20040325GALE Direct PUC Original Scan.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 STATEOF IDAHO
IDAHO POWER COMPANY
DIRECT TESTIMONY
JOHN R. GALE
CASE NO. IPC-E-O3-
please state your name and business address.
My name is John R. Gale and my business
address is 1221 West Idaho Street, Boise, Idaho.
By whom are you employed and in what
capaci ty?
I am employed by Idaho Power Company (Idaho
Power or the Company) as the Vice President of Regulatory
Affairs.
Please describe your work experience.
In October 1983, I accepted a position as
Rate Analyst with Idaho Power Company.In March 1990, I was
assigned to the Company s Meridian District Office for one
year where I held the posi tion of Meridian Manager.
March 1991, I was promoted to Manager of Rates.In July
1997 , I was named General Manager of Pricing and Regulatory
Services.In March of 2001, I was promoted to Vice
President of Regulatory Affairs.As Vice President of
Regulatory Affairs, I am responsible for the overall
coordination and direction of the Pricing & Regulatory
Department, including development of jurisdictional revenue
requirements and class cost-of-service studies, preparation
of rate design analyses, and administration of tariffs and
customer contracts.In my current position, I am
responsible for policy matters related to the economic
regulation of Idaho Power Company.
GALE, DI
Idaho Power Company
What role did you play in the preparation of
the general rate case?
My role in the preparation of the general
rate case was to oversee, manage, and coordinate the filing
and to make the policy decisions related to regulatory
matters.
What was your interaction with the other
Company wi tnesses?
I discussed the content and preparation of
the witnesses ' testimony and exhibits.I was assisted in
this effort by Ms. Maggie Brilz and Mr. Greg Said, along
with the Company s regulatory attorneys directed by Mr.
Barton Kline.
Please provide an overview of the Company
general rate case filing.
The Company 1 eads wi th Mr. LaMont Keen, our
President and COO.Mr. Keen speaks to the Company
financial condition and its management performance in recent
Mr. Keen is our primary policy witness.Our nextyears.
witness is Mr. William Avera, who has been retained by the
Company as our return on equi ty (ROE) expert.Mr. Avera
also performed this function for Idaho Power in our last
general rate case.Mr. Avera s recommended ROE range
becomes an input to Mr. Dennis Gribble s considerations.
Mr. Gribble selects an ROE point estimate and includes that
GALE, DI
Idaho Power Company
with the test year capital structure to derive the proposed
overall rate of return.
Ms. Lori Smith then testifies to the financial
inputs, both actual and estimated, that become our initial
starting point for the system data for the 2003 test year.
Ms. Smith includes system adjustments for deductions to
certain expenses not allowed in rates, annualizing
adjustments to expenses and rate base, known and measurable
adjustments to expenses and rate base, and other adjustments
to revenues, expenses and rate base related primarily to
past Idaho Public Utili ties Commission (IPUC or the
Commission) orders.Mr. Obenchain takes Ms. Smi th ' s data,
Mr. Gribble s return recommendation, Mr. Said's normalized
net power supply expenses, along with other selected inputs
and prepares the jurisdictional separation study (JSS).The
JSS, as its name states, separates system values for rate
base, revenues, and expenses for each state and federal
jurisdiction by an assignment and allocation process.One
result of the JSS is the Idaho retail jurisdictional revenue
requirement.
As stated before, Mr. Said provides the normalized
net power supply expenses for the test year.Mr. Said also
addresses the requisite changes needed to the Company
Power Cost Adjustment as a result of changing the normalized
net power supply expenses in Idaho. Power s Base Rates.
GALE, DI
Idaho Power Company
Ms. Brilz takes the Idaho retail jurisdictional
output from Mr. Obenchain and further separates costs by
customer class and special contract through a class cost of
service (CCOS) study.Additionally, Ms. Brilz proposes
price changes to the customer classes that are consistent
with the Company s ratemaking objectives and recover the
Company s Idaho revenue requirement.Ms. Theresa Drake
addresses additional changes to Idaho Power s tariffs and
non-recurring charges.
Ms. Susan Fullen provides information regarding a
variety of Idaho Power s customer-related acti vi ties,
including the results of recent customer satisfaction
surveys.Finally, I finish the direct case addressing
regulatory policy issues.
What was Idaho Power Company s executive
management involvement with the preparation of the general
rate case?
