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HomeMy WebLinkAbout20040319Ripley Rebuttal.pdf,;'- :;L\, i:.L . ,,- ,".."n ! 9 PH 4: , ,, ' r" . - , U i ; L. \ I i c:..:J l, U - ", iSS\ON BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. IPC-O3- IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO INCREASE ITS INTERIM AND BASE RATES AND CHARGES FOR ELECTRIC SERVICE. IDAHO POWER COMPANY DIRECT REBUTTAL TESTIMONY LARRY D. RI PLEY please state your name and business address. My name is Larry D. Ripley and my business address is 1221 West Idaho Street, Boise, Idaho 83702. What is your educational background? I received a B. S. in business from the University of Idaho in 1960 and my LL.B. in 1962.I have attended numerous conferences and seminars throughout the years concerning public utility regulatory matters. Please outline your business experience. I was admitted to the Idaho State Bar in 1962, and after a short time in the Army Reserve, I was employed by the Idaho Attorney General's office in mid-1963 as legal counsel for the Idaho Public Utili ties Commission and Idaho State Tax Commission.In 1965 I transferred to the Idaho Public Utili ties Commission as a salaried employee wi th the title of Assistant Attorney General assigned to the In late 1971, I left theIdaho Public Utili ties Commission. Idaho Public Utilities Commission and joined a law firm. represented Idaho Power Company as a private attorney for a number of years and became a salaried Idaho Power Company I retired from Idahoemployee-attorney in March of 1992. Power Company in May of 2003 but agreed to continue to handle certain matters which I had been engaged in prior to my retirement.Since 1963 to date my practice has been primarily involved in public utility regulatory law before RIPLEY, Di-Reb Idaho Power Company the Idaho Public Utili ties Commission and other regulatory agencies, and in court litigation involving public utility regulatory law. Did Idaho Power Company request that you review the Staff's proposed income tax methodology as set forth in Mr. Holm s prepared testimony, pp. 25 through 33, in this proceeding? Yes. What is your understanding as to the income tax methodology that Staff is proposing for this proceeding? Staff is proposing that Idaho Power s income tax expense that is used to determine the Company s revenue requirement be based upon what Staff terms the "average effective tax rate over the last five years including 2003, which in reali ty is simply the ratio that is obtained when Staff compares income taxes to regulatory income for those Staff proposed that this ratio be used as the taxyears. gross-up rate on the revenue deficiency as well. In your opinion, should Staff's proposal be accepted by the Commission? Staff's proposal is a violation of theNo. test year methodology that the Commission must utilize in determining Idaho Power s revenue requirement. Why do you contend that Staff's proposal would be a violation of the test year methodology? RIPLEY, Di-Reb Idaho Power Company The Commission utilizes a test year adjusted for known and measurable changes to arrive at a revenue requirement that is used to determine the rates Idaho Power should charge for the future.Nei ther revenue nor expense items based on past events , which are extraordinary and will not occur in the future, can be used to determine a utility s revenue requirement; in this case Idaho Power I will not burden this record with arevenue requirement. number of legal citations that state this fundamental It is sufficient to refer to 'the Idaho Supremeproposi tion. Utah Power Light v. Idaho Public Utili tiesCourt case, Commission, 685 P. 2d 276, 107 Idaho 47 (1984) .In tha proceeding the Idaho Commission had ruled that there was a general prohibi tion against setting rates based on previous periods of unreasonably high or unreasonably low rates.The Idaho Supreme Court affirmed this concept by stating that to take into account previous extraordinary revenues or expenses, which will not reoccur, would be retroactive In the instant proceeding Staff has obviouslyratemaking. been influenced by a large income tax deduction Idaho Power included in its 2001 income tax return, resulting in a refund which was paid in 2002. In your opinion, can Staff take into account the one-time out-of-period income tax deduction? Since this proceeding does not involveNo. RIPLEY, Di-Reb Idaho Power Company ei ther 2001 or 2002, the deduction must be considered a one- The position advanced by thetime out-of-period event. Staff is a violation of years of revenue requirement determinations by this Commission.This Commission has observed that it will not take into account prior extraordinary events which have increased the utility expenses unless appropriate orders have been obtained to amortize these expenses over a period of time.The Commission's pronouncements have been. clear that any attempts to obtain this authorization after the fact will The same is equally true of extraordinarynot be permitted. The Commission has observed that it cannotrevenue items. capture