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HomeMy WebLinkAbout20010625Gale Direct.pdfBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF IDAHO POWER ) COMPANY'S INTERIM AND PROSPECTIVE,) HEDGING RESOURCE PLANNING,)CASE NO. IPC-E-01-16 TRANSACTION PRICING, AND IDACORP ) ENERGY SERVICES (IES) AGREEMENT ) ) IDAHO POWER COMPANY DIRECT TESTIMONY OF JOHN R. GALE GALE, DI 1 Idaho Power Company Q.Please state your name and business address.1 A.My name is John R. Gale and my business2 address is 1221 West Idaho Street, Boise, Idaho.3 Q.By whom are you employed and in what4 capacity?5 A.I am employed by Idaho Power Company; as the6 Vice President of Regulatory Affairs.7 Q.Please describe your work experience.8 A.In October 1983, I accepted a position as9 Rate Analyst with Idaho Power Company. In March 1990, I was10 assigned to the Company’s Meridian District Office for one11 year where I held the position of Meridian Manager. In12 March 1991, I was promoted to Manager of Rates. In July13 1997, I was named General Manager of Pricing and Regulatory14 Services. In March of 2001, I was promoted to Vice15 President of Regulatory Affairs. As Vice President of16 Regulatory Affairs, I am responsible for the overall17 coordination and direction of the department, including18 development of jurisdictional revenue requirements and class19 cost-of-service studies, preparation of rate design20 analyses, and administration of tariffs and customer21 contracts. In my current position, I am actively involved22 GALE, DI 2 Idaho Power Company with restructuring activities throughout our service1 territory.2 Q.What is the purpose of your testimony in this3 proceeding?4 A.I will address the Commission's desire to5 more fully review the manner in which Idaho Power Company6 (“Idaho Power” or “the Company”) and IDACORP Energy7 Solutions, LP (“IES”) can conduct business for the benefit8 of Idaho Power's customers on both an interim and9 prospective basis. Additionally, I will speak to Idaho10 Power’s approach to providing resources to meet system loads11 during the near-term time period.12 Q.Please summarize Idaho Power Company’s13 recommendation for the interim rules governing transactions14 between Idaho Power Company and IES.15 A.Until such time as the Idaho Public Utilities16 Commission (“IPUC” or "Commission") makes a final17 determination that the existing rules should be changed,18 Idaho Power believes that the rules governing the conduct of19 transactions between Idaho Power and IES (including transfer20 prices) should be the same rules accepted by the Commission21 in Order No. 28596 issued in Case No. IPC-E-00-13. Idaho22 GALE, DI 3 Idaho Power Company Power believes this approach is consistent with prior1 Commission decisions requiring that practices and rules2 adopted by the Commission remain in effect until changed by3 subsequent IPUC order.4 The Agreement may need to be modified5 slightly to comply with the final order of the Federal6 Energy Regulatory Commission (“FERC”) approving the7 Electricity Supply Management Services Agreement (“the8 Agreement”) that was the subject of IPUC Order No. 28596.9 When the final order is received from FERC, if it is10 acceptable to Idaho Power, it will be filed with the IPUC.11 If any changes to the existing rules are necessitated by the12 FERC order, Idaho Power will make a filing to obtain13 Commission approval for such change.14 Q.Please summarize the principals that Idaho15 Power believes should underlie the rules governing16 transactions between Idaho Power Company and IES.17 A.The rules governing transactions between18 Idaho Power and IES should be designed to achieve (1)19 alignment of risk and reward, (2) sharing of the economic20 and market knowledge benefits of one trading operation, (3)21 protection against affiliate abuse, and (4) energy transfers22 GALE, DI 4 Idaho Power Company at visible, verifiable market prices. I believe that a1 reasonable period of operating experience will demonstrate2 that the existing Electricity Supply Management Services3 Agreement between Idaho Power and IES will meet these4 criteria. A copy of the Agreement is included as Exhibit 15 to my testimony.6 Q.Please describe the existing Electricity7 Supply Management Services Agreement.8 A.Under the business arrangement memorialized9 in the Electricity Supply Management Services Agreement10 submitted to the FERC, the IPUC, and the Oregon Public11 Utility Commission ("OPUC"), IES will purchase surplus power12 from Idaho Power on a daily and real-time basis, and will13 make daily and real-time sales of electricity to Idaho Power14 to meet native load needs. All wholesale transactions15 between Idaho Power and IES will be at market prices. The16 Agreement also provides for IES to serve as a broker for17 Idaho Power transactions, which will be performed on a non-18 exclusive basis.19 Q.Why did Idaho Power and IES develop the20 Agreement?21 A.Idaho Power and IES developed the Agreement22 GALE, DI 5 Idaho Power Company to respond to changes in the competitive