20161121Lobb Direct.pdf

BEFORE THE RECEIVED
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IDAHO PUBLIC UTILITIES COMIVUSSI-ON· ·1 11L'I LIS :· · .~ "O:,.i .. lSS10i4
IN THE MATTER OF THE APPLICATION )
OF AVISTA CORPORATION DBA AVISTA ) CASE NO. AVU-E-16-03
UTILITIES FOR AUTHORITY TO INCREASE )
ITS RATES AND CHARGES FOR )
ELECTRIC SERVICE IN IDAHO. )
) ___________ )
DIRECT TESTIMONY OF RANDY LOBB
IN SUPPORT OF THE STIPULATION
AND SETTLEMENT
IDAHO PUBLIC UTILITIES COMMISSION
NOVEMBER 21, 2016
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Q. Please state your name and business address for
the record.
A. My name is Randy Lobb and my business address
is 472 West Washington Street, Boise, Idaho.
Q.
A.
By whom are you employed?
I am employed by the Idaho Public Utilities
Commission as Utilities Division Administrator.
Q. What is your educational and professional
background?
A. I received a Bachelor of Science Degree in
Agricultural Engineering from the University of Idaho in
1980 and worked for the Idaho Department of Water
Resources from June of 1980 to November of 1987. I
received my Idaho license as a registered professional
Civil Engineer in 1985 and began work at the Idaho Public
Utilities Commission in December of 1987. I have
analyzed utility rate applications, rate design, tariff
filings and customer petitions. I have testified in
numerous proceedings before the Commission including
cases dealing with rate structure, cost of service, power
supply, line extensions, regulatory policy and facility
acquisitions. My duties at the Commission include case
management and oversight of all technical Staff assigned
to Commission filings.
Q. What is the purpose of your testimony in this
CASE NO. AVU-E-16-03
11/21/16
LOBB, R. (Stip) 1
STAFF
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case?
A. The purpose of my testimony is to describe the
proposed comprehensive settlement and explain Staff's
support.
Q.
A.
Please summarize your testimony.
Avista Utilities filed an application with the
Commission on May 26, 2016 requesting an electric rate
increase of $15.4 million (6.3%) effective January 1,
2017. After comprehensive review of the Company's
Application, thorough audit of Company books and records
and extensive negotiation with parties to the case, an
agreement was reached by all parties to settle the case
without further litigation.
The proposed settlement and Stipulation
provides an electric rate increase on January 1, 2017, of
$6.25 million (2.57%). It also specifies how the revenue
requirement will be allocated to the various customer
classes, how rates within each class will be adjusted and
describes an opportunity for parties to meet and discuss
low income and cost of service issues.
Staff believes the proposed Settlement
represents a reasonable compromise of revenue requirement
issues. The Settlement is only 41% of the electric rate
increase originally proposed by the Company and is a
reasonable compromise of its original position. Staff
CASE NO. AVU-E-16-03
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also believes that the customer class revenue allocation,
rate adjustments and issues identified for further
discussion properly address concerns of participating
parties. Staff maintains that the Settlement is in the
public interest and recommends that it be approved by the
Commission.
Background
Q. Please describe Avista's original filing and
the process leading to settlement.
A. Avista originally filed on May 26, 2016
requesting authority to increase its electric rates by
15.4 million (6.3%) effective January 1, 2017. The
Company proposed a 50/50 capital structure and a return
on common equity of 9.9%. The Company proposed to spread
the revenue increase to the various customer classes
using a 25% move toward cost of service and increase the
residential customer charge from $5.25 to $6.25.
The Commission accepted the application for
filing and approved intervention in the case by
Clearwater Paper Corporation, Idaho Forest Group LLC.,
Snake River Alliance and Community Action Partnership
Association of Idaho (CAPAI). Together with the Company
and Commission Staff, these participants make up the
parties to the case.