extraordinary revenues that are non-reoccurring A test year, adjusted for known andoutside of a test year. measurable changes which will o-ccur in the future, is the proper procedure by which a utility s revenue requirement, Staff's proposal toand thus its rates, are determined. reach back in time and capture a past reduction in income tax expense which will not reoccur in the future is a clear violation of the Commission s and the Supreme Court' s pronouncements that the establishment of Idaho Power revenue requirement will be determined utilizing a test year adjusted for known and measurable changes that will occur in the future. Do you agree that Staff's proposal to change RIPLEY, Di-Reb Idaho Power Company the tax gross-up factor on the revenue deficiency is reasonable and appropriate? The Staf f proposal to changeNo, I do not. the tax gross-up factor is not reasonable for the same reasons I have just discussed.The Commission is setting rates for the future, and if the revenue requirement upon which those rates are based is artificially low, clearly confiscation will occur.If the Commission adopts Staff' proposal to use a tax gross-up rate which is lower than the actual rate upon which Idaho Power s income' will be taxed, the Company will not have an opportuni ty to attain the revenue requirement which the Commission will have determined Idaho Power is entitled.A built-in discount by using a past income tax deduction , which will not occur in the future, to determine Idaho Power s revenue deficiency is unreasonable and in my opinion unlawful. During the period that you represented Idaho Power Company before this Commission , have there been occasions when the Commission has reviewed Idaho Power Company s revenue requirement based on a change in the income tax rates? The Commission has ruled in the pastYes. that an adjustment to Idaho Power Company s rates or revenue requirement is appropriate taking into account a change in newly enacted income tax rates.Such adjustments were RIPLEY, Di-Reb Idaho Power Company prospective, not retroactive. Could you briefly describe those proceedings. Case No. IPC-93-24 involved an increase in Idaho Power Company s revenue requirement as the result of the federal income tax rate being increased from 34 percent The Commission stated that it can process ato 35 percent. single-issue rate case based on a change in Idaho Power A copy of CommissionCompanys actual income tax rates. Order No. 25339 that was issued in that proceeding is In Case No. U-1500-164 theattached as Exhibi t 72. Commission determined that it could investigate Idaho Power Company s revenue requirement based on a reduction in the federal income tax rate from 46 percent to 34 percent.The final order in that case was Order No. 21364, a copy of which is attached as Exhibit 73. Did the Commission in either of these proceedings use an average ratio of income tax expense over a period of years? The Commission based its considerationNo. upon the actual income tax rates that would be in effect during the year under investigation.The Commission determined that this was the appropriate method to determine Idaho Power Company s revenue requirement for the future due Staff's proposedto a change in income tax rates. methodology is contrary to the Commission s determinations RIPLEY, Di-Reb Idaho Power Company in those proceedings. Did the Commission in these proceedings allude to retroactive ratemaking? The Commission observed that it couldYes. not use prior years income tax rates, whether more or less, to determine Idaho Power Company s revenue requirement. Has the Commission ever used anything other than currently enacted income tax rates to determine' Idaho Power s revenue requirement? The Commission has always used currently enacted income tax rates that reflect actual or known changes to determine Idaho Power s revenue requirement. Has Staff recommended amortization of the tax deficiency payment included in Idaho Power Company s revenue requirement over a three-year period? Yes. Do you believe this is consistent wi previous Commission orders? In Order No. 17499 issued in Case No. U-No. 1006-185 (1982), the Commission specifically opined that it would not recognize tax contingencies for ratemaking purposes and rejected them.The Commission did state that it would include income tax deficiencies that had been paid in the test year in the test year revenue requirement. Since the Commission s ruling on that issue is very short RIPLEY, Di-Reb Idaho Power Company and succinct, I will quote from the pertinent part of that Order: We find that recognizing these contingencies for ratemaking purposes is not reasonable and reject them. We will allow the Company to recover as a tax expense any contingency actually paid in the year that itis paid. But, in the meantime, we find that it is not just and reasonable to charge ratepayers for these contingencies until they are paid. Order No.7499, p. 24. Mr. MacMahon has stated that the Staff income tax proposals cause a violation of the Internal Revenue Code normalization provisions.Has the