20040713Reconsideration Order No 29547.pdf

Office of the Secretary
Service Date
July 13 , 2004
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
IDAHO POWER COMPANY FOR AUTHORITY
TO IN CREASE ITS INTERIM AND BASE
RATES AND CHARGES FOR ELECTRICSERVICE.
CASE NO. IPC-O3-
ORDER NO. 29547
The Commission on May 25 , 2004, issued Order No. 29505 in this Idaho Power
Company rate case, approving an increase in the Company s annual revenue requirement in the
amount of $25 329 438. The Company on June 15, 2004, timely filed a Petition for
Reconsideration pursuant to Idaho Code 9 61-626 and the Commission s Rules of Procedure 33
and 331. IDAP A 31.01.01.033 and .331. The Company identified several issues for which it
asked reconsideration, but only one of which would significantly affect the Company s revenue
requirement. The Commission Staff was the only party to file an answer to Idaho Power
Petition for Reconsideration. The Commission in this Order grants in part Idaho Power
Petition for Reconsideration.
IDAHO POWER'S PETITION FOR RECONSIDERATION
1. Adjustment to Test Year Tax Expense.
The first and most significant issue Idaho Power identified for reconsideration relates
to the determination of the Company s federal income tax expense. As noted in its Petition
Idaho Power calculated its test year federal income tax costs based on the current statutory
income tax rate of 35%. The Company lowered the test year federal tax rate to account for the
non-Idaho jurisdiction portion of its business and the Idaho state income tax. The Commission
in Order No. 29505 adjusted the Company s test year income tax expense, adopting a proxy
income tax rate to recover expected tax costs in rates. The Commission used a historic five-year
average to calculate the Company s test year expense in lieu of the statutory rate. This reduced
the test year income tax expense by $11 504 677.
Idaho Power in its Petition for Reconsideration renews several arguments it
previously made against the use of a historic average tax rate. For example, the Company argued
in rebuttal testimony and its post-hearing brief that use of the proxy tax rate violates principles
ORDER NO. 29547
against retroactive ratemaking.The Commission addressed those arguments in Order No.
29505, and will not address them here. We have determined, however, that reconsideration is
appropriate on the tax issue for the purpose of receiving additional evidence.
Idaho Power asserts in its Petition that serious consequences to the Company "would
ensue if the Commission s Order violates the normalization requirements of the Internal Revenue
Code.Petition for Reconsideration p. 11. The Company discussed portions of an Internal
Revenue Service private letter ruling and attached to its Petition letters from accounting firms.
Idaho Power stated it "requested that the normalization issue be reviewed by its outside tax
counsel and outside auditor, as well as other national accounting firms and has requested advice
as to whether or not they believe a normalization violation of the Internal Revenue Code has
been triggered by Order No. 29505.Petition for Reconsideration p. 13. Staff in its Answer
objected to the new evidence Idaho Power included with its Petition, noting that the
Commission s Rules of Procedure require a petitioner to include only a statement of the nature
and quantity of evidence the petitioner will offer if reconsideration is granted, and not the
evidence itself. See IDAP A 31.01.01.331. Staff also asserted, if the Commission grants
reconsideration to receive the Company s evidence
, "
a hearing would be appropriate and (StaffJ
is prepared to offer additional relevant evidence, including on the effect normalization of the
significant tax refund would have had on customer rates." Staff Answer, p. 4.
Staff's objection to Idaho Power s inclusion of new evidence with its Petition is well-
founded, and the Commission did not consider the evidence in reviewing the Company s request
for reconsideration. The appropriate forum for new evidence to be presented is in a hearing on
reconsideration that will allow all parties to review the evidence and respond.Given the
significance of the income tax adjustment made by the Commission in Order No. 29505, we find
it is appropriate to grant reconsideration on the issue and permit the parties an opportunity to
present new evidence regarding the use of a five-year average to calculate the Company
income tax expense. The Company and Staff are directed to propose a procedural schedule to
complete the reconsideration process, including an evidentiary hearing, within the statutory time
constraints.
