20090624Lobb Direct re Stipulation.pdf

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BEFORE THE
IN THE MATTER OF THE APPLICATION )
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-E-09-1/
AUTHORITY TO INCREASE ITS RATES) AVU-G-09-1
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC )
AND NATURAL GAS CUSTOMERS IN THE )STATE OF IDAHO. )
)
)
DIRECT TESTIMONY OF RANDY LOBB
IN SUPPORT OF STIPULATION
IDAHO PUBLIC UTILITIES COMMISSION
JUNE 24,2009
1 Q.Please state your name and business address for
2 the record.
3 A.My name is Randy Lobb and my business address is
4 472 West Washington Street, Boise, Idaho.
5 Q.By whom are you employed?
6 A.I am employed by the Idaho Public Utilities
7 Commission as Utili ties Division Administrator.
8 Q.What is your educational and professional
9 background?
10 A.I received a Bachelor of Science Degree in
11 Agricultural Engineering from the University of Idaho in
12 1980 and worked for the Idaho Department of Water Resources
13 from June of 1980 to November of 1987. I received my Idaho
14 license as a registered professional Civil Engineer in 1985
15 and began work at the Idaho Public Utilities Commission in
16 December of 1987. My duties at the Commission currently
17 include case management and oversight of all technical
18 Staff assigned to Commission filings. I have conducted
19 analysis of utility rate applications, rate design, tariff
20 analysis and customer petitions. I have testified in
21 numerous proceedings before the Commission including cases
22 dealing with rate structure, cost of service, power supply,
23 line extensions, regulatory policy and facility
24 acquisitions.
25 Q.Are you the same Randy Lobb that previously filed
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB , R . (D i ) 1
STAFF
1 direct testimony in this case?
2 A.Yes I am.
3 Q.What is the purpose of your testimony today?
The purpose of my testimony is to describe the4A.
5 Stipulation (the Proposed Settlement) filed in this case
6 and to explain the rationale for Staff's support.
7 Q.Please summarize your testimony.
8 A.Staff believes that the comprehensive Stipulation
9 and Settlement resolving all issues in the general rate
10 case is in the public interest. The Settlement was agreed
11 to by all parties. It is just and reasonable and should be
12 approved by the Commission.
13 Q.Please provide an overview of the Stipulation and
14 Set tlement .
15 A.The Stipulation filed with the Commission on June
16 16, 2009 settles a variety of issues to arrive at an
17 overall base rate revenue requirement increase of $9.43
18 million or 4.29% for electric service and $1.939 million or
19 2.11% for natural gas service. The parties also
20 acknowledged that the revenue requirement for electric
21 service could increase to $12.548 million or 5.7% if FERC
22 issued a new Spokane River hydroelectric license by July
23 22, 2009.1 Nevertheless, the likely increase is relatively
24
25
lOn June 18, 2009, FERC issued a new 50-year license for
Avista's five hydroelectric facilities on the Spokane River.
This issue is discussed in greater detail below.
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di)
STAFF
2
1 close to the Staff recommendation provided in pre-filed
2 direct testimony of $8.62 million (3.91%) and $1.89 million
3 (2.06%) for electric and natural gas service respectively.
4 It also represents a significant decrease in the Company's
5 requested increase of $31.2 million (12.8%) and $2.7
6 million (3.0%) for electric and natural gas service,
7 respectively.
8 When proposed decreases in the Power Cost
9 Adj ustment (PCA) rate for electric service and the Purchase
10 Gas Adjustment (PGA) rate for gas service are included,
11 there is no overall revenue requirement increase for gas or
12 electric service. However, overall electric revenue
13 requirement will increase by 1.5% when the Spokane River
14 relicensing costs are included.
15 Q.How does the revenue adjustments specified in the
16 Stipulation compare to revenue adjustments previously
17 proposed by Staff?
