20030513_468.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:LISA NORDSTROM
DATE:MAY 12, 2003
RE:IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY
FOR AUTHORITY TO IMPLEMENT A POWER COST ADJUSTMENT (PCA)
RATE FOR ELECTRIC SERVICE FROM MAY 16,2003 THROUGH MAY 15,
2004. CASE NO. IPC-03-
On April 15, 2003 , Idaho Power Company filed an Application with the Commission for
authority to decrease the Power Cost Adjustment (PCA) rate schedule. This request, if approved
would decrease the Company s overall revenues by approximately $114 million. The Company has
requested an effective date of May 16, 2003. In its Notice of Application and Modified Procedure
issued on April 17, 2003 , the Commission established a May 8 comment deadline and allowed Idaho
Power to respond no later than May 12. Order No. 29229.
THE PCA APPLICATION
The Company s request, if approved, would decrease its overall revenues by
approximately $114 million and lower overall rates by an average of 18.2%. Although the
Company s request would reduce the current PCA surcharge, the proposed rates would generate
approximately $81 million more than base rates. First, Idaho Power seeks approximately $38.
million to recover above normal power supply costs incurred during the April 2002 - March 2003
PCA period. These costs are predominantly Astaris load reduction and settlement costs.
Second, the Company requests approximately $26.6 million in anticipation of above
normal power supply costs for the April 2003 - March 2004 PCA period due to below normal Snake
River stream flows and storage. Low reservoir levels upstream have caused forecasted streamflow
into Brownlee Reservoir to be only 53% of normal.
DECISION MEMORANDUM
Although not traditionally part of the PCA, a third component of the Company
Application seeks recovery of approximately $16 million in Commission-authorized deferrals for
amounts still owed by three customer classes from last year s PCA. To recover this additional
amount, Idaho Power proposes that small general service customers pay an additional 0.2438~ per
kilowatt hour (kWh), industrial customers pay an additional 0.2178~ per kWh, and irrigation
customers pay an additional 0.7120~ per kWh.
PUBLIC COMMENTS
As of May 9, 2003 , the Commission had received seven public comments regarding Idaho
Power s proposed PCA decrease. Not surprisingly, all the respondents were in favor ofthe decrease.
One commentor from Fruitland argued
, "
the rate decrease should be considerably more than 18.9%"
given past rate increases and "very good dividends" paid to Idaho Power shareholders. A small
commercial customer from Caldwell likewise favored the rate reduction but urged the Commission
to make the reduction 'just and reasonable '" by reducing small commercial electric rates by the
same percentage as large commercial users. A Boise resident also suggested that Idaho Power make
a 100% conversion to green power this year, or at least phase-in such a program over a specified
period.
IDAHO IRRIGATION PUMPERS ASSOCIATION COMMENTS
The Irrigators identified three issues that must be addressed before the Commission can
approve the PCA for the current fiscal year. Therefore, the Irrigators requested a hearing be held
on these issues because the record may be insufficient to allow the Commission to make an informed
decision.
1. More Recent Sales Data must be Used to Establish the True Up Rate.
The rationale behind the PCA was to strike a balance such that Idaho Power s total power
costs where fully recovered, but not over-recovered. Although it was meant to be revenue-neutral
the PCA' s true-up mechanism has one fatal flaw - it is based upon outdated normalized sales data.
The size of the revenue shortfall and thus the magnitude of the positive true up revenue in the last
few years have been well beyond the expectations of those that helped to establish the PCA
mechanism a decade ago.
In 2001 and 2002, true up levels were on the order of 10 times greater than anything
witnessed previously. Although the mechanism would have over-collected the true up
DECISION MEMORANDUM
approximately $25 million during the last two years, actual over-collection ofthis magnitude did not
occur because the procedure for establishing the true up rate was modified during these year to
reflect the most recent normalized sales data. The Irrigators argue that this was an improvement to
the overall PCA mechanism and not just a one-time correction to make the numbers seem more
palatable.
In the present case, Idaho Power wishes to revert to spreading this "target" revenue
requirement over historic (and thus smaller) sales levels even though the true up is very large. After
using the most recent sales data available in the last two PCA cases, it does not make sense that
Idaho Power would now request reverting back to the outdated values with the perceived intention of
over-collection. The Irrigators urge the Commission to utilize the most recent normalized sales data
for establishing the true-up rate in Idaho Power s Application.
2. Normalized Sales Data Needs to be Refined.
Although the most recent normalized sales data should be used in establishing the PCA
rate, the Irrigators believe use of normalized sales data for 2002 to be inappropriate. More
specifically, the Irrigators are concerned about using this data because the normalized load for
residential customers decreased 1.5% between 2000 and 2002 even though the number ofresidential
customers increased 9%.
The Irrigators speculate that Idaho Power s sales normalization procedures have not been
reviewed in a formal setting in at least 10 years. The Irrigators believe that it would be impossible to
address the inadequacies of Idaho Power s normalization procedures without a hearing. In the
meantime, the Irrigators recommend that the PCA rates be set by using the 2000 normalized sales
levels (that were once accepted by all) with FMC/ Astaris removed. Once a new normalization
procedure has been accepted by the Commission, the Commission can either use it to amend the
PCA rates set in this case, or simply use them in future cases.
