20031021Gribble Direct.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC SERVICE
TO ELECTRIC CUSTOMERS IN THE STATE)
OF IDAHO. )
)
CASE NO. IPC-E-03-13
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
DENNIS C. GRIBBLE
1 Q. Would you state your name, address and
2 present occupation?
3 A. My name is Dennis C. Gribble and my business
4 address is 1221 West Idaho Street, Boise, Idaho. I am
5 employed by Idaho Power Company as Assistant Treasurer.
6
7
Q.
A.
What is your educational background?
I graduated in 1975 from Boise State
8 University, Boise, Idaho, receiving a Bachelor of Business
9 Administration degree in Economics. In 1978, I graduated
10 from Boise State University, Boise, Idaho, with a Master in
11 Business Administration. In 1989, I completed the
12 University of Idaho's Public Utilities Executive Course in
13 Moscow, Idaho. I have also attended numerous seminars and
14 conferences on accounting and finance issues related to the
15 utility industry. I am a Certified Treasury Professional.
16 Q. Would you please describe your business
17 experience with Idaho Power Company?
18 A. I joined Idaho Power Company in 1979. In
19 June 1982, I transferred to the Finance and Reporting
20 Services Department as a Business Analyst. In June 1986, I
21 was promoted to a Business Analyst Supervisor. In March
22 1991, I was promoted to Manager of Financial Services.
GRIBBLE, DI
In
1
Idaho Power Company
1 January 1992, I was promoted to Manager of Corporate
2 Accounting and Reporting. In 1996, I was promoted to
3 Controller-Financial Services and in May 1999 I was promoted
4 to my current position as Assistant Treasurer.
5 In the course of my duties with Idaho Power Company,
6 I have presented testimony to the Idaho Public Utilities
7 Commission and the Oregon Public Utility Commission.
8 Q. What are your duties as Assistant Treasurer
9 as they relate to the current proceeding?
10 A. I oversee the direct financial planning,
11 procurement, and investment of funds for Idaho Power, as
12 well as supervise corporate liquidity management.
13 Q. What are your financial activities and
14 responsibilities with respect to Idaho Power Company?
15 A. My activities and responsibilities include
16 various aspects of all the Company's financings and other
17 financial matters. With respect to long-term financings -
18 sale of bonds, preferred stock, and common stock - my
19 activities include development of financial plans with
20 senior officers, meeting with representatives of investment
21 banking firms that are interested in underwriting our
22 securities, discussions with rating agencies, assisting in
GRIBBLE, DI 2
Idaho Power Company
1 preparation of financial material including Registration
2 Statements filed with the Securities and Exchange
3 Commission, representing the Company at information meetings
4 for investment banking firms, reviewing recommendations on
5 bids received relative to the Company's financings and
6 recommending disposition of net proceeds. With respect to
7 short-term financings, these activities and responsibilities
8 include negotiation of lines of credit with commercial banks
9 and arranging for the sale of commercial paper.
10 Q. Are you in continual communication with
11 members of the financial community?
12 A. Yes. I am in constant contact with
13 individuals representing investment and commercial banking
14 firms, rating agencies, insurance companies, institutional
15 investment firms, and other organizations interested in
16 publicly traded securities, that actively follow IDACORP and
17 Idaho Power Company. In association with the Chief
18 Financial Officer and the Director of Investor Relations, my
19 responsibilities include keeping these persons informed of
20 the Company's financial condition, arranging meetings with
21 these people and Idaho Power's senior executive management,
22 and visiting with financial representatives in their
GRIBBLE, DI 3
Idaho Power Company
1 respective offices. These members of the investment
2 community have followed the electric utility industry for an
3 extended period of time and have a great deal of expertise
4 in the financial problems and prospects of utilities.
5 Through my continual contact with the financial
6 community, and review of investment banking analytical
7 reports and articles issued by these firms, I am able to
8 keep informed on trends, interest rates, financing costs,
9 security ratings, and other financial developments in the
10 public utility industry.
11 Q. Are you a member of any professional
12 societies or associations?
13 A. Yes. I am a member of the Association for
14 Financial Professionals (AFP) and the Institute of
15 Management Accountants (IMA).
16 Through information received from attendance at
17 conferences and seminars of these and other utility
18 professional groups such as the Edison Electric Institute,
19 I am able to gain additional insights into the financial
20 developments affecting Idaho Power Company as well as the
21 electric utility industry.
