20040325GRIBBLE 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.
CASE NO. IPC-O3-
IDAHO POWER COMPANY
DIRECT TESTIMONY
DENNIS C. GRIBBLE
Would you state your name, address and
present occupation?
My name is Dennis C. Gribble and my business
address is 1221 West Idaho Street, Boise, Idaho.I am
employed by Idaho Power Company as Assistant Treasurer.
What is your educational background?
I graduated in 1975 from Boise State
University, Boise, Idaho, receiving a Bachelor of Business
Administration degree in Economics.In 1978, I graduated
from Boise State University, Boise, Idaho, with a Master in
Business Administration.In 1989, I completed the
University of Idaho s Public Utilities Executive Course in
Moscow, Idaho.I have also attended numerous seminars and
conferences on accounting and finance issues related to the
utili ty industry.I am a Certified Treasury Professional.
Would you please describe your business
experience wi th Idaho Power Company?
I joined Idaho Power Company in 1979.
June 1982, I transferred to the Finance and Reporting
Services Department as a Business Analyst.In June 1986, I
was promoted to a Business Analyst Supervisor.In March
1991, I was promoted to Manager of Financial Services.
January 1992, I was promoted to Manager of Corporate
Accounting and Reporting.In 1996, I was promoted to
Controller-Financial Services and in May 1999 I was promoted
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Idaho Power Company
to my current position as Assistant Treasurer.
In the course of my duties with Idaho Power Company,
I have presented testimony to the Idaho Public Utili ties
Commission and the Oregon Public Utility Commission.
What are your duties as Assistant Treasurer
as they relate to the current proceeding?
I oversee the direct financial planning,
procurement, and investment of funds for Idaho Power, as
well as supervise corporate liquidity management.
What are your financial activities and
responsibilities with respect to Idaho Power Company?
My acti vi ties and responsibilities include
various aspects of all the Company s financings and other
financial matters.With respect to long-term financings -
sale of bonds, preferred stock, and common stock - my
activities include development of financial plans with
senior officers, meeting with representatives of investment
banking firms that are interested in underwriting our
securities, discussions with rating agencies, assisting in
preparation of financial material including Registration
Statements filed with the Securities and Exchange
Commission, representing the Company at information meetings
for investment banking firms, reviewing recommendations on
bids received relative to the Company s financings and
recommending disposition of net proceeds.Wi th respect to
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Idaho Power Company
short-term financings, these acti vi ties and responsibilities
include negotiation of lines of credit with commercial banks
and arranging for the sale of commercial paper.
Are you in continual communication with
members of the financial community?
Yes.I am in constant contact with
individuals representing investment and commercial banking
firms, rating agencies, insurance companies, institutional
investment firms, and other organizations interested in
publicly traded securities, that actively follow IDACORP and
Idaho Power Company.In association with the Chief
Financial Officer and the Director of Investor Relations, my
responsibili ties include keeping these persons informed of
the Company s financial condition, arranging meetings with
these people and Idaho Power s senior executive management,
and visiting with financial representatives in their
respective offices.These members of the investment
communi ty have followed the electric utility industry for an
extended period of time and have a great deal of expertise
in the financial problems and prospects of utili ties.
Through my continual contact with the financial
communi ty, and review of investment banking analytical
reports and articles issued by these firms, I am able to
keep informed on trends, interest rates, financing costs,
security ratings, and other financial developments in the
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Idaho Power Company
public utility industry.
Are you a member of any professional
societies or associations?
Yes.I am a member of the Association for
Financial Professionals (AFP) and the Institute of
Management Accountants (IMA).
Through information received from attendance at
conferences and seminars of these and other utility
professional groups such as the Edison Electric Institute, I
am able to gain additional insights into the financial
developments affecting Idaho Power Company as well as the
electric utility industry.
What is the purpose of your testimony in this
proceeding?
I am sponsoring testimony as to the point
estimate for Idaho Power Company s rate of return on common
equi ty, the embedded cost of long-term debt and preferred
stock, the use of an estimated year-end 2003 capital
structure, and the resultant overall cost of capital to be
used in these proceedings.
What exhibits are you sponsoring?
I am sponsoring Exhibi ts numbered 12 through
15.
What is the point estimate you recommend for
the rate of return on common equi ty for Idaho Power Company?
