IPUC Staff Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE PETITION OF
AVISTA CORPORATION DBA AVISTA
UTILITIES -WASHINGTON WATER POWER
DIVISION (IDAHO) FOR PROPOSED
MODIFICATIONS TO THE POWER COST
ADJUSTMENTS (PCA) METHODOLOGY.
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CASE NO. AVU-E-01-1

COMMENTS OF 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 in response to the Notice of
Modified Procedure, Notice of Comment/Protest Deadline, Notice of Additional Scheduling, and
Order No. 28673 issued on March 14, 2001, submits the following comments.
On January 16, 2001, Avista Corporation (Avista; Company) filed an Application with the
Idaho Public Utilities Commission (Commission) seeking approval of proposed modifications to its
existing Power Cost Adjustment (PCA) mechanism. As justification for the proposed changes, the
Company states that the current PCA does not allow recovery of increased power supply costs
associated with two specific situations. First, when the system load increases which causes the
Company to make additional power purchases, and second, when there are generating problems at
Colstrip or Kettle Falls generating stations which causes the Company to purchase replacement
power. In both of these situations extremely high market prices result in dramatically increased
power supply costs that the Company is required to pay but cannot pass on to customers through its
existing PCA.
STAFF COMMENTS 1 APRIL 4, 2001
AVISTA’S EXISTING PCA
Avista’s Power Cost Adjustment mechanism calculates the difference between two
computerized power supply model runs. One model run being the power supply cost normalization
study accepted in the Company’s last general rate case and the other being the same study with two
“actual” inputs as opposed to normalized inputs. The two actual inputs that cause the difference in
the two computer runs are actual hydro power generation and actual market price. One-hundred
percent of this difference is accumulated monthly and deferred in a balancing account until the
balance reaches $3 million, approximately 2.5% of the Company’s annual revenue requirement,
which triggers a Company filing for a rate adjustment. After review and Commission approval
customer rates are changed for a one-year period to refund or recover the balance in the deferral
account.
Several modifications have been made to Avista’s PCA since it was established in 1989. A
change was made to account for changes in the Company’s long-term contracts. Occasionally a
contract expires and at other times new contracts were entered into. A PCA cost adjustment has
been required when contract energy amounts change. The average monthly market price was
adjusted to remove Palo Verde trading that did not properly reflect market conditions in the
northwest where the regulated utility does its business. Later the average monthly market price was
adjusted to properly account for Heavy Load Hour and Light Load Hour price differences within a
month. One of the most recent adjustments was to include the Rathdrum turbines. They were
included on an actual basis rather than a modeled basis. All of these modifications to Avista’s
original PCA have been done to make the "modeled actual" power supply costs more closely reflect
actual power supply costs. This filing by the Company includes a request to use actual booked
power supply costs and eliminates any further need to approximate them using a computer model.
PCA changes to the original methodology have been moving in the direction of using actual booked
costs for some time.

COMPANY PROPOSED PCA MODIFICATIONS
The Company proposes substantial changes to the existing PCA mechanism. The Company
proposes the following.
1) That actual fuel costs, Accounts 501 and 547, actual purchased power costs, Account
555, and actual secondary sales revenues, Account 447, be used in the PCA
calculation instead of computer modeled actuals.
STAFF COMMENTS 2 APRIL 4, 2001
2) That Centralia be removed from the PCA and that the “replacement contract” be
included in the PCA.
3) That the Coyote Springs 2 generation station be included in the PCA when it comes
on line in 2002.
4) That the PGE capacity sale remain unchanged for PCA purposes.
5) That a retail load revenue adjustment be made as a credit to customers through the
PCA since the power supply costs associated with retail load growth will be captured
in the actual power supply costs.
6) That power supply cost differences be shared 90/10 between the customers and the
Company’s shareholders.
7) That the trigger be increased from its current level of $3 million to $12 million,
which is approximately 10% of the Company’s annual revenue requirement.
8) That interest be paid monthly on the balance in the deferral account.
9) That the Company report the PCA status to the Commission on a monthly basis.