wholesale1 electricity market and concerns expressed by Idaho Power's2 customers regarding the allocation of costs between3 operating and non-operating transactions in that market.4 Idaho Power’s goal is to prudently and cost-effectively5 participate in the wholesale electricity market for the6 benefit of the Company's retail customers. Idaho Power7 believes that there are significant cost savings and market8 risk mitigation benefits that are realized by contracting9 with IES to provide electricity marketing and other10 electricity supply management services to Idaho Power. The11 Agreement benefits Idaho Power’s customers by protecting12 them from the risk of speculative transactions while at the13 same time lowering Idaho Power’s administrative costs of14 participating in the market. Pursuant to a stipulation15 previously approved by the IPUC, Idaho Power will flow back16 $2,000,000 per year to reflect these estimated cost savings17 once the Agreement is approved by all appropriate regulatory18 authorities. The Agreement also enables Idaho Power,19 through advice given by IES, to apply greater expertise in20 the wholesale market, resulting in better optimization21 between cost and risk for customers.22 GALE, DI 6 Idaho Power Company This arrangement will protect Idaho Power’s1 retail customers from practices that FERC has characterized2 as "affiliate abuse". All transactions between Idaho Power3 and IES will be priced at market, as determined by published4 market indexes (daily transactions) or transactions with5 non-affiliates (real-time transactions). These market6 prices are not subject to manipulation by Idaho Power or7 IES. Real-time transactions are transactions up to 12 hours8 in duration (usually hourly transactions), while daily9 transactions are 24-hour transactions (usually next day10 transactions). Longer-term transactions may be brokered by11 IES or entered into directly with third parties by Idaho12 Power.13 Q.Please describe the circumstances leading up14 to the Power Supply Management Agreement between Idaho Power15 and IES.16 A.The Agreement is the outgrowth of a number of17 events that Idaho Power has experienced in its wholesale18 marketing activities coupled with the risks associated with19 Idaho Power’s unique generation resource supply mix. One of20 the unique characteristics of Idaho Power is its heavy21 reliance on hydro-based generation.22 GALE, DI 7 Idaho Power Company Q.Why is the Company’s hydro-based generation a1 factor in the evolution of the Agreement?2 A.At one time, virtually all Idaho Power3 generation came from hydroelectric facilities on the Snake4 River. Because of the variations in streamflow conditions5 from year-to-year, the Company became active in the6 Northwest energy markets, buying from others during low7 water years and during the low streamflow periods within8 individual years, while selling its surplus power during9 periods when water was abundant.10 Over the years, the Company added some11 thermal (coal-fired) plants, through joint ownership, to12 complement the hydro facilities. Nevertheless, in a normal13 water year hydro facilities still produce more than 60% of14 the generation on the Idaho Power system. Idaho Power15 continues to buy and sell in short-term markets to balance16 the system’s loads and resources. During the summer months,17 Idaho Power has relied and planned on short-term power18 purchases, rather than installing new generation, to serve19 the peak system loads. While this approach has been viewed20 as a long-term, least-cost solution, there is an added21 element of near-term risk that Idaho Power faces as an22 GALE, DI 8 Idaho Power Company active participant in the wholesale market that many other1 utilities do not face.2 As a hydro-based utility, Idaho Power is3 unique in its exposure to supply risk associated with its4 reliance on generation with an inherently unpredictable fuel5 source -- water. All electric utility companies (including6 Idaho Power) face volume risks associated with economic7 conditions and weather fluctuations. Loads can go up and8 down based upon a robust or sluggish economy. Furthermore,9 extreme temperatures can affect the load volume as well.10 For hydro utilities, there is an extra element of supply11 risk that the utility must manage. The additional risk is12 the uncertainty of the amount of generation available to13 meet load. Water storage is severely limited due to14 reservoir constraints. When the water is not available,15 there is no fuel to run the hydro plant. The fuel16 availability is an important distinction in comparing17 predominately hydro-based utilities and predominately18 thermal-based utilities. This supply risk introduces an19 added element of uncertainty for Idaho Power as a wholesale20 market participant.21 Idaho Power’s hydro resources provide22 GALE, DI 9 Idaho Power Company positive economic impacts to the utility and its customers1 because these plants operate with virtually a zero fuel2 cost. Under normal conditions, the total system generation3 cost