20040325SMITH 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
LORI SMITH
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Would you please state your name, business
address, and present occupation?
My name is Lori Smith and my business address
is 1221 West Idaho Street, Boise, Idaho.I am employed by
Idaho Power Company as Director of Strategic Analysis and
Ri sk Management.
What is your educational background?
I graduated in 1983 from Boise State
Uni versi ty, Boi se, Idaho, receiving a Bachelor of Business
Administration degree in Information Sciences.In 1999, I
was awarded the designation of Chartered Financial Analyst.
I have also attended numerous seminars and conferences
related to utility accounting, corporate finance and risk
related topics.
Would you please outline your business
experience?
From 1983 to 1986, I was employed by Idaho
Power Company and assigned to the Materials Management
Departmen t .From 1986 to 1994, I served as a Financial
Accountant and later as a Budget Accountant.I was promoted
to Business Analyst in 1994.In 1996, I was promoted to
Strategic Analysis Team Leader.In 2000, I was named
Director of Strategic Analysis.In 2003, I was promoted to
my current position as Director of Strategic Analysis and
Ri sk Managemen t .
SMITH, DI
Idaho Power Company
What are your duties as Director of Strategic
Analysis and Risk Management?
I manage and conduct strategic analysis,
corporate budgeting and administration financial support,
and risk management.Strategic Analysis has the
responsibili ty to maintain ongoing financial forecasts,
prepare monthly subsidiary accounting, prepare annual
service level agreements and develop methodology, perform
intercompany accounting and reconciliation, prepare and
perform due diligence activities, and develop capital
raising strategies.
Corporate Budgeting and Reporting has the
responsibility to coordinate financial support for Idaho
Power's administrative areas, prepare monthly variance
reporting, and monitor corporate spending and budgets.
Corporate Risk Management has the responsibility of
implementing risk management tools related to credit risk,
market risk, and operational risk for the utility along with
exploring and implementing hedging strategies.
What is the purpose of your testimony in this
proceeding?
The purpose of my testimony is to present the
test year financial information for the twelve-month period
ended December 31, 2003, to present the adjustments which
have been included to annualize certain 2003 operating
SMITH, DI
Idaho Power Company
expenses and rate base items, and to quantify and support
certain known and measurable changes to the Company
operating statement and rate base.
Will you be supporting any of the normalizing
adjustments to the 2003 test year?
No.Mr. Obenchain will address the
normalizing adjustments to sales and revenues and Mr. Said
will address the normalization of power supply costs.
How was the information for 2003 prepared?
For the 2003 general rate case filing, the
system financial information was prepared using six months
actual and six months estimated information.The 2003
Operations and Maintenance Budget and the 2003 Construction
Budget were the basis for this process.The 2003 test year
combined January through June actual data with forecast
information for July through December.The forecast process
started with actual information through April 2003 and then
rebudgeted all the non-normalized components for the time
period May through December 2003.The additional components
related to operating expenses and rate base include the
annualizing adjustments to operating expenses and rate base,
the known and measurable changes to operating expenses and
rate base, and the additional rate base and expense
adjustments are detailed in my exhibits.
What were the forecasted components to the
SMITH, DI
Idaho Power Company
test year?
The forecasted components include the
following items:(1) other operating revenues,(2) other
revenues and expenses,(3) operation and maintenance
( 4) property insurance expense,( 5 ) regula toryexpenses,
( 6) depreciation and amorti za tion expense,(7 )expenses,
taxes other than income,(8) Idaho Energy Resources Company
ra te base and income s ta temen t,(9) electric plant in
(10) materials and supplies,(11 )service and related items,
deferred conservation programs,(12) other deferred
programs,(13) deferred income taxes,(14) customer advances
for construction, and (15) deductions from operating and
maintenance expenses.
Please summarize the test year adjustments.