3. The Deferral Amount for the 2002/2003 PCA Is Incorrect.
The Irrigators argue that the deferral amount attributed to the irrigation class is slightly
less than originally calculated and an adjustment should be made to reflect the fact that the Irrigators
were only getting the benefit of a 0.5955 cents per kWh deferral (plus interest, plus a $7 534
intervenor funding charge). Under Idaho Power s current proposal, this deferral amount of
approximately $10.9 million is to be spread over 1993 normalized sales data, thus spreading that
DECISION MEMORANDUM
deferral over less units and greatly increasing the rate to be paid in comparison to the prior year PCA.
Because the deferrals for Schedules 7 , 19, and 24 were all based upon 2000 normalized sales data, it
is inappropriate for Idaho Power to now calculate a deferral recovery rate that is significantly higher
than that which was originally to be deferred.
STAFF COMMENTS
Staff s comments explained the extent of its audit and review of the Company s PCA
records and Application. Staff made several recommendations and adjustments as described in
greater detail below.
1. Pricin2 IE Real-Time Transactions.
In its Application, the Company proposes to price four months of real-time transactions
with IDACORP Energy (IE) based on the weighted average of all IE real-time transactions. This
methodology is consistent with what the Company used in the last PCA. Although Idaho Power
case before the Federal Energy Regulatory Commission (FERC) has not been resolved as to the
pricing mechanism for real-time power, Idaho Power committed to give its customers the benefit of
the best mechanism in its March 17, 2003 proposal to the FERC.
Staff recommends that the Commission accept the first three months of real-time pricing
as proposed by the Company using the weighted average methodology because it is more favorable
for customers. For the month of July, Staff recommends that the Company use the FERC's high-low
methodology for calculating the real-time prices because it provides greater customer benefits than
the weighted average methodology. The Company assured FERC that it would use the methodology
most favorable for Idaho Power and its customers over the life of the agreement. Staff believes that
in this case, it is reasonable to compare methodologies on a monthly basis given the purpose of the
settlement to resolve pricing discrepancies between Idaho Power and IE.difference in
methodologies for the month of July 2002 is reasonable due to the change in operations resulting
from the winding down of trading at IE. Ratepayers should receive the benefit on a monthly basis
and not be penalized for changes in operations at IE. After the month of July 2002, it is no longer
necessary to compare methodologies because Idaho Power began managing its own real-time needs.
Staff recommends that $50 242.47 be removed from July 2002 purchases and sales to reflect this
pricing procedure. After jurisdictional and Company sharing, customers would receive a benefit of
$38,435.49.
DECISION MEMORANDUM
2. Missin2 IE Payment.
While conducting its audit, Staff identified a missing payment from IE to Idaho Power
relating to a contract termination with Montana Power. When Staff asked the Company why the
payment had not been made, it was stated that IE personnel had inadvertently forgotten and would
forward the amount immediately. Staff proposes to flow through the $63 229.16 relating to the IE
payment to customers during the month of September 2002 when it should have been made. After
jurisdictional and Company sharing, customers would receive a benefit of$48 370.32.
3. Natural Gas and Transportation
Idaho Power entered into another short-term contract with IGI Resources (IGI) to
purchase gas and resell any of its unused transportation related to its Danskin facility in Mountain
Home, Idaho. The new IGI contract expires in March 2004. Staff recommends that the Company
undertake an RFP process before the expiration of the current IGI contract to see if IGI or other
marketers could provide the same or better services at a price that is more advantageous for
customers.
4. IE Settlement of Tri-State Contract Transmission Costs
In September 2002, Idaho Power announced that it had failed to properly disclose three of
its wholesale transactions with IE to FERC. Idaho Power has since reported the transactions and is
working with the FERC enforcement division to develop an acceptable settlement amount to be
passed on to customers. Idaho Power believes a settlement with FERC is imminent and recommends
that the unpaid $1 782 320 portion of the $5 826 186 settlement proceeds flow through the PCA
accounts to customers. Staff has reviewed the proposed settlement and agrees that it is appropriate
for customers to receive a benefit in the current PCA.
The settlement involves three contracts, of which Staff only identified concerns regarding
one - the Tri-State contract. In its proposed settlement, Idaho Power and IE recommend that Idaho
Power pay $428 625 for transmission costs that IE allegedly incurred while servicing this contract.
Staff does not believe it is reasonable to charge customers this amount under the PCA mechanism
because it relates to transmission payments that are not normally included in the PCA mechanism.
Transmission costs and benefits have been identified as an issue to be further considered in IPC-
01-16. If Idaho Power agrees to this settlement payment with FERC, Staff believes Idaho Power
should bear the cost ofthat transmission. Staff recommends removal ofthe $428 625 relating to the
DECISION MEMORANDUM
transmission payments that Idaho Power would have to bear under the proposed settlement until the
proper treatment of transmission is resolved in IPC-01-16.