Commission ever had occasion to rule upon the action it will take if it is determined that Idaho Power Company s income taxes for revenue requirement purposes have been calculated based upon an unauthorized flow-through of tax benefits prohibited by the Internal Revenue Code? Al though not pleased with the result,Yes. the Commission observed in Order No. 21651 that it would not require a flow-through treatment of an income tax adjustment where the flow-through would be a violation of the Internal A copy of Order No. 21651 is attached asRevenue Code. Exhibit 74.The reason for the Commission s action described in Order No. 21651 is equally apparent.If the Company is required to flow through a tax benefit which is required to be normalized under the federal tax code, the utili ty, in this case Idaho Power Company, loses the tax RIPLEY, Di-Reb Idaho Power Company benefi t and thus the Commission s calculation utilizing flow-through is erroneous and would result in an increase in revenue requirement. What income tax rates should the Commission use to compute Idaho Power Company s income tax expense for purposes of determining Idaho Power Company s revenue requirement? The Commission should use the currently enacted federal and state statutory rates which are the rates that Idaho Power Company used to compute its income tax expense for purposes of determining its revenue requirement in this proceeding.The Commission should also use the gross-up rate of 1.642 that results when the existing composite statutory rates are used. Does this conclude your direct rebuttal testimony in this case? Yes, it does. RIPLEY, Di-Reb Idaho Power Company BEFORE THE IDAHO PUBLIC UTiliTIES COMMISSION CASE NO. IPC-13 , IDAHO POWER COMPANY EXHIBIT NO. 72 l. RIPLEY Order No. 25339 CI8Il.. yw r'I, -.. JAN 10 1994 BEFORE THEIDABO PUBUC UTILITY COl\1MlSSI0N , IN THE MATTER OF THE APPUCATION ) OF IDAHO POWER FOR AUTHORITY TO ) 0 FFS E T THE GAIN FRO M THE SALE OF) TEE EAlLEY TURB lNE A GAJN S T THE REVENUE HE U1REMENT IN CREASE CAUSED BY CHANGES IN FEDERAL TAX RATES. CASE NO. IPC.93~ ORDER NO. 25339 S lJM1.'f.- A..RY On January 27 , 1993 , this Commission issued Order No. 24676, Case No. IPC-92-, approvillg Idaho Power Company s (Jdaho Power, Company) request to sell its Hai1ey Combustion Turbine to an out of state purchaser. At the time of the Commission s Order, it was known that there wou1d be a net gain to ratepayers from the sale although the precise amount of the gain was not known due to as of yet' inCUITed costs of the sa1e (e.g., site restoration). The Order directed Idaho Power to file for a det.€rmmation of the accounting and rat.€making treatment to be given the sa1e DO 1ater than September 30, 1993. On September 30, 1993, Idaho Power made two separate filings. The Company fiJed for a determination of accounting and ratemaking treatment in the 92-9 case. It a1so fiJed a petition in the present case for authority to offset the net gain from the sa1e of the turbine against the recent increase in Idaho Power s income tax rates. In a N(ltice (If Modi:5ed PrlY'-edu.re, the Cc::nm5ssio~ ~corpcrr.tcd the 92- case into the present one. By this Order we grant in part and reject in part Idaho Power's Petitions. IDAHO POWER On August 6, 1993 , the Umted States Congress passed the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) retroactively increasing the marginal corporate income tax rate effective January 1, 1993. ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, IPCo Page 1 of 8 The Company estimates an increase in its Idaho juri;dictibnal revenue requirement in the amount of $2,270 673 resulting from OBRA 93. The Idaho jurisdktional share of the net gain from the sale of the Hailey Turbine is $3,645 108. The Company proposes that it be p€rmitted to offset this gain against the projected iDcrease in its Idaho jurisdictional revenue requirement, due to the tax iDcrease, for the years 1993 and 1994 in the amount of $4 541 286 or $2,270 643 for each year. Thus, Idaho Power s shareholders win, essentially, absorb a total of $896 178 in increased taxes over two years. For years commencing after January 1, 1995, if the Commission has Dot yet completed a review of the Company s revenue requirement, Idaho Power would absorb the increase in revenue requirement due to the increase in the income tax rates. Idaho Power argues that the CoIDIJ:Dssion has previously ruled that changes in the Company s revenue requirement caused by changes in its income tax rate win be reflected in its revenue requirement following an investigation by the CoIDnilssion. The Company contends that it would promote rate stability and, therefore, the public interest to offset the gain from the Hailey Turbine against the increased income taxes. COMM1SS10N STAFF Staff is the only party that filed comments~Staff notes that the conventional accounting treatment at the time of the retirement of depreciable electric utility plant, based on the Uniform System of Accounts , would be to remove the original cost of the aEset from the asset aa:ount. Account 108, Accumu1ated provision