for Idaho Power is among the very lowest for investor-4 owned utilities in the United States. As purchased power5 costs become more volatile, they become more important to6 the overall power supply costs of Idaho Power. The Company7 wants to protect its overall low cost status from the8 adverse impacts of high purchased power costs. By9 sheltering Idaho Power Company from the more speculative10 market transactions, the Agreement is designed to reduce the11 risks that Idaho Power faces as a wholesale market12 participant to help ensure that purchased power expenses do13 not upset Idaho Power’s favorable cost situation, to the14 detriment of Idaho Power’s retail customers.15 Q.Please describe the emergence and growth of16 the Company’s trading activities.17 A.The size and complexity of the wholesale18 markets for electricity have increased dramatically in the19 past few years, as has Idaho Power’s participation in those20 markets. In addition, the IPUC has approved a method to21 change Idaho Power’s rates that encourages Idaho Power to22 GALE, DI 10 Idaho Power Company reduce wholesale power purchase costs for its retail1 customers.2 In Idaho, prior to 1993, Idaho Power sold3 power to retail customers at fixed capacity and energy4 charges (that is, charges that were subject to adjustment in5 rate proceedings, but not through the operation of a fuel6 adjustment clause or similar provision). In 1993, following7 several years of drought conditions in which Idaho Power’s8 purchased power expenses substantially exceeded9 expectations, the IPUC approved Idaho Power’s request to add10 a Power Cost Adjustment (“PCA”) to the Company’s Idaho11 retail rate structure. The IPUC and the Company’s Idaho12 retail customers favored this arrangement because it enabled13 those customers to receive the benefit of more favorable14 water conditions in the form of reduced rates. With the15 implementation of the PCA, Idaho Power’s shareholders’ and16 customers’ interests became aligned, because they both17 shared in the savings and costs from operating transactions.18 Historically, Idaho Power’s wholesale19 transactions primarily involved sales of Idaho Power20 resources that were temporarily surplus to Idaho Power’s21 retail customers’ needs, and purchases of generation needed22 GALE, DI 11 Idaho Power Company to meet Idaho Power’s retail customers’ needs. Idaho Power1 refers to such purchases and sales as “operating”2 transactions. Then, in the mid-1990’s, as the wholesale3 power market continued its rapid expansion, Idaho Power4 identified increasing opportunities to engage in more5 speculative off-system transactions that were unrelated to6 the Company’s system resources. Idaho Power refers to such7 purchases and sales as “non-operating” transactions. In8 1998, the Emerging Issues Task Force ("EITF") of the9 Financial Accounting Standards Board ("FASB") issued EITF98-10 10, Accounting for Contracts Involved in Energy Trading and11 Risk Management Activities. EITF98-10 became effective for12 all fiscal quarters beginning with fiscal years that started13 after December 15, 1998. Idaho Power’s simultaneous14 participation in operating and non-operating transactions,15 along with the establishment of accounting and reporting16 standards for energy trading contracts by the Emerging17 Issues Task Force of the Financial Accounting Standards18 Board created the need for Idaho Power to separate the19 transactions for accounting and ratemaking purposes. Idaho20 Power adopted these standards on January 1, 1999.21 Q.What was the accounting and ratemaking result22 GALE, DI 12 Idaho Power Company of adopting these standards?1 A.Since January 1, 1999, transactions related2 to balancing of system load and system resources and3 transactions related to system reliability are classified as4 “operating” and remain on settlement accounting. These5 transactions are recorded and maintained in an “operating”6 trading book that is separated from other trading7 transactions. Operating transactions meet the “energy8 contracts” definition of the Emerging Issues Task Force9 consensus opinion because they are expected to settle10 physically. Operating transactions continue to be booked in11 FERC Accounts 447 or 555 and are thus included for PCA12 reporting purposes.13 Transactions not related to the balancing of14 the system load and resources are classified as “non-15 operating” or energy trading contracts and are required to16 be accounted for using mark-to-market, or fair value17 accounting. These transactions are maintained in “non-18 operating” trading books that are differentiated from one19 another by time periods; i.e., transactions that settle20 outside the “prompt” month, transactions that settle within21 the prompt month or sooner, and daily or real time22 GALE, DI 13 Idaho Power Company transactions. The prompt month is the month following the1 current month. Non-operating transactions meet the “energy2 trading contracts” definition of the Emerging Issues Task3 Force consensus opinion and beginning in January 1, 