20080505Westerfield Rebuttal Testimony.pdf

SUBJECT:
Section 1:
Section 2:
Section 2.1 :
Section 2.
Section 3:
INDEX
REBUTTAL TESTIMONY OF
LOU ANN WESTERFIELD
Witness for the Idaho Public Utilities Commission
DEEMER BALANCES AND LOOKBACK ANALYSIS
Introduction and Purpose of Testimony .................................................,......
Deemer Balances ..........................................................,................................
Deemer Interest
....................................,.......................................................
Deemer Termination......................................................................................
Lookback Analysis
....................................................,..................................
WP-O7-ID-
Page i
Witness: Lou Ann Westerfield
Page
REBUTTAL TESTIMONY OF
LOU ANN WESTERFIELD
Witness for the Idaho Public Utilities Commission
SUBJECT: DEEMER BALANCES AND LOOKBACK ANALYSIS
Section 1: Introduction and Purpose of Testimony
Please state your name and qualifications?
My name is Lou Ann Westerfield and my qualifications are described in WP-07-Q-
ID-
What is the purpose of your testimony?
I rebut certain direct testimony of
1. The Western Public Agencies Group ("WPAG") (WP-07-WA-5);
2. The Cowlitz County PUD and Clark Public Utilities (collectively, the
JP 17 Parties ) (WP-07-JPI7-1); and
3. The Association of Public Agency Customers ("APAC") (WP-07-
AP-l).
My testimony addresses the deemer balances and the Lookback analysis offered by
the parties.
Section 2: The Deemer Balances
Please summarize the assertions that AP AC, WP AG, and JP 17 (Cowlitz and Clark)
make in their testimony about the deemer balances?
Without elaboration, the three parties support BP A's proposal that deemer balances
should be "cleared" before the affected investor-owned utilities (IOUs) are eligible to
WP-07-ID-
Page 1
Witness: Lou Ann Westerfield
receive future REP payments. For example, WPAG insists "that each IOU'
outstanding deemer account would have to be paid in full with interest prior to
receiving their hypothetical REP payments during FY 2002-2008 period. . . make ( s)
some sense." WP-07-WA-05 atp. 47, 11.9-, p. 48 , 1.14. The JP 17 Parties state:
BP A should calculate and determine deemer balances during the Lookback period
just as it did under the 1984 ASCM prior to the REP settlement." WP-07-JPI7-1 at
p. 39, l1.13-16. AP AC states: "I will not address the issue of deemer balances except
to say that those balances should be cleared before any payments are made to utilities
that have them." WP-07-AP-l at p. 79, 11.17-20.
Did these three parties offer any reasons why the deemer balances should be paid in
full before becoming eligible to receive REP payments?
Not in testimony. However, WPAG offered this explanation in response to Data
Request ID- W A-I: "It is generally accepted rate setting practice and business
practice to repay any debts before credits are applied.
Based on your experience, do you agree with this statement?
, I do not. The notion of having to repay any debts before receiving
revenues/credits is not part of any regulatory framework of which I am aware because
it flies in the face of the fact that an electric utility business is a "going concern
operating over an extended period of time. An electric utility does not incur debt to
build infrastructure and provide service over a discrete period of time, repay all its
debt, and then start over in an on-again, off-again fashion because that approach
would assume the number of customers, loads, resources, and technologies always
WP-07-ID-
Page 2
Witness: Lou Ann Westerfield
remained the same. Rather, electric utilities continuously plan for and invest in
facilities needed for the provision of service to current and anticipated future
consumers and finance these investments with a combination of revenues, debt, and
equity. In fact, for IOUs, the elimination of all debt could increase the cost of
providing utility service because equity usually costs more than debt and it would
shift all investment risks to shareholders.
I am not aware of any state regulatory commission that has made the receipt of
revenues/credits contingent upon the repayment of all debt. In fact, the contention
that any debt must be repaid to receive credits is circular because the source of funds
for the payment of debt lies in the receipt of credits/revenues.
Do the deemer balances represent debt in a ratemaking setting?
I dispute their characterization as "debt" in a ratemaking setting because the purported
debt has never been recorded on BPA's or the IOUs ' books. Moreover, the IOUs
RPSAs provide that deemer balances "shall not be a cash obligation of the Utility
and the IOUs' Suspension Agreements provide that the deemers shall not cause the
utility "to incur any cash obligation to BP A as a result of the suspension
respectively. RPSA at 9 10; Suspension Agreement at 9 3. Thus, WPAG's assertion
that any "debt" must be repaid before credits are applied not only has no regulatory
underpinning, but also assumes that umecorded debts are valid debts.