After the initial 2003 test year information
was compiled, the 2003 operating and maintenance expenses
were reduced by standard ratemaking adjustments, followed by
annualizing adjustments, known and measurable adjustments,
and other adjustments.The additional components included
in this filing for annualizing adjustments to operating
expenses and rate base are adjustments for payroll, property
and liability insurance, depreciation, depreciation reserve,
and annualized major plant additions and their associated
impacts.The additional components for known and measurable
changes to operating expenses and rate base are salary
SMITH, DI
Idaho Power Company
structure, employee incentives , pension service cost,
property and liability insurance, depreciation, depreciation
reserve, American Falls interest, major plant additions
known to occur through May 2004 and their associated
impacts, and a reduction to operating expense for non-
reoccurring prescription expenses related to 2002.The May
2004 cutoff for maj or plant additions was given to me by Mr.
Gale.
How was the forecast method determined?
In preparation for the split test year
methodology, the Finance Department, in consultation with
various other Company departments, developed the methodology
used to prepare the forecast portion of the case.Each area
developed the methodology to estimate the remaining six
months of 2003 starting with the approved 2003 budgets.
rebudget process was begun to reflect the projected
expenditures for both Operating and Maintenance (O&M) and
Capi tal proj ect spending from Apri 1 through December.The
Idaho Power Company business uni ts were asked to provide
updates to the original 2003 O&M and Capital Budgets as we
reviewed our work priorities through to the end of 2003.
Addi tionally, the business units were requested to identify
major plant additions that would close to plant Account 101
through May of 2004.Each Company cost center reviewed
their expected expenditures for new positions and payroll-
SMITH, DI
Idaho Power Company
related items including benefit expense.Each cost center
also reviewed project timing for both O&M-related projects
and construction- related proj ects, and any other known
changes to planned work for the remainder of the year.This
information was then compiled to produce a May through
December restatement of all O&M and Capital budget items.
The case is prepared wi th January through June
actuals combined with the results from the process above to
produce the 2003 results.A variety of methodologies were
identified that best fit the component being forecasted
including meetings with cost center managers, updated
estimates for timing of projects which were reflected in our
proj ections, comparisons to prior years actuals, analysis of
historical data including five years of history where
applicable, and inclusion of any updated expenditures that
were not known during the annual budgeting cycle.
Would you please describe Exhibi t No. 16?
Exhibit No. 16 is a compilation of the
Company I S supporting schedules for the twelve months ended
December 31, 2003.Page 1 of Exhibit No. 16 sets forth the
development of the Other Operating Revenues (Accounts 451,
454, and 456) for the 2003 test year. . Page 2 of Exhibit
shows the Other Revenues (Account 415) and Expenses (Account
416) for the year 2003.The 2003 operating and maintenance
expenses, by FERC accounts, appear on pages 3 through 6 of
SMITH, DI
Idaho Power Company
Exhibi t No. 16.
Would you please describe pages 7 through 12
of Exhibit No. 16?
Page 7 reflects the detail of Account 924,
Property Insurance Expense.Page 8 reflects expense for
Account 928, Regulatory Commission Expense.Pages 9 and 10
show total depreciation and amortization expense by plant
account.Page 11 shows the Prairie Power acquisition
amortization adjustment for gains and losses.Page 12 shows
the detail of the Taxes Other Than Income Taxes.
Would you please describe page 13 of Exhibit
No. 16?
Page 13 of Exhibit No. 16 develops the net
earnings from IERCo that are added to the booked operating
income for ratemaking purposes.
How does the Company treat IERCo I s earnings
and investment for ratemaking purposes?
The primary purpose of IERCo is to mine coal,
which provides fuel for the Jim Bridger thermal power plant
in Wyoming.Consistent with prior Commission orders, the
Company treats IERCo I s coal operations as a part of i~s
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receivable from Idaho Power Company (line 10, page 13 of
Exhibi t No. 16) and I have deducted notes payable to IERCo
in determining the Company I s net investment in IERCo to be
included in the rate base (Line 14, page 22 of Exhibit No.
16) .
Why have you made these adjustments to
IERCo s earnings and rate base in this proceeding?
I have made adjustments to reduce IERCo ' s
rate base for notes payable of $5,909,558 and the associated
interest income adjustment of $78,613 to allow IERCo ' s rate
base and earnings to reflect only the cash required to fund
IERCo operations for the year 2003.If IERCo were to use
these funds to make a distribution of earnings to the
Company, or if the Company were to actually fold IERCo into
its own operations, the result would be the same as
presented herein.