19994 have been booked in FERC Account 421 and are thus excluded5 for PCA reporting purposes.6 Purchases or sales are typically classified7 as operating or non-operating at the time of the8 transaction. As transactions close in real time, the9 operating system book needs to balance against the physical10 requirements of the loads and resources. Beginning one11 month prior to scheduled settlement, transactions between12 the operating and non-operating books occur at the13 appropriate market settlement price in order to start14 bringing the system into balance.15 In Idaho Power’s 1999-2000 PCA case (Case No.16 IPC-E-99-3), some of Idaho Power’s larger customers17 expressed concern regarding Idaho Power’s operating and non-18 operating transactions and whether Idaho Power’s expenses19 and capital costs were being properly allocated between20 operating and non-operating transactions. In response to21 these concerns, the IPUC issued Order No. 28049 directing22 GALE, DI 14 Idaho Power Company the parties to determine how best to address the issues1 raised by the customers. Subsequently, on February 14,2 2000, the IPUC Commission Staff filed a report addressing3 some of the issues raised by the customers in the 1999-20004 PCA case. The IPUC acknowledged receipt of that report in5 Idaho Power’s 2000-2001 PCA case and encouraged the parties6 to address the issues further.7 In further response to the concerns expressed8 in the above-cited cases, Idaho Power is moving its non-9 operating transactions into a separate entity. IES has been10 chosen as that entity. IES rents office space from someone11 other than Idaho Power, has its own employees, and is12 managed and operated independently from Idaho Power. Moving13 non-operating transactions to IES will substantially reduce14 the levels of support services currently provided by Idaho15 Power and will provide a clearer line of demarcation between16 the operating and non-operating electric marketing17 businesses of IDACORP, Inc. Upon final implementation of18 the Agreement, Idaho Power as an entity, will no longer19 participate in non-operating transactions, and the more20 speculative transactions that are currently non-operating21 transactions will be undertaken exclusively by a separate22 GALE, DI 15 Idaho Power Company corporate entity, IES. Idaho Power adopted this structure1 to meet the concerns expressed by Idaho Power’s customers2 and the IPUC in the 1998-1999, 1999-2000, and 2000-2001 PCA3 cases.4 Q.How is the wholesale electric market of today5 different from the one of yesteryear?6 A.The wholesale market is becoming more7 complex. The decreased regulatory oversight and the8 increased volume of wholesale transactions between9 suppliers, marketers and consumers of bulk electricity has10 created an increasing demand for market participants to11 maintain a high level of market intelligence and12 understanding of market movements. The increasing13 availability of sophisticated financial instruments for14 managing price volatility risk for electricity transactions15 has further stimulated the burgeoning wholesale market for16 electricity. Regardless of the status of restructuring of17 the retail electric utility industry in the state of Idaho,18 this expanding wholesale market will continue to19 significantly affect the way Idaho Power operates in this20 changing environment.21 While the expanding wholesale market has the22 GALE, DI 16 Idaho Power Company potential to provide opportunities for increased price1 efficiency resulting from a larger and more diverse group of2 market participants and products, there are certainly3 greater costs and risks associated with managing power4 supplies within this new environment. The Agreement5 addresses these concerns by increasing Idaho Power’s access6 to expertise in the wholesale market, while protecting Idaho7 Power’s retail customers from speculative trading risks.8 Idaho Power believes that there are significant cost savings9 and market risk mitigation benefits that can be realized by10 this arrangement, which I describe in greater detail later11 in my testimony.12 Q.What functions or activities are remaining13 with Idaho Power?14 A.The Agreement alters the manner in which15 Idaho Power will transact in the wholesale market, but does16 not alter Idaho Power’s generation and reliability17 obligations. Under the Agreement, Idaho Power continues to18 own, operate and maintain its system resources and be19 responsible for system reliability. Idaho Power continues20 to dispatch system resources to match generation and load21 within the Idaho Power control area. The Agreement does not22 GALE, DI 17 Idaho Power Company modify Idaho Power’s commitment or ability to manage and1 control its system resources in a manner that will provide2 Idaho Power’s customers with access to all available3 capacity and energy from Idaho Power’s system resources on a4 first-priority basis. Idaho Power will comply with its5 FERC-approved Code of Conduct in providing any non-power6 goods and services to IES, as well