Did AP AC, WP AG, or JP 17 indicate in their testimonies the specific amounts of any
of the deemer balances?
WP-07-ID-
Page 3
Witness: Lou Ann Westerfield
, they did not provide any calculations or balances regarding the individual deemer
accounts. After acknowledging the integral role the deemer balances play in the
Lookback analysis and in setting rates going forward, the parties do not quantify the
magnitude of the deemers. They rely upon BP A to "determine the deemer balances
during the Lookback period" and to extinguish those balances. WP-07-JPI7-
, p.
1.14; WP-07-WA-, p. 47, 11.9-, p. 48, 11.13-14; WP-07-AP-, p. 79 11.19-
20.
What reasons do you have to question the accounting of the deemer balances for
Idaho Power?
In May 1985, the Federal Energy Regulatory Commission (FERC) approved a
Settlement Agreement among BP A, Idaho Power, and each direct service industry
(DSI) customer regarding Idaho Power s Average System Costs (ASC) filings in
several FERC dockets between 1981-1983. WP-07-ID-AT4, 31 F.E.R.C. ~
61240 (May 20, 1985). As indicated in the settlement agreement, BP A credited Idaho
Power s deemer account a total of$6.7 million (jurisdictionally separated for Idaho
Oregon, and Nevada). Id. at p. 7 (p. 4 of the agreement).
With this $6.7 million credit to Idaho Power s deemer account, were you able to
determine the balance of its deemer account?
Yes. Following FERC's approval of the 1985 Settlement Agreement, Idaho Power
sent a letter dated June 18, 1985 to BP A asking that the agency confirm Idaho
Power s deemer balance as of May 31 , 1985. WP-07-ID-A T5. The letter
declares that Idaho Power s jurisdictional deemer accounts (again comprised of Idaho
WP-07-ID-
Page 4
Witness: Lou Ann Westerfield
Oregon, Nevada) totaled $8 068 020.50 as of May 31 , 1985. The letter asked that
BP A "indicate below by signature if you agree with the (Idaho Power) balances.
BPA apparently agreed because the letter was purportedly signed by BPA'
representative, Harry 1. Allen on July l , 1985. WP-07-ID-AT5.
Why is this cumulative deemer balance as of May 31 , 1985 significant?
In Data Request ID-BPA-, we asked for a "copy of the calculations or the
worksheet(s) used to determine Idaho Power s monthly deemer balances from 1981 to
the present." The Excel spreadsheet provided by BP A did not go back to 1981 but the
first entries indicated a date of approximately January 1987. The Excel spreadsheet
indicated that the deemer balances for each of Idaho Power s jurisdictions were as
follows:
Idaho
Oregon
Nevada
Total
$52 903 825
$ 4 56l 262
$ 689,064
$58 154 151
If this total amount in the table above is accurate, this means that Idaho Power
deemer account increased by approximately $50 million in the 18 months between
May 1985 and January 1987. AP AC, WP AG and JP 17 offered no explanation for
why Idaho Power s deemer balance increased so dramatically - seven times greater-
over so short a period of time, and BP A has offered neither documentation nor
explanation for this gap. In fact, no party has offered any evidence explaining this
crucial time period in the history of the deemer balances. Similarly, BP A'
workpapers in this case show only a beginning balance for Avista in January 1987 and
no explanation for the source of that balance.
WP-07-ID-
Page 5
Witness: Lou Ann Westerfield
This lack of evidence is both a recordkeeping and a ratemaking issue. The
significant gap in the records of the deemer balances and the magnitude it represents
undermine the parties' presumption that inclusion of the deemer balance in this rate
case is appropriate. The parties did not calculate the balances, and it is umeasonable
to rely on BP A's calculation given the gaps in the record. Parties cannot merely pick
a number or reasonably rely on BPA's number for inclusion in the Lookback
mechanism.
Are there financial statements or other accounting records that support the calculation
of the deemer balances?
No. BP A did not record the deemer balances in its financial statements. An "off the
books" Excel spreadsheet is not the equivalent of a durable accounting record.
Section 2.1: Deemer Interest
Do you agree with WP AG's assertion that the deemer balances should be "paid in full
with interest. . . .? (WP-07-WA-05, p. 47, 1l.10.