The parties agreed to a procedural schedule for
CASE NO. AVU-E-16-03
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processing the case that included a settlement
conference, staff and intervenor prefiled testimony,
Company rebuttal and a technical hearing. Staff also
scheduled and held two customer workshops in Moscow and
Coeur d'Alene, Idaho on September 21 and September 22,
2016 respectively.
The parties held a Settlement Conference on
October 3, 2016 and reached agreement resolving all
issues in the case. The Settlement Stipulation
specifying the terms of the agreement was filed with the
Commission on October 25, 2016.
Settlement Terms
Q. Would you please describe the terms of the
proposed Settlement?
A. Yes, the Settlement Stipulation specifies an
overall annual revenue requirement increase of $6.25
million or 2.57% higher than current base revenues. The
smaller increase relative to that originally proposed by
the Company ($13.7 million or 6.2%) is due to agreement
on a 9.5% return on equity rather than the 9.9% proposed
by the Company, and a variety of other expense and
capital adjustments. Total electric rate base is set at
$754 million.
Q. What expense and capital adjustments are
included in the Stipulation?
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A. The Stipulation specifies nine adjustments that
decrease the Company's requested base rate revenue
requirement by approximately $10.4 million per year. The
four largest adustments are for: 1) removal of $4.5
million in Palouse Wind contract expenses for 90%
recovery in the Power Cost Adjustment (PCA) mechanism; 2)
a $2.47 million reduction to reflect the lower return on
equity; 3) a $1.33 million reduction to reflect removal
of capital plant additions projected to occur in 2017;
and 4) a $1.06 million reduction to reflect removal of
2015 storm costs from the average storm expense included
in rates.
The other five adjustments total $1.04 million
and were for: 1) adjustment to actual 2016 deferred
debits and credits; 2) removal of 2017 non-union labor
expenses; 3) including a Nine Mile investment tax credit;
4) removal of officer incentives; and 5) removal of legal
expenses. The Settlement also included a $1.22 million
increase in expense to reflect updated 2016 employee
benefit costs. The net effect of these combined
adjustments is to reduce the proposed increase by $9.18
million.
Q. Does the Stipulated Settlement specify how the
revenue requirement will be spread to each customer class
and how rates within each class will change?
CASE NO. AVU-E-16-03
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A. Yes, the Settlement specifies that the increase
be allocated to the various customer classes using a
prorated 25% move toward costs of service as originally
proposed by the Company. This results in a non-uniform
increase to various classes. For example, residential
customers will see a 3.2% increase while large industrial
customers will see a 1.9% increase.
The residential customer charge will increase
from $5.25 per month to $5.75 per month with the balance
of the class revenue requirement collected through a
uniform increase in the commodity rate. Rate components
for all other customer classes will increase uniformly.
Q. What other terms and conditions are specified
in the Stipulation and Settlement?
A. The parties agreed to two other conditions as
part of the Stipulated Settlement. The first is to hold
a workshop to discuss class cost of service methodology
to determine how and why cost recovery responsibility
changes for the various customer classes in between rate
cases. The second condition requires collaboration by
interested parties on low income issues. The issues
identified for discussion include policy and structure
for low income weatherization and energy efficiency
education programs.
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Settlement Negotiation
Q. Could you please describe Staff's investigation
leading up to the settlement conference?
A. Yes . Staff's approach prior to the settlement
conference was to extensively review the Company's
filing, identify adjustments to its revenue requirement
request and prepare to file testimony for a fully­
litigated proceeding. Staff submitted over 140
production requests as part of its investigation and
conducted comprehensive on-site auditing of Company books
and records. Staff reviewed both completed and proposed
Company investments, evaluated expenditures including
pensions, salaries, and operation and maintenance,
investigated power supply modelling, weather
normalization and class cost of service methodologies and
compared rate design alternatives. Staff identified 19
revenue requirement adjustments and established positions
on test year proforma limitations, class revenue
allocations and rate design modification.
Staff positions were established through
investigation and were prepared for presentation at the
Settlement conference. These positions would form the
basis for Staff testimony at hearing should settlement
negotiations have failed.
