the Company s generation resources in terms of
base load/peak load, in terms of basic electric using
appliances that are in the household, and their
seasonali ty of their use.I thought he did a good job of
providing a rationale for it.
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2409 POWER ( Com)
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My approach in coming up wi th a much
smaller block was that I wanted to make sure that almost
all of the electric energy that I s being consumed is being
consumed by customers who are operating outside of the
block so that for at least some of their electricity they
see that higher price.So that if they conserve, if they
do something to improve the efficiency with which they
use electricity, they get the reward associated with the
higher-tailed block rate.Or if they choose to install
their third hot tub , you know, they pay the price.
So that's the point of me being very
stingy in term of my block.It's 96 percent of the
energy is consumed by folks who are outside of that
block.And for that reason I think almost all of the
electric energy being consumed by the residential class
is being priced correctly.
Thank you.You know, I always wondered
when we implemented tiered rates during the energy
crisis, we had outrageous screams heard throughout the
And some of those customers were using 6000state.
kilowatt hours in a month.And I always wondered what a
residential customer had to do to use that much.But it
must have been that third hot tub.
Well, I remember one of your predecessors
quizzing me 25 years ago and asking me because I must
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have made some crack like that.He said isn I t it true,
Dr. Power, that you think the consumption of electricity
is evil.And I had to say, no , I enjoy a hot tub.
COMMISSIONER SMITH:Thank you.
Redirect , Mr. Purdy.
MR. PURDY:Yes , just a few.
REDIRECT EXAMINATION
BY MR. PURDY:
Dr. Power , in response to questions by
Mr. Budge you were asked whether rate shock and other
non-cost of service considerations should be relied upon
in allocating revenue requirements.And I think you
agreed that should; is that true?
Yes.
All right.And shouldn I t that principle
apply to all customer classes and not just the irrigation
class?
Absolutely.I mean , that's one of the
more difficult - - one of the things that gets lost in the
discussion here is that we can I t support the irrigators
without burdening all other economic actors.And so
what's helpful to them and their part of the economy is
burdensome, what avoids rate shock for them adds to the
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2411 POWER (Di)
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rate shock of other customers.
Okay.So then is it fair to say that a
20-plus-year irrigation subsidy carried on the backs of
other rate classes, is any less obj ectionable to you from
an economic standpoint, than any rate shock that
irrigators might experience as a result of a rate
increase in this case?
Well , I think an economic burden is an
economic burden.And that we have to look at who I s
providing this assistance to the irrigators.
And the notion has been put forth , I
believe Mr. Budge and others, have suggested that, well,
this subsidy or whatever you want to call it has been
around for so long, it was created by past commissions,
it's almost become institutionalized.
In your considerable experience in
testifying before this commission and others, is that any
reason to not try to solve a known problem?
Absol utely not.I mean , we had to go in
this region from declining block rates aimed at
supporting all electric homes, to inclining block rates
trying to get under control the cost associated with
rising - - the rising cost associated with generation.
this Commission has been through fundamental changes in
rate design before.
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And just two other areas briefly.Mr.
Budge asked you about whether you had performed any type
of economic impact analysis study to determine the effect
that your proposal to ramp up irrigation rates would have
on irrigators.You gave kind of a , I guess , qualified
answer in terms of what constitutes a study.But my
question is, should we be equally concerned about the
economic impact on low-income customers who are operating
at the margin , maybe on the verge of bankruptcy, maybe
having to choose between providing adequate medical care
to their children and paying their power bills?
Absolutely as well as - - I mean , the
burden, the shock is something that exists across the
Micron , I don t know on how competitive aspectrum.
market Micron is operating.It may be that people love
south Idaho so much that they I re willing to come here and
work for lower salaries and that Micron , like Bill Gates'
operation in the Puget Sound area is never going to move
because they've got a good thing going.But most
businesses are in a competi ti ve situation.And to the
extent you shift rates from one group of economic actors
to another , you aren't doing the regional economy a
favor.You have to be hurting the individuals, the
low- income individuals, individuals on fixed income,
residential customers in general , all other businesses.