It is unclear exactly what WP AG means by "with interest." All the deemer balances
already include interest calculated since 1987. For example, the BP A Excel
spreadsheet provided in response to Data Request ID-BP A-4 shows the interest rates
applied to Idaho Power s deemer "account." BPA workpapers in this case show
similar calculations for Avista s deemer "account." Consequently, it is improper to
assess additional interest on the deemer balances.
Have you discovered any other irregularity with the calculation ofldaho Power
deemer account?
WP-07-ID-
Page 6
Witness: Lou Ann Westerfield
Yes, in the Excel spreadsheet for BPA's calculation ofldaho Power s deemer
accounts, the spreadsheet shows an entry for January 1987 of $52 903 825. ID-BP A-
4. In the BP A-Idaho Power "Suspension of Residential Purchase and Sales
Agreement" (Suspension Agreement) dated August 22 1989, paragraph 4 of that
document reflects that "the parties agree that Idaho Power s accrued deemer account
balance as provided in Section 10 of RPSA is $52 903 825., including interest, as of
. . . July 31 , 1988, for the Idaho jurisdiction." (WP-07-ID-A T6.) Both the
Suspension Agreement and BP A spreadsheet contain the identical accrual balance but
reflect an 18-month time difference.
Did A vista and Idaho Power both suspend their 1981 RSP As?
Yes. Idaho Power s Suspension Agreement (WP-07-ID-AT6) with BPA became
effective by its terms on July 31 , 1988. The Suspension Agreement was dated August
, 1989. Avista s (then known as WWP) Suspension Agreement (WP-07-ID-
A T7) became effective June 30, 1987.
Are there significant differences between the Idaho Power and A vista Suspension
Agreements?
Yes. In particular, there is one significant difference between the termination
agreements for the two utilities. Section 4 of both agreements provides the deemer
balances will accrue interest. For example, Idaho Power s Suspension Agreement
states that "from an August 1 , 1988 , such amounts shall accrue interest, which shall be
compounded quarterly
, . ..
" WP-07-ID-AT6 at p. 4, ~ 4. In comparison, Section 4
of Avista s Suspension Agreement contains a significant difference. Avista s contract
WP-07-ID-
Page 7
Witness: Lou Ann Westerfield
reads in part: "from and after October 1 , 1987 , such amounts shall incur interest
which shall not be compounded at the average prime rate for each calendar quarter. . .
Id. (emphasis added). In other words, Avista s Suspension Agreement specified
simple interest and Idaho Power s Suspension Agreement specified compound
interest.
Why is the difference between applying simple and compound interest important?
Compound interest adds to the principal balance and assesses interest on interest.
According to BPA, the deemers reflect the difference between an IOU's lower ASC
and the PF Exchange rate, and that is the principal portion of the deemer balances.
However, BPA's Excel spreadsheet indicates that, for Idaho Power s deemer
balances, every three months the interest is added to the principal and interest is then
calculated for the next three months on the "new" principal balance. On the other
hand, Avista s principal deemer balance has not changed since January 1987 and
includes the addition solely of monthly interest accruals.
Have AP AC, WP AG, JP 17 or BP A explained why some deemer balances have
compound interest and other balances are subject to simple interest?
No party has explained why there is a different interest mechanism for some of the
IOUs. In my opinion it is umeasonable for some IOUs to have compound interest and
others to have simple interest applied to their deemer balances. It is inequitable to
apply different interest mechanisms to individual IOUs within the group ofiOUs.
Has the difference in simple versus compound interest adversely affected Idaho
Power?
WP-07-ID-
Page 8
Witness: Lou Ann Westerfield
Yes. Without agreeing to the correctness of BP A's calculations, the application of
simple interest on A vista s deemer balance from 1987 to 2007 represents an increase
of2.5 times. Conversely, the application of compound interest for Idaho Power on its
alleged deemers balance from 1987 to 2007 has increased its deemer balance 4.
times. AP AC, WP AG, and JP 17 offer no justification for the application of different
interest mechanisms between A vista and Idaho Power.
How do the REP benefits compare to the correct deemer balances?
Tthe REP benefits from FY 1982 to FY 1994 demonstrate the umeasonableness of the
deemer mechanism. As indicated in a summary table prepared by BPA (WP-07-
ID-ATI6), Avista and Idaho Power received REP benefits totaling $6 550 000 and
$42 342 000, respectively. In comparison, BPA calculates that Avista s deemer
balance is $99.32 million as of October 2007 and Idaho Power s deemer balance is
$245.36 million as of October 2007. Clearly, the benefits are over-shadowed by the
negative balances in the deemer accounts.