22 Q. What is the purpose of your testimony in
GRIBBLE, DI 4
Idaho Power Company
1 this proceeding?
2 A. I am sponsoring testimony as to the point
3 estimate for Idaho Power Company's rate of return on common
4 equity, the embedded cost of long-term debt and preferred
5 stock, the use of an estimated year-end 2003 capital
6 structure, and the resultant overall cost of capital to be
7 used in these proceedings.
8
9
10 15.
11
Q.
A.
Q.
What exhibits are you sponsoring?
I am sponsoring Exhibits numbered 12 through
What is the point estimate you recommend for
12 the rate of return on common equity for Idaho Power
13 Company?
14 A. As I will discuss in further detail later in
15 my testimony, I have selected 11.2 percent as a reasonable
16 cost of equity for the Company, which falls at the mid-
17 point of Mr. Avera's recommended cost of equity range for
18 Idaho Power Company of 10.6 to 11.9 percent. The 11.2
19 percent is also the minimum required fair rate of return
20 considering the Company's overall management efforts
21 throughout these last ten years as discussed by Mr. Keen
22 and Ms. Fullen in their testimony, as well as the Company's
GRIBBLE, DI 5
Idaho Power Company
1 efforts to economically refinance outstanding debt and
2 preferred stock securities in recent years.
3 Q. What is the overall cost of capital for
4 Idaho Power Company?
5 A. Based on an estimated year-end 2003 capital
6 structure provided to me by Ms. Smith, the embedded cost of
7 debt and preferred stock presented in my testimony, and
8 incorporating the 11.2 percent cost of equity, the
9 resultant overall cost of capital for Idaho Power Company
10 is 8.334 percent.
11 Q. Mr. Avera indicates that his 10.6 to 11.9
12 percent recommended cost of equity range does not include
13 any additional basis points as an incentive to the Company
14 for its stewardship of the system and overall management
15 efforts described by Mr. Keen and Ms. Fullen nor for the
16 Company's efforts to economically refinance its securities.
17 What effect does this have on your 11.2 percent point
18 estimate for the rate of return on the Company's common
19 equity?
20 A. If the Commission selects a cost of equity
21 value that is less than the mid-point of the recommended
22 cost of Mr. Avera's recommended equity range, then the
GRIBBLE, DI 6
Idaho Power Company
1 Company will be penalized since the cost of equity range
2 derived by Mr. Avera does not include any such reward.
3 Q. Mr. Avera indicates in his testimony that
4 Idaho Power, when compared to the Western electric utility
5 industry and its selected comparable peer group, has a
6 greater share of specific risk. Do you agree with this
7 conclusion?
8 A. Yes. Financial analysts, bond rating
9 agencies, regulators, and other commentators in the
10 financial press continue to chronicle the increasing
11 volatility of change and risk in the western electric
12 utility industry. The Company, not unlike the majority of
13 the industry, also faces the prevalence of change and
14 uncertainty. Most observers agree that individual
15 companies tend to have increasingly less and less control
16 of both the pace and magnitude of this change and
17 uncertainty. In addition to the impact of the general
18 electric utility industry risk, Idaho Power Company faces
19 very specific risks.
20 Q. What risks are specific to Idaho Power
21 Company?
22 A. The following are risks that the investing
GRIBBLE, DI 7
Idaho Power Company
1 public view as specific to Idaho Power Company: (1) a
2 predominately hydroelectric generating base subject to the
3 vagaries of weather, water, and a volatile wholesale power
4 supply market in the Western United States and specifically
5 the Northwest, (2) the renewal of federal licenses for its
6 hydroelectric projects, namely the Hells Canyon Complex
7 which provides 40 percent of the Company's total generating
8 capacity, and (3) the ability to recover significant
9 capital investment required for present and growing
10 electrical requirements and service reliability for its
11 customers.
12 Q. Can you elaborate as to the nature of Idaho
13 Power Company's risks?
14 A. Yes. I will provide additional detail on
15 each specific risk and also provide the financial investing
16 communities perspective relative to that risk. Allyson
17 Rodgers, an equity analyst formerly with Ragen McKenzie
18 (Pacific Northwest Research), succinctly states these
19 specific risks in her May 7, 2003 research report (pg. 6);
20 "We believe primary risks to IDACORP's ability to return to
21 a more normal earnings range include continued slow
22 economic activity, weather, including hydro conditions, and
GRIBBLE, DI 8
Idaho Power Company
1 unfavorable regulatory action at the state or federal
2 level."