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Idaho Power Company
As I will discuss in further detail later in
my testimony, I have selected 11.2 percent as a reasonable
cost of equity for the Company, which falls at the mid-point
of Mr. Avera s recommended cost of equity range for Idaho
Power Company of 10.6 to 11.9 percent.The 11.2 percent is
also the minimum required fair rate of return considering
the Company s overall management efforts throughout these
last ten years as discussed by Mr. Keen and Ms. Fullen in
their testimony, as well as the Company s efforts to
economically refinance outstanding debt and preferred stock
securi ties in recent years.
What is the overall cost of capital for Idaho
Power Company?
Based on an estimated year-end 2003 capital
structure provided to me by Ms. Smith, the embedded cost of
debt and preferred stock presented in my testimony, and
incorporating the 11.2 percent cost of equity, the resultant
overall cost of capital for Idaho Power Company is 8.334
percent.
Mr. Avera indicates that his 10.6 to 11.
percent recommended cost of equity range does not include
any additional basis points as an incentive to the Company
for its stewardship of the system and overall management
efforts described by Mr. Keen and Ms. Fullen nor for the
Company s efforts to economically refinance its securities.
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Idaho Power Company
What effect does this have on your 11.2 percent point
estimate for the rate of return on the Company s common
equi ty?
If the Commission selects a cost of equity
value that is less than the mid-point of the recommended
cost of Mr. Avera s recommended equity range, then the
Company will be penalized since the cost of equity range
derived by Mr. Avera does not include any such reward.
Mr. Avera indicates in his testimony that
Idaho Power, when compared to the Western electric utility
industry and its selected comparable peer group, has a
greater share of specific risk. Do you agree with this
conclusion?
Yes.Financial analysts, bond rating
agencies, regulators, and other commentators in the
financial press continue to chronicle the increasing
volatility of change and risk in the western electric
utility industry.The Company, not unlike the maj ori ty of
the industry, also faces the prevalence of change and
uncertainty.Most observers agree that individual companies
tend to have increasingly less and less control of both the
pace and magnitude of this change and uncertainty.
addition to the impact of the general electric utility
industry risk, Idaho Power Company faces very specific
risks.
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Idaho Power Company
What risks are specific to Idaho Power
Company?
The following are risks that the investing
public view as specific to Idaho Power Company:(1) a
predominately hydroelectric generating base subject to the
vagaries of weather, water, and a volatile wholesale power
supply market in the Western United States and specifically
the Northwest,(2) the renewal of federal licenses for its
hydroelectric proj ects, namely the Hells Canyon Complex
which provides 40 percent of the Company s total generating
capacity, and (3) the ability to recover significant capital
investment required for present and growing electrical
requirements and service reliability for its customers.
Can you elaborate as to the nature of Idaho
Power Company s risks?
Yes.I will provide additional detail on
each specific risk and also provide the financial investing
communities perspective relative to that risk.Allyson
Rodgers an equity analyst formerly wi th Ragen McKenzie
(Pacific Northwest Research), succinctly states these
specific risks in her May 7 2003 research report (pg. 6);
We believe primary risks to IDACORP' s ability to return to
a more normal earnings range include continued slow economic
ac t i v i ty wea ther inc 1 uding hydro condi t ions, and
unfavorable regulatory action at the state or federal
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Idaho Power Company
level. "
Please describe the risks specific to a
predominately hydroelectric generating base subject to the
vagaries of weather and water.
Idaho Power Company and its customers have
long enj eyed the benefits of a hydroelectric based utility.