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So you can'- - unless somebody is willing to make a
charitable donation to cover that revenue deficiency, it
has to be picked up by other economic actors who are no
- -
in no better pos it ion to pay it than the irrigators.
Thank you.And then you ve just partially
answered my last area of questioning which had to do with
Mr. Budge s discussion of economic development theories.
And I think you've just testified, and correct me if I'
wrong, if you subsidize one sector of an economy in any
gi ven region , then aren't you asking other customers who
live in the very same region to shoulder that subsidy?
Absolutely.Unless you can find a captive
set of economic actors who can't go anywhere else.
So you - - were you finished?
No.I was just going to say if you ve got
- -
if you can shuck costs off on somebody else who has no
alternative and you don t care about them because they'
not lovable , you know , then maybe you can get away with
something because that set of economic actors won I t
affected because they have to be operating there and you
don I t ike them anyway.And so you can load up burdens
on them and have very little impact on other people.
But that's very unusual to be in that sort
of setting.So that when you
- -
when you unburden one
group and put the burden on another group, you I
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stimulating one part of the economy, depressing another
part of the economy.
So the concern that I have is the
suggestion that if you're in Jerome, or Wendell , or
American Falls , that this assumption that the entire
economy and the benefit of everybody who lives in that
region is riding on the back of the irrigator.And isn't
it true that farmers have to buy their groceries from a
grocery store, don I t they?
Certainly.They I 11 be paying part of
the - - indirectly they will be paying part of the subsidy
themselves.
Right.Everybody has to.So the grocery
store I s going to have to pick up part of that subsidy.
True , ye s
And even the Company that provides the
fertilizer to the farm is going to have to pick up part
of that subsidy.
Yes.
And when a farmer goes into a grocery
store, he doesn r t pay any less for a jar of peanut butter
than anyone else , does he?
No.I don I t think there I s a peanut butter
subsidy.
MR. PURDY:And I III leave it at that.
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Thank you.
COMMISSIONER SMITH:That's good.I think
the horse has died.
We thank you, Dr. Power, for your
testimony. I'm assuming Mr. Purdy would like to have you
excused.
THE WITNESS:That would be good.
MR. PURDY:As well as all my
other witnesses.
COMMISSIONER SMITH:If there's no
objection , the witnesses of AARP and the Community Action
Partnership are excused.
(The witness left the stand.
COMMISSIONER SMITH:'ll be at lunch.
And Mr. Miller.
MR. MILLER:Just one thing in the
continuing obj ection department.
COMMISSIONER SMITH:Yes, sir.
MR. MILLER:Could I have a continuing
obj ection to hypothetical facts that are not based on any
evidentiary record?And hypothetical questions that are
not based on any evidentiary record?
The point being that in the judicial
system , of course, you can I t ask a hypothetical question
unless there is some evidentiary basis for it in the
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record.We don't enforce those rulings, necessarily
strictly here, but there I s a good reason for it which is
it I S a bad idea to make policy based on speculation that
doesn t have any evidentiary support.
So with that , I'd just like to have a
continuing obj ection to hypothetical questions not based
on any evidence.
COMMISSIONER SMITH:And Mr. Miller,
will certainly grant you that continuing obj ection.And
I thought, I don I t know about evidence in the record, but
at least some relationship to reality.
COMMISSIONER KJELLANDER:How many cases
are you going back?
COMMISSIONER SMITH:Just this one.
It's our intention to break for lunch now
and come back at 1: 30 and take up with Dr. Peseau.
that going to work for you , Mr. Ward?
MR. WARD:Tha t 's fine.
COMMISSIONER SMITH:All right.We I 11 see
you at 1: 3 0 .
(Noon recess.
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