3 Q. Please describe the risks specific to a
4 predominately hydroelectric generating base subject to the
5 vagaries of weather and water.
6 A. Idaho Power Company and its customers have
7 long enjoyed the benefits of a hydroelectric based utility.
8 However, because of the heavy reliance on hydroelectric
9 generation, the Company's operations and resulting
10 financial condition can be significantly impacted by low
11 water conditions. Reduced hydroelectric generation
12 resulting from below normal water flows, compels the
13 Company to use more expensive thermal generation and/or
14 purchased power to meet the electrical needs of its
15 customers. Although the Idaho Public Utilities Commission
16 (IPUC) grants recovery for the majority of extraordinary
17 purchased power costs through the Company's Power Cost
18 Adjustment Mechanism (PCA), the recovery is less than 100
19 percent, is on a deferred basis, and is subject to the
20 regulatory process. Generally, the investment community
21 views the PCA mechanism as a positive since it does allow
22 for recovery of the majority of excess net power supply
GRIBBLE, DI 9
Idaho Power Company
1 costs. As a result of the 2000-2001 California energy
2 crisis and four years of Northwest drought conditions, the
3 last three PCA rate proceedings (i.e., 2001, 2002, and
4 2003) have resulted in unprecedented increased net power
5 supply costs. Although originally conceived as a fair
6 sharing mechanism, the Idaho jurisdictional 10 percent
7 portion of the recent PCA proceedings borne by the
8 Company's shareholders has had a devastating impact on the
9 earnings capability of the Company. Unlike the more
10 familiar fuel cost adjustment mechanisms (for gas
11 utilities) that recover 100 percent of the changes in base
12 fuel costs, the Company's PCA mechanism is viewed by the
13 investment community as more risky as a result of this
14 sharing feature. The firm of Ragen MacKenzie reported this
15 impact in its February 25, 2002 IDACORP, Inc. research
16 report (pg.6); "IDACORP estimates that Idaho Power
17 Company's earnings (2002) would have been $1.45 higher
18 ($1.27 negative impact from excess power costs not included
19 in the PCA adjustment and a write-off of $0.18 for excess
20 power costs) without the negative impact of higher power
21 costs."
22 Q. Please describe the risks specific to the
GRIBBLE, DI 10
Idaho Power Company
1 renewal of federal licenses for its hydroelectric projects,
2 namely the Hells Canyon Complex that provides 40 percent of
3 the Company's total generating capacity.
4 A. Idaho Power Company is the only investor-
5 owned electric utility in the United States with 57 percent
6 of its generation derived from hydro generating facilities
7 under normal water conditions. With such a large portion
8 of the Company's generation resources based on hydro
9 facilities, a negative economic impact resulting from
10 renewing the Federal licenses of these facilities could
11 have a significant financial impact on the Company and the
12 prices its consumers pay for electricity. As part of this
13 process, the Company has and will file applications with
14 the Federal Energy Regulatory Commission (FERC) for new
15 licenses on 92 percent of its hydro generating capacity.
16 Once an application is filed, the time frame to actually
17 receive an order from the FERC is unknown. The combination
18 of an unknown time frame to receive a new license along
19 with a financial impact that is difficult to quantify, lays
20 the foundation for a potentially large financial risk
21 unique to the Company. The Hells Canyon generating
22 facilities comprised of Hells Canyon, Oxbow, and Brownlee
GRIBBLE, DI 11
Idaho Power Company
1 make up 68 percent of the Company's hydro generation
2 capacity and 40 percent of its total generation capacity.