for Deprecia tion, would be charged with the book cost of the property retired and the cost of removal and credited with the salvage value and any other amounts recovered. The gain aEsociated with the transaction would be reflected as an increase in the accumulated provision for depreciation, the reserve account, and would , in future yeaTI, benefit ratepayers by reducing the rate base on which they must pay a return. Staff notes that ordinarily this treatment is reasonable when the specific assets involved win be replaced and the replacement assets will be used in the continued operation of the utility, Where the assets involved are removed from ORDER NO, 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, IPCo Page 2 of 8 r€gulatory operations, such as being sold to a' thiro party, however, it is Staff, opinion that extraordinary treatment is required to preserve the integrity ofthe rate base. Staff also believes that extraordinary tr€atment is required when the assets r€present a major portion of the total account balances. Both of these exceptions apply, Staff CDntends, to the sale of the Hailey Turbine. Staff notes that an alternative to permanently deueasing the rate base is to place the gain in a regulatory account with amortization over a period of years. The anIlual amortization of the gain would be included as a reduction of the revenue reqwrement. This would pass the gain onto ratepayers. The unamortized gain can be used as a reduction to rate base but this would lower shareholders' return over the life of the defeITal. Staffb€lieves that the unamortized 'portion ofthe gain should not be used as a reduction to rate base. This win maintain the shareholders' return whi1e passing the gain onto ratepayers. Staff argues that the Company is , in effect, asking to recover retroactively the amount of the inCr€ase in taJtes accruing for 1993 as well as prospectively recovering amounts that win accrue in 1994. Although as explained later, Staff does not take exception to the Company s proposal to offset future increases in its accrued tax expense associated with OBRA 93 against the gain from the sale of the Hai1ey Turbine , it does oppose the retroactive offsetting of incremental OBRA 93 related tax expense for 1993 with proceeds from the Hai1ey Turbine sale. Although it appears the United States Congress has the authority to raise rates retroactively, Staff believes that the Commission does not. Staff aJntends that the Comm5ssion did not, at any time, put Idaho Power's customers on notice that the Company's rates might Dot be just and reasonab1e in 1993 and were, therefore, subject to retroactive adjustment, nor were there past pract1ces such as a trawDonal deferral and tracking through of changes in tax expenses that would imply that rates were subject to retroactive adjustment due to a change in tax rates. Although the Commission did order Idaho Power and other utilities in Idaho to adjust rates to reflect the Tax Reform Act of 1986 (TRA 86), Staff notes, all cbanges were on a prospective basis even though Dot all Orders were issued before ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, IPCo Page 3 of 8 the actual change in rates occurred. In fact, the Commission took great pains to ensure that changes in rates would occur on a prospedive basis by issuing its Order initiating generic Case No. U-1500-164 in January of 1987 , well before the effective date of the tax change on July 1, 1987. Even so, when final Order No. 21364 addressing all issues related to Idaho Power was not issued until July 29, 1987, no attempt was made to somehow r~apture tax savings realized by Idaho Power betwe€n the eff~tive date of the TRA 86 and the e ffective date of the Order. Staff states that it is generally opposed to single item rate cases when a r~ent determination of the Company s revenue requirement has not be€n made. Adilltionally, with Idaho Power , there have been numerous deferrals and single item cases since 1986 that should be evaluated when detenllining the Company normalized earned rate ofreturn and revenue requirement. An offset ofthe increased tax expense from OERA 93 v.'ith the gain on the sale of the Hailey Turbine generates questions regarding the actual normalized earnings of Idaho Power and whether the offset is ne€ded, Staff asserts. The Commission has, however, previously hand1ed changes in tax rates as a single issue rate case. A review of earnings was determined not to be necessary when the reduction in tax expense from the TRA 86 was offset in 1987 against the revenue requirement for Idaho Power associated with accumulated cogeneration and small power production deferrals. Staff suggests that actlJal , normalized earned return levels do not need to be explored in this case. Earnings will be reviewed when the deferral for Financial Accounting Standard No. 106 (FAS-I06), Accounting for Post-Retirement Benefits other than Pensions, is included in rates or when the Company IDes its next general rate case. Order No. 24-831 issued in Case No. IPC-92-28 approving the deferral of the post-retirement benefit expenses included a requirement for an earnings test. If earnin~ are above the authorized rate of return, the full aJDount of deferred F AS- 106 costs will not be included in rates. This earnings test provides a safeguard that an offset of the increased tax expense from OEM 93 against the gain from the sale of the Haney Turbine will Dot provide excessive returns for Idaho Power. ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, IPCo Page 4 of 8 Staff recmnmends, therefore, that Idaho Power be allowed to offset its Dormalized in~mental t3.x expense associated with OBRA 93 on a prosp~ti~e basis from the date of the Commission s final Order entered in this case with the gain from the sale of the Hailey Turbine. Using this method and the calculations provided by Idaho Power in its filing, Staff would anticipate that if the Company s general rate case is fi1ed when expected, with new rates in effect by year end 1994, approximately $1,200 000 of the Hai1ey Turbine gain win remain for disposition in the general rate case. IDABO POWER RESPONSE Idaho Power argues that its proposal to offset 1993 related taxes is not retroactive ratemaking. According to the Company, ratemaking is retroactive only if rates are changed to recover or refund a past IDCre8..5e or decrease in expenses or reveDues. The Company CDnc1udes that until the event which gives rise to the lDCT€ase or decrease in exp€D.5es or revenues OCC1lTS, there is no retroactive a pplica tion. Idaho Power states that the increased income taxes related to OBRA 93 are not CDnsidered to be payable until the last two ins~nments for the 1993 ca1endar year, September 15, 1993 and December 15, 1993. More importantly, the Company Dotes, Congress , in firing the time of the actual payment of the expense, provided that penaltjes for the underpayment of estimated taxes are waived for underpayment of 1993 taxes attributable to the change in tax rates resulting from OBRA 93. Thus, the Company bas until March of 1994 to pay the increased tax without incurring any penalty. The Company states tbat "it is well established in tax law tbat the additional tax is a future liability and CDl1~tion of the tax (Le., the incurring of the expense) will Dot be retroactive. FINDINGS AB Idaho Power Dotes, this Commission bas historically anowed the Company to capture, for purposes of ratemaking, increases in its income tax rates occurring betwe€n rate cases (Case No. U-1500-164). We find no justification for deviating from this practice in this case. ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, (PCo Page 5 of 8 In our miDas, the issue before us is not whether" '"' a utility may include an expense in rates that is retroactive. It is a fundamental tenet ofut1lity law that rates must be set prospectively and exp€nses incurred by a utility in a previous period may not later be re\:overed through rates unless prior notice of deferred recovery has been given or can reasonably be construed from past practices of the Commission. Idaho Code ~ 61-502 provides: Whenever the Commission. . . shan find that the rates. . . are unjust, unreasonable , discriminatory or pT€ferential, . . , or that such rates. . . are insufficient, the Commission shall determine the just, reasonable or sufficient rat€s . . . to be thereafter observed. . . . The question we must answer is whether a11owing the Company the offset it seeks for OBRA 93 ~s, in itself, retroactive. W1D1e OBRA 93 was given an effective date of January 1, 1993, it was not pasS€d until August 6, 1993. Thus, the earliest that Idaho Power rou1d have approached this Commission 5e€king rate recovery re1ated to the tax increase was sometime after August 6. AB stated, Idaho Power made its filing on September 30, 1993. Thus , we find that the Company pursued rate relief with reasonable diligence. We also find that ,this is not a typical retroactive situation in which, for example , a utility seeks in a general rate case to include an expe~ incurred during a period that has since expired. In this case, the tax increase was for the entire year of 1993 and forward. Idaho Power filed its Petition during 1993. The period in question, therefore, had not yet expired. Our analysis does not end here. We concerned about the length of time since Idaho Power fiJed its 1E..st general rate case. Idaho Power has increasingly relied upon the habit of filing single item rate cases, often offS€ttiDg credit items against debita. The advan~e of this practice is that it promotes rate stability. The more time that expires since the Company's earnings were last analyzed, however, the greater the concern that its rates no longer valid. In C8.S€ No. IPC-93-25, Order No. 24806, we rejected Idaho Power's request to pass 100% of net power supply costs on to ratepayers in lieu of a 60-40% sharing until Idaho Power filed a general rate case at which time the percentage would llCI"€ase to 90-10. It is still not bOWD when the Company intends to fi1e a general rate case. We find, therefore, that Idaho ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, IPCo , Page 6 