However, because of the heavy reliance on hydroelectric
generation, the Company s operations and resulting financial
condition can be significantly impacted by low water
condi tions .Reduced hydroelectric generation resul ting from
below normal water flows, compels the Company to use more
expensive thermal generation and/or purchased power to meet
the electrical needs of its customers Al though the Idaho
Public Utilities Commission (IPUC) grants recovery for the
majority of extraordinary purchased power costs through the
Company s Power Cost Adjustment Mechanism (PCA) , the
recovery is less than 100 percent, is on a deferred basis,
and is subject to the regulatory process Generally, the
investment community views the PCA mechanism as a positive
since it does allow for recovery of the maj ori ty of excess
net power supply cos ts .As a result of the 2000-2001
California energy crisis and four years of Northwest drought
conditions, the last three PCA rate proceedings (i.eo, 2001,
2002, and 2003) have resulted in unprecedented increased net
power supply costs.Al though originally conceived as a fair
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Idaho Power Company
sharing mechanism, the Idaho jurisdictional 10 percent
portion of the recent PCA proceedings borne by the Company
shareholders has had a devastating impact on the earnings
capability of the Company.Unlike the more familiar fuel
cost adjustment mechanisms (for gas utili ties) that recover
100 percent of the changes in base fuel costs, the Company
PCA mechanism is viewed by the investment community as more
risky as a result of this sharing feature.The firm of
Ragen MacKenzie reported this impact in its February 25,
2002 IDACORP, Inc. research report (pg.6); "IDACORP
estimates that Idaho Power Company s earnings (2002) would
have been $1.45 higher ($1.27 negative im~act from excess
power costs not included in the PCA adjustment and a wri te-
off of $0.18 for excess power costs) without the negative
impact of higher power costs.
Please describe the risks specific to the
renewal of federal licenses for its hydroelectric proj ects,
namely the Hells Canyon Complex that provides 40 percent of
the Company s total generating capacity.
Idaho Power Company is the only investor-
owned electric utility in the United States with 57 percent
of its generation derived from hydro generating facilities
under normal water conditions.Wi th such a large portion of
the Company s generation resources based on hydro
facilities, a negative economic impact resulting from
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Idaho Power Company
renewing the Federal licenses of these facilities could have
a significant financial impact on the Company and the prices
its consumers pay for electricity.As part of this process,
the Company has and will file applications with the Federal
Energy Regulatory Commission (FERC) for new licenses on 92
percent of its hydro generating capacity. Once an
application is filed, the time frame to actually receive an
order from the FERC is unknown. The combination of an
unknown time frame to receive a new license along with a
financial impact that is difficult to quantify, lays the
foundation for a potentially large financial risk unique to
the Company.The Hells Canyon generating facilities
comprised of Hells Canyon, Oxbow, and Brownlee make up 68
percent of the Company s hydro generation capacity and 40
percent of its total generation capacity. The Hells Canyon
license application was filed in July of 2003.This process
moves at an extremely deliberate pace due to the large
number of interested parties involved in evaluating the
application.This makes the likelihood of a new Hells
Canyon facilities license being issued in 2005 remote.
these types of delayed situations, historically the Company
has been given an annual license renewal (under the existing
old license) until the formal new license is issued.This
delay further reinforces the ambiguity of the ultimate
financial impact.For any particular generating facility,
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Idaho Power Company
the worst possible outcome would be the loss of the license
to a competing party.Along with the uncertainty as to the
eventual receipt of licenses and the costs involved in
preparing for the license applications, costs of protection,
mitigation and enhancement of natural resources (PME' s)
related to these proj ects are also difficult to quantify.
The potential financial magnitude of these PME' s and their
effect on the Company s low cost hydrogeneration resources,
threaten the financial stability of a company the size of
Idaho Power and the ultimate rates it must charge its
customers.These amounts will vary between each facility,
but in all cases they can be significant due to lost
capaci ty, less generation at a higher cost, and the
decreased ability of the Company to time and control water
flows.If the Company cannot generate when it is most
advantageous for the system, then some of the economic value
of the generation has been lost, even if the amount of total
generation does not change.Kevin Rose, an analyst with
Moody s Investor Services notes in his June 20, 2003 Opinion
upda te on Idaho Power Company (Pg. 2); "What Could Change
the Rating - DOWN....., Significant increases in relicensing
costs and/or stringent operational constraints imposed as
part of the license renewal process....
In addition to the hydro relicensing risk, the
Company continually faces significant capital, operating and
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Idaho Power Company
other costs associated with compliance with current
environmental statutes, rules and regulations. These costs
may be even higher in the future as a result of, among other
factors, changes in legislation and enforcement policies and
the potential additional requirements imposed in connection
wi th the relicensing of the Company s hydroelectric
projects.
Why do you say that a volatile wholesale
power supply market in the Western United States and
specifically the Northwest is specific to Idaho Power
Company?
