20040319Tier One Violation Report.pdf

IDAHO POWER COMPANY
O. BOX 70
BOISE, IDAHO 83707
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BETSY GAL TNEY
Regulatory Affairs Representative
Pricing & Regulatory Services
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FAX [phone]
MAIL bqaltnevaD.idahopower.com
March 18, 2004
Ms. Jean Jewell
Commission Secretary
472 West Washington
PO Box 83720
Boise, Idaho 83720-0074
RE:Case No. IPC-01-
Tier One Violations
Dear Ms. Jewell:
provision of the Stipulation in Case No. IPC-01-, which was approved by the
Commission in Order No. 29102, provides that Idaho Power will advise the Commission , Commission
Staff and CAG of any Tier One System Risk Limit violations and describe the actions the Company
has taken to address such violations. The Company has previously discussed Tier One violations with
the Commission Staff and the CAG and is now providing the following report to the Commission.
Recently the Company has experienced breeches of the System Risk Limits. The System
Risk Limit is currently set at $100 million. (See attached worksheets , which highlight breeches of the
System Risk Limit and the actions taken by the RMC to alleviate or correct breech.) These breeches
have occurred for multiple reasons with eroding hydro conditions and reduced thermal production
being the main drivers for the 2003-2004 PCA Year breech and adverse power markets movements
and continual reduction in the hydro availability forecasts being the main drivers for the 2004-2005
PCA Year breech. Breeches of the System Risk Limit have been addressed by the RMC in each
instance. Based on the cause of the breech the RMC has decided to let the Tier One violation stand
approve the execution of purchase orders to completely eliminate the Tier One violation or approve the
execution of purchase orders to reduce the upward pressure on the Tier One Limit but not completely
correct the breech. The rational for these decisions is highlighted in the appropriate RMC meeting
minutes. As the minutes reflect the Company was continually aware that in situations where it was
possible to cure or reduce the System Risk Limit violation through purchases to cover deficits under
the low water/high-price case scenario, such corrective measures would make the Company
significantly long under the expected case--an imprudent action.
The continual breech of the System Risk Limit and the fact that the breech did not necessarily
correlate to a significant rise in the PCA deferral balance called into question the efficacy of the Tier
One risk management strategy. (The 2003-2004 PCA deferral balance as of February 29, 2004 is
$48.8 million.) This issue has been discussed within the RMC and with the Customer Advisory Group
and Staff, those parties that had collaborated to establish the annual System Risk Limits. All parties
recognized that there was a difference between the Tier One variance and PCA deferral balance. The
three tiered risk management policy currently in place protects against adverse movements in net
power supply costs as measured by the variance between a baseline established in October of each
year and the forecast of power supply costs under a low water/high-price case scenario (Tier One)
while the accumulated PCA deferral balance records the variance of actual PCA "formulated" power
costs from a forecasted number set in the Spring of each year. The issue put before the collaborative
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was whether in the short term the System Risk Limit should be increased to prevent hedging activity
that could drive the Company to be carrying an excessively long portfolio or if the collaborative was
comfortable with the RMC handling the decision of whether or not to cure a breech on a case by case
basis. The collaborative agreed to defer that decision to the Company and Staff with the
understanding that if appropriate a long-term strategy would be discussed at the next CAG meeting.
The Risk Management group has evaluated the issue and recommends maintaining the
current process and guidelines for calculating and reporting Tier One Variance. The most recent
Operations Plan presents the Variance once again within the System Risk Limit. This is the result of
improvement in the current low-case forecast plus prior hedges ordered and executed. Until the Fall
CAG meeting (when guidelines are reviewed and set), we recommend addressing violations of Tier
One guidelines individually as described in the Policy, with RMC decisions (including potential
exceptions) documented in meeting minutes.
Risk Management makes this recommendation for the following reasons:
Any changes to the current System Risk Limit could be seen as arbitrary
in nature and would not address the "root of the problem
mid-stream changes in the calculation of the Tier One variance and the
components associated with its calculation will hinder analysis of the
Company s risk management program as required by the Commission
modification of the System Risk Limit requires Board approval which is
not foreseeable until at least June 2004 and,
RMC review System Risk Limit violations on an individual basis will
prevent over hedging of the Company s portfolio.
The Company will propose improvements to the Tier One risk management strategy at the Fall
CAG meeting based on discussion with Staff and the Company Board of Directors. Should you wish to
discuss this issue further, please feel free to contact me.
In addition, Terri Carlock is also well informed on the issues presented in this letter should you
have any immediate questions.
Cordially,
Betsy Galtney
BG:ma
Attachmentsc: Terri Carlock, IPUC
Randy Lobb, IPUC
Lisa Nordstrom, IPUC
Ric Gale, IPCO
Legal Files
P&RS Files
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