20031021Smith 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 )
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CASE NO. IPC-E-03-13
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
LORI SMITH
1 Q. Would you please state your name, business
2 address, and present occupation?
3 A. My name is Lori Smith and my business
4 address is 1221 West Idaho Street, Boise, Idaho. I am
5 employed by Idaho Power Company as Director of Strategic
6 Analysis and Risk Management.
7
8
Q.
A.
What is your educational background?
I graduated in 1983 from Boise State
9 University, Boise, Idaho, receiving a Bachelor of Business
10 Administration degree in Information Sciences. In 1999, I
11 was awarded the designation of Chartered Financial Analyst.
12 I have also attended numerous seminars and conferences
13 related to utility accounting, corporate finance and risk
14 related topics.
15 Q. Would you please outline your business
16 experience?
17 A. From 1983 to 1986, I was employed by Idaho
18 Power Company and assigned to the Materials Management
19 Department. From 1986 to 1994, I served as a Financial
20 Accountant and later as a Budget Accountant. I was
21 promoted to Business Analyst in 1994. In 1996, I was
22 promoted to Strategic Analysis Team Leader. In 2000, I was
SMITH, DI 1
Idaho Power Company
1 named Director of Strategic Analysis. In 2003, I was
2 promoted to my current position as Director of Strategic
3 Analysis and Risk Management.
4 Q. What are your duties as Director of
5 Strategic Analysis and Risk Management?
6 A. I manage and conduct strategic analysis,
7 corporate budgeting and administration financial support,
8 and risk management. Strategic Analysis has the
9 responsibility to maintain ongoing financial forecasts,
10 prepare monthly subsidiary accounting, prepare annual
11 service level agreements and develop methodology, perform
12 intercompany accounting and reconciliation, prepare and
13 perform due diligence activities, and develop capital
14 raising strategies.
15 Corporate Budgeting and Reporting has the
16 responsibility to coordinate financial support for Idaho
17 Power's administrative areas, prepare monthly variance
18 reporting, and monitor corporate spending and budgets.
19 Corporate Risk Management has the responsibility of
20 implementing risk management tools related to credit risk,
21 market risk, and operational risk for the utility along
22 with exploring and implementing hedging strategies.
SMITH, DI 2
Idaho Power Company
1 Q. What is the purpose of your testimony in
2 this proceeding?
3 A. The purpose of my testimony is to present
4 the test year financial information for the twelve-month
5 period ended December 31, 2003, to present the adjustments
6 which have been included to annualize certain 2003
7 operating expenses and rate base items, and to quantify and
8 support certain known and measurable changes to the
9 Company's operating statement and rate base.
10 Q. Will you be supporting any of the
11 normalizing adjustments to the 2003 test year?
12 A. No. Mr. Obenchain will address the
13 normalizing adjustments to sales and revenues and Mr. Said
14 will address the normalization of power supply costs.
15
16
Q.
A.
How was the information for 2003 prepared?
For the 2003 general rate case filing, the
17 system financial information was prepared using six months
18 actual and six months estimated information. The 2003
19 Operations and Maintenance Budget and the 2003 Construction
20 Budget were the basis for this process. The 2003 test year
21 combined January through June actual data with forecast
22 information for July through December. The forecast
SMITH, DI 3
Idaho Power Company
1 process started with actual information through April 2003
2 and then rebudgeted all the non-normalized components for
3 the time period May through December 2003. The additional
4 components related to operating expenses and rate base
5 include the annualizing adjustments to operating expenses
6 and rate base, the known and measurable changes to
7 operating expenses and rate base, and the additional rate
8 base and expense adjustments are detailed in my exhibits.
9 Q. What were the forecasted components to the
10 test year?
11 A. The forecasted components include the
12 following items: (1) other operating revenues, (2) other
13 revenues and expenses, (3) operation and maintenance
14 expenses, (4) property insurance expense, (5) regulatory
15 expenses, (6) depreciation and amortization expense, (7)
16 taxes other than income, (8) Idaho Energy Resources Company
17 rate base and income statement, ( 9) electric plant in
18 service and related items, (10) materials and supplies,
19 (11) deferred conservation programs, (12) other deferred
20 programs, (13) deferred income taxes, (14) customer
21 advances for construction, and (15) deductions from
22 operating and maintenance expenses.
SMITH, DI 4
Idaho Power Company
1
2
Q.
A.
Please summarize the test year adjustments.