of 8 Power may offset OERA 93 related t.a.Xes for 1993 agronst the gain from the saleo- the Hailey Turbine. We make DO decision, at this time , as to a similar offset for 1994 OERA related expense. ORDER IT IS HEREBY ORDERED that Idaho Power may offset OERA 93 related tax increases ~ainst the gain from the sale of the Haney Turbine for the entire year of 1993. The decision as to an offset for the 1994 increased tax expense win be made in the future, if presented to the Commission. TillS IS A FJNAL ORDER. !illy pen3on interested in this Order (or in issues fiDa11y decided by this Order) or in interlocutory Orders previously issued in this Case No. IPC-93-24 may petition for reconsideration within twenty-one (21) days of the service date of this Order with regard to any matter decided in this Order or in inter1ocutory Orders previously issued in this caSe No. IPC-93-24. Within seven (7) days after any pen3on has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~. 61-B26. ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L. Ripley, IPCo Page 7 of 8 DONE by Order of the Idaho Public Utilities Cbmmission at Boise, Idaho this 7 '6L day of January 1994. iJJ // J: , MARSHA H. SMITH, PRESIDENT :i cre: Mille:" vi tro.:Jt mini a1 DEAN J. MILLER, COMMISSIONER r/ J..--,~ RALPH LSON, COMMISSIONER ATTEST: Myrna J. Walters Co:mmission Secretary VLD/O-IPC-93-24. ORDER NO. 25339 Exhibit No. 72 Case No. IPC-O3- L Ripley, IPCo Page 8 of 8 BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. IPC-O3~ IDAHO POWER COMPANY EXHIBIT NO. 73 L. RI PLEY Order No. 21364 ,",UL. '" iJ I~O/. BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE INVESTIGA- TION OF THE EFFECTS OF REVISIONS OF THE FEDERAL INCOME TAX CODE UPON THE COST OF SERVICE REGULA TED UTILITIES. CASE NO. U-1500-164 ORDER NO. 21364 This nnal order comp1etes our investigation of the effects of revisions of the federal and state income tax codes upon the revenue requirement of Idaho Power Company. For the reasons stated in this Order, we estimate the reduction in Idaho Power s revenue requirement resu1ting from changes in federal and state income tax laws as $5,600,728 to offset exactly the increase in revenue requirement recognized by Order No. 21363, issued today in Case No. U-I006-288. This estimate is not a ca1cu1ated number, but is a settlement of questions left open by our previous orders. We wi11 not repeat the history of our investigation into the effect of the federal and state income tax law changes upon the revenue requirement of regulated utilities. It appears in Orders previously issued in this generic proceeding, which has been underway since January.Instead, our starting point for discussion is Order No. 21340, issued July 20, 1987. In that Order we rejected Idaho Power s argument that we should consider in this proceeding the effect of poor streamnow conditions, resulting in reduced hydroelectric generation and increased fuel and purchased power expenses, upon the Company s rmanciaI health. We said: We are compel1ed to reject Idaho Power Company s legal argument that it is entitled to present evidence at a hearing of poor financial" performance as a re2son for not reducing its rates in light of TRA-86. We may appropria tely limit the issues to be considered in this case to the single issue of changes in rates required by the Tax Reform Act. ORDER NO. 21364 Exhibit No. 73 Case No. IPC-03- L. Ripley, IPCo Page 1 of 6 However, when we initiated this proceeding, we provided that our tax investigation would aHow those utilities whose rates are set under normalized conditions to provide normalized rather than actual changes in revenue requirement associated with 1986 opercnions. But , it is difficult to quantify normalizing adjustments in the absence of a general rate case or protracted hearings. This difficulty leads to uncertainty that justifies our acceptance of the Company s offer, which we nnd to be a reasonable approximation of changed revenue requirement. Order No. 21340 directed the Company and the Staff to report to us whether they could agree on a reduction in revenue requirement resulting from TRA-86. They were unable to do so. The Staff reponed three figures to us: (1) A reduction in revenue requirement of $10,510,630 based upon 1986 weather normalized sales and normalized power supply costs based upon all of the power supply inputs U5ed in Order No. 20924 the final order fol1owing rehearing establishing the Company revenue requirement in Case No. 0-1006-265. (2) A reduction in revenue requirement of $6,905,651 based upon the same assumptions as in ~1(1), except that off-system sales prices were reduced to reflect lower prices recommended by the Company at rehearing in Case No. U-IOO6-265. (3) A reduction in revenue requirement of $6 876,078 based upon the same assumptions as ~1(2), except that the maximum selling price for off-system hydro sales was lowered to 5.mills/kwh and separate transmission constraints for sales to the northwest and to the soUtheast were imposed, both as proposed by the Company Case No. 0-1006-265. Idaho Power reponed to