as any additional7 requirements governing transactions between affiliates that8 the state commissions may find to be appropriate.9 Q.What functions are moving to IES?10 A.Under the Agreement, IES provides wholesale11 marketing services to Idaho Power. IES and Idaho Power12 enter into daily and real-time purchases and sales, and IES13 serves as a non-exclusive broker for longer-term14 transactions (such transactions are entered into directly15 with third parties). Transactions between the two entities16 occur only when Idaho Power determines that such17 transactions would be beneficial for Idaho Power and its18 customers. This arrangement enables Idaho Power to balance19 its system load and resources. In addition, IES buys power20 from Idaho Power at market prices when Idaho Power21 determines that Idaho Power has surplus power for sale and22 GALE, DI 18 Idaho Power Company that such sales would be beneficial to Idaho Power and its1 customers. All of the transactions between Idaho Power and2 IES are at market prices established in a manner that3 prevents either entity from benefiting at the expense of the4 other. IES obtains the transmission and ancillary services5 that are necessary to deliver Idaho Power’s purchases and6 sales to the agreed-upon destination. IES advises Idaho7 Power regarding desirable transactions to enter into, and8 serves as a non-exclusive broker for purchases and sales9 with a duration that exceeds one day. IES complies with the10 FERC’s Code of Conduct for its brokering activities.11 In addition to the power purchases and sales12 described previously, the Agreement states that IES will13 provide Idaho Power various other non-power goods and14 services. IES advises Idaho Power regarding scheduling,15 hedging transactions, and risk management activities to16 minimize price volatility, among other things. In this17 role, IES among other things, confirms purchases and sales,18 administers market-based contracts, and coordinates19 scheduling of energy transactions in adherence with20 transaction protocols. IES also provides finance and21 accounting support and counter-party credit analysis for22 GALE, DI 19 Idaho Power Company power marketing activities. Credit analysis has become an1 increasingly important activity for wholesale market2 participants, and requires the application of substantial3 expertise and resources to be done effectively. Idaho Power4 complies with the FERC’s Code of Conduct and the Statement5 of Policy and Code of Conduct accepted by the IPUC on an6 interim basis in Order No. 28596 in purchasing these and7 other non-power goods and services from IES.8 Q.How do Idaho Power’s customers benefit under9 the Agreement with IES?10 A.By entering into the Agreement with IES,11 Idaho Power believes that it will be able to lower its12 expenses, streamline staffing requirements, reduce the risks13 associated with power market volatility, and maintain its14 existing high level of system operating efficiency and15 reliability. These results will benefit Idaho Power’s16 retail customers.17 Possibly the greatest benefit to Idaho18 Power’s customers, and one of the central reasons why Idaho19 Power developed this proposal, is the realignment of risk20 and reward under the proposed organization. Recent events21 have demonstrated that today’s more volatile energy markets22 GALE, DI 20 Idaho Power Company can present significant risks for utilities and potentially1 for their customers. Under the Agreement, speculative2 transactions will be performed by IES for its own account3 rather than by Idaho Power. This assigns to IES, rather4 than to Idaho Power, the potential risks and rewards from5 these transactions. This arrangement benefits Idaho Power’s6 retail customers, because they are sheltered from the7 speculative market transactions of the affiliate IES. In8 addition, safeguards are being established to prevent9 speculation on behalf of the utility. System transactions10 will be directed toward balancing loads and resources while11 considering cost, reliability and risk. Idaho Power’s12 Oversight Manager will approve system transactions. The13 Oversight Manger’s decisions will be reviewed by the14 Corporate Risk Management Committee and subject to at least15 annual review by the IPUC Staff.16 While retail customers lose the potential17 rewards of speculative transactions under this arrangement,18 this is more than offset by the reduction in risk from these19 transactions. As previously mentioned, Idaho Power has some20 of the lowest retail rates in the Nation, but experiences21 unique risks in participating in the wholesale electricity22 GALE, DI 21 Idaho Power Company market. By protecting retail customers from the additional1 risks of speculative transactions, Idaho Power can better2 ensure that its purchased power expenses can be managed3 while maintaining a favorable rate environment for its4 customers.5 Retail customers will enjoy the benefits of6 the market expertise that a full scale trading operation has7 to offer. The benefit manifests