ipce01.3jhtckhrl.doc

JOHN HAMMOND
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5470

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 APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO ACQUIRE REDUCTIONS IN ELECTRICAL DEMAND AND ASSOCIATED CONSUMPTION OF ELECTRICAL ENERGY FROM IRRIGATION CUSTOMERS. )
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CASE NO. IPC-E-01-3

COMMENTS OF THE COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission (“Commission”), by and through its Attorney of record, John Hammond, Deputy Attorney General, and in response to Order No. 28647 issued on February 20, 2001, Order No. 28660 issued on March 5, 2001 and Idaho Power Company’s (“Idaho Power”) Request for Authority to Accept Bids, filed with the Commission on March 7, 2001 submits the following comments.
BACKGROUND
On February 7, 2001, Idaho Power Company filed an Application seeking Commission authorization to conduct its Irrigation Buy-Back Program (“Program”) to solicit competitive offers from its irrigation customers to reduce their electrical demand and associated consumption of electrical energy during the 2001 growing season. A preliminary hearing was held on this Application on February 14, 2001, after which the Commission issued Order No. 28647 approving Idaho Power’s Program in concept so that the Company could solicit competitive bids from irrigation customers. However, the Commission reserved final approval on the Program so that it could gather and receive information to determine whether it would provide benefits to Idaho ratepayers. Accordingly, the Commission ordered Idaho Power to make a subsequent filing on or before March 9, 2001 requesting authorization to proceed with its Program. Order No. 28647 at 7. In an effort to obtain opinions from interested persons and parties about this Program the Commission also accepted written comments.
On March 7, 2001 Idaho Power filed its Request for Authority to Accept Bids (“Request”) as required by Order No. 28647. In this filing Idaho Power states that it received approximately 900 bids from qualified irrigation customers, taking service under Schedule 24, offering to sell the Company reductions in energy consumption during the 2001 irrigation season. Idaho Power proposes to accept 364 bids, which have an estimated average price of 14.2¢ per kilowatt hour (“kWh”). The maximum bid price Idaho Power will accept is 15¢ per kWh. Idaho Power states that the load reduction associated with accepted bids represents approximately 409,973,664 kWh or 205 average Megawatts (“MW”) over a 2000-hour irrigation season. The Company also states that the total number of acres to be taken out of production as indicated by accepted bids would be 136,300. See Attachment II to Request.
The Company estimates that once the reduced revenue impact is added, its purchased power expense for Power Cost Adjustment (“PCA”) purposes will be approximately $79.5 million in total cost or 19.4¢ per kWh. When compared to forward market prices for the months of April through October the Company states that this represents a savings of approximately 11.1¢ per kWh for energy reductions offered through this Program.
In Attachment I Idaho Power has provided its estimates of the current monthly energy prices in the forward market for the 2001 season. The Company also has submitted a confidential report, which it contends, shows what the projected loads and resources by month will be during the irrigation season with and without the Program.
Idaho Power states that a Program which will successfully reduce the Company’s purchase power costs will still result in it expending substantial sums in payments to successful bidding irrigation customers. The Company also states that as a result of large load reductions on the part of irrigators it will experience substantial lost revenues. Accordingly, the Company requests recovery of both of these costs. The Company believes that recovery of lost revenues is critical to the Company’s willingness to proceed with this Program as without them it alleges it will incur a loss. Alternatively, if allowed full recovery of its lost revenues the Company believes it will not only be made whole but will actually receive a net benefit. Accordingly, the Company requests authorization to recover lost revenues.
Based on the information described above the Company requests that the Commission approve its request to accept bids from its irrigation customers in order to implement its Program.
COMMISSION STAFF ANALYSIS
In its Request Idaho Power has included the information required by the Commission in order to more fully evaluate this Program and its associated impacts. See Order No. 28647 at 6-7. Staff has reviewed this information and makes the following recommendations.
1. Purchase Price
The proposed Irrigation Buy-Back Program is one of several options Idaho Power has proposed to use to obtain supply or reduce load. These options which include Commercial and Industrial buy-back programs, diesel generators, time of day metering, natural gas turbines and market purchases have the potential of contributing to the elimination of any energy deficit that the Company may experience this coming summer. All of these options have different energy characteristics and costs ranging from about 10¢ per kWh to over 30¢ per kWh. The actual cost, timing and quantity of energy that can be obtained from these options is difficult to predict and, as in the case of this Program, is not fully known until implemented. Even now, the exact timing of energy delivered under this Program is not known.
The Company states that the 19.4¢ per kWh paid for energy under this Program, including lost revenues, represents a discount of approximately 11.1¢ per kWh when compared to forward market prices. When compared to the other available resource options, the Company believes the price paid for energy under this Program is cost effective. Absent more specific information regarding the characteristics and mix of resource options planned and implemented by the Company, Staff is unable to determine the most appropriate price to pay irrigators for energy purchased under this Program. The price proposed by the Company is certainly less than forward market prices and appears to be within a reasonable range when compared to other resource options.
Staff believes that it is Idaho Power’s responsibility to base its resource acquisition decisions on the best information available to integrate options and minimize total costs. The current Power Cost Adjustment ("PCA") mechanism requires Idaho Power to share above normal power supply costs thereby providing the Company incentive to make the most cost effective decisions possible. Nevertheless, Staff believes that the Commission should continue to review the individual resource acquisition decisions of the Company based on information and alternatives available at the time the decisions were made. It will be up to the Company to demonstrate that costs resulting from its resource acquisition activities were prudently incurred. After such review, Staff would support passing approved Program costs through the Company’s PCA.
2. Program costs and lost revenues
Idaho Power requests Commission authorization to recover two costs associated with this Program. They are costs the Company incurs to buy-back energy from irrigators and the lost revenues resulting from reduced energy sales to Program participants. Staff estimates that the cost of this Program is approximately $58.2 million without inclusion of any lost revenues. Including 100% of lost revenues as the Company has requested, increases the costs of the Program to approximately $79.5 million.
Staff believes that the money paid to irrigators, net of the penalties paid to the Company under the Program should be passed through the Company’s PCA mechanism like any other power supply cost. Likewise, known and measurable Program costs should also be shared based on a 90% pass through to ratepayers with the Company’s shareholders absorbing the remaining 10%.
Staff is aware that in several previous cases involving energy conservation programs the Commission has not allowed utilities to recover lost revenues. See e.g., Case No. GNR-E-89-2,