us by letter that it would consider its request for an increase in its revenue requirement in Case No. 0-1006-288 (a "tracker" seeking to recover additional expeI15es of purchase of cogeneration and small power production) to be exactly offset by the revenue reduction resulting from the Commission s investigation in this proceeding. Further, the Company proposed there be no refund of its rates from ORDER NO. 21364 2- Exhibit No. 73 Case No. I PC-O3- L. Ripley, IPCo Page 2 of 6 July I, 1987, resulting from this proceeding, and no decrease in its rates on January I 1988, 3550Ciated with the tracker.The unrelated issue of proper normalization of deferred income t3)(es associated with Valmy IT described in Order No. in Case No. 1009-265 would be independent of the agreement in this proceeding. We accept the Company s offer of settlement.Since the inception of this proceeding, we have recognized that proper normalization of actual 1986 results of operations is a fair and reasonable method of conducting our investigation when utility TOteS are set upon weather-normalized and streamflow-normalized. data rather than actual cldta. The precise results of the normalization can fairly be at issue in such a proceeding. The Staff's report shows a wide range of resuhs associated with various assumptions underlying streamflow normalization. Furthermore, the Staff's report does not detail additional results, with lower reductions to revenue requirement, that would associated with change in transmission access for sales to California. Were this proceeding to be fully litigated, it: seems likely the Company would attempt to prove a structural change in off-system markets for secondary sales associated with power supply model1ng and streamflow normalization, putting even more dollars at is.sue than are shown by the Staff's three calculations.The advantages of certainty and swifmess collI15 els in favor of accepting a reasonable settlement offer by the Company. We do so because of the likelihood that the Company could put on a prima facie case of stTUCtural changes in secondary markets showing deterioration in those markets , ~ible reduced transmission access, and displacement of opportunity sales to the California markets by natural gas, California cogeneration and small power production. and intrUSion of Desert Southwest sales. We express no opinion whether would find for the Company s prima facie case or whether others could pUt on convincing cases to the contrary, but we are convinced of the benefits of avoiding extended litigation in the area and accepting the Company s compromise offer. ORDER NO. 21364 Exhibit No. 73 Case No. IPC-O3- L. Ripley, IPCo Page 3 of 6 We emphasize what we are not accepting. To the extent that drought has affected the Company s financial performance, that is not an appropriate factor to coru;ider in this decision. Drought is not a structural change in power supply modeling and subs~uent normalization. During the Company s banner water years of 1982-1984, when its stock appreciateD from 70-80% of book to 150-160% of book and split two-for-one, we did not call the Company into our hearing room and attempt to moderate its earnings. The Company s earnings increase in high water years with its rates set upon normalized data. Conversely, the Company s earnings dec1ine in low water years in the absence of its application for a sUTcharge and proof of extraordinary conditions that would justify a surcharge. It has not attempted to prove the case for a surcharge this year. Accordingly, the dec1ine in earnings assoCiated with poor streamflow conditions is not before the Commission in this proceeding. FINDINGS OF FACT There is a legitimate dispute regarding the ca1culation of the Company reDuction in revenue requirement because of uncertainties over weather-normalized sales and power supply costS, which yield uncertainties in associated tax efforts. The amount of $5,600,728 proposed by the Company is within the range figures that would represent a reasonable quantification of the reduction in revenue r~uirement. III Acceptance of this settlement is in the public interest because we win avoid protracted litigation aimed at quantifying an amount that is incapable of precise ORDER NO. 21364 -4- Exhibit No. 73 Case No. IPC-O3- L. Ripley, IPCo Page 4 of 6 quantification and it win anow us to preserve rate stabiHty by implementing this Order in conjunction with our Orders in -265A and -288. IT IS THEREFORE ORDERED that the reduction in the Idaho Power Company revenue requirement associated with changes in federal and state income tax laws, based upon normalized d3ta for the test year 1986, be estimated at $5,600,728, exactly offsetting the increase in revenue requirement contained in Order No. 21363 in Case No. IOO6-288 also issued today. THlS IS A FINAL ORDER on all lssues addressing Idaho Power Company. Any person interested in this Order (or in issues nnaI1y decided by this Order) or in interlocUtory orders previously issued in this Case No. U-1500-164 with regard to issues addressing Idaho Power Company rates may .petition for reconsideration within , twenty-one (21)d3ys of the service d2te of this Order with regard to matters addressing Idaho Power Company s rates decided in this Order or in interlocutory orders previously issued in this Case No. U-1500- I 64. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration in response to issues nised in the petition for reconsideration. See Idaho Code ~61-626. ORDER NO. 21364 Exhibit No. 73 Case No. IPC-O3- L. Ripley, IPCo Page 5 of 6 11111 11111 11111 11111 11111 11111 ...... DONE by Order of the Id2ho Public Utmties Commission at Boise, Idaho, trus:i~l'~y of Jilly, 1987. ATTEST:~g~s MG:ccJ528L ORDER NO. 21364 ( J~. . ~ ~ ,~-'" P R E~ PRESIDENT ~\ \lQQ DEAN J. MILLER, COMMISSIONER I? J ).. /1./ .L RJ(LPH ELSON , COMMISSIONER Exhibit No. 73 Case No. IPC-O3- L. Ripley, IPCo Page 6 of 6 BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. IPC-O3- IDAHO POWER COMPANY EXHIBIT NO. 74 L. RIPLEY Order No. 21651 BEFORE THE IDAHO PUBLIC UTILITIES COM:MlSSION IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORlTY TO INCREASE ITS RATES AND CHARGES FOR ELECTRJC SERVICE IN THE STATE OF IDAHO. CASE NO. U-1006-265 ORDER NO. 21651 On November 6 , 1987 , Idaho Power petitioned this Commission to reopen its general rate Case No. U-I006-265 to address an issue reserved by the Commission in Order No. 20988 , i~sued January 9, 1987: What ratemaking treatment of deferred taxes and accelerated depreciation associated with the Valmy II plant wi11 comply with the normalization requirements of the Internal Revenue Code of the United States? To answer that question Idaho Power, in consultation with the Staff of this Commission, requested a private letter ruling from the Internal Revenue Service. described what happened as fol1ows in Order No. 21594: The Internal Revenue Service, in a private letter' ru1ing that can only be characterized as a breach of faith with those citizens of this state who are both taxpayers of the federal government and ratepayers of Idaho Power Company, simply avoided addressing the issues identified in the Staff's memorandum accompanying Idaho Power s request for private letter ruling. ... Be that as it may, Idaho Power s petition is now before us and has been served upon the parties to this proceeding. Idaho Power petition proposes a method by which the normalization requirements of the Internal Revenue Service may be met and further proposes a method of calculation of its rates that it characterizes as consistent with the requirements of the Internal Revenue Code that results in an (annual) increase in rates of $682 744. We propose to give the paTties and all interested persons until Monday, December 14 , 1987, to comment upon Idaho Power proposal , to state whether hearings are necessary in considering this proposal, and to present in writing alternative proposals if the parties have one. ORDER NO. 21651 Exhibit No. 74 Case No. IPC-O3- L. Ripley, IPCo Page 1 of 3 Thepanies, presumably recognizing the futi1ity of relitigating an IRS private ruling that ignored the basic r,nemaking concerns of this Commission, fi1ed no comments whatsoever. We, like the parties , bow to the inevitable, although not without restating our displeasure with the Internal Revenue Service s fai1ure to address the critical issues placed before it. Furthermore, there is no contention by any party that Idaho Power calculation of an annual revenue requirement of $682 744 assodated with ratemaking treatment of accumulated deferred income taxes and accelerated depreciation for Valmy II is in error. Accordingl~,. we f1nd that this increase ' in annual rates, amounting to approximately 0.22% of existing rates , has accounted for the ratemaking treatment of deferred taxes and accelerated depreciation cssociatedwith Valmy II according to the private letter ruling of the Internal Revenue Service. We further find it is fair. just and reasonable , given this constraint in the interpretation of federal law (with which we disagree), to allow that increase to go into effect on December 16, 1987. 11 IS THEREFORE ORDERED that the petition of Idaho Power Company to increase its rates and charges by 0.22% effective December 16, 1987, be granted. THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally decided by this Order) or in interlocUtory Orders previously issued in this Case No. lO06-265 may petition for reconsideration within twenty-one (21) days of the service date of this Order with regard to any matter decided in this Order or in interlocutory Orders previously issued in this Case No. U-lOO6-265. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~61-626. ORDER NO. 21651 Exhibit No.7 4 Case No. IPC-O3- L. Ripley, IPCo Page 2 of 3 //111 IIIII 11111 11111 IIIII 11111 DONE by Order of the Idaho Pub1ic Utmties Commlsslon at Boise, Idaho, this /s 'uday of December, 1987. ATTEST:/t~ MYR A J. TERS, SECRETARY MG:vsI726L ORDER NO. 21651 . - rbA/\.lv\ PERRY SWISH , PRESIDENT " V~ ...... EAN J. MILLER, COMMISSIONER .L '// RALPH NELSON , COMMISSIONER Exhibit No.7 4 Case No. IPC-O3- L. Ripley, IPCo Page 3 of 3