951013.docx

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 WEST WASHINGTON STREET
PO BOX 83720
BOISE,  IDAHO  83720-0074
[phone]
Street Address for Express Mail:
472 W WASHINGTON
BOISE ID  83702-5983
Attorney for the Commission Staff
BEFORE  THE  IDAHO  PUBLIC  UTILITIES  COMMISSION

IN THE MATTER OF THE APPLICATION)
OF IDAHO POWER COMPANY FOR)CASE  NO.  IPC-E-95-14
APPROVAL OF A SPECIAL CONTRACT)
FOR SERVICE TO MICRON TECHNOLOGY,)
INC. AND A REVISED SCHEDULE 26 -- )COMMENTS OF
MICRON TARIFF.)THE COMMISSION
______________________________________)STAFF
COMES  NOW  the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and submits the following  comments for the Commission’s consideration in Case No. IPC-E-95-14.
STAFF ANALYSIS
Idaho Power Company and Micron have submitted a joint application requesting Commission approval of a service contract which provides for Micron’s load to grow from   40 MW to somewhere in the range of 100 to 140 MW in the near future.  The contract also includes Micron rates at current levels unless changed by the Commission under the tariff standard.  Micron’s current rates were set in Idaho Power's last general rate case based on the results of an embedded cost cost-of-service study and a 37 MW peak load.  The ability of these rates to cover the costs associated with this very substantial load growth is the subject of Staff's analysis and comments in this case.
Staff has chosen to analyze proposed Micron contract rates by comparing incremental resource costs associated with load growth to the incremental revenues produced by the same load-growth scenarios.  In order to make the comparison, Staff requested and received the results of three IRP (Integrated Resource Plan) computer model runs from Idaho Power Company.  The three runs identified costs associated with different Micron load-growth assumptions.  The "Base Case" run kept the Micron load at 40 MW through the entire 20-year planning horizon.  "Case 1" allowed the Micron load to grow to 100 MW by 1997.  "Case 2" allowed the Micron load to grow to 140 MW by 2001.
Using the results of these computer runs Staff examined two scenarios.  The first scenario computes resource cost differences between the "Base Case" and "Case 1" and compares those cost differences to differences in Micron revenue between the two cases.   The IRP methodology includes inflators for the various components of production cost.     The calculation of incremental Micron revenue includes a 2.5 percent per year rate inflator.  The inflator was calculated to make the sum of the present values of the incremental revenue equal to the sum of the present values of the incremental generating costs for the 20-year period.  The graph on Exhibit No. 1 compares the results of these computations.  The calculation of the rate inflator that produces equal present values for the accumulated incremental costs and incremental revenues was undertaken to determine if rate increases needed to cover costs are realistic.  If one believes that Micron rates are going to increase more rapidly than 2.5 percent per year then production costs are more than covered over the 20-year planning horizon.  Of course, if Micron rates do not increase 2.5 percent per year then the contract rates do not cover production costs.
Exhibit No. 2 makes the same comparison between the "Base Case" and "Case 2".  The calculated rate inflator that makes the accumulated present values equal in this situation is 3.1 percent per year.
Both of these analyses assume that incremental generation cost and incremental revenue as shown on Exhibit Nos. 1 and 2 are comparable on an annual basis and on a present value basis.  It is appropriate to point out two factors that affect comparability.  First, incremental generation costs include only energy and capacity costs of new resources.  Under regulation, increases in Micron rates capture not only increased generation costs but also increased generation and transmission maintenance costs and increased administrative and general costs.  If one believes these cost increases will significantly affect Micron rates over the planning horizon, then, that part of the uniform annual Micron rate increase associated with these costs must be factored out before a valid comparison can be made.  Second, the Idaho Power rate stability proposal currently before the Commission, where current rates are frozen until the year 2000, could affect the comparison.  If the Commission implements the rate freeze, Micron revenues may not grow at all until the freeze expires.  (There are a few circumstances described in the rate freeze proposal where rates can increase.)  Will the Commission impose a rate freeze and if so, what will happen to rates when the freeze expires?  Because these questions are not easily answered, Staff chose to make comparisons based on a uniform inflator over the entire 20-year period.
Staff is compelled to address the obvious question.  How is it that the customer with the second lowest rates on Idaho Power's system can increase its load by 100 MW and continue paying the same low embedded-cost rates and have those rates cover the near-term cost of incremental production?  The answer is that the Company has excess capacity, the cost of which is already included in rates.  Much of the excess capacity necessary to serve the Micron load expansion was made excess when the Company recently changed its total reserve margin for planning purposes from twelve percent to six percent.  The change from twelve percent to six percent is included in Idaho Power's recent IRP filing which has not yet been acted upon by the Commission.  In Idaho Power's case a six percent reduction in reserve margin amounts to more than 100 MW.
STAFF RECOMMENDATION
Staff supports approval of the proposed Micron Contract.  Under both of the scenarios that Staff analyzed, incremental revenues cover incremental costs each year until the year 2007 if modest rate increases below projected inflation rates are assumed.  Over the 20-year planning horizon both scenarios indicate that increases in Micron rates below the projected rate of inflation allow the net present value of revenues to offset the net present value of modeled incremental costs.  Further, Staff has determined that Micron incremental revenues, without a rate increase, cover incremental costs through the proposed rate-freeze period.  Therefore, this contract should not contribute to the Company's use of ADITC (accelerated deferred investment tax credits) if the Company earns less than 11.5 percent.  As for incremental maintenance and administrative and general costs not captured in Staff's analysis, Staff believes that normal inflation will cause incremental maintenance costs to increase but that administrative and general costs will decrease on the short term in spite of inflation, due to the Company's efforts to slim down in preparation for competition.
DATED  at Boise, Idaho, this            day of October 1995.
______________________________________
Scott Woodbury
Deputy Attorney General
_______________________________________
Keith Hessing
Staff Engineer
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