18 A.The difference in the base electric revenue
19 requirement agreed to in the Stipulation and that proposed
20 by Staff in pre-filed direct testimony is due to movement
21 by Staff on four issues. They are: 1) an increase in
22 anticipated net power supply costs using more current
23 forward natural gas prices, 2) a slight increase in
24 executive labor to reflect actual 2008 compensation, 3) an
25 increase in Information Services expense to reflect the
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09
LOBB, R. (Di)
STAFF
3
1 actual 2009 level of employees and 4) rate base treatment
2 of costs associated with Montana riverbed leases. With the
3 exception of the Spokane River Relicensing, all other
4 revenue requirement adjustments listed in the Stipulation
5 are as proposed by Staff in direct testimony.
6 Q.How do the stipulated non-revenue issues compare
7 to the Staff position presented in pre-filed testimony?
8 A.All other issues described in the Stipulation
9 such as class revenue spread, rate component adjustments,
10 evaluation of payment plans and review of low income
11 deposit requirements were resolved as proposed by Staff or
12 other intervenors in direct testimony. Finally, resolution
13 of the remaining issues represented a reasonable
14 alternative to litigation in this case. For example, the
15 Company agreed to withdraw its request to change the PCA
16 sharing percentage, and agreed to request prudency of DSM
17 program costs in a subsequent docket. Moreover, all
18 parties agreed that the Company would further study cost of
19 service issues and continue to address a variety of low
20 income concerns.
21 Q.Does Staff believe the proposed Stipulation and
22 Settlement is reasonable?
23 A.Yes. As previously stated, the overall base
24 revenue requirement increase for electric and gas service
25 of $9.43 million (4.29%) and $1.939 million (2.11%)
CASE NO. AVU-E-09-1/AVU-G-09-1
06/24/09
LOBB, R. (Di) 4
STAFF
1 respectively, is quite close to the $8.62 million (3.91%)
2 and $1.89 million (2.01%) originally proposed by Staff in
3 direct testimony. Even with Spokane River relicensing
4 costs included, the increase of $12.548 (5.7%) million for
5 electric service is about 60% less than the Company's
6 original $31.2 million (12.8%) request. The Company
7 originally requested an increase of $2.7 million (3.0%) for
8 gas service.
9 Other issues such as use of the PCA and PGA rate
10 reductions to offset the base rate increases, rate spread,
11 rate design, treatment of Lancaster costs, changes to PCA
12 sharing percentages, prudency review of DSM costs and
13 customer service considerations were consistent with
14 Staff's direct testimony. Staff believes that the
15 addi tional issues addressed in the Stipulation including
16 further cost of service analysis, agreement on low income
17 issues and rate implementation date were fairly straight
18 forward, reasonable accommodations to achieve comprehensive
19 settlement.
20 A.How did Staff approach settlement in this case?
21 Q.After filing direct testimony on May 29, 2009,
22 Staff met with the Company and other parties on June 5,
23 2009, in an effort to resolve any undisputed issues. Staff
24 was only willing to consider movement on its revenue
25 requirement adjustments for those issues where updated
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09
LOBB, R . (D i)
STAFF
5
1 information was available or errors were identified.
2 Q.In what areas did Staff agree to modify its
3 revenue requirement recommendations?
4 A.Staff agreed to modify its revenue requirement
5 recommendations in the following four areas: 1) increase
6 net power supply costs recovered in base rates (line b,
7 Electric Table, p. 5) i 2) slightly increase executive
8 compensation (line f, p. 5) i 3) increase information
9 service expense (line g, p. 5) ¡and 4) allow rate base
10 treatment of costs associated with Montana riverbed leases
11 (note 3, p. 5). Staff also agreed to include Spokane River
12 relicensing costs in this case if FERC issued a new
13 hydroelectric operating license by July 22, 2009.