Order No. 22758; Case No. IPC-E-89-6, Order No. 22478; Case No. WWP-G-92-1, Order No. 24417. However, the Commission has suggested that under the right circumstances consideration of lost revenue recovery might be appropriate. See Final Order No. 22758 at 5. Staff believes that this Program presents the right circumstances. First, this case is different than traditional demand side management (“DSM”) programs because the energy savings associated with this Program are more easily quantified as each irrigator has bid to forego consuming a certain amount of kWh at a set price. Furthermore, the energy reduction occurs during a single year and would not be subject to test year true up in a general rate case as would long term reductions associated with traditional DSM programs. These factors distinguish the present case from those cited above. Staff also believes that the Commission should consider lost revenue recovery in this case because the situation that exists today is significantly different than that which existed when the cases cited above were decided. Presently, prices for power on the wholesale market are at unprecedented levels and water levels throughout the State are extremely low creating the likelihood that Idaho Power will incur costs substantially above normal to purchase power this season. Accordingly, Staff believes that the Commission must make certain that the Company is not penalized for pursuing creative and cost effective alternatives to meet its energy commitments.
In the Company’s Request, Attachment III provides a hypothetical example of the impacts on the Company with and without lost revenue recovery. The Company contends that without lost revenue recovery it would experience a $1,837.40 loss if it acquired a reduction from irrigators equaling 100 MWh at a price of $ 120 a MWh. That same Attachment shows that with lost revenue recovery the Company would be better off by $1,284.70.
While the Staff does not necessarily disagree with the methodology used to estimate the relative revenue impact of the Program, its does not agree with the Company’s lost revenue proposal. Using the format presented by Idaho Power in Attachment III Staff has also prepared a worksheet showing the projected impacts on the Company under this Program with and without recovery of lost revenues. Staff multiplied the total expected energy buy back of 409,974 MWh by the average buy-back rate proposed by the Company of $142 per MWh. This is then compared to the costs of buying this same amount of energy at the forward market price of $305 per MWh. Staff’s calculations, which are shown in Attachment A, show that with the Program, the Company’s power supply costs can be reduced by approximately $67,000,000. Using the Company’s assumptions with these numbers, Staff believes that the Company would suffer a loss of roughly $8,200,000 without lost revenue recovery. Staff also estimates that the Company would profit by approximately $4,500,000 if it is allowed full recovery of lost revenues. Based on these calculations Staff agrees that at least some revenue will be lost by Idaho Power and should be subject to recovery. Failure to allow recovery could cause the Company to be less inclined to continue with this Program or others like it in the future. The Commission has recognized this reality in Final Order No. 22758 from In the Matter of the Investigation Into the Regulatory Treatment of Lost Revenue Resulting From Conservation Programs, Case No. GNR-E-89-2 where it stated that “Lost revenue from successful conservation programs represents a potential damper on utility investment in conservation programs.” In this case Staff believes that the Commission should allow the Company to recover at least a portion of its lost revenues.
Although Staff believes that the Company should be allowed to recover a portion of its lost revenues it does not believe that the Company should be enriched. Allowing recovery of at least some lost revenue will make the Company no worse off with the irrigation program than it would have been without it. On the other hand recovery should be limited to an amount that would not leave the Company better off. Staff recognizes that the Company may not agree with this proposal. However, regardless of the lost revenue recovery approved if any, the Company has the responsibility as a public utility to keep charges made for the services it provides “just and reasonable.” Idaho Code § 61-301. This responsibility in combination with the current market situation make it clear that the Company should emphasize the development and implementation of programs that reduce power supply cost because failure to do so could be deemed imprudent. Staff believes its view on this matter is consistent with the Commission’s decision in Case Nos. WWP-E-92-1 and WWP-G-92-1, Order No. 24417 where it stated:
The Commission is unconvinced that “Lost Margin” constitutes the significant
barrier or disincentive to DSM implementation. Without recovery of lost margin
the Company states that it will not implement DSM. It seems the Company
believes that it is under no obligation to provide DSM. In taking this position,
the Company may be acting at its peril. Cost-effective demand-side management
resources are generally also least-cost resources and they are of significant value to
the Company, to its shareholders, to its customers and to the general community.
To not acquire such resources might constitute imprudence in the legal meaning of
the word. We expect utilities to operate effectively and efficiently in the long-term
best interests of their shareholders and customers.