3 The Hells Canyon license application was filed in July of
4 2003. This process moves at an extremely deliberate pace
5 due to the large number of interested parties involved in
6 evaluating the application. This makes the likelihood of a
7 new Hells Canyon facilities license being issued in 2005
8 remote. In these types of delayed situations, historically
9 the Company has been given an annual license renewal (under
10 the existing old license) until the formal new license is
11 issued. This delay further reinforces the ambiguity of the
12 ultimate financial impact. For any particular generating
13 facility, the worst possible outcome would be the loss of
14 the license to a competing party. Along with the
15 uncertainty as to the eventual receipt of licenses and the
16 costs involved in preparing for the license applications,
17 costs of protection, mitigation and enhancement of natural
18 resources (PME's) related to these projects are also
19 difficult to quantify. The potential financial magnitude
20 of these PME's and their effect on the Company's low cost
21 hydrogeneration resources, threaten the financial stability
22 of a company the size of Idaho Power and the ultimate rates
GRIBBLE, DI 12
Idaho Power Company
1 it must charge its customers. These amounts will vary
2 between each facility, but in all cases they can be
3 significant due to lost capacity, less generation at a
4 higher cost, and the decreased ability of the Company to
5 time and control water flows. If the Company cannot
6 generate when it is most advantageous for the system, then
7 some of the economic value of the generation has been lost,
8 even if the amount of total generation does not change.
9 Kevin Rose, an analyst with Moody's Investor Services notes
10 in his June 20, 2003 Opinion update on Idaho Power Company
11 (Pg. 2) ; "What Could Change the Ra ting - DOWN ..... ,
12 Significant increases in relicensing costs and/or stringent
13 operational constraints imposed as part of the license
14 renewal process .... "
15 In addition to the hydro relicensing risk, the
16 Company continually faces significant capital, operating
17 and other costs associated with compliance with current
18 environmental statutes, rules and regulations. These costs
19 may be even higher in the future as a result of, among
20 other factors, changes in legislation and enforcement
21 policies and the potential additional requirements imposed
22 in connection with the relicensing of the Company's
GRIBBLE, DI 13
Idaho Power Company
1 hydroelectric projects.
2 Q. Why do you say that a volatile wholesale
3 power supply market in the Western United States and
4 specifically the Northwest is specific to Idaho Power
5 Company?
6 A. The recent California energy crisis and its
7 unprecedented effects on the prices in the wholesale energy
8 markets, coupled with persistent drought in the Northwest
9 have specifically impacted the Company. These impacts are;
10 first, and as noted above, reduced access to the Company's
11 low cost hydroelectric generation, second, increased
12 reliance on the Company's thermal based generating
13 resources, and lastly, the heightened exposure to volatile
14 wholesale energy prices when the Company must rely on the
15 wholesale energy market to meet native load requirements.
16 When the Company is unable to utilize its hydro resources,
17 it must next turn to the wholesale markets or its own
18 thermal based resources. Typically pricing and
19 availability will determine these decisions. Over the last
20 several years, the Company's thermal fleet has been
21 required to supply a large amount of the resource deficit
22 since the wholesale energy market prices were extremely
GRIBBLE, DI 14
Idaho Power Company
1 high and hydro availability was low. Although these
2 thermal resources have been there when dispatched, these
3 thermal resources are aging and are requiring increased
4 capital and O&M expenditures just to maintain availability.
5 As the reliability of these thermal resources diminishes,
6 either as a result of age or over-utilization, the Company
7 is further at the mercy of a volatile western and northwest
8 energy market. Philip C. Adams, Banc One Capital Markets,
9 Inc., describes this situation in his December 12, 2002
10 Update and New Issue Review (Pg. 2), "Challenges: IPC is
11 on its third consecutive year of below-average water
12 availability for hydroelectric power. Its reliance on
13 purchased power remains higher than normal, forcing IPC to
14 fund purchases in anticipation of rate relief. IPC relies
15 heavily on hydroelectric power for it generating needs and
16 can experience a negative impact from adverse weather, such
17 as a low snow pack in the mountains above IPC reservoirs,
18 or low precipitation levels. As demand outstrips
19 hydroelectric capacity, more expensive coal and diesel
20 facilities, along with purchased power, are needed to make
21 up the difference."
22 Q. Please describe the risks specific to the
GRIBBLE, DI 15
Idaho Power Company
1 Company's ability to recover significant capital investment
2 required for present and growing electrical requirements
3 and service reliability for its customers.
4 A. As the Company's system ages and customer
5 electrical requirements increase, additional investment is
6 required to meet reliability standards and the additional
7 demand on its electrical infrastructure. The Company's
8 latest forecast requires construction budgets of $150
9 million in 2003; this budget will rise to $675 million over
10 the next three years. Recovery of these investments
11 introduces an element of risk since; first, the need for
12 the Company's to attract capital, and second, recovery of
13 these investments will be on a deferred basis and subject
14 to the regulatory process. Kevin Rose, Moody's Investors
15 Services, identifies one of the Company's key credit
16 challenges in his June 20, 2003 Opinion Update as; "General
17 rate increase needed to recover costs of customer growth,
18 additional capacity needs and expansion of T&D system."