14 While the Production Property Adjustment (line c,
15 p. 5) and the Restatement of Debt Interest (line p, p. 5)
16 changed from that proposed by Staff in its direct
17 testimony, these adjustments are the direct results of
18 changes in other Staff adjustments as specified in the
19 Stipulation and flow through automatically.
20 Net Power Supply Cos ts
21 Q.Please explain the difference in the Idaho
22 jurisdictional net power supply cost adjustment of
23 $14,455,000 as recommended by Staff in its pre-filed direct
24 testimony and the $13,869,000 adjustment agreed to in the
25 Stipulated Settlement on line b, page 5.
CASE NO. AVU-E-09-1/AVU-G-09-1
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STAFF
1 A.The difference is primarily due to a difference
2 in gas prices used in the AURORA analysis performed to
3 develop net power supply cost. In its initial Application
4 in this case, Avista used a three-month average of natural
5 gas prices from September 1, 2008 to November 30, 2008, of
6 monthly forward prices for the pro forma period. Staff, in
7 its analysis, used a one-month average of forward gas
8 prices from March 27, 2009 to April 27, 2009. Staff chose
9 to use a one -month average of prices because they were the
10 most recently available at the time it performed the AURORA
11 analysis. Staff believed that the most recent gas forward
12 prices were a better indication of prices likely to occur
13 in the pro forma period.
14 In the Settlement Stipulation, Avista adopts
15 Staff's position to use a one-month average of gas prices,
16 but proposes to use a more current average of prices from
17 May 1, 2009 to May 31, 2009 for the un-hedged portion of
18 the generation. Staff agrees that a one-month average of
19 gas prices using a more current period to derive the net
20 power supply costs is appropriate.
21 Q.Were any other changes made in Staff i s analysis
22 to derive the net power supply cost included in the
23 Settlement Stipulation?
24 A. Yes, a minor error in Staff i s analysis was
25 corrected. The error involves necessary after-the-fact
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di)
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1 additions of start-up fuel costs to the AURORA results, and
2 adj ustment of fuel costs at Coyote Springs 2 that cannot be
3 accommodated in AURORA.
4 Q.Does Staff agree with the results of the analysis
5 done to develop the net power supply cost recommendation
6 included in the Settlement Stipulation?
7 A.Yes, Staff has reviewed the analysis, including
8 replication of the revised AURORA results and including the
9 minor errors identified in Staff's analysis. Staff agrees
10 with the revised AURORA results and supports using the more
11 current gas prices in the Staff proposed one-month average.
12 The parties agree as part of the Settlement to support
13 Staff's recommendation to exclude short-term contracts
14 already entered into for the pro forma period and instead
15 to recover these costs through the peA subject to the 90/10
16 percent sharing. Consequently, Staff supports the net
17 power supply cost decrease adjustment of $13.869 million
18 included in the Settlement Stipulation.
19 Executive Labor Compensation
20 Q.What was Staff's position regarding Executive
21 Labor Compensation in its pre-filed testimony?
22 A.Staff removed all proposed increases to Executive
23 Labor expenses for 2009 and 2010, and annualized the
24 executive salaries at their current level of expense.
25 Q.Why did Staff agree to the smaller adjustment
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di)
STAFF
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1 specified in the Stipulation on line f, page 5?
2 A.Staff's original filing did not calculate the
3 overhead loading associated with the executive labor. The
4 Stipulation accepts Staff's position of excluding 2009 and
5 2010 increases for executives, and annualizes the current
6 level of Executive Labor expense. However, the Stipulation
7 recognizes the associated overhead applied to the
8 annualized Executive Labor.
9 Staff believes it is appropriate to account for
10 indirect overhead expenses when computing labor expense.
11 The settlement on this adjustment corrects an oversight in
12 Staff's original filing.
13 Information Service Expense
14 Q.What was Staff's position regarding Information
15 Service (IS) Expense in its pre-filed testimony?
16 A.Staff excluded IS labor expense for four
17 positions that the Company intended to, but had not yet
18 filled. Staff further reduced IS expense to recognize
19 operating efficiencies gained by including the pro forma
20 level of expense in rates.
21 Q.Why did Staff agree to the smaller adjustment
22 specified in the Stipulation on line g, page 5?