Q. Could you please describe the settlement
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process?
A. Yes, settlement negotiations began with a Staff
presentation of its investigative results. This
primarily entailed a step by step discussion of each
identified revenue requirement adjustment. Staff
explained its rationale and the other parties, primarily
the Company, asked questions and provided positions on
why the adjustments should be rejected, modified or
accepted.
The Company then developed a revenue
requirement counter proposal and presented it to the
parties for discussion. Staff likewise evaluated the new
Company proposal based on previous discussion and an
assessment of how successfully an adjustment might be
defended at hearing. Staff then developed and presented
a counter proposal. After several iterations of counter
proposals, negotiation and compromise, agreement was
reached on individual adjustments and an overall revenue
requirement that was supported by all parties.
Q. Were there other areas of disagreement that had
to be resolved during the settlement process?
A. Other than revenue requirement, the parties
were generally in alignment on remaining issues. There
was some discussion of class cost of service and while no
party agreed on any specific class cost of service
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methodology, all agreed that the 25% move originally
proposed by the Company was reasonable in this case. The
parties did agree that a workshop was needed to discuss
how and why class cost responsibility changes between
rate cases.
The parties also agreed it was reasonable for
interested parties to meet on low income energy
efficiency issues including appropriate funding levels.
Other issues such as the $0.50 increase in monthly
residential customer charges, PCA expense levels and the
authorized base for the Fixed Cost Adjustment (FCA)
mechanism were discussed and approved as reasonable.
Q. How did Staff determine that the overall
Settlement was reasonable?
A. In every settlement evaluation, Staff and other
parties must determine if the agreement is a better
overall outcome than could be expected at hearing. Staff
looked at each of its revenue requirement adjustment and
determined that the overall agreement was as good or
better than what could be achieved through litigation.
Other parties, made up of customer groups and low income
representatives obviously agreed with Staff in support of
the settlement.
In addition, Staff evaluated this case by
comparing it to the last general rate case filed by
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Avista in 2015. In Case No. AVU-E-15-05, Avista applied
for a two-year rate plan through 2017. The Company
requested a $13.2 million increase in 2016 and a $13.7
million increase in 2017. The parties settled for a one
year increase of $1.7 million. However, much of the
investment and many of the expenses removed from that
case are included in this case. Nevertheless, the
overall increase in 2016 when combined with the
settlement in this case totals approximately $7.95
million or less than 30% of the original 2015 two-year
request.
Staff Support of the Settlement Terms
Q. Could you please describe the Palouse Wind
adjustment and explain Staff's support?
A. Yes. The largest single adjustment of $4.5
million is for Palouse Wind contract expenses. Staff
maintains that this project was acquired by Avista to
meet Resource Portfolio Standards (RPS) for the state of
Washington and not to meet Idaho Load. Moreover, Staff
estimates that the $4.5 million is the difference between
what Avista pays for the energy generated by the project
and the market value of the energy. Staff believed that
this difference should not be recoverable from Idaho
customers.
The Company maintains that the project does
CASE NO. AVU-E-16-03
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serve Idaho load and is a very low cost renewable
resource relative to other regional resources. Rather
than remove the entire amount from rates, the compromise
is to remove the above market value from base rate
recovery and flow it through the PCA at 90%. The net
effect of the adjustment is a savings to Idaho customers
of $450,000 annually.
This adjustment has been included in the last
four Avista rate case settlements and Staff continues to
support the compromise rate treatment.
Q. Please explain why Staff believes the 9.5%
Return on Equity and capital structure with 50% equity
and 50% debt are reasonable.
A. Staff believes a 9.5% Return on Equity (ROE)
will provide continued cash flow for capital
expenditures, maintain credit ratings and allow access to
capital markets at a reasonable cost. New capital
expenditures are required to maintain safe and reliable
customer service. Not only is access to capital markets
important to fund new expenditures but also to refund and
repay maturing short-term and long-term debt obligations.