Order No. 24417 at 16.
A secondary issue relates to the definition and quantification of lost revenue. The Commission in Order No 22758 stated that “The ‘revenue loss’ under discussion here is that which can be attributed to programmatic conservation efforts, not declining sales due to business fluctuations[.]” Staff believes that there is uncertainty in measuring energy reduction due solely to this Program. It is quite possible that some irrigators would not have farmed at all or would have switched to a crop that required less water even if this Program had not been offered. Energy use may also be reduced if the pumping season is shortened due to lack of water. In short the effect of “free riders” tends to reduce energy consumption due to economics or weather and results in overstated energy savings from this Program. Therefore, Staff believes that any calculation of lost revenues should be reduced to account for these factors.
The issue of lost revenues is further complicated by the Company’s presumption that there is an entitlement to the projected sales that might have occurred without the Program. The projected volume of sales most certainly includes some sales due to growth. To the extent that growth in any customer class can be offset with this or any other energy buy-back programs that are more cost effective than market purchases, the Company’s liability is reduced. Staff argues that to the extent energy associated with growth is offset by this Program the Company is not entitled to recovery of the associated revenues through a lost revenue adjustment.
Although Staff believes that a precise quantification of the effect these factors would have on lost revenue would be difficult to calculate, we believe that these issues provide further justification for allowing only a portion of the lost revenue to be recovered. Staff believes the proper recovery is an amount that would make the Company revenue neutral. By taking the total eligible energy at the end of the Program season along with the average buy-back rate, the amount of revenue recovery that would make the Company revenue neutral can be calculated. Staff has estimated that the lost revenue adjustment would be reduced by $5.1 million with this approach.
In conclusion Staff believes that there should be no disincentives for the Company to secure the least cost power supply options. At the same time they should not be enriched for doing what would be expected to minimize the economic crisis on its customers. The amount of lost revenue that would give the Company zero benefit should be calculated at the conclusion of the Program this fall. This reduced amount should then be filed with Staff for review prior to passing it through the PCA. Furthermore, Staff supports the review of these costs as part of the PCA. Staff also recommends that Idaho Power record the purchase cost paid to irrigators and any calculated lost revenue in separate Purchased Power subaccounts. The separate subaccount detail with all supporting documentation should be such that the costs for the buy-back program and any lost revenue amounts will be easily identified for audit. The PCA filing should also include a separate line to identify these costs.
3. Secondary Economic Effects
One of the Commissions stated reasons for this intermediate review of the Company’s irrigation buy-back proposal prior to bid acceptance was to allow assessment of the secondary impacts on rural economies associated with this Program. Attachment II to Idaho Power’s Request contains data gathered from accepted bids. It shows that at a maximum bid price of 15¢ per kWh, 136,300 irrigated acres will be taken out of production during this irrigation season. This Attachment also breaks these 136,300 acres down between counties and shows the percentage of the total number of acres per county that will be taken out of production. A review of this information shows the greatest impact to be in Elmore County where 29.3% of the irrigated land would be removed from production if the Company’s recommendation to accept bids up to and including 15¢ kWh were accepted. Staff calculates that Program participants in this County will receive $12.2 million in payments from Idaho Power, or $457.00 an acre, to reduce their energy consumption. Elmore County is the only county where more than 10% of the irrigated acreage would be removed from production. Although 29.3% is a very significant amount of the irrigated acres in the County, Staff recommends that all kWh, regardless of County, that are bid into the Program and that are at or below the accepted bid price be accepted.
4. Interest on Holdback Amounts
The Company’s Program proposes that 25% of the monthly payments due irrigators be held back until the Program ends in November to provide for penalties that the irrigators could owe at the end of the season if they fall more than 5% short of the kWh savings they bid. Staff recommends that the Company pay interest on this hold back in the amount of 6% APR. Staff believes that this is a fair amount for the Company to pay irrigators for the use of their money as it is consistent with the interest rate paid on customer deposits. Staff further recommends that all interest amounts should be paid in November when the Program is closed out.
SUMMARY
After completing a careful review and analysis of Idaho Power’s Request Staff recommends that the Commission approve the Company’s Irrigation Buy-Back Program.
Staff finds that the maximum price proposed by the Company is reasonable when compared to other resource options described by the Company. Should the Company ultimately pay more for energy this summer than what it has proposed to pay under this program, it should be prepared to justify its actions. Staff also believes that the Company should be allowed to pass payments made to irrigators under this Program through its PCA mechanism.
Staff also recommends that the Company should be allowed to recover the amount of lost revenue that would make the Company revenue neutral. This amount should also be allowed to pass through the PCA. However, Staff recommends that prior to passing these costs through the PCA mechanism, the parties to the extent possible should agree on the amount that makes the Company revenue neutral and provide this information to the Commission for review.
Staff also recommends that Idaho Power record the purchase cost paid to irrigators and any calculated lost revenue in separate Purchased Power subaccounts. The separate subaccount detail with all supporting documentation should be such that the costs for the buy-back program and any lost revenue amounts will be easily identified for audit. The PCA filing should also include a separate line to identify these costs.
Staff also recommends that the Company pay interest on the 25% of the monthly payment due irrigators that is held back at an interest rate of 6% APR.
Staff further recommends that the Commission continue to review the individual resource acquisition decisions of the Company based on the information and alternatives at the time the decisions were made. Accordingly, Staff believes that it should be up to the Company to demonstrate that costs and lost revenues resulting from its resource acquisition activities were prudently incurred.