5. Company Sharin2 of FERC Settlement Proceeds.
The Company proposes allocating the settlement between Idaho and its other customers
based on the current Idaho jurisdictional allocation factor of 85%. In addition, the Company
recommends sharing the remaining amount based on the 90/1 0 split normally used when allocating
surplus power sales. Staff agrees that customers should receive the benefits of the proposed
settlement, but believes that customers should receive the entire Idaho jurisdictional share. Staff
does not believe it is appropriate for the Company to fail in its regulatory responsibilities and receive
a financial benefit. According to Staff, this recommendation is consistent with past Commission
practice for settlements and separately ordered items where 100% has flowed through the PCA.
6. $2 million Payment from IE Mana2ement A2reement.
According to Staff, customers were guaranteed $2 million each year to ensure that
customers would receive at least some benefit from the IE-Idaho Power Management Services
Agreement (Agreement) pursuant to the Stipulation in Case No. IPC-OO-13 and Order No. 28596.
Staff recommends the Commission require the Company to book the $2 million amount in monthly
installments until the next rate case in accordance with the terms ofthe Agreement, even though IE
no longer provides management services to Idaho Power.
7. Risk Mana2ement Committee Review.
Although noting many risk management improvements made by Idaho Power, Staff is
concerned that the RMC occasionally authorizes a transaction to be completed but which is not
undertaken by the next RMC meeting or identified in the RMC minutes or supporting
documentation. Staff recommends that the Company document in the RMC meeting minutes the
reasons why authorized transactions are not carried out. Additional documentation of e-mail orders
or changes to orders also need to be included with the RMC minutes. This will allow faster
verification of power supply transactions in future PCA filings.
8. Normalized Ener2Y (kWh).
With regard to the calculation of PCA rates, Staff disagreed with the energy (kWh)
amounts used by the Company to determine the true up and class specific adder portions ofthe rates.
DECISION MEMORANDUM
In short, the Company used 1993 normalized energy and Staff used 2002 normalized energy that is
on average, 10.4 % higher.
Staff argues that when the PCA methodology was initially determined in 1993, use of
normalized energy consumption as established in the Company s last general rate case was a
simplification thought to be acceptable because true up surcharges and rebates were expected to be
balanced and, in case they were not exactly balanced, true up amounts were expected to be relatively
small resulting in small errors. Staff also expected that the base would be updated more regularly to
minimize over-recovery of true up surcharges and over-refunding of true up rebates.
In PCA years nine and ten, 2001 and 2002, true up amounts were many times greater than
the amounts previously experienced and the 1993 base energy consumption was very stale. In its
PCA filings the Company departed from approved methodology and used updated normalized annual
energy amounts to determine the true up rate. In both cases, Staff and the Commission accepted the
use of updated energy in the true up rate calculation. Staff estimates the over-collection for those
two years would have been approximately $70 million. Since recovery ofthe true up is not tracked
and trued up, the over-collection would have been the Company s to keep. Staff anticipates this
over-collection will also occur in this PCA period if normalized annual energy is not updated, which
could result in the Company receiving a $4.5 million windfall.
In this year s Application, the Company proposes to return to the use of 1993 normalized
base energy amounts to determine the true up rate. Staff argues that this may have been appropriate
if the true up amounts had returned to pre-2000 levels and the recovery assumptions and associated
risks remained acceptable. However, that has not happened. This year s true up amount is the third
largest ever and is more than twice as much as any of the true up amounts prior to 2001. The
majority of these high true up costs were contractually incurred during the period of extremely high
market prices that existed in early 2001 when the Astaris VLR contract was signed. These are the
same kind of very high costs recovered through the PCA during the last two years when the
Company appropriately used updated energy amounts.
As would be expected with a smaller true up amount and more energy to spread the above
normal power supply costs over, Staffs proposal decreases rates more than the Company s proposal.
The overall reduction proposed by Staff is 19.12%. This reduction amounts to $5.1 million more
than Company-proposed rates would produce if 2002 amounts of energy were sold. The additional
DECISION MEMORANDUM
$5.1 million reduction is composed of a $0.6 million reduction in the underlying true up amount, and
a $4.5 million reduction in true up and carry-over recovery associated with the use of updated energy
amounts.
9. Consumer Issues.
Staff recommends that the Company encourage customer service representatives to
continue to work with customers to establish payment arrangements when customers call the utility
stating they are unable to pay bills in full. Staff also recommends Idaho Power continue to provide
customers with energy conservation information.
IDAHO POWER REPLY COMMENTS
Due to the short period in which tracker cases are processed, the Commission allowed
Idaho Power the opportunity to respond to comments filed in this case until May 12. Idaho Power
has not yet submitted its reply comments as of the filing of this memorandum.
COMMISSION DECISION
1. Does the Commission wish to make a final decision regarding the Company s Power
Cost Adjustment Application based on the evidence contained in the evidentiary record?
2. If not:
a. Does the Commission wish to adopt an interim rate, i., the rate
proposed in the Company Application with any agreed-upon
adjustments to be made effective May 16, 2003 subject to refund and
interest?
b. Does the Commission wish to schedule further proceedings to gather
additional evidence on the issues in dispute?
M:IPCEO305 ln2
DECISION MEMORANDUM