Section 2.2: Deemer Termination
A vista and Idaho Power both terminated their 1981 RSP As in 1993. Are the
companies' termination notices identical?
No. A vista s termination notice simply states that A vista gives notice "of its election
to terminate its 1981 RSPA effective September 30 1993...." WP-07-ID-AT8.
A vista s termination notice is silent on the issue of interest. In comparison, Idaho
Power s termination notice dated September 28 , 1993 notifies BP A "of its election to
terminate that our RPSA effective September 30, 1993." WP-07-ID-A T9. Idaho
WP-07-ID-
Page 9
Witness: Lou Ann Westerfield
Power s termination notice goes on to ask that BP A calculate the utility s deemer
balances through September 30, 1993 "so that we might then either agree to the
calculations or resolve any disagreements about them.Id. The Idaho Power notice
also states that the utility "agrees that the Company s deemer account balances
accrued as of September 30, 1993, . . . shall continue to accrue interest, said interest to
be compounded quarterly. . . .Id.
Have you uncovered any reason how Idaho Power and A vista came to have two
different termination notices?
In a note from BPA's counsel to Avista s counsel and Idaho Power s counsel dated
September 21 1993 (six days before Idaho Power s notice), BPA suggested specific
language for the parties to include in their termination notice. WP-07-ID-A Tl O.
Idaho Power s termination notice is nearly identical to the language suggested by
BP A, including the provision about compound interest.
Did BP A accept A vista s termination notice that does not address the accrual of
interest?
Apparently not. In a letter dated October 19 1993, BPA responded to Avista
termination notice. WP-07-ID-A Tl1. BP A's October 19 response states that BP A
accepts the termination (notice J subject to the following conditions." In particular
one condition was that A vista s deemer "account balances accrued as of September
, 1993 for each of its exchange jurisdiction shall continue to accrue interest, which
shall be compounded quarterly
, . . . .
Id. (emphasis added). BPA subsequently sent a
correction the following day on October 20, 1993 correcting A vista s deemer account
WP-07-ID-
Page lO
Witness: Lou Ann Westerfield
balances as "$41 664 455 for its Washington Jurisdiction and $18 271 996 for its
Idaho Jurisdiction." WP-07-ID-A Tl2.
Did A vista notify FERC of the termination of its RPSA?
Yes. On September 30 1993 , Avista filed a "notice of termination of rate schedule
FERC Electric Tariff No. 1 between WWP and Bonneville Power Administration.
WP-07-ID-A Tl3. In a Letter Order dated December 6, 1993, FERC accepted the
termination notice effective September 30 1993. WP-07-ID-ATI4. FERc's Letter
Order also observed that no "comments, protests, or interventions were filed.Id.
Did Avista ever agree with BP A's interest accrual condition (WP-07-ID-A Tl1)?
Apparently not. In a September 9 , 1998 letter to BPA's Administrator, the senior vice
president of WWP (now A vista) stated that the utility expressly did not agree with
Bonneville s position" that the deemer balance would be carried over to a new
contract. WP-07-ID-A TIS (emphasis original). Attached to the Avista vice
president's September 1998 letter was a position paper prepared by the utility
attorney. The position paper recites that when "WWP terminated the exchange in
1993 , WWP expressly did not agree with Bonneville s position that the deemer
balance resulting from the change methodology would be carried over to a new
contract. WWP's notice of termination contains no such language. While Bonneville
sent a confirmation of the termination with its position stated, WWP has never agreed
with (BP A's) position.Id. at p. 4 of 4.
Section 3: Lookback Analysis
WP-07-ID-
Page 11
Witness: Lou Ann Westerfield
Please summarize the assertions that the AP AC, WP AG, and the JP l7 Parties make
in their testimonies about the Lookback Analysis?
APAC opines that there is no assurance ofrepayment of the overpayments made to
the IOUs through the REP program. WPAG asserts that overpayments to the IOUs
should be assessed compound interest. The JP 17 Parties assert that the Lookback
Analysis should include the calculation of deemer balances for the time period and
the use of the IOUs ' ASC filings under the 1984 ASc methodology.
Do you agree with any of these assertions?
No.