After the initial 2003 test year information
3 was compiled, the 2003 operating and maintenance expenses
4 were reduced by standard ratemaking adjustments, followed
5 by annualizing adjustments, known and measurable
6 adjustments, and other adjustments. The additional
7 components included in this filing for annualizing
8 adjustments to operating expenses and rate base are
9 adjustments for payroll, property and liability insurance,
10 depreciation, depreciation reserve, and annualized major
11 plant additions and their associated impacts. The
12 additional components for known and measurable changes to
13 operating expenses and rate base are salary structure,
14 employee incentives, pension service cost, property and
15 liability insurance, depreciation, depreciation reserve,
16 American Falls interest, major plant additions known to
17 occur through May 2004 and their associated impacts, and a
18 reduction to operating expense for non-reoccurring
19 prescription expenses related to 2002. The May 2004 cutoff
20 for major plant additions was given to me by Mr. Gale.
21
22
Q.
A.
How was the forecast method determined?
In preparation for the split test year
SMITH, DI 5
Idaho Power Company
1 methodology, the Finance Department, in consultation with
2 various other Company departments, developed the
3 methodology used to prepare the forecast portion of the
4 case. Each area developed the methodology to estimate the
5 remaining six months of 2003 starting with the approved
6 2003 budgets. A rebudget process was begun to reflect the
7 projected expenditures for both Operating and Maintenance
8 (O&M) and Capital project spending from April through
9 December. The Idaho Power Company business units were
10 asked to provide updates to the original 2003 O&M and
11 Capital Budgets as we reviewed our work priorities through
12 to the end of 2003. Additionally, the business units were
13 requested to identify major plant additions that would
14 close to plant Account 101 through May of 2004. Each
15 Company cost center reviewed their expected expenditures
16 for new positions and payroll-related items including
17 benefit expense. Each cost center also reviewed project
18 timing for both O&M-related projects and construction-
19 related projects, and any other known changes to planned
20 work for the remainder of the year. This information was
21 then compiled to produce a May through December restatement
22 of all O&M and Capital budget items.
SMITH, DI 6
Idaho Power Company
1 The case is prepared with January through June
2 actuals combined with the results from the process above to
3 produce the 2003 results. A variety of methodologies were
4 identified that best fit the component being forecasted
5 including meetings with cost center managers, updated
6 estimates for timing of projects which were reflected in
7 our projections, comparisons to prior years actuals,
8 analysis of historical data including five years of history
9 where applicable, and inclusion of any updated expenditures
10 that were not known during the annual budgeting cycle.
11
12
Q.
A.
Would you please describe Exhibit No. 16?
Exhibit No. 16 is a compilation of the
13 Company's supporting schedules for the twelve months ended
14 December 31, 2003. Page 1 of Exhibit No. 16 sets forth the
15 development of the Other Operating Revenues (Accounts 451,
16 454, and 456) for the 2003 test year. Page 2 of Exhibit 16
17 shows the Other Revenues (Account 415) and Expenses
18 (Account 416) for the year 2003. The 2003 operating and
19 maintenance expenses, by FERC accounts, appear on pages 3
20 through 6 of Exhibit No. 16.
21 Q. Would you please describe pages 7 through 12
22 of Exhibit No. 16?
SMITH, DI 7
Idaho Power Company
1 A. Page 7 reflects the detail of Account 924,
2 Property Insurance Expense. Page 8 reflects expense for
3 Account 928, Regulatory Commission Expense. Pages 9 and 10
4 show total depreciation and amortization expense by plant
5 account. Page 11 shows the Prairie Power acquisition
6 amortization adjustment for gains and losses. Page 12
7 shows the detail of the Taxes Other Than Income Taxes.
8
9 No. 16?
10
Q.
A.
Would you please describe page 13 of Exhibit
Page 13 of Exhibit No. 16 develops the net
11 earnings from IERCo that are added to the booked operating
12 income for ratemaking purposes.
13 Q. How does the Company treat IERCo's earnings
14 and investment for ratemaking purposes?
15 A. The primary purpose of IERCo is to mine
16 coal, which provides fuel for the Jim Bridger thermal power
17 plant in Wyoming. Consistent with prior Commission orders,
18 the Company treats IERCo's coal operations as a part of its
19 utility operation and accordingly adds the current year
20 IERCo earnings to electric operating income and the
21 investment in IERCo to the net electric rate base.
22 Accordingly, I have deducted the interest income on notes
SMITH, DI 8
Idaho Power Company
1 receivable from Idaho Power Company (line 10, page 13 of
2 Exhibit No. 16) and I have deducted notes payable to IERCo
3 in determining the Company's net investment in IERCo to be
4 included in the rate base (Line 14, page 22 of Exhibit No.
5 16) .
6 Q. Why have you made these adjustments to
7 IERCo's earnings and rate base in this proceeding?
8 A. I have made adjustments to reduce IERCo's
9 rate base for notes payable of $5,909,558 and the
10 associated interest income adjustment of $78,613 to allow
11 IERCo's rate base and earnings to reflect only the cash
12 required to fund IERCo operations for the year 2003. If
13 IERCo were to use these funds to make a distribution of
14 earnings to the Company, or if the Company were to actually
15 fold IERCo into its own operations, the result would be the
16 same as presented herein.