19 Q. What is the status of Idaho Power Company's
20 bond ratings?
21 A. The following are the current First Mortgage
22 Bond (FMB), Preferred Stock, Commercial Paper (CP-short
GRIBBLE, DI 16
Idaho Power Company
1 term debt), and Rating Outlook ratings for Idaho Power
2 Company:
3
4 General Corporate Ra ting
5 FMB' s
6 Pref erred
7 CP
8 Outlook
Moody's s . & P. Fitch
A3 A- No Rating
A2 A A
Baa2 BBB BBB+
P-1 A-2 F-1
Negative Stable Stable
9 Q. Have the Company's ratings been under
10 pressure in recent years?
11 A. Yes. Although the bond ratings for the
12 Company's first mortgage bonds have remained intact, the
13 ratings on its preferred stock were changed due to a rating
14 agency philosophy that replaced preferred stock ratings
15 with a debt like standard. Accordingly, S&P has changed
16 its rating on the Company's short term debt from A-1 to A-
17 2, Moody's has the Company on a Negative Rating Outlook,
18 and S&P has moved the Company from a Positive to a Stable
19 Outlook. Moody's reasoned as follows; "IPC's rating
20 outlook is negative as the utility continues to cope with
21 difficult power supply markets in the region and prepares
22 to seek a base rate increase to bolster utility returns and
GRIBBLE, DI 17
Idaho Power Company
1 cash flow. Affiliate transaction issues with FERC and the
2 IPUC have been largely resolved without undue cost,
3 although certain internal compliance assessments still need
4 to be completed." Swami Ven Kataroman, Standard & Poor's,
5 in his October 3, 2003 update, states: "Standard & Poor's
6 now expects that ratios will only meet expectations for the
7 'A-' rating and may even be slightly weaker in the interim,
8 as Idaho Power continues to recover deferred power costs
9 and face poor water conditions in the Snake River and lower
10 than expected sales." The Company's S&P financial
11 measurement benchmarks reflect the financial pressure the
12 Company faces in maintaining its current ratings.
13 Q. What are the principal financial measurement
14 ratio benchmarks used by Standard and Poor's (S&P)?
15 A. The first benchmark is the funds from
16 operations (FFO) as a percent of average total debt. The
17 second principal benchmark is FFO interest coverage. Pre-
18 tax cash interest coverage is the third benchmark. The
19 fourth benchmark used by Standard and Poor's is the ratio
20 of total debt to total capital. In the first three
21 benchmarks higher scores are better, while in the fourth
22 benchmark, a lower score is better. These objective
GRIBBLE, DI 18
Idaho Power Company
1 measurements are but one set of tools that Standard &
2 Poor's use in determining the ultimate credit rating for a
3 company. Other factors that standard and Poor's considers
4 are management credibility and track record, forecasts
5 provided by management, and general overall judgment by the
6 rating agency committees.
7 Q. What are the Standard and Poor's electric
8 utility financial ratio benchmarks?
9 A. The Standard and Poor's electric utility
10 financial ratio benchmarks are set forth in Exhibit No. 12.
11 Q. How does Idaho Power Company's current (12
12 months ended June 30, 2003) S&P financial ratio benchmarks
13 compare with the mid-point ratio benchmarks for an "A"
14 rated electric utility with a level 4 business risk
15 position (the Company's current risk position).
16 A. The resulting ratios are as follows:
17
18
19
20
21
"A" IPCo
FFO/total debt ( % ) 30.5%-24.5% 24.4%
FFO interest coverage ( x) 4.5x-3.8x 6.70x
Pretax interest coverage ( x) 4.0x-3.3x 2.00x
Total debt/total capital ( % ) 43.0%-49.5% 52.9%
22 Q. What do the Company's current financial
GRIBBLE, DI 19
Idaho Power Company
1 benchmark ratios indicate regarding the Company's financial
2 condition?