What risks does AP AC identify regarding repayments?
AP AC states: "... in summary the risks are that the victims of the over-collection
have no assurance of repayment." WP-07-AP-
, p.
, 11.19-21.
Are there actions AP AC could have taken to mitigate these risks?
APAC could have requested a stay of the WP-02 rates from BPA, FERC, or the Ninth
Circuit Court. A stay would have minimized the risk of non-repayment or partial
repayment and of mismatching benefits between past and future consumers. The
opportunity for mitigation of this risk of repayment has passed, and future residential
and small farm customer should not have to suffer for the erroneous WP-02 rates set
by BP A. AP AC recognizes these "intergenerational equity problems
" - "
where one
set of (COU) customers has suffered the loss while another (set) enjoys the
repayment." Id. at p. 86, 11.8-
WP-07-ID-
Page 12
Witness: Lou Ann Westerfield
Does WP AG provide justification for charging compound interest on over-payments
to the IOUs (Id. at p. 49, 11.10-12)?
WP AG fails to support why compound, rather than simple, interest is appropriate, but
rather, presumes an entitlement to compound interest. Compound interest results in a
penalty on a penalty because it assesses interest on both principal and interest.
WP AG' s self-serving, unsupported assertion that compound interest is appropriate in
this case should be rejected. As with the deemer balances as discussed above
compound interest would lead to an unjustifiably punitive result if applied as WP
recommends.
Do the JP 17 Parties explain how the deemer balances could be calculated for the
Lookback period?
No. They offer no explanation of how these calculations could be made, except that
they should be made just as they were "under the 1984 ASCM prior to the REP
settlement." WP-07-JPI7-, p. 38 11.13-16. As discussed above, calculations of
the deemer principal have not occurred since the late 1980s. So the JP 17 Parties
assertion that deemer balances were calculated on a regular basis in some prior time is
false. The only additions to the deemer balance since the late 1980s have been
interest (A vista) or interest and interest on interest (Idaho Power).
How do the JP 17 Parties propose to calculate ASc for the Lookback Analysis?
They state that the IOUs must submit ASC filings for review pursuant to the 1984
ASCM in order to calculate an "accurate" Lookback. Id. at p. 40, 11.9-13. The fact is
that the IOUs did not make ASC filings with BPA from 2002-2008 because of the
WP-07-ID-
Page 13
Witness: Lou Ann Westerfield
administrative burden of the preparation and review of such filings. If the ASC filings
were made now, a long, drawn out review process would ensue that would
umeasonably delay the resolution of this case and would not be any more "accurate
than BPA's use ofFERc Form 1 data for the Lookback Analysis.
Additionally, the JP 17 Parties state that "if a utility is not willing to produce
these filings, there should be a full forfeiture of any REP settlement payments
provided to that entity.Id. at p. 37, 1l.19-20. Given the number of rate change
filings occurring during the Lookback period and the 21 O-day review for each one
under the 1984 ASC Methodology, the JP 17 Parties' view is punitive , if not
Draconian, and would serve no purpose other than to obfuscate the process of
resolving this rate case and moving forward. Thus , I recommend rejecting this
approach.
Do the JP 17 Parties offer any alternatives to the Appendix 1 filings under the 1984
ASC methodology?
Yes, in spite of the finality of the above recommendation, the JP 17 Parties, using
PacifiCorp s Idaho service territory as an example, suggest that "there are several
benchmarks that come to mind to test the reasonableness of this result. . . (1) the
actual rate paid by the residential customers in this jurisdiction; (2) the rate charged to
large power customers in the jurisdiction; and (3) regular reports filed with utility
commissions.Id. at p. 32, 1l.17-30 and p. 32-33. However, using retail residential or
retail industrial rates or reports filed with state commissions for purposes other than
setting retail rates seems just as arbitrary and inappropriate as strict adherence to the
WP-07-ID-
Page 14
Witness: Lou Ann Westerfield
1984 ASC filings is rigid. As the Parties are well aware, state rate case decisions and
the setting of retail rates reflect a myriad of considerations. As with adherence to the
ASC filings under the 1984 methodology, benchmarking is subject to timing and
complexity issues not created by the transparency, timeliness, and availability of
FERC Form 1 data. Thus, I recommend that a benchmarking approach to evaluating
ASCs be rejected.
Does this conclude your testimony?
Yes, it does.
WP-07-ID-
Page 15
Witness: Lou Ann Westerfield