23 A.The Stipulation includes Staff's recognition of
24 operating efficiencies, however, two positions that Staff
25 excluded were positions that were actually filled but the
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09
LOBB, R. (Di)
STAFF
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1 amounts were being capitalized rather than expensed. The
2 Stipulation recognizes that these positions were filled,
3 but because the Company did not include any expense
4 associated with these two positions in its original filing,
5 no Staff adjustment was necessary.
6 Non tan a Riverbed Leases
7 Q.In the last rate case, the Company was allowed to
8 defer unamortized payments it made to the State of Montana
9 for lease of the riverbeds for the Noxon Rapids and the
10 Cabinet Gorge hydroelectric projects. In this rate case,
11 the Company requested inclusion of the unamortized balance
12 in its rate base, thus collecting a return on that balance.
13 What was Staff's position on the inclusion of the
14 unamortized balance of deferred payments in the Company's
15 rate base with a return?
16 A.Staff initially agreed that the Company should be
17 allowed to amortize the unamortized balance over the
18 remaining eight (8) year life of the lease, but did not
19 recommend allowing the Company to earn a return on the
20 unamortized balance.
21 Q.How does the Stipulation treat the unamortized
22 balance for the Montana lease?
23 A.The Stipulation allows the Company to include the
24 unamortized balance of $1,582,501 in rate base to earn at
25 the authorized rate of return. The balance remains
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di) 10
STAFF
1 amortized over eight (8) years.
2 Q.Why did Staff agree to include the unamortized'
3 balance of $1,582,501 in the Company's rate base at the
4 overall rate of return?
5 A.The unamortized balance is the amount paid by the
6 Company to the State of Montana for its use of the
7 riverbeds at the Company's hydro-electric projects in
8 Montana. The Montana courts have determined that the
9 Company was liable for use of the riverbeds owned by the
10 State of Montana at the Company's proj ects. Thus, the
11 Company entered into a lease with the State of Montana for
12 the use of the riverbeds.
13 In the last rate case the Company sought and
14 obtained an Order (Order No. 30647) from this Commission to
15 defer any payments it made pursuant to the lease and prior
16 to this rate case. Pursuant to our settlement discussions
17 and the Commission's prior approval to defer these lease
18 payments, Staff believes the payments were reasonable and
19 prudent for the production of electricity at the Company
20 facilities. Therefore, Staff included the amortization in
21 rates for recovery. Staff now accepts including the
22 unamortized balance in rate base at the Company's
23 authorized return because it was previously included in
24 this manner to establish the stipulated revenue requirement
25 in the last rate case, Case No. AVU-E-08-1. Language
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di) 11
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1 included in that prior Stipulation indicated that the
2 return on the unamortized balance was at the customer
3 deposit rate (Stipulation, p. 7, 9 (c) AVU-E-08-1).
4 However, this language related to the return during the
5 deferral period, not the return once it was included in
6 rates.
7 Spokane River Relicensing
8 Q.How did Staff originally propose to treat Spokane
9 River relicensing costs in this case?
10 A.Staff reviewed the costs associated with
11 relicensing and determined that they should not be included
12 for recovery in this case because a new FERC operating
13 license had not yet been obtained. The expenditures were
14 therefore, not deemed used and useful.
15 Q.Why did Staff agree to include the relicensing
16 costs in this case if a new license was issued by July 22,
17 2009?
18 A. The Company maintained that a new license was
19 imminent. In fact FERC issued the new 50-year license on
20 June 18, 2009 - two days after the Stipulation was filed.
21 Staff agreed that if a new license was obtained prior to
22 the Company's filed rebuttal or during the course of the
23 hearings, it is likely that the Commission would include
24 the cost in this case. It would also be difficult for
25 Staff to continue to argue that the relicensing costs were
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di) 12
STAFF
1 not used and useful. Therefore, Staff agreed to the July
2 22, 2009 cutoff date for the Company to obtain a license
3 with the caveat that un-audited costs are subject to audit
4 before they are reflected in rates. Additional revenue
5 requirement subject to recovery in this case with timely
6 receipt of the new license totals $3.11 million annually.