3 A. Using a strict analytical approach, the
4 FFO/total debt ratio of 24.4 percent would warrant a high
5 "BBB" rating, the FFO interest coverage of 6.70x would
6 yield a high "AA" rating (this ratio will decline, however,
7 due to the recent reductions in PCA recovery), the Pretax
8 interest coverage of 2.00, would produce a high "BB"
9 rating, and the Total debt/total capital ratio of 52.9
10 percent, would score a "BBB" rating. Rating agency
11 analysts must and do take into account qualitative aspects
12 of a company, but a literal interpretation of these
13 quantitative financial benchmark results would suggest a
14 downgrade from the Company's current "A" rating.
15 Q. What are the implications to the Company of
16 increasingly more stringent risk assessments by rating
17 agencies and the Company's current financial benchmark
18 ratios?
19 A. Without adequate rate relief and more normal
20 water conditions, it is uncertain as to how long the
21 Company can maintain an "A" rating. Although many
22 Investor-Owned Utilities (IOU's) find a "BBB" or "BBB+"
GRIBBLE, DI 20
Idaho Power Company
1 acceptable, the Company believes that maintaining a strong
2 "A" rating is essential. The Company must maintain its
3 ability to attract capital in the ultra-competitive
4 investing environment. Idaho Power is not a large electric
5 utility and when matched against other utility investment
6 opportunities, the Company lacks the benefit of broad
7 investment analyst coverage. Unless a strong single "A"
8 rating is maintained; the absence of broad investment
9 analyst coverage and the small size of the Company could
10 prove to great an obstacle for the Company to overcome in
11 its efforts to raise capital. A "BBB" rating for the
12 Company would mean a 50-55 basis point annual increase on
13 newly issued long-term debt and prevent the Company from
14 accessing the low-cost short-term commercial paper (CP)
15 market. Without access to the CP market, the Company will
16 pay an added 70-80 basis points for short-term debt. In
17 simple terms, a strong "A" rating is critical for Idaho
18 Power to maintain its independence and attract lower cost
19 capital as the Company enters into a period of substantial
20 investment requirements.
21 Q. Is Idaho Power also affected by rating
22 agencies imputing debt onto its balance sheet due to
GRIBBLE, DI 21
Idaho Power Company
1 purchased power contracts?
2 A. Yes. Like other electric utilities, when
3 the Company adds to its rate base, it must use some portion
4 of shareholder equity to fund the investment. The Company
5 must maintain its equity component above a certain level as
6 it continues this investment process. Or as the debt
7 levels increase, the Company will face the threat of a bond
8 downgrading. Conversely, when the Company enters into
9 contracts for purchased power, an obligation that is not
10 reflected in its financial statement, an increase in equity
11 to maintain credit quality is not automatic. This lack of
12 required equity funding as an offset to the debt-like
13 obligation of purchase power contracts, results in an off
14 balance sheet risk. For financial commitments that do not
15 appear on the balance sheet, financial analysts and rating
16 agencies impute the debt and interest equivalents on the
17 financial statements of the Company to achieve a more
18 accurate picture of the risk associated with their
19 investment. The added equity needed to offset this imputed
20 debt and interest represents the effect that long-term
21 purchase power commitments have on the cost of capital. Any
22 increase in the long-term obligation of a utility related
GRIBBLE, DI 22
Idaho Power Company
1 to its capacity and energy resources will have to be backed
2 by an appropriate amount of equity in the eyes of the
3 investment community.
4 Q. In their testimony, Mr. Keen and Ms. Fullen
5 describe Company and management efforts in the areas of
6 stewardship of the system, customer service, and demand-
7 side management. Is there anything in the area of
8 financing activity that you feel deserves similar
9 recognition?
10 A. Yes. In addition to the areas discussed in
11 detail by Mr. Keen, the Company has taken numerous
12 opportunities to refund various issues of both long-term
13 debt and preferred stock on a cost effective basis. This
14 has resulted in significantly lower embedded costs than
15 would otherwise have been the case. At the last Idaho
16 general rate case, the Company's overall cost of debt
17 capital was 8.024 percent and the effective cost of
18 preferred stock was 6.083 percent. As will be shown later
19 in my testimony, the Company's current cost of debt capital
20 is 5.983 percent and the effective cost of preferred stock
21 is 6.534 percent. The primary driver for the small
22 increase in the effective cost of preferred stock was the
GRIBBLE, DI 23
Idaho Power Company
1 removal of the $50 million variable rate auction preferred
2 stock that was redeemed in August 2002. This redemption
3 was due to a different preferred stock rating criteria that
4 placed added pressure on the ability of this market to
5 avoid a failed auction process. The resulting financing
6 efforts by the Company are reflected by the overall cost of
7 capital at the last Idaho general rate case of 9.199
8 percent being reduced to the current cost of capital of
9 8.334 percent that is proposed in this filing.