17 Q. Would you please describe the data contained
18 on pages 14 through 22 of Exhibit No. 16?
19 A. Pages 14 through 22 of Exhibit No. 16
20 reflect the development of all the components applicable to
21 the combined system rate base of the Company for the year
22 2003. Page 14 of Exhibit No. 16 reflects the balance by
SMITH, DI 9
Idaho Power Company
1 month and the thirteen-month average of Electric Plant in
2 Service (Account 101). Page 15 of Exhibit No. 16 reflects
3 the balance by month and the thirteen-month average of
4 Accumulated Provision for Depreciation (Account 108). Page
5 16 of Exhibit No. 16 reflects the balance by month and the
6 thirteen-month average of Accumulated Provision for
7 Amortization (Account 111). Page 17 of Exhibit No. 16
8 reflects the balance by month and the thirteen-month
9 average of Materials and Supplies (Accounts 154 and 163).
10 Page 18 and Page 19 of Exhibit No. 16 reflect the balance
11 of the Company's Conservation and Other Deferred Programs.
12 For these programs the Company includes the December 31,
13 2003 ending balance in rate base consistent with prior
14 orders of this Commission. Page 20 of Exhibit No. 16
15 reflects the balance at the beginning and end of 2003 and
16 the average balance for Accumulated Deferred Income Taxes
17 (Accounts 190, 282, and 283). Page 21 of Exhibit No. 16
18 reflects the balance by month and the thirteen-month
19 average of Customer Advances for Construction (Account
20 2 52) . Page 22 of Exhibit No. 16 reflects the balance by
21 month and the thirteen-month average of the rate base
22 components for IERCo, consistent with prior orders of this
SMITH, DI 10
Idaho Power Company
1 Commission.
2 Q. What adjustments have you made to the 2003
3 information for ratemaking purposes?
4 A. After the initial 2003 test year information
5 was compiled, the 2003 operating and maintenance expenses
6 were reduced by standard ratemaking adjustments, followed
7 by annualizing adjustments, known and measurable
8 adjustments, and other adjustments. The additional
9 components included in this filing for annualizing
10 adjustments to operating expenses and rate base are
11 adjustments for payroll, property and liability insurance,
12 depreciation, depreciation reserve, and annualized major
13 plant additions and their associated impacts. The
14 additional components for known and measurable adjustments
15 to operating expenses and rate base are salary structure,
16 employee incentives, pension service cost, property and
17 liability insurance, depreciation, depreciation reserve,
18 American Falls interest, major plant additions known to
19 occur through May 2004 and their associated impacts, and a
20 reduction to operating expense for non-reoccurring
21 prescription expenses related to 2002. The May 2004 cutoff
22 for major plant additions was given to me by Mr. Gale.
SMITH, DI 11
Idaho Power Company
1 Lastly, I have made certain other adjustments to operating
2 expense and rate base that are primarily related to
3 specific regulatory treatment of these items.
4 Q. Have you prepared or supervised the
5 preparation of exhibits detailing these adjustments to the
6 books and records of the Company for the year 2003?
7 A. Yes. I have supervised the preparation of
8 Exhibit Nos. 17 through 20, which reflect certain
9 adjustments to the 2003 results of operation and rate base.
10
11
Q.
A.
Would you please describe Exhibit No. 17?
Exhibit No. 17 reflects the detailed support
12 of deductions from the operation and maintenance expense of
13 the Company for certain general advertising, memberships,
14 and contributions. This adjustment has been made by the
15 Company to comply with prior orders of this Commission.
16 The adjustments shown on Exhibit No. 17 are reflected on
17 page 1 and page 2 of Exhibit No. 17.
18
19
Q.
A.
Would you please describe Exhibit No. 18?
Exhibit No. 18, consisting of 4 pages,
20 reflects the detailed support for annualizing adjustments
21 to the 2003 operating expenses and the rate base of the
22 Company. These adjustments reflect changes to certain
SMITH, DI 12
Idaho Power Company
1 expense and rate base items as if they had been in
2 existence for a full year or to year-end 2003 levels,
3 whichever is applicable. Items adjusted to year-end levels
4 include an increase in operating payroll of $2,913,244 and
5 property and liability insurance expense of $384,583.
6 The total annualizing adjustment shown on page 1 of
7 Exhibit No. 18, line 3 amounts to an increase to operating
8 expense of $3,297,826. The computations for the amounts
9 are shown on page 2 of Exhibit No. 18. Page 3 shows the
10 annualized impacts of major plant additions for production
11 and transmission assets. The net annualizing adjustment to
12 rate base is $19,779,389. The related changes to
13 Depreciation Expenses, Depreciation Reserve, Property Tax,
14 and Insurance Expense are shown on line 7 of Exhibit No.