The recent California energy crisis and its
unprecedented effects on the prices in the wholesale energy
markets, coupled with persistent drought in the Northwest
have specifically impacted the Company.These impacts are;
first, and as noted above, reduced access to the Company
low cost hydroelectric generation, second, increased
reliance on the Company s thermal based generating
resources, and lastly, the heightened exposure to volatile
wholesale energy prices when the Company must rely on the
wholesale energy market to meet native load requirements.
When the Company is unable to utilize its hydro resources,
it must next turn to the wholesale markets or its own
thermal based resources.Typically pricing and availability
will determine these decisions.Over the last several
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Idaho Power Company
years, the Company s thermal fleet has been required to
supply a large amount of the resource deficit since the
wholesale energy market prices were extremely high and hydro
availability was low.Al though these thermal resources have
been there when dispatched, these thermal resources are
aging and are requiring increased capi tal and O&M
expendi tures just to maintain availability.As the
reliability of these thermal resources diminishes, either as
a result of age or over-utilization, the Company is further
at the mercy of a volatile western and northwest energy
market.Philip C. Adams, Banc One Capital Markets, Inc.,
describes this situation in his December 12, 2002 Update and
New Issue Review (Pg. 2), " Challenges: IPC is on its third
consecutive year of below-average water availability for
hydroelectric power.Its reliance on purchased power
remains higher than normal, forcing IPC to fund purchases in
anticipation of rate relief.IPC relies heavily on
hydroelectric power for it generating needs and can
experience a negative impact from adverse weather, such as a
low snow pack in the mountains above IPC reservoirs, or low
precipitation levels.As demand outstrips hydroelectric
capaci ty, more expensive coal and diesel facilities, along
wi th purchased power, are needed to make up the di f f erence . "
Please describe the risks specific to the
Company s ability to recover significant capital investment
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Idaho Power Company
required for present and growing electrical requirements and
service reliability for its customers.
As the Company s sys tem ages and cus tomer
electrical requirements increase, additional investment is
required to meet reliability standards and the additional
demand on its electrical infrastructure.The Company
latest forecast requires construction budgets of $150
million in 2003; this budget will rise to $675 million over
the next three years.Recovery of these investments
introduces an element of risk since; first, the need for the
Company s to attract capital, and second, recovery of these
investments will be on a deferred basis and subj ect to the
regulatory process.Kevin Rose, Moody s Investors Services,
identifies one of the Company s key credit challenges in his
June 20, 2003 Opinion Update as; "General rate increase
needed to recover costs of customer growth, additional
capacity needs and expansion of T&D system.
What is the status of Idaho Power Company
bond ratings?
The following are the current First Mortgage
Bond (FMB) , Preferred Stock, Commercial Paper (CP-short term
debt), and Rating Outlook ratings for Idaho Power Company:
Mood Fitch
General Corporate Rating No Rating
FMB'
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Idaho Power Company
Preferred Baa2 BBB BBB+
Negative Stable Stable
Have the Company ratings been under
Outlook
pressure in recent years?
Yes.Although the bond ratings for the
Company s first mortgage bonds have remained intact, the
ratings on its preferred stock were changed due to a rating
agency philosophy that replaced preferred stock ratings with
a debt like standard.Accordingly, S&P has changed its
rating on the Company s short term debt from A-l to A-
Moody s has the Company on a Negative Rating Outlook, and
S&P has moved the Company from a Posi ti ve to a Stable
Outlook.Moody s reasoned as follows; "IPC' s rating outlook
is negative as the utility continues to cope with difficult
power supply markets in the region and prepares to seek a
base rate increase to bolster utility returns and cash flow.
Affiliate transaction issues with FERC and the IPUC have
been largely resolved without undue cost, although certain
internal compliance assessments still need to be completed.
Swami Ven Kataroman, Standard & Poor s, in his October
2003 update, states:Standard & Poor's now expects that
ratios will only meet expectations for the ' A-' rating and
may even be slightly weaker in the interim, as Idaho Power
continues to recover deferred power costs and face poor
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Idaho Power Company
water conditions in the Snake River and lower than expected
sales.The Company s S&P financial measurement benchmarks
reflect the financial pressure the Company faces in
maintaining its current ratings.
What are the principal financial measurement
ratio benchmarks used by Standard and Poor'(S&P)?