10 Q. Would you please comment on page 1 of
11 Exhibit No. 13?
12 A. Page 1 of Exhibit No. 13 details the
13 calculation of the Idaho Power Company capital structure
14 for long-term debt, preferred stock, and common equity
15 balance resulting from the Company's estimated year end
16 2003 capital structure as provided to me by Ms. Smith.
17 Q. Earlier in your testimony you indicated that
18 you have used an estimated 2003 financial result in
19 arriving at the overall cost of capital for the Company.
20 Why have you selected this particular capital structure?
21 A. The estimated year end 2003 financial
22 results as provided to me by Ms. Smith reflect the
GRIBBLE, DI 24
Idaho Power Company
1 Company's best estimate at this time of the 2003 year-end
2 capital structure. The Commission can update the capital
3 structure to incorporate known and measurable changes as
4 this proceeding progresses to reflect an actual year-end
5 2003 capital structure. Mr. Avera, in his testimony, has
6 indicated that the capital structure submitted on page 1 of
7 my Exhibit No. 13 is reasonable and is consistent with
8 comparable companies in the industry.
9 Q. The capital structure presented on page 1 of
10 Exhibit No. 13 incorporates changes to the Company's normal
11 financial reporting of its capital structure. Could you
12 please discuss the rationale for the variance?
13 A. For financial reporting purposes the
14 American Falls Bond Guarantee and the Milner Dam Note
15 Guarantee are included in the long-term debt portion of the
16 capital structure. For ratemaking purposes the interest
17 costs associated with both the American Falls and the
18 Milner debt securities are covered as operating and
19 maintenance ("O&M") expenses. Even with these exclusions,
20 the capital structure presented in my Exhibit No. 13 is
21 reasonable in light of industry and rating agency criteria.
22 Q. Would you please comment on page 1 of
GRIBBLE, DI 25
Idaho Power Company
1 Exhibit No. 14?
2 A. Page 1 of Exhibit No. 14 details the
3 calculation of the embedded cost of debt used in the
4 estimated year-end 2003 capital structure. The embedded
5 cost of debt is 5.983 percent.
6 Q. Does the Company utilize variable rate
7 securities in its long-term capitalization?
8 A. Yes, the Company currently utilizes several
9 variable rate securities in its long-term capitalization.
10 These securities are the County of Sweetwater Variable Rate
11 Series 1996B ($24.2 million), and 1996C ($24.0 million)
12 Pollution Control Bonds, and the Port of Morrow Variable
13 Rate Pollution Control Bonds ($4.36 million). Also, the
14 Company intends to refinance its $49.8 million, 8.30
15 percent Humboldt County Pollution Control Revenue bonds in
16 October, 2003 by issuing new $49.8 million of variable rate
17 bonds. These securities are listed on lines 12, 13, 14,
18 and 15 of page 1 on Exhibit No. 14.
19 Q. Would you please describe the variable rate
20 nature of these variable rate pollution control bonds?
21 A. These variable rate pollution control bonds,
22 although considered long-term securities, have features
GRIBBLE, DI 26
Idaho Power Company
1 that allow the Company to take advantage of rates
2 applicable to short term securities. The County of
3 Sweetwater Pollution Control Variable Rate Bonds Series B
4 and C (Bridger Variable Rate Bonds) reset the interest rate
5 on a daily basis. The Port of Morrow Pollution Control
6 Variable Rate Bonds (Boardman Variable Rate Bonds) reset
7 the interest rate on a weekly basis. The proposed Humboldt
8 Pollution Control Revenue Bonds (Valmy Variable Rate Bonds)
9 will reset their interest rate every 35 days. The Bridger
10 Variable Rate Bonds daily rate interest rate is determined
11 each business day by a Remarketing Agent by examining tax-
12 exempt obligations comparable to the Bridger Variable Bonds
13 known to have been priced or traded under the then-
14 prevailing market conditions that would be the lowest rate
15 which would enable the Remarketing Agent to sell the
16 Bridger Variable Rate Bonds. Likewise, on a weekly basis
17 the Boardman Variable Rate Bonds weekly interest rate is
18 determined the first day of a weekly period by a
19 Remarketing Agent by examining tax-exempt obligations
20 comparable to the Boardman Variable Bonds known to have
21 been priced or traded under the then-prevailing market
22 conditions that would be the lowest rate which would enable
GRIBBLE, DI 27
Idaho Power Company
1 the Remarketing Agent to sell the Boardman Variable Rate
2 Bonds. The new Valmy Variable Rate Bonds are designed to
3 reset their interest rate every 35 days via a dutch auction
4 process (lowest bid received by an Auction Agent that
5 covers the bonds outstanding) to reflect the current market
6 conditions.