7 See Note 1 to Table on page 5 of the Stipulation.
8 Other Issues
9 Q.What other revenue requirement adjustments are
10 itemized in the Settlement Stipulation and how do they
11 compare to Staff's original recommendation?
12 A.Other revenue requirement adjustments itemized in
13 the Stipulation include return on equity (10.5%),
14 regulatory fees , non-executive labor, asset management,
15 Colstrip mercury emissions O&M, compensation incentives,
16 generation O&M expense, insurance expense, miscellaneous
17 expenses and the Coeur d' Alene Tribe Settlement. Other
18 than allocation of system adjustments, the capital
19 additions adjustment is the only issue specifically
20 identified on the natural gas side. All of these
21 adjustments are the same as those originally recommended in
22 Staff's pre-filed direct testimony.
23 Q.What does the Stipulation provide in terms of
24 revenue spread and rate design?
25 A.The parties agreed in paragraph 15 to spread the
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di) 13
STAFF
1 electric revenue increase uniformly across all customer
2 classes and increase only the energy component of rates in
3 each class as originally proposed by Staff. Likewise, the
4 Agreement follows Staff's original proposal to spread the
5 natural gas revenue increase to customer schedules based on
6 the Company's cost of service study and increase only the
7 commodity component of the gas rate.
8 The Settlement endorses Staff's proposal to
9 reduce the PCA and PGA rates to mitigate the base rate
10 increase. The required PCA rate reduction is 0.266 cents
11 per kWh for electric customers and the required PGA rate
12 reduction is 2.662 cents per therm for natural gas
13 customers. The PCA rate reduction will not fully offset
14 the base rate revenue requirement with the Spokane River
15 relicensing costs included in this case. The PGA rate
16 reduction offsets the base rate increase in Schedule 101
17 and reduces the overall rate in other schedules by various
18 amounts.
19 Q.Are the higher PCA and PGA rate reductions
20 specified by the Settlement of any concern to you?
21 A.I have no concern regarding the PGA reduction.
22 Forecasted gas prices over the period that rates will be in
23 effect are well below the weighted average cost of gas
24 (WACOG) currently embedded in rates. The PCA reduction is
25 only slightly more likely to produce higher deferral
CASE NO. AVU-E-09-1/AVU-G-09-1
06/24/09 LOBB, R. (Di) 14
STAFF
1 balances for surcharge than that proposed by Staff in
2 direct testimony. The risk caused by the slightly lower
3 PCA rate is also partially offset by stipulated higher
4 power supply costs embedded in rates.
5 Q.Are there other issues identified in the
6 Stipulation that are consistent with Staff recommendations
7 presented in direct testimony?
8 A.Yes, the Stipulation in paragraph 14 on page 11
9 specifically addresses the Company's proposal to change the
10 PCA sharing percentage from 90%/10% to 95%/5%. Staff did
11 not believe the Company sufficiently justified its proposal
12 in direct testimony and the Company withdrew the issue as
13 part of the settlement.
14 The Stipulation in paragraph 12 on page 11 also
15 specifies that the issue of prudence review of DSM
16 expenditures for the period January 1, 2008 through
17 November 30, 2008 will be addressed in a future docket.
18 Staff did not believe the Company provided sufficient
19 evidence in its direct case to justify a finding of
20 prudency for these expenditures. Consequently, Staff
21 believes it is reasonable to delay a prudency review to a
22 later date when more information is available.
23 In addition, the Stipulation reiterates Staff's
24 position supporting the Company's proposed cost recovery of
25 the Lancaster power proj ect tolling agreement. See ~ 10.
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06/24/09 LOBB, R. (Di) 15
STAFF
1 The Stipulation also supports Staff's original
2 recommendation provided in direct testimony for cost
3 recovery of the Coeur d' Alene Tribe Agreement. See ~ 9 (0)
4 on p. 10.