15 18. Page 4, lines 3 and 4, details by major asset group
16 the change to Depreciation Expense (Account 403) and
17 Depreciation Reserve (Account 108).
18
19
Q.
A.
Would you please describe Exhibit No. 19?
Exhibit No. 19, consisting of 5 pages,
20 reflects the detailed support for certain known and
21 measurable adjustments to expenses and rate base that have
22 occurred subsequent to year-end 2003. A summary of the
SMITH, DI 13
Idaho Power Company
1 various adjustments is shown on page 1 of Exhibit No. 19.
2 Q. Would you please describe the known and
3 measurable adjustments that were made to the annualized
4 2003 results of operations?
5 A. Line 1, page 1 of Exhibit No. 19 is the
6 normalized annual employee incentive expense of $5,114,821.
7 Line 2, page 1 is an increase to Operating Pension Expense
8 of $2,170,163 to reflect service costs for 2003, which is
9 more representative of pension costs going forward. Line
10 3, page 1 is a $280,107 reduction related to 2002
11 Prescription Expenses booked in 2003. Line 4, page 1 shows
12 the operating payroll adjustment of $2,241,595 to estimate
13 the Company's general wage adjustment for 2004. Line 5,
14 page 1 reflects the increased costs associated with
15 American Falls Falling Water payments. Line 6, page 1
16 reflects an increase to operating expense for premium
17 increases for 2004.
18 The computation and detail supporting the amount
19 shown on page 1 of Exhibit No. 19 are shown on pages 2
20 through 3 of Exhibit No. 19.
21 Page 4 of Exhibit No. 19 shows the known and
22 measurable impacts of major plant additions for
SMITH, DI 14
Idaho Power Company
1 transmission assets that will be in service through May
2 2004. The known and measurable adjustment to rate base is
3 $18,388,690. The changes to Depreciation Expense,
4 Depreciation Reserve, Property Tax, and Insurance Expense
5 are shown on line 5, page 4 of Exhibit No. 19 (Account
6 4 0 3) • Page 5 details by major asset group the change to
7 Depreciation Expense (Account 403) and Depreciation Revenue
8 (Account 108).
9
10
Q.
A.
Would you please explain Exhibit No. 20?
Exhibit No. 20 consisting of one page
11 reflects additional adjustments to rate base or operating
12 expense resulting from charges to Account 101, Electric
13 Plant in Service, Account 108, Accumulated Provision for
14 Depreciation, Account 114, Electric Plant Acquisition
15 Adjustments, Account 115, Accumulated Provision for
16 Amortization of Electric Plant Acquisition Adjustments,
17 Account 182.3, Other Regulatory Assets, Account 165,
18 Prepayments, Account 454, Other Operating Revenue and
19 Account 928, Regulatory Commission Expense.
20 Q. Would you please describe the adjustments to
21 rate base, operating revenues and operating expenses on
22 Exhibit No. 20?
SMITH, DI 15
Idaho Power Company
1 A. Exhibit No. 20, line 1 details the
2 unamortized portion of extraordinary costs associated with
3 increased security measures implemented on company property
4 since September 11, 2001. The amortization is included in
5 2003 operating expense and will be amortized over the next
6 five years per IPUC Order No. 28975. Line 2 details an
7 increase to operating expense to recover intervenor funding
8 paid to the Land and Water Fund of the Rockies per IPUC
9 Order 28927. Lines 3 through 5 show the unamortized
10 portion of the Electric Plant Acquisition Adjustment
11 associated with the Prairie Power Rural Electric
12 Cooperative purchase in July 1992. Line 6 reflects an
13 increase to Other Operating Revenue for pole attachment
14 revenues to be received in January 2004 that applies to
15 service to be provided in December 2003. Lines 7 and 8
16 reflect rate base adjustments directly offsetting prior
17 entries to Account 101, Electric Plant in Service and
18 Account 108, Accumulated Provision for Depreciation made
19 during 2003. Statement of Financial Accounting Standard
20 143 (SFAS 143) implemented in January 2003 requires
21 specific accounting for Asset Retirement Obligations. SFAS
22 143 has no revenue requirement impact in this case. Line
SMITH, DI 16
Idaho Power Company
1 10 reflects the balance of Account 165320 Prepaid Pension
2 Expense after deducting service costs for 2003.
3 Q. Are all the data and their adjustments made
4 to your exhibits and supporting schedules calculated on a
5 total system basis?
6
7
A.
Q.
Yes.
Does this conclude your direct testimony in
8 this case?
9 A. Yes, it does.
SMITH, DI 17
Idaho Power Company