Idaho Power s Office of the Chief Operating
Officer, consisting of the Company s President, Senior Vice
President of Delivery, Vice President of Power Supply, Vice
President of Corporate Services, and myself along with the
Chief Financial Officer, served as the oversight group.
What are the policy issues related to the
preparation of the test year financial information?
The policy decisions related to the
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Idaho Power Company
- .
preparation of the general rate case include the selection
of the test year, the decision to use a split year, the
treatment of annualizing adjustments, and the treatment of
known and measurable adjustments.
What is the Company s test year?
The Company s test year is the 12 months
ending December 31, 2003.
Why did you choose 2003 as the test year?
Using a test year of 2003 provides the most
recent information available as to the Company s expenses
and investments.The year captures increased levels of
capital and O&M spending that are needed to fund our utility
infrastructure.The year also provides a clear break with
our past affiliate transactions with IDACORP Energy (IE).
Why did the Company choose to file with a
split test year that used both actual and estimated data?
The split test year using six months actual
and six months estimated data offers rate recovery closer to
the time that costs are incurred, allows the timing of
general rate changes to be coordinated with and potentially
mi tigated by PCA changes, and provides the Commission an
opportunity to see actual information for the whole year
before issuing its final order.
What was the basis for making annualizing
adjustments to rate base for 2003?
GALE, DI
Idaho Power Company
The annualizing adjustments to rate base for
2003 are related to electric plant in service items closing
to book during the last half of 2003.These items and their
related impacts (such as depreciation and property tax) were
treated as if they were in place for a full twelve months.
Please describe the annualizing adjustment to
the 2003 operating expense related to payroll.
The annualizing adjustment to the 2003
operating expense related to payroll, changes the payroll
expense to an amount reflective of what it would have been
had the year-end payroll expense been in existence for the
full year in 2003.
What was the Company s basis for including
known and measurable additions to its rate base?
The Company included only assets of a
material size that were planned to close to the books before
June 1, 2004.These assets are major projects related to
transmission and transmission substation.The Company chose
June 1, 2004 as the cutoff for known and measurable plant
adjustments because that is the date that the proposed rates
are expected to become effective if the Commission uses the
full time to issue its order.
please describe the rationale for including a
known and measurable adjustment to operating expense for
employee incentives.
GALE, DI
Idaho Power Company
Since the last general rate case, Idaho Power
has made a material change in the manner in which it
compensates its employees.Starting in 1995, the Company
modified its existing "cash" compensation to include an
element of "pay at risk"The new plan continues to provide
a fixed base salary, but now includes the potential for an
incentive.Since the incentive can vary from year to year
according to Company and employee performance, using the
actual incentive amount as part of the test year
compensation can be misleading.Because the range of
potential outcomes is large, a normalized number is more
reflective of ongoing compensation than an actual amount.
Why do you use the term "pay at risk"
Before the incentive was introduced, the
Company targeted its base pay upon the 60th percentile of
the relevant labor market rate for the specific job
category.After the incentive was added to the compensation
package, the benchmark for the base pay was reduced to the
5 Oth percentile.The difference between the two percentile
levels became the pay at risk.
What is the difference between the two
percentile levels worth in percentage terms?
Based upon our 2002 wage information, the
difference is approximately 7 percent.This figure can vary
slightly from one year to the next based on changes in the
GALE, DI
Idaho Power Company
market place, but in general the market changes are not
large enough to cause significant change.
Why did you make a known and measurable
adjustment related to salary structure?
The known and measurable expense related to
salary structure adjusts payroll expense to account for an
employee general wage adjustment (GWA) at year-end 2003.
The adjustment for the GWA was 3 percent.
What was the basis for the Company known and
measurable for pension costs?
There are three options which reflect the
cost of providing pension benefits to our employees:(1) Pay
(2) Service Cost, and (3) Pension Expense.TheAs You Go,
Pay As You Go reflects the actual benefits paid to employees
receiving pension benefits during the relevant time period.
The Service Cost benefit amount reflects the cost to provide
The Pension Expensea new year of benefits to employees.
method reflects the cost to provide the benefits including
the volatility of market movements that impact the pension
plan assets and the impact of interest rate movements.
Using the Service Cost method for ratemaking purposes
removes the market volatility and interest rate volatility,
while quantifying the annual cost of providing a new year of
The test year information wasbenefits to employees.
adjusted to reflect service costs for 2003, which the
GALE, DI
Idaho Power Company
Company believes to be more representative of our pension
costs going forward.