itself in the market advice8 that can be offered in developing the operating plans for9 the system and in the recommendations regarding potential10 system hedging transactions on behalf of the system. IES11 will be operating in virtually all of the Western markets12 for virtually all time frames. All of the market13 information gleaned during those operations will be14 available to Idaho Power for decision-making purposes. In15 addition, Idaho Power will obtain increased access to people16 familiar with sophisticated financial instruments intended17 to reduce risk and mitigate price volatility.18 IES will assist Idaho Power in managing its19 system resources in an optimum manner. Dispatch decisions20 can be made using the best available market information.21 The information assists day-to-day operations, as well as22 GALE, DI 22 Idaho Power Company longer-term decisions related to scheduled maintenance,1 river operations, and customer program coordination.2 Customers further will benefit from the3 clearer separation of the non-power costs between Idaho4 Power and IES through organizational and reporting changes5 as well as the physical location move. Allocations will be6 replaced with verifiable direct cost assignments. These7 direct cost assignments will be in compliance with8 applicable IPUC and FERC Code of Conduct requirements.9 Finally, Idaho Power’s customers will benefit10 from overall reduced costs that will flow through directly11 into jurisdictional revenue requirement determinations. The12 cost reduction is attributable to the ability to serve two13 entities with one trading operation instead of two. Both14 entities benefit by sharing the costs instead of replicating15 the corresponding organization and costs within each. As16 discussed above, Idaho Power has agreed to flow through to17 its Idaho retail customers $2,000,000/year in cost savings18 once the Agreement is approved by the necessary regulatory19 authorities, allowing these cost savings to occur.20 Q.What protections are in place to prevent21 affiliate abuse?22 GALE, DI 23 Idaho Power Company A.Idaho Power recognizes that the IPUC and1 interested retail customers are concerned that inter-2 affiliate transactions do not create the opportunity for3 those affiliates to shift benefits from utility customers to4 shareholders. The Agreement recognizes and addresses these5 affiliate abuse concerns and includes measures that prevent6 affiliate abuse from occurring.7 The market price to which Idaho Power and IES8 will tie the transaction price is an objective standard for9 the pricing of electricity that is not subject to10 manipulation by Idaho Power or IES.11 For daily transactions, the market price will12 be determined based on published market indexes. The13 Agreement specifically references the Dow Jones Mid-Columbia14 Electricity Price Index (“Mid-C”) and the Dow Jones Palo15 Verde Price Index (“PV”). The Mid-C and PV Indexes are16 reliable and verifiable sources indicative of the prevailing17 market price, and are appropriate Indexes to use to18 determine the market price for daily electricity19 transactions. Mid-C and PV are two of the three major cash20 markets in the west. Mid-C is an active trading hub, with21 trading volumes comparable to those at PV. The Mid-C Index22 GALE, DI 24 Idaho Power Company is widely used for indexed wholesale and retail1 transactions. For example, Idaho Power references the Mid-C2 Index for several of its retail contracts and tariffs,3 including non-firm prices for purchases from Qualifying4 Facilities. Exhibits 2 and 3 explain the Mid-C and PV Index5 categories that Dow Jones publishes, and the methodology6 that Dow Jones uses to calculate these indexes. As shown in7 that discussion, both the indexes and methodologies are8 comparable. For both indexes, prices are published daily9 based on actual transactions.10 For real-time transactions, Idaho Power will11 determine the market price based on the weighted average of12 the real-time prices at which IES bought and sold power to13 non-affiliates. The average of these transactions is14 indicative of the market price at the time, and its use15 provides appropriate protection against affiliate abuse.16 All energy transactions (buy or sell) that17 are not real-time or daily will be bilateral agreements with18 third parties and may be or may not be brokered by IES.19 Q.Please provide an example to illustrate the20 transfer pricing in use.21 A.If Idaho Power desired to purchase or sell22 GALE, DI 25 Idaho Power Company power in June 2002 for the month of July 2002 (e.g., to meet1 expected peak loads), it would enter into a transaction2 directly with a third party or parties, or use IES’3 brokering services to arrange such a third party transaction4 if warranted. If, during July 2002, Idaho Power desired to5 enter into a transaction for a particular day (e.g., to meet6 a sudden load increase due to hot weather), it would7 transact with IES, and the price for such transaction8 between Idaho Power and IES would be based on the Mid-C