5 Finally, the Stipulation supports Staff's
6 original proposals that the Company evaluate its payment
7 plans and low income deposit policies for effectiveness.
8 See ~ 16 (d) and (e) on p. 15.
9 Q.What issues are included in the Stipulation that
10 were not originally addressed by Staff in direct testimony?
11 A.Issues supported by Staff in the Stipulation that
12 were not originally addressed by Staff in direct testimony
13 include additional cost of service evaluation (see ~ 13),
14 continuation of low income customer service programs (see
15 ~ 16 (b) and (c)), and new rate implementation on August 1,
16 2009 (~ 15 (f) ). The cost of service recommendations to
17 evaluate various methods of allocating transmission
18 facili ties and to provide twelve months of current load
19 data in a timely manner are necessary to properly determine
20 cost of service and are supported by Staff.
21 The low income recommendations for Avista to
22 support low income rate assistance legislation, to continue
23 funding for low income weatherization and outreach
24 education are a continuation of existing support and
25 programs. Staff supports these recommendations based on
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di) 16
STAFF
1 its belief that they reasonably improve low income
2 affordability.
3 Q.Why did Staff support an August 1, 2009
4 implementation date for new rates rather than the statutory
5 deadline of August 23, 2009?
6 A.This provision was agreed to by Staff as part of
7 the give and take of settlement negotiations. Staff
8 believed that the accelerated implementation date was
9 reasonable given that comprehensive settlement would reduce
10 the need for lengthy hearings, complicated deliberations
11 and time consuming development of the final Commission
12 Order. Staff also accepted the Company position that a
13 first of the month implementation of new rates would
14 simplify calculation of monthly power supply costs for
15 determination of PCA deferral balances.
16 Q.Does this conclude your testimony in this
1 7 proceeding?
18
19
20
21
22
23
24
25
A.Yes, it does.
CASE NO. AVU-E-09-1/AVU-G-09-106/24/09 LOBB, R. (Di) 17
STAFF
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 24TH DAY OF JUNE 2009,
SERVED THE FOREGOING DIRECT TESTIMONY IN SUPPORT OF STIPULATION
OF RANDY LOBB, IN CASE NOS. AVU-E-09-1 & AVU-G-09-1, BY ELECTRONIC
MAIL TO THE FOLLOWING:
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL
AVISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220
E-MAIL: david.meyer(iavistacorp.com
KELL Y NORWOOD
VICE PRESIDENT - STATE & FED. REG.
A VISTA UTILITIES
PO BOX 3727
SPOKANE WA 99220
E-MAIL: kelly.norwood(iavistacorp.com
DEAN J MILLER
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701
E-MAIL: joe(imcdevitt-miler.com
SCOTT ATKINSON
PRESIDENT
IDAHO FOREST GROUP LLC
171 HIGHWAY 95 N
GRANGEVILLE ID 83530
E-MAIL: scotta(iidahoforestgroup.com
CONLEY E WARD
MICHAEL C CREAMER
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
E-MAIL: cew(igivenspursley.com
mcc(igivenspursley.com
DENNIS E PESEAU, Ph.D.
UTILITY RESOURCES INC
SUITE 250
1500 LIBERTY STREET SE
SALEM OR 97302
E-MAIL: dpeseau(iexcite.com
BETSY BRIDGE
ID CONSERVATION LEAGUE
710 N SIXTH STREET
PO BOX 844
BOISE ID 83701
E-MAIL: bbridge(iwildidaho.org
ROWENA PINEDA
ID COMMUNITY ACTION NETWORK
3450 HILL RD
BOISE ID 83702-4715
E-MAIL: . Rowena(iidahocan.org
CARRIE TRACY
1265 S MAIN ST, #305
SEATTLE WA 98144
E-MAIL: carrie(inwfco.org
BRAD MPURDY
ATTORNEY AT LAW
2019N 17TH ST
BOISE ID 83702
E-MAIL: bmpurdy(ihotmail.com
~.\(o&Eë
CERTIFICATE OF SERVICE