20020213_dh.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOUANN WESTERFIELD
BILL EASTLAKE
RANDY LOBB
DAVE SCHUNKE
TERRI CARLOCK
LYNN ANDERSON
TONYA CLARK
BEV BARKER
GENE FADNESS
WORKING FILE
FROM:
DATE:
FEBRUARY 13, 2002 RE: IDAHO POWER’S REQUEST FOR AN ACCOUNTING ORDER TO DEFER EXTRAORDINARY COSTS ASSOCIATED WITH INCREASED SECURITY MEASURES, CASE NO. IPC-E-01-41

On November 15, 2001, Idaho Power filed an Application requesting the Commission issue an accounting Order authorizing the Company to defer its extraordinary costs associated with increased security measures subsequent to events of September 11, 2001. On November 21, 2001, the Commission issued a Notice of Application and a Notice of Modified Procedure requesting public comment in this matter. In response to the Commission’s request for comments, the Commission received eight comments from members of the public and comments from the Commission Staff. On January 4, 2002, Idaho Power filed a response to the Staff’s comments.
THE APPLICATION
In its Application, Idaho Power stated that it has increased security at its facilities and has retained a security consultant to advise the Company of additional security measures that may be warranted. For “obvious security reasons,” the Company does not desire to present more specific details of its increased security measures. The Company maintained that the extraordinary security measures are needed to ensure the safety of its employees and to protect the Company facility. The Company asserted that the additional “security measures implemented by the Company benefit all Idaho Power customers.” App. at 2.
Idaho Power proposed that the Commission issue an accounting Order allowing the Company to defer in Account 182.3 (Regulatory Assets), with interest, its “extraordinary security costs incurred since September 11, 2001.” Id. at 3. The Company reported its ordinary security costs incurred for the nine months prior to September 2001 were approximately $11,000 per month. The Company proposed to book and defer the extraordinary security costs over and above the $11,000 per month threshold.
THE COMMENTS
A. Public Comments
All eight of the public comments opposed Idaho Power’s request. Several commentors indicated that the request represents in essence a rate hike. In addition, several commentors argued that increasing security was a cost of doing business. As one commentor stated, the “cost of security is a cost that all businesses must endure. When you enter a place of business you are not assessed a security cost, it’s their cost of doing business.” Another commentor observed that if Idaho Power wants to recover its additional security costs, then it should reduce other expenses to offset the increases.
B. The Commission Staff and Company Reply
The only other person to comment was the Commission Staff. Set out below is the Staff’s comments and the Company’s specific response to each recommendation.
1. No Automatic Recovery. Although the Commission Staff recommended that Idaho Power be allowed to defer its extraordinary security costs, the Staff had several conditions or recommendations. Staff recommended that if the Commission were to approve of the deferral account, than the Order should clearly state that a deferred accounting Order does not constitute automatic Commission approval to collect the increased costs from ratepayers. The prudency of these costs must be demonstrated by the Company prior to recovery.
In its reply, the Company sought to clarify the Staff’s comments. It responded that if it “does not have assurance that it is appropriately deferring these additional security measure costs, then it cannot defer what would otherwise be an expense to a future. If Staff is recommending a prudency review, then the Company has no objection and recognizes that this is always within the authority of the Commission.” Reply at 2.
2. Reimbursement. Staff recommended that Idaho Power pursue all alternative resources of reimbursement from government or other programs. Staff noted that Presidential Executive Order No. 13010 designated certain electrical facilities as critical national infrastructure. Consequently, funding for additional protective measures for these facilities may be available. Idaho Power said that it will endeavor to seek reimbursement from other entities, “but based upon recent pronouncements, the likelihood of such recovery is remote at best.” Reply at 3. Idaho Power agreed that any reimbursement from other programs or entities shall be shown as a reduction to the deferred balance when the reimbursement is received. Id.
3. Sharing Security Deferral Costs. Staff next proposed that the cost of additional security measures be shared between the customers and the Company’s shareholders. The sharing of costs will encourage Idaho Power to mitigate the additional security costs and provide additional incentives for the Company to spend funds wisely. Staff recommended that the deferral amounts be shared 50/50. Because the additional security will protect the assets of the Company as well as benefit all customers, the Staff recommended that other affiliates of Idaho Power should also share in these costs. Staff also recommended that the annual deferral costs should be subject to a return-on-equity earning test. The test would limit the annual deferral when Idaho Power’s earnings are greater than 11% return on equity.
The Company insisted that additional security costs represent extraordinary or unusual expenditures, which the Company could not have anticipated and which are not being recovered in its existing revenue requirement. The Company argued that the Staff’s sharing suggestion is unreasonable. Until such time as the Commission conducts its prudency review, the extraordinary costs fall “within the purview of reasonable expenditures.” Id. Staff submitted no precedent for its sharing recommendation and, as such, it should be rejected.
4. PCA Recovery. Although Idaho Power did not propose recovery of these costs in the PCA mechanism, Staff maintained that recovery of these costs through the PCA would be inappropriate. The Company acknowledged that the PCA was not an appropriate mechanism to recover these costs.
5. Carrying Charges. Staff also recommended that no carrying charges on the accrued deferred balance be allowed. The Staff argued that Idaho Power has not justified interest being accrued on this deferred balance. The Staff suggested that the opportunity to recover these costs along with the resulting improved earnings position are sufficient reasons to not grant interest on the account balances. The Company argued that pending the prudency review, the additional security expenditures are reasonable. Consequently, the Company maintained it should be entitled to earn interest on the deferred balance. “The cost of money cannot be ignored when examining or reviewing a Company expenditure.” Id. at 4.
6. Amortization. Finally, Staff suggested that the amount in the security deferral accounts be amortized. Staff suggested that the deferred expenditures through December 31, 2001, should be amortized over a five-year period beginning in January 2002. Amounts incurred on and after January 1, 2002, should be amortized over a five-year period beginning with January following the date it is booked. Finally, Staff also recommended that Idaho Power continue to provide confidential briefings to the Staff concerning the status of the Company’s extraordinary security measures and the associated costs. Staff recommended that the Company keep adequate records to document the necessity and prudency of each security measure.
The Company recommends that the Staff’s amortization recommendation be modified to recognize the timing of the expenditures. The Company agrees with the five-year amortization period but proposes that the commencement of the five-year period should begin January 2003. The Company further recommends that before amortization begins, the Commission should conduct its prudency review on the security expenditures. Consequently, the Company proposes to submit its extraordinary expenses incurred prior to January 31, 2002 before the start of the proposed five-year amortization period on January 1, 2003.
COMMISSION DECISION
1. Does the Commission believe it is appropriate to allow Idaho Power to defer its “extraordinary security costs” in Account 182.3?
2. Does the Commission believe it is appropriate to defer those security costs (subject to a prudency review) in excess of $11,000 per month? If so, does the Commission wish to state that approval of the deferred accounting Order does not constitute automatic approval?
3. Does the Commission wish to encourage the Company to seek reimbursement from other programs or entities?
4. What is the Commission’s decision regarding the issue of sharing deferral costs between ratepayers and shareholders/other affiliates?
5. Does the Commission wish to address not recovering this amount in the PCA mechanism?
6. Are carrying charges or interest on the deferred amount appropriate?
7. Does the Commission find that a five-year amortization is appropriate? If so, should the amortization begin on January 2002 (Staff recommendation) or January 2003 (Company recommendation) after the Commission has examined the prudency of those expenses incurred between September 11, 2001 and December 31, 2001?
8. Is there anything else?

vld/M:IPCE0141_dh2

DECISION MEMORANDUM 5