or9 PV index as appropriate. If, during a particular day in10 July 2002, Idaho Power desired to enter into a real-time11 transaction (e.g., to sell during off-peak hours power12 acquired in a daily transaction to meet on-peak needs), it13 would transact with IES, and the price for such transactions14 between Idaho Power and IES would be based on the weighted15 average of the real-time prices at which IES bought and sold16 power to non-affiliates.17 To further protect against potential18 affiliate abuse, the Agreement provides for Idaho Power to19 designate an Oversight Manager to ensure that Idaho Power’s20 interests are protected. Idaho Power’s Oversight Manager21 will be an officer or senior manager in the Company, and22 GALE, DI 26 Idaho Power Company will report directly to the Office of the Chief Executive1 Officer and to Idaho Power’s Risk Management Committee. The2 Idaho Power Oversight Manager will be responsible for3 coordinating with IES and providing a single decision-making4 point from Idaho Power concerning IES’s provision of the5 power marketing and system management services.6 In addition to engaging in inter-affiliate7 purchases and sales, IES will provide brokering services to8 Idaho Power. These services will be provided in accordance9 with FERC’s Code of Conduct brokering rules (including the10 requirement that the brokering arrangement between IES and11 Idaho Power be non-exclusive), and thus do not present the12 potential for affiliate abuse. Finally, Idaho Power and IES13 will engage in the purchase and sale of non-power goods and14 services, as described above. These services will also be15 provided in accordance with FERC’s Code of Conduct rules for16 non-power goods and services. The combination of the FERC17 Code of Conduct rules and the outcome of the pending IPUC18 docket in codes of conduct should provide adequate comfort19 to the Commission that affiliate abuse is adequately20 mitigated.21 Q.Please describe Idaho Power's resource22 GALE, DI 27 Idaho Power Company planning process, beginning with long-term planning and1 ending with the "next-hour" decisions.2 A.Idaho Power plans to serve its loads under3 the general guidance of its Integrated Resource Plan4 ("IRP"). The last such plan was filed with the Idaho Public5 Utilities Commission and the Oregon Public Utility6 Commission in June 2000. It was acknowledged by the IPUC in7 December 2000. The IRP is a long term (10 years) look at8 load and resources and emphasizes median water conditions9 for planning purposes. As might be expected, because of the10 median water assumption, the 2000 IRP necessarily relies11 more heavily on market purchases to provide energy in dry12 years than a resource plan that acquires system resources13 based upon critical water conditions.14 Q.Please explain in more detail how planning15 for the near-term time period takes place.16 A.Under the Company's existing IRP, the Company17 plans to cover its near-term energy deficiencies through18 short-term purchases in the wholesale market. Other19 alternatives to market purchases such as demand-side20 initiatives or supply-side options are evaluated against21 market purchases on an economic basis. Additionally, near-22 GALE, DI 28 Idaho Power Company to-mid term market purchases are evaluated by the Company's1 Risk Management Committee as to the timing of such2 purchases. Typically, Idaho Power Company buys to meet3 expected system requirements and does not take speculative4 positions in the market.5 The Company's planning process in the short-term is6 complicated by the dominance of hydro generation in the7 resource base. Until the snow packs are known for the year,8 it is very difficult to determine the extent and duration of9 the Company's system deficiencies.10 Q.How does the assumption regarding water11 availability impact the planning process?12 A.Idaho Power has historically planned on a13 median water condition. This means water availability is14 assumed to be the equivalent of the middle water condition15 among the historical group of water conditions. Planning on16 median water means that the Company is more dependent on17 market purchases for supply in low water years than it would18 be if its planning assumption was based on more critical19 water conditions. If the Company planned on less than20 median water conditions, it would typically add resources21 sooner than it would under median water planning and would22 GALE, DI 29 Idaho Power Company have more capacity available on an ongoing basis. Of1 course, the additional capacity adds additional costs to the2 Company's base rates. The trade-off for customers under3 median water planning is increasing base rates on an ongoing4 basis through the PCA to mitigate rate spikes during poor5 water years.6 Q.How would you propose to evaluate whether or7 not it is time to change the water assumption for planning8 purposes?9 A.Idaho Power believes that the Company’s 200210 IRP should address the issue in detail.11 Q.Does this conclude your testimony?12 A.Yes, it does.13