Staff's evaluation of the Discounted Cash Flow and other
earnings comparison support a 9.5% ROE. The 9.5% ROE is
also the lower point in Avista's Cost of Equity range.
The projected capital structure at December 31, 2016
CASE NO. AVU-E-16-03
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consists of 50.8% equity. The actual capital structure
at December 31, 2015 had 49.3% equity. These equity
ratios provide a reasonable range and are consistent with
the proposed and stipulated capital structure with 50%
equity.
The 9.5% ROE and a capital structure consisting of
50% equity and 50% debt are the same and maintain
consistency with the stipulated components in AVU-E-15-05
and AVU-G-15-01. They were approved with Order No. 33437
and continue to be reasonable.
Q. Could you please describe Staff's support for
the other Settlement adjustments?
A. Many of the other revenue requirement
adjustments consist of removal of forecasted capital
additions and expense adjustments beyond a proforma
period of December 31, 2016. Staff has consistently
proposed limiting forecasted proforma adjustments to a
defined test period many times in the past and believes
it is appropriate in this case as well.
Likewise, most of the other adjustments such as
legal expenses, storm expenses and salaries associated
with Company management have consistently been removed.
Staff maintains that the adjustments that are
specifically identified and those that are not reflect a
compromise by the parties and are supported by Staff as
CASE NO. AVU-E-16-03
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part of the Settlement.
Q. Why does Staff support the residential customer
charge increase?
A. Staff believes that an increase in the
residential customer charge from $5.25 to $5.75 per month
is reasonable given the level of fixed cost incurred to
serve each customer. While the energy rate has increased
several times over the last five years, the customer
charge has not increased since 2011. In addition,
slightly increasing the customer charge will reduce fixed
cost recovery in the energy rate thus reducing the
potential impact of the FCA on residential customers.
Q. Why does Staff support a cost of service
workshop and collaboration on low income issues?
A. Staff believes that meeting to discuss these
issues will help all parties better understand how
various customers groups are impacted. For example,
class cost of service studies show significant variation
in cost allocation between rate cases. A better
understanding of factors that cause this to occur would
assist parties in evaluating future cost of service
methodologies. With respect to low income issues, Staff
agrees that evaluating how low income customers utilize
energy efficiency programs and how the cost of these
programs are covered by all customers is important to
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properly establish funding levels.
Q.
A.
Does that conclude your testimony?
Yes it does.
CASE NO. AVU-E-16-03
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LOBB, R. (Stip) 14
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 2I5t DAY OF NOVEMBER 2016,
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB IN
SUPPORT OF THE STIPULATION AND SETTLEMENT, IN CASE NO.
AVU-E-16-03, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
KELLY NORWOOD
VP -STATE & FED REG
AVISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-mail: [e-mail]
[e-mail]
PETER J RICHARDSON
RICHARDSON ADAMS PLLC
PO BOX 7218
BOISE ID 83702
E-mail: [e-mail]
DEAN J MILLER
3620 E WARM SPRINGS
BOISE ID 83716
E-mail: [e-mail]
KEN MILLER
SNAKE RIVER ALLIANCE
223 N 6TH ST STE 317
BOISE ID 83702
E-mail: [e-mail]
MARV LEWALLEN
CLEARWATER PAPER CORP
E-MAIL ONLY:
[e-mail]
carol. [e-mail]
DAVID J MEYER
VP & CHIEF COUNSEL
AVISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-mail: [e-mail]
DR DON READING
6070 HILL ROAD
BOISE ID 83703
E-mail: [e-mail]
LARRY A CROWLEY
THE ENERGY STRATEGIES INSTITUTE
5549 S CLIFFSEDGE A VENUE
BOISE ID 83716
E-mail: [e-mail]
BRADMPURDY
ATTORNEY AT LAW
2019 N 17TH ST
BOISE ID 83702
E-mail: [e-mail]
CERTIFICATE OF SERVICE