ORDER NO. 29547
2. Computational Errors.
Idaho Power identified in its Petition "computational errors that understate Idaho
Power s Idaho jurisdictional revenue requirement by $2 668 367.1 Petition for Reconsideration
p. 25. The Company identified calculation errors in the Company s depreciation adjustment to
rate base, its budget to actual expense adjustment, and the pension expense adjustment. The
errors occurred in Staff's calculations for its recommended adjustments to the test year expenses
or rate base. The Commission approved some of Staff's recommendations , which were then
incorporated into Order No. 29505, including the underlying computational errors. The total
amount of the miscalculations is $2 668 367, which if corrected would bring the Commission
approved revenue requirement increase to $27 997 805. Staff in its Answer supported granting
reconsideration to correct the computational errors , and stated the Company and Staff will
submit a statement showing correction to the calculation errors.
It is appropriate to grant reconsideration to correct calculation errors that occurred in
Order No. 29505. The depreciation adjustment error occurred when $2 205 647 was deducted
from the Company Electric Plant in Service accounts rather than from Accumulated
Depreciation Reserve accounts. According to Idaho Power, correcting the error increases the
Company s rate base by $4 411 294 and its Idaho jurisdiction revenue requirement by $522 228.
The budget to actual expense error was an inadvertent omission of $379 967 from the
Company s General Plant Maintenance Account. The Idaho jurisdiction revenue requirement
amount is $271 853. The pension expense adjustment error occurred because approximately $2
million was deducted from test year pension expense accounts when it should have been
deducted from rate base.The adjustment to correct the error is an increase in the Idaho
jurisdiction revenue requirement in the amount of $1 774 286. The three calculation errors
resulted in understating the Company s revenue requirement by $2 668 367.
Idaho Power asked the Commission to allow it to defer, with interest, the amount of
668 367 "for inclusion in customer rates when any increase in revenue requirement resulting
from the Company s Petition for Reconsideration in this case is authorized or when the 2005-
2006 Power Cost Adjustment is implemented, whichever may occur first."Petition for
I Idaho Power on June 11 , 2004 filed a Notice of Computational Errors in Establishing the Company s Revenue
Requirement, which included a request that the Commission issue an order the next day to correct the computational
errors. We believe it appropriate to address these errors in an Order on Reconsideration.
ORDER NO. 29547
Reconsideration p. 26. Because the errors the Company identified are simply calculation errors
and prevent the Company s recovery of revenue the Commission intended it to obtain, it is
appropriate that the Company begin recovery of that amount as soon as possible. Accordingly,
the Commission grants reconsideration to adjust the revenue requirement stated in Order No.
29505 for these computational errors, finds that it should be increased to $27 997 805, and
directs the Company to work with Staff to spread the amount in rates, on or before August 1
2004. The Company may file tariffs to adjust its rates as soon as possible to reflect recovery of
the correct revenue requirement.
3. Three-Year Recovery of Additional Tax Assessment, Disallowance of
Refund Litigation Expenses, Removal of Capitalized Portion of
Incentive Pay.
Idaho Power asks for reconsideration on three separate accounting issues, but does
not ask for a hearing, nor does the Company propose new evidence on the issues. The first issue
is the Commission s decision to amortize recovery over a three-year period of a $2.9 million tax
payment resulting from the Company s 1998-2000 tax audit cycle. The Commission explained
why it adopted a three-year recovery period in Order No. 29505: First
, "
ratepayers should pay
the amount of the tax deficiencies once, not the entire three-year deficiency every single year.
Second
, "
because the Company s three-year audit cycle allows for the possibility of tax
deficiencies every third year, the Commission finds it reasonable to average the additional tax
deficiencies over a three-year period. This symmetry between tax expense and collection in rates
will allow the Company to recover its legitimate tax costs while minimizing the potential for
over-collection.Order No. 29505 p. 30. In its Petition for Reconsideration, Idaho Power
argues that past Commission decisions allowed recovery of tax expenses in the year in which the
tax was paid. The Company acknowledged the Commission can change its precedent, but
contended that "a two-year amortization period is a more reasonable period" than the
Commission approved three-year recovery period. The Commission is not convinced by the
Company s argument that the three-year recovery period is an error requiring correction on
reconsideration. Idaho Power concedes the Commission is not bound by statements made in past
cases that were based on the unique facts of those historical cases. The Commission finds
insufficient basis to grant reconsideration on this point.
ORDER NO. 29547
The second accounting issue relates to the Commission s decision to disallow
recovery of legal costs Idaho Power incurred by participating in two different refund cases filed
at the Federal Energy Regulatory Commission (FERC). The Company asserts it "is exposed