Would you please describe the data contained
on pages 14 through 22 of Exhibit No. 16?
Pages 14 through 22 of Exhibit No. 16 reflect
the development of all the components applicable to the
combined system rate base of the Company for the year 2003.
Page 14 of Exhibit No. 16 reflects the balance by month and
the thirteen-month average of Electric Plant in Service
(Account 101).Page 15 of Exhibit No. 16 reflects the
balance by month and the thirteen-month average of
SMITH, DI
Idaho Power Company
Accumulated provision for Depreciation (Account 108).Page
16 of Exhibit No. 16 reflects the balance by month and the
thirteen-month average of Accumulated provision for
Amortization (Account 111).Page 17 of Exhibit No. 16
reflects the balance by month and the thirteen-month average
of Materials and Supplies (Accounts 154 and 163) .Page 18
and Page 19 of Exhibit No. 16 reflect the balance of the
Company s Conservation and Other Deferred Programs.For
these programs the Company inc udes the December 31, 2003
ending balance in rate base consistent with prior orders of
this Commission.Page 20 of Exhibit No. 16 reflects the
balance at the beginning and end of 2003 and the average
balance for Accumulated Deferred Income Taxes (Accounts 190,
2 82, and 2 83) .Page 21 of Exhibit No. 16 reflects the
balance by month and the thirteen-month average of Customer
Advances for Construction (Account 252).Page 22 of Exhibit
No. 16 reflects the balance by month and the thirteen-month
average of the rate base components for IERCo, consistent
wi th prior orders of this Commission.
What adjustments have you made to the 2003
information for ratemaking purposes?
After the initial 2003 test year information
was compiled, the 2003 operating and maintenance expenses
were reduced by standard ratemaking adjustments, followed by
annualizing adjustments , known and measurable adjustments,
SMITH, DI
Idaho Power Company
and other adjustments.The additional components included
in this filing for annualizing adjustments to operating
expenses and rate base are adjustments for payroll, property
and liability insurance, depreciation, depreciation reserve,
and annualized major plant additions and their associated
impacts.The additional components for known and measurable
adjustments to operating expenses and rate base are salary
structure, employee incentives, pension service cost,
property and liability insurance, depreciation, depreciation
reserve, American Falls interest, maj or plant additions
known to occur through May 2004 and their associated
impacts, and a reduction to operating expense for non-
reoccurring prescription expenses related to 2002.The May
2004 cutoff for major plant additions was given to me by Mr.
Gale.Lastly, I have made certain other adjustments to
operating expense and rate base that are primarily related
to specific regulatory treatment of these items.
Have you prepared or supervised the
preparation of exhibits detailing these adjustments to the
books and records of the Company for the year 2003?
I have supervised the preparation ofYes.
Exhibit Nos. 17 through 20, which reflect certain
adjustments to the 2003 results of operation and rate base.
Would you please describe Exhibi t No.1 7?
Exhibi t No. 17 reflects the detailed support
SMITH, DI
Idaho Power Company
of deductions from the operation and maintenance expense of
the Company for certain general advertising, memberships,
and contributions.This adjustment has been made by the
Company to comply with prior orders of this Commission.The
adjustments shown on Exhibit No. 17 are reflected on page 1
and page 2 of Exhibit No. 17.
Would you please describe Exhibit No. 18?
Exhibit No. 18, consisting of 4 pages,
reflects the detailed support for annualizing adjustments to
the 2003 operating expenses and the rate base of the
Company.These adjustments reflect changes to certain
expense and rate base items as if they had been in existence
for a full year or to year-end 2003 levels, whichever is
applicable.Items adjusted to year-end levels include an
increase in operating payroll of $2,913,244 and property and
liabili ty insurance expense of $384,583.
The total annualizing adjustment shown on page 1 of
Exhibit No. 18, line 3 amounts to an increase to operating
expense of $3,297,826.The computations for the amounts are
shown on page 2 of Exhibit No. 18.Page 3 shows the
annualized impacts of major plant additions for production
and transmission assets.The net annualizing adjustment to
rate base is $19,779,389.The related changes to
Depreciation Expenses, Depreciation Reserve, Property Tax,
and Insurance Expense are shown on line 7 of Exhibit No. 18.