Dated at Boise, Idaho, this day of March 2001.

________________________
John Hammond Deputy Attorney General

Technical Staff: Randy Lobb
Terri Carlock
Keith Hessing
David Schunke

JH:TC:KH:DESgdk:i:umisc/comments/ipce01.3jhtckh
The Company arrived at this maximum price after reviewing its expectations of all of its load reduction programs, supply resources and market purchases. The Company states when the reduced revenue component of 5.2¢ per kWh is added to the maximum purchase price of 15¢ per kWh the total PCA cost is 20.2¢ per kWh.
Attachment II to Idaho Power’s Request breaks down these 136,300 acres between counties and also shows the percentage of the total number of acres per county that will be taken out of production.
See Case Nos. IPC-E-01-04 (Energy Buy-Back Temporary Program for industrial and large commercial customers, Tariff Schedule 22) & IPC-E-01-06 (Irrigation Service, Optimal Time-Of-Use, Pilot Program).
In regards to penalties the “Liquidated Damages” section of Idaho Power’s Requests for Proposals from its Irrigation Customers to Reduce Consumption of Electrical Energy (“RFP”)states:

Idaho Power and Bidder agree that if Bidder fails to supply at
least 95% of the Offered Energy Reduction amount, Bidder will pay Idaho
Power, as liquidated damages, an amount equal to 200% of the bid price
in the accepted offer multiplied by the amount of energy reduction which is
less than 95% of the Offered Energy Reduction amount.

RFP at p.12.
It is only because of the PCA that the Company can find itself better off purchasing power at $.30 and selling it at $.05 instead of buying back that power for $.14.
Staff arrived at the revenue per acre by dividing $12.2 million by 26,694 the total amount of acreage to be taken out of production in Elmore County.

STAFF COMMENTS 3 MARCH 12, 2001