7 Q. Please comment on the derivation of the
8 effective cost of the interest rates for the Pollution
9 Control Bonds listed on lines 12, 13, 14, and 15 on page 1
10 of Exhibit No. 14?
11 A. Page 2 of Exhibit No. 14 is a chart that
12 depicts the Bond Market Association (BMA) Municipal Swap
13 Index for the last 10 years. The BMA Municipal Swap Index,
14 produced by Municipal Market Data (MMD), is a 7-day high-
15 grade market index comprised of tax-exempt Variable Rate
16 Demand Obligations (VRDO's) from MMD's extensive database.
17 The Index was created in response to industry participants'
18 demand for a short-term index to accurately reflect
19 activity in the VRDO market. In 1991, The Bond Market
20 Association established a Market Index Subcommittee to
21 analyze the need for such an index, and determined a
22 solution. MMD worked closely with The Bond Market
GRIBBLE, DI 28
Idaho Power Company
1 Association to determine appropriate criteria on which to
2 base the index. Issuers, investment bankers and other
3 market participants need an efficient way to monitor the
4 market on a regular basis. The index provides a
5 consistent, superior means of tracking market movements as
6 they occur.
7 Pages 3, 4, 5, and 6 of Exhibit No. 14 show the
8 Company's spreads (difference of the Company's actual
9 variable rate, plus or minus, when compared to the BMA
10 Municipal Swap Index) over the BMA Municipal Swap Index for
11 the Bridger Variable Rate Bonds and the Boardman Variable
12 Rate Bonds since the life of these bonds, plus an estimate
13 for the Valmy Variable Rate Bonds.
14 In light of the volatility in short-term interest
15 rates, I determined that an average of the 10 year BMA
16 Municipal Swap Index, plus an average of the Company's
17 spreads since the inception of these variable rate bonds,
18 should be used in calculating the cost of these securities.
19 This is a conservative approach in that, there are a
20 significantly larger amount of data points at the low end
21 of the 10-year cycle and the trough covers a relatively
22 high percentage of this cycle.
GRIBBLE, DI 29
Idaho Power Company
1 The average of the 10 BMA Municipal Swap Index is
2 3.04 percent, the average Company spreads for the Bridger
3 Variable Rate Bond Series Bis -.07%, the Bridger Variable
4 Rate Bond Series C is -.12%, the Boardman Variable Rate
5 Bond is .94%, and the Valmy Variable Rate Bonds is .61%
6 (includes amortization of call premium, spread over BMA
7 index, broker dealer fees, and insurance costs). The
8 resulting coupon rates used for these variable rate
9 securities are:
10 Bridger Variable Rate Bond Series B - 2.97%
11 Bridger Variable Rate Bond Series C - 2.92%
12 Boardman Variable Rate Bond - 3.98%
13 Valmy Variable Rate Bond is - 3.65%
14
15
Q.
A.
Would you please comment on Exhibit No. 15?
Exhibit No. 15 details the calculation of
16 the embedded cost of preferred stock used in the forecasted
17 2003 capital structure. The embedded cost of preferred
18 stock is 6.534 percent.
19 Q. What is the overall weighted cost of capital
20 when you incorporate the respective costs?
21 A. The overall weighted cost of capital for
22 revenue requirement purposes in this proceeding is 8.334
GRIBBLE, DI 30
Idaho Power Company
1 percent. This is based on a 5.993 percent embedded cost of
2 debt; a 6.534 percent embedded cost of preferred stock; and
3 the 11.2 percent rate of return on common equity.
4 Q. Does this conclude your direct testimony in
5 this case?
6 A. Yes, it does.
GRIBBLE, DI 31
Idaho Power Company