SMITH, DI
Idaho Power Company
Page 4, lines 3 and 4, details by major asset group the
change to Depreciation Expense (Account 403) and
Depreciation Reserve (Account 108).
Would you please describe Exhibit No. 19?
Exhibit No. 19, consisting of 5 pages,
reflects the detailed support for certain known and
measurable adjustments to expenses and rate base that have
occurred subsequent to year-end 2003.A summary of the
various adjustments is shown on page 1 of Exhibit No. 19.
Would you please describe the known and
measurable adjustments that were made to the annualized 2003
results of operations?
Line 1, page 1 of Exhibit No. 19 is the
normalized annual employee incentive expense of $5,114,821.
Line 2, page 1 is an increase to Operating Pension Expense
of $2,170,163 to reflect service costs for 2003, which is
more representative of pension costs going forward.Line 3,
page 1 is a $280,107 reduction related to 2002 Prescription
Expenses booked in 2003.Line 4, page 1 shows the operating
payroll adjustment of $2,241,595 to estimate the Company
general wage adjustment for 2004.Line 5, page 1 reflects
the increased costs associated with American Falls Falling
Water paYments.Line 6, page 1 reflects an increase to
operating expense for premium increases for 2004.
The computation and detail supporting the amount
SMITH, DI
Idaho Power Company
shqwn on page 1 of Exhibi t No. 19 are shown on pages 2
through 3 of Exhibit No. 19.
Page 4 of Exhibit No. 19 shows the known and
measurable impacts of maj or plant additions for transmission
assets that will be in service through May 2004.The known
and measurable adjustment to rate base is $18,388,690.The
changes to Depreciation Expense, Depreciation Reserve,
Property Tax, and Insurance Expense are shown on line
page 4 of Exhibit No. 19 (Account 403) Page 5 details by
major asset group the change to Depreciation Expense
(Account 403) and Depreciation Revenue (Account 108).
Would you please explain Exhibi t No.2 O?
Exhibit No. 20 consisting of one page
reflects additional adjustments to rate base or operating
expense resulting from charges to Account 101, Electric
Plant in Service, Account 108, Accumulated provision for
Depreciation, Account 114, Electric Plant Acquisition
Adjustments, Account 115, Accumulated provision for
Amortization of Electric Plant Acquisition Adjustments,
Account 182.3, Other Regulatory Assets, Account 165,
PrepaYments, Account 454, Other Operating Revenue and
Account 928, Regulatory Commission Expense.
Would you please describe the adjustments to
rate base, operating revenues and operating expenses on
Exhibit No. 20?
SMITH , DI
Idaho Power Company
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Exhibit No. 20, line 1 details the
unamortized portion of extraordinary costs associated with
increased security measures implemented on company property
since September 11, 2001.The amortization is included in
2003 operating expense and will be amortized over the next
five years per IPUC Order No. 28975. Line 2 details an
increase to operating expense to recover intervenor funding
paid to the Land and Water Fund of the Rockies per IPUC
Order 28927.Lines 3 through 5 show the unamortized portion
of the Electric Plant Acquisition Adjustment associated with
the prairie Power Rural Electric Cooperative purchase in
July 1992.Line 6 reflects an increase to Other Operating
Revenue for pole attachment revenues to be received in
January 2004 that applies to service to be provided in
December 2003.Lines 7 and 8 reflect rate base adjustments
directly offsetting prior entries to Account 101, Electric
Plant in Service and Account 108, Accumulated provision for
Depreciation made during 2003.Statement of Financial
Accounting Standard 143 (SFAS 143) implemented in January
2003 requires specific accounting for Asset Retirement
Obligations.SFAS 143 has no revenue requirement impact in
this case.Line 10 reflects the balance of Account 165320
Prepaid Pension Expense after deducting service costs for
2003.
Are all the data and their adjustments made
SMITH , DI
Idaho Power Company
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to your exhibits and supporting schedules calculated on a
total system basis?
Yes.
Does this conclude your direct testimony in
this case?
Yes, it does.
SMITH, DI
Idaho Power Company