How have the Operating Revenues of the
Company been adj us ted?
The Operating Revenues are primarily adjusted
through the normalizing adjustments to the Company s net
power supply expenses as a result of multiple water
conditions discussed by Mr. Said.Other known changes to
tariffs or contracts were also included either in the test
year revenues or adjustments to the test year.Sales
revenues for the test year 2003 were based on weather
normalized retail sales for the first six months and
estimated normalized sales for the later six months.
What are the policy issues related to the
rate spread and rate design proposed by the Company?
The policy issues related to rate spread and
rate design are that rates should be primarily cost-based,
adjustments to the rate spread, an emphasis on fixed cost
recovery, and the introduction of time-of-use pricing (both
seasonal and diurnal)
What is the Company s philosophy on setting
rates?
In the last several general rate cases, the
Company s primary approach to ratemaking has been to reflect
costs as accurately as possible in setting its tariff rates.
GALE, DI
Idaho Power Company
Accordingly, the Company s ratemaking proposals usually
advocate movement toward cost-of-service results which
assign costs to those customers that cause the Company to
incur the costs.The Company realizes that there are other
ratemaking objectives, such as ability to pay, that the
Commission may consider in making its determination.
However, the Company believes that the best starting point
for Commission deliberations is an economic one.
Nevertheless, some ratemaking situations cause such abrupt
change, the Company has proposed some limits to the movement
toward cost-of-service.
How did you approach rate spread among the
customer classes and special contracts?
Rate spread is a term that refers to the
division of the jurisdictional revenue requirement into
individual revenue requirements for each customer class and
special contract.Each special contract is essentially a
rate class of one customer.The CCOS resul ts are one means
of performing rate spread.Please refer to Exhibit No. 61,
a four-page exhibit that steps through the revenue
requirement allocation process from the CCOS results to the
Company s ultimate proposal for each customer class and
special contract.Page 1 of Exhibit No. 61 is the proformed
normalized test year sales and revenues.Page 2 indicates
the adjustments in terms of percentages and dollars that
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Idaho Power Company
would be made to each customer class to obtain the results ,
indicated by the CCOS.A pure CCOS rate spread would mean a
67.1 percent increase to the irrigation customer class.
Page 3 constrains the changes to the revenue allocations in
order to mitigate the magnitude of the rate increase to the
irrigation customer class.A 25 percent limit is placed on
the increase to irrigation, while the small unmetered
classes are held at zero instead of the decreases indicated
by the CCOS.Page 4 spreads the revenue shortfall created
by the mitigation back to the other customer classes, so
that the total Idaho jurisdictional target revenue can be
obtained.
Has the Company s cost-based approach
influenced other rate design proposals?
Yes, the cost-based approach has led to rate
design proposals that better align fixed costs with fixed
prices and variable costs with variable prices.Ideally an
energy rate that corresponds to our energy costs would help
address a number of rate-related issues, including net
metering and customer conservation decisions.The emphasis
on moving fixed and variable prices to be more reflective of
fixed and variable costs led to the Company s proposals to
increase the monthly service charge for residential and
small general service customers.Since these customers are
not demand metered,the service charge the only fixed
GALE,
Idaho Power Company
rate component available to adjust and thus becomes more
important as a tool for fixed cost recovery.The increases
to the service charges are a moderate step toward better
alignment of costs and prices.However, as described by Ms.
Brilz, there is still a long way to go.
Did the Company s cost-based approach
influence any other ratemaking proposals?
Yes, the cost-based approach also influenced
our decision to propose seasonal and time-of-use rates for
certain customer groups.Both types of time-based rates
allow for the incorporation of time-based cost differences
into the Company s pricing.
Should the Company s seasonal rate proposals
be adopted, is there a related issue concerning the
Company s Power Cost Adjustment (PCA)?
Yes, because the summer season is proposed to
begin on June 1 and the current PCA is scheduled to change
on May 16, the Company believes it would be best to
consolidate the two rate change dates into one.As Mr. Said
states in his testimony, we are proposing to move the start
date for each year s PCA to June In addition, the change
would give the Commission the benefit in the future of an
extra two weeks to process the annual PCA application.
How has depreciation expense been treated in
the rate filing?