The first benchmark is the funds from
operations (FFO) as a percent of average total debt.The
second principal benchmark is FFO interest coverage.Pre-
tax cash interest coverage is the third benchmark.The
fourth benchmark used by Standard and Poor s is the ratio of
total debt to total capi tal.In the first three benchmarks
higher scores are better, while in the fourth benchmark, a
lower score is better.These objective measurements are but
one set of tools that Standard & Poor s use in determining
the ultimate credit rating for a company.Other factors
that standard and Poor s considers are management
credibili ty and track record, forecasts provided by
management, and general overall judgment by the rating
agency commi t tees.
What are the Standard and Poor s electric
utility financial ratio benchmarks?
The Standard and Poor s electric utility
financial ratio benchmarks are set forth in Exhibit No. 12.
How does Idaho Power Company s current (12
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Idaho Power Company
months ended June 30, 2003) S&P financial ratio benchmarks
compare with the mid-point ratio benchmarks for an "A" rated
electric utility with a level 4 business risk position (the
Company s current risk position)
The resulting ratios are as follows:
IPCo
FFO / total debt
( %)
24.30.5%-24.
FFO interest coverage (x)70x4. 5x-3 . 8x
Pretax interest coverage (x)2. OOx4. Ox-3. 3x
Total debt total capi tal
(%)
43.0%-49.52.
What do the Company s current financial
benchmark ratios indicate regarding the Company s financial
condition?
Using a strict analytical approach, the
FFO/total debt ratio of 24.4 percent would warrant a high
BBB" rating, the FFO interest coverage of 6. 70x would yield
a high "AA" rating (this ratio will decline, however, due to
the recent reductions in PCA recovery), the Pretax interest
coverage of 2.00, would produce a high "BB" rating, and the
Total debt/total capital ratio of 52.9 percent, would score
a "BBB" rating.Rating agency analysts must and do take
into account quali tati ve aspects of a company, but a literal
interpretation of these quantitative financial benchmark
results would suggest a downgrade from the Company s current
A" rating.
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Idaho Power Company
What are the implications to the Company of
increasingly more stringent risk assessments by rating
agencies and the Company s current financial benchmark
ratios?
Without adequate rate relief and more normal
water conditions, it is uncertain as to how long the Company
can maintain an "A" rating.Al though many Inves tor-OWned
Utilities (IOU's) find a "BBB" or "BBB+" acceptable, the
Company believes that maintaining a strong "A" rating is
essential.The Company must maintain its ability to attract
capi tal in the ul tra-competi ti ve investing environment.
Idaho Power is not a large electric utility and when matched
against other utility investment opportunities, the Company
lacks the benefit of broad investment analyst coverage.
Unless a strong single "A" rating is maintained; the absence
of broad investment analyst coverage and the small size of
the Company could prove to great an obstacle for the Company
to overcome in its efforts to raise capital.A "BBB" rating
for the Company would mean a 50-55 basis point annual
increase on newly issued long-term debt and prevent the
Company from accessing the low-cost short-term commercial
paper (CP) market.Without access to the CP market, the
Company will pay an added 70-80 basis points for short-term
debt.In simple terms, a strong "A" rating is critical for
Idaho Power to maintain its independence and attract lower
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Idaho Power Company
cost capital as the Company enters into a period of
substantial investment requirements.
Is Idaho Power also affected by rating
agencies imputing debt onto its balance sheet due to
purchased power contracts?
Yes.Like other electric utili ties, when the
Company adds to its rate base, it must use some portion of
shareholder equity to fund the investment.The Company mus
maintain its equity component above a certain level as it
continues this investment process.Or as the debt levels
increase, the Company will face the threat of a bond
downgrading.Conversely, when the Company enters into
contracts for purchased power, an obligation that is not
reflected in its financial statement, an increase in equity
to maintain credit quality is not automatic.This lack of
required equity funding as an offset to the debt-like
obligation of purchase power contracts, results in an off
balance sheet risk. For financial commitments that do not
appear on the balance sheet, financial analysts and rating
agencies impute the debt and interest equivalents on the
financial statements of the Company to achieve a more
accurate picture of the risk associated with their
investment.The added equity needed to offset this imputed
debt and interest represents the effect that long-term
purchase power commitments have on the cost of capital. Any
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Idaho Power Company
increase in the long-term obligation of a utility related to
its capacity and energy resources will have to be backed by
an appropriate amount of equity in the eyes of the
inves tmen t communi ty .