STAFF ANALYSIS
For the purpose of its analysis Staff chooses to identify some proposed PCA components as
being like components in Idaho Power Company’s PCA. Staff does this not to make an argument
that the two PCA’s should be the same but to facilitate the discussion. The Commission and
Commission Staff have approximately eight years experience with the Idaho Power PCA and have a
great deal of understanding of its components and how they work. On the other hand, the proposed
Avista PCA components that are unlike Idaho Power PCA components may require more analysis
and explanation.
Actual Accounting Data
Avista proposes to use actual accounting data from its books in its PCA calculations. The
actual accounting data include fuel costs from Accounts 501 and 547, power purchase costs from
Account 555 and power sales revenues from Account 447. The heart of the PCA is the calculation
of the total of these accounts in comparison to the total of the same accounts from the last general
rate case. This difference is called the difference between “actual” and “authorized” power supply
costs. As previously discussed, Avista’s current PCA captures the difference between “authorized”
power supply costs from the last general rate case and a computer “modeled actual” power supply
cost which only contained two “actual” inputs, actual hydro generation and actual average monthly
STAFF COMMENTS 3 APRIL 4, 2001
market price. In addition to these two actuals, Avista’s proposed PCA would capture the effects on
power supply costs of actual loads, unit costs of fuel, availability of generation resources, energy
purchases for the system, energy sales from the system and anything else that affects the balances in
the previously identified power supply cost accounts. The modeled actual power supply costs
currently used in Avista’s PCA calculation assume all input information remains the same for an
entire month. In reality market prices, system loads and generation availability change continuously
throughout the month. The Company’s actual booked accounting data reflects the costs associated
with the constantly changing power supply situation.
To the extent that power purchase costs and power sales revenues are limited to energy
purchases and sales contracts for terms less than one year, this part of Avista’s proposal is the same
as Idaho Power’s existing PCA. However, Avista proposes to also include capacity contracts and
all purchase and sale contracts without regard to the length of the contract. Relative to Idaho Power
Company, Avista has many long term purchase and sale contracts that make their inclusion in the
PCA a much more important issue with Avista.
A concern of including long term contracts in the PCA is that the PCA mechanism not
inappropriately influence the decisions of the utility regarding resource additions. If the mechanism
favors long term contracts as opposed to construct and rate base options, the Company may make
decisions that are not in the best interest of ratepayers. In its recommendations Staff proposes a
solution to this potential problem.
Centralia vs. Replacement Contract
Avista proposes that the Centralia generating station be replaced by the “replacement
contract” in the modified PCA. Centralia was sold, with Commission approval, in May of 2000 and
the Company began receiving energy from the replacement contract in July of 2000. The change
proposed by the Company is automatically captured in the actual booked power supply account
numbers previously discussed except for the fixed costs of Centralia which are currently included in
rates. The Company proposes a credit in the PCA for these costs that are identified as operation,
maintenance, depreciation, taxes and return on investment. Staff recognizes that if actual costs, that
do not include generation from Centralia, are tracked in a modified PCA, then replacement power
costs will be included. If the Centralia "replacement contract" is excluded from the modified PCA,
then the default resource will be market purchases. Although the terms of the "replacement
contract" have not been formally reviewed by the Commission, Staff believes that the "replacement
contract" is much more cost effective than market purchases. Also, the "replacement contract"
STAFF COMMENTS 4 APRIL 4, 2001
expires in just over a year, so the Commission will have opportunity to review subsequent
replacement resource decisions and determine ratemaking treatment. Finally, to deny this change
would be technically difficult since the elimination of Centralia and the inclusion of the replacement
contract and the associated effects are captured in the actual booked accounting entries that the
Company proposes to use. Unwinding the effects from the actual booked power supply costs could
in theory be done using a computer simulation but it would be complicated and not completely
accurate.
Coyote Springs 2
The Company proposes to include the Coyote Springs 2 generating station in the PCA when
it comes on line in 2002. Staff does not believe that the Commission should make a decision now
concerning the future PCA treatment of Coyote Springs 2. Staff believes that the Company should
file a ratemaking proposal for Coyote Springs 2 at or just prior to project completion. The
Commission should then decide on the appropriate treatment of the new project. If Coyote Springs 2
were to be excluded from PCA treatment, the unwinding of the actual costs from PCA accounts
would have to be done with a less than perfect computer simulation.
PGE Capacity Sale
The Company proposes that the PGE capacity sale treatment, as captured in rates in the
Company’s last general rate case, remain unchanged at this time. This proposal requires no changes
to actual booked power supply costs. The actual accounting data correctly captures the power
supply effects of the contract. Treating the contract the same way it was treated in the general rate