GALE, DI
Idaho Power Company
The depreciation expense in the Company
general rate request includes the depreciation rates
contained in the Company s application filed with this
Commission on May 6, 2003 in Case No. IPC-03-07.Since
that time, a stipulation has been reached among the parties
regarding that case and filed with the IPUC on October
2003.(Should the IPUC approve that stipulation, the
overall requested revenue requirement would adjust downward
to incorporate the final action).
Have the Company and Commission Staff
attempted to settle other rate issues recently that may have
an impact on the general rate case?
The Company, the Commission Staff, andYes.
the Industrial Customer of Idaho Power have reached verbal
agreement regarding the final settlement of issues in Case
No. IPC-01-16, a case pertaining to the relationship
between IE and Idaho Power, including appropriate
compensation to be paid by IE to Idaho Power for the use of
Idaho Power s transmission and capacity resources.
approved, the settlement of Case No. IPC-01-16 will bring
past issues between Idaho Power and IE to closure.
Are you generally familiar with the Company
recent management efforts in the areas of stewardship of the
system, customer service, demand-side management, and
financing activity?
GALE, DI
Idaho Power Company
Yes.As described in detail by Ms. Fullen,
the Company has implemented a new business model that better
serves customers.That model includes changes that improved
outage management and communication systems, improved
customer service systems throughout the Company s service
terri tory, demonstrated performance of our metering and
billing systems, renewed focus on demand-side management
programs, and improved customer satisfaction results.
On the financial side of the business, the Company
has utilized available opportunities to refund various
issues of both long-term debt and preferred stock on a cost-
effective basis.This has resulted in significantly lower
embedded costs.At the time of the Company s last Idaho
general rate case, the Company s overall cost of debt
capi tal was 8.024 percent.The Company s current cost of
debt capital is 5.983 percent.Mr. Gribble speaks to the
financing efforts in his testimony.
And despite all the stresses on the system both
internal (heightened emphasis on reliability, increased
demand for infrastructure investments, increasing
relicensing costs, poor cash flow, and negative earnings
implications) as well as external (major drought, out of
step inflation in energy markets, market chaos, and the
eventual exodus of credit worthy counterparties and
investment dollars), in the end, Idaho Power has honored its
GALE, DI
Idaho Power Company
obligation to serve our customers and keep the lights on at
Mr. Keen s testimony describes thesea reasonable price.
activities and results in greater detail.
Are there other instances of Company
management decisions that have been helpful to its
customers?
I would like to highlight two otherYes.
areas in which the Company has made great strides.The
first is our Green Power Program and the second is Idaho
Power s development of a comprehensive risk management
policy over the last two years.
Because of Idaho Power s hydroelectric resources,
our customers get most of their electricity from a resource
that's virtually emission-free.With the establishment of
our Green Power Program, customers have yet another
emission- free alternative -- wind power.The Green Power
Program is a voluntary program that allows Idaho Power
customers to add any dollar amount they choose to their
power bills to purchase resources from the Stateline Wind
Proj ect .The Company has sponsored multiple campaigns aimed
at generating awareness and encouraging customers to enroll
in the program.Enrollment in the two-year-old program has
grown nearly 20 percent since the last campaign bringing the
number of participating subscribers to almost 2000.
The second area of Company business that I would
GALE, DI
Idaho Power Company
like to highlight is risk management.It became clear to
the Company s Risk Management Committee (RMC) during the
2000-2001 Energy Crisis that our risk management techniques
for dealing with the market and the associated drought
worked well in most cases but not in all.Learning from
this experience, the Company acquired new energy, made
investment to increase capacity and reliability throughout
the system, adopted more conservative financial policies,
and developed and implemented a state-of-the-art risk
management policy.This collaborative risk management
strategy protects against adverse movements in net power
supply costs and manages the cost of energy supply with
respect for the risk tolerance of stakeholders.Together,
these strategies will lead to more stable rates.
Do you believe it is in the public interest
for the Commission to recognize these management efforts in
set ting Idaho Power rates?
Yes.Tradi tionally, this is done by the
Commission adding basis points to the authorized rate of
return.
In its general rate application, is the
Company requesting additional basis points in its authorized
rate of return on equity to recognize good management
performance?
No.
GALE, DI
Idaho Power Company
How would the Company like to be recognized
by the IPUC for its management performance?
The Company would like to be recognized
through timely and positive consideration of our rate relief
reques t .
Is it your opinion that the granting of the
rate relief proposed by the Company is in the public
interest?
Yes.
Does this conclude your testimony?
Yes.
GALE, DI
Idaho Power Company