In their testimony, Mr. Keen and Ms. Fullen
describe Company and management efforts in the areas of
stewardship of the system, customer service, and demand-side
managemen t .Is there anything in the area of financing
activity that you feel deserves similar recognition?
Yes. In addition to the areas discussed in
detai 1 by Mr. Keen, the Company has taken numerous
opportuni ties 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 than would
otherwise have been the case.At the last Idaho general
rate case, the Company s overall cost of debt capital was
024 percent and the effective cost of preferred stock was
083 percent.As will be shown later in my testimony, the
Company s current cost of debt capital is 5.983 percent and
the effective cost of preferred stock is 6.534 percent.The
primary driver for the small increase in the effective cost
of preferred stock was the removal of the $50 million
variable rate auction preferred stock that was redeemed in
August 2002.This redemption was due to a different
preferred stock rating criteria that placed added pressure
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Idaho Power Company
on the ability of this market to avoid a failed auction
process.The resulting financing efforts by the Company are
reflected by the overall cost of capital at the last Idaho
general rate case of 9.199 percent being reduced to the
current cost of capital of 8.334 percent that is proposed in
this filing.
Would you please comment on page 1 of Exhibit
No. l3?
Page 1 of Exhibit No. 13 details the
calculation of the Idaho Power Company capi tal structure for
long-term debt, preferred stock, and common equity balance
resulting from the Company s estimated year end 2003 capital
structure as provided to me by Ms. Smi th.
Earlier in your testimony you indicated that
you have used an estimated 2003 financial result in arriving
at the overall cost of capital for the Company.Why have
you selected this particular capital structure?
The estimated year end 2003 financial results
as provided to me by Ms.Smith reflect the Company best
estimate at this time of the 2003 year-end capi tal
structure.The Commission can update the capital structure
to incorporate known and measurable changes as this
proceeding progresses to reflect an actual year-end 2003
capi tal structure.Mr. Avera, in his testimony, has
indicated that the capital structure submitted on page 1 of
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Idaho Power Company
my Exhibit No. 13 is reasonable and is consistent with
comparable companies in the industry.
The capital structure presented on page 1 of
Exhibit No. 13 incorporates changes to the Company s normal
financial reporting of its capital structure.Could you
please discuss the rationale for the variance?
For financial reporting purposes the American
Falls Bond Guarantee and the Milner Dam Note Guarantee are
included in the long-term debt portion of the capital
structure.For ratemaking purposes the interest costs
associated with both the American Falls and the Milner debt
securi ties are covered as operating and maintenance ("O&M"
expenses.Even with these exclusions, the capital structure
presented in my Exhibit No. 13 is reasonable in light of
industry and rating agency criteria.
Would you please comment on page 1 of Exhibit
No. l4?
Page 1 of Exhibit No. 14 details the
calculation of the embedded cost of debt used in the
estimated year-end 2003 capital structure.The embedded
cost of debt is 5.983 percent.
Does the Company utilize variable rate
securities in its long-term capitalization?
Yes, the Company currently utilizes several
variable rate securities in its long-term capitalization.
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Idaho Power Company
These securities are the County of Sweetwater Variable Rate
Series 1996B ($24.2 million), and 1996C ($24.0 million)
Pollution Control Bonds, and the Port of Morrow Variable
Rate Pollution Control Bonds ($4.36 million) .Also, the
Company intends to refinance its $49.8 million, 8.30 percent
Humboldt County Pollution Control Revenue bonds in October,
2003 by issuing new $49.8 million of variable rate bonds.
These securities are listed on lines 12, 13, 14, and 15 of
page 1 on Exhibit No. 14.
Would you please describe the variable rate
nature of these variable rate pollution control bonds?