case will cause no PCA impacts because there will be no difference between “actual” and
“authorized” amounts until the contract expires.
Load Growth Adjustment
The Company proposes a retail load revenue adjustment to the PCA. The revenue
adjustment would be a credit to offset the costs of power supply incurred due to load growth. The
adjustment would prevent the double recovery of the variable cost of supplying power to new load.
Without the adjustment, most of the costs would be double recovered because the PCA captures
actual power supply costs and the rates received by the Company from the sale of load growth
energy has a component that recovers the average variable cost of power supply. New load is
served at the marginal cost of power supply. The PCA is not designed to permanently recover the
higher marginal cost of serving new load outside of a general rate case. The Company proposes to
STAFF COMMENTS 5 APRIL 4, 2001
calculate total revenue from load growth and reduce it by the distribution costs of serving new load
and credit the remaining amount back to the PCA to offset PCA power supply costs.
Staff has an alternate proposal that borrows from the Idaho Power PCA methodology. The
Idaho Power PCA methodology has the same potential problem of double counting the variable
costs of power supply. Instead of crediting back a portion of revenue to offset one set of power
supply costs, the method used in Idaho Power’s PCA removes the variable cost of load growth
related power supply costs from the PCA costs and allows the Company to keep the retail revenue
as it normally would. The adjustment uses the variable cost of power supply on the margin that can
be determined using the power supply model accepted in the Company’s last general rate case. For
Avista this number is 21.23 mills/kWh. Each month the average marginal cost of power supply is
multiplied times the growth in load and the product is used to reduce actual monthly power supply
costs. Staff believes that this adjustment is easily computed and more accurate than the Company
proposed adjustment.
90/10 Sharing
The Company proposes to share the variable costs of power supply 90/10 between
customers and shareholders. These are the same sharing percentages currently contained in Idaho
Power’s PCA. Staff believes that sharing is essential to provide the Company with the correct
economic incentives to make the best possible decisions. To the extent that customers and
shareholders win and lose together as the Company makes power supply decisions, Staff believes
that the best possible decisions will be made.
The Company’s PCA proposal would exclude fixed power supply cost adjustments
associated with Centralia and Coyote Springs 2 from 90/10 sharing. Once again these costs are
fixed operation, maintenance, depreciation, taxes and return on investment. The Company’s
proposal is that these increases or decreases in costs be passed to ratepayers through the PCA with
no shareholder sharing.
Staff is concerned about the Company proposal to not share the fixed cost of new Company
owned generation supplies. If fixed power supply costs are subsequently allowed in the PCA and
are not shared, the playing field for new resource additions is not level. Through the PCA the
Company proposes to recover 100% of the fixed costs of build and rate base options but only 90%
of all costs of long-term purchase contract options. This inequity could inappropriately influence
Company choices for new resources. Staff believes that this issue should be further addressed when
the Company requests cost recovery for Coyote Springs.
STAFF COMMENTS 6 APRIL 4, 2001
Interest on Deferred Balance
The Company proposes to accrue interest on the monthly accumulations in the deferral
account. The Company’s current PCA balancing account does not accrue interest. The Company
currently accrues interest on the balance in its Purchased Gas Adjustment (PGA) balancing account.
This interest rate is the same as the interest rate on deposits, currently 6%, that is reviewed and
established annually by the Commission. The Company proposes that the interest rate applied to its
PGA balancing account also be applied to the PCA balancing account proposed in this proceeding.
Idaho Power Company accrues interest at the same rate on balances in its PCA balancing account.
Monthly Reporting
Avista proposes to continue to file detailed monthly reports with the Commission. Such
reports are valuable to the Commission and Commission Staff in tracking accumulations in the
account as well as for tracking surcharge and rebate amounts while they are in progress. Staff uses
the reports along with other information when the PCA is audited.
Effective Date and PCA Trigger
The Company proposes that modifications be effective January 1, 2001. The Company has
represented to Staff that for the months January through March of 2001 the proposed methodology
is more beneficial to ratepayers than the existing PCA methodology. A limited review supports the
Company’s contention.
The Company proposes a soft surcharge/rebate trigger of $12 million that is approximately
10 percent of the Company’s annual revenue requirement. One of the reasons that the Company
proposes a large soft trigger is that it hopes to ride through the current period of large accumulations
in the deferral account due to anticipated poor water conditions and high market prices until the
situation changes and the surcharge balance is gradually eaten away. The Company hopes to do this
with no further PCA rate increases if the PCA modifications are approved. The Company is
counting on a few things to make this happen. Next year two wholesale sales contracts expire
which will return resources for native load customer use. If water conditions return to near normal
and market prices stay high, the balance to surcharge will decline as the Company sells excess
energy into a high priced market.

STAFF RECOMMENDATIONS
Staff recommends that Avista be allowed to modify its existing PCA as it proposes with the
following exceptions. Staff believes that its alternative to the Company proposed Retail Load
STAFF COMMENTS 7 APRIL 4, 2001
Adjustment is an improvement in correcting the potential for double counting the variable costs of
power supply in a load growth situation. Staff recommends that the Commission accept its solution
to this problem.
Staff recommends that the “one-month lag” accounting treatment approved in Avista’s
current PCA be eliminated. Staff represents that this has been discussed with the Company and that
the Company is in agreement. This will allow monthly PCA results to be booked in the month that
the costs are incurred instead of the following month.
Staff recommends that the ratemaking treatment of Coyote Springs 2 not be determined at
this time. Staff believes that the Company should propose treatment to the Commission near the
time of project completion in a formal Application.
In addition, Staff recommends that other generation additions and power supply contracts
with terms longer than one year be submitted to the Commission for review and Commission
approval. Staff understands that actual accounting entries will be effective starting with the delivery
of energy. If for some reason Commission approval for PCA treatment is not granted the cost
differences can be unwound. Staff recommends a maximum review period of 90 days.
If new Company-owned generation is approved for PCA treatment, Staff recommends that
any Fixed costs included in the PCA be shared between customers and shareholders on a 90/10
basis instead of a 100% pass through to customers as proposed by the Company. As previously
discussed, this levels the playing field for new resource acquisitions.
Staff recognizes that the proposed changes to Avista’s PCA are extensive and that they
depart from the philosophy that the PCA only capture power supply cost changes outside of the
Company’s control. This new proposal captures all differences between “authorized” and “actual”
Power supply costs which includes many discretionary decisions by the Company. The proposed
90/10 sharing is in Staff’s view a necessary component that addresses the change in philosophy.
With sharing, good decisions benefit ratepayers and shareholders and poor decisions harm
ratepayers and shareholders. Recent dramatic increases in prices on the wholesale market have
caused Avista’s current PCA calculated power supply costs to depart entirely from reality. This is a
substantial reason for Staff's support of these modifications.

STAFF COMMENTS 8 APRIL 4, 2001
STAFF COMMENTS 9 APRIL 4, 2001

Respectively submitted this day of April 2001.

________________________________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Keith Hessing
Terri Carlock

SW:jo:i:umisc/comments/avue01.1swkhtc