These variable rate pollution control bonds,
although considered long-term securities, have features that
allow the Company to take advantage of rates applicable to
short term securities.The County of Sweetwater Pollution
Control Variable Rate Bonds Series B and C (Bridger Variable
Rate Bonds) reset the interest rate on a daily basis.The
Port of Morrow Pollution Control Variable Rate Bonds
(Boardman Variable Rate Bonds) reset the interest rate on a
weekly basis.The proposed Humboldt Pollution Control
Revenue Bonds (Valmy Variable Rate Bonds) will reset their
interest rate every 35 days.The Bridger Variable Rate
Bonds daily rate interest rate is determined each business
day by a Remarketing Agent by examining tax-exempt
obligations comparable to the Bridger Variable Bonds known
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Idaho Power Company
to have been priced or traded under the then-prevailing
market conditions that would be the lowest rate which would
enable the Remarketing Agent to sell the Bridger Variable
Rate Bonds.Likewise, on a weekly basis the Boardman
Variable Rate Bonds weekly interest rate is determined the
first day of a weekly period by a Remarketing Agent by
examining tax-exempt obligations comparable to the Boardman
Variable Bonds known to have been priced or traded under the
then-prevailing market conditions that would be the lowest
rate which would enable the Remarketing Agent to sell the
Boardman Variable Rate Bonds.The new Valmy Variable Rate
Bonds are designed to reset their interest rate every 35
days via a dutch auction process (lowest bid received by an
Auction Agent that covers the bonds outstanding) to reflect
the current market conditions.
Please comment on the derivation of the
effective cost of the interest rates for the Pollution
Control Bonds listed on lines 12, 13, 14, and 15 on page 1
of Exhibit No. l4?
Page 2 of Exhibit No. 14 is a chart that
depicts the Bond Market Association (BMA) Municipal Swap
Index for the last 10 years.The BMA Municipal Swap Index,
produced by Municipal Market Data (MMD), is a 7-day high-
grade market index comprised of tax-exempt Variable Rate
Demand Obligations (VRDO's) from MMD's extensive database.
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Idaho Power Company
The Index was created in response to industry participants
demand for a short-term index to accurately reflect activity
in the VRDO market. In 1991, The Bond Market Association
established a Market Index Subcommittee to analyze the need
for such an index, and determined a solution.MMD worked
closely with The Bond Market Association to determine
appropriate criteria on which to base the index.Issuers,
investment bankers and other market participants need an
efficient way to monitor the market on a regular basis.The
index provides a consistent, superior means of tracking
market movements as they occur.
Pages 3, 4, 5, and 6 of Exhibit No. 14 show the
Company s spreads (difference of the Company s actual
variable rate , plus or minus, when compared to the BMA
Municipal Swap Index) over the BMA Municipal Swap Index for
the Bridger Variable Rate Bonds and the Boardman Variable
Rate Bonds since the life of these bonds, plus an estimate
for the Valmy Variable Rate Bonds.
In light of the volatility in short-term interest
rates, I determined that an average of the 10 year BMA
Municipal Swap Index, plus an average of the Company
spreads since the inception of these variable rate bonds,
should be used in calculating the cost of these securities.
This is a conservative approach in that, there are a
significantly larger amount of data points at the low end of
GRIBBLE, DI
Idaho Power Company
the 10-year cycle and the trough covers a relatively high
percentage of this cycle.
The average of the 10 BMA Municipal Swap Index
04 percent, the average Company spreads for the Bridger
Variable Rate Bond Series B is -07%, the Bridger Variable
Rate Bond Series C is - .12%, the Boardman Variable Rate Bond
is .94%, and the Valmy Variable Rate Bonds is .61% (includes
amortization of call premium, spread over BMA index, broker
dealer fees, and insurance costs) .The resul ting coupon
rates used for these variable rate securities are:
Bridger Variable Rate Bond Series 97%
Bridger Variable Rate Bond Series 92%
Boardman Variable Rate Bond -98%
Valmy Variable Rate Bond is - 3.65%
Would you please comment on Exhibit No. l5?
Exhibit No. 15 details the calculation of the
embedded cost of preferred stock used in the forecasted 2003
capi tal structure.The embedded cost of preferred stock is
534 percent.
What is the overall weighted cost of capital
when you incorporate the respective costs?
The overall weighted cost of capi tal for
revenue requirement purposes in this proceeding is 8.334
percent.This is based on a 5.993 percent embedded cost of
debt; a 6.534 percent embedded cost of preferred stock; and
GRIBBLE, DI
Idaho Power Company
the 11.2 percent rate of return on common equity.
this case?
Does this conclude your direct testimony in
Yes, it does.
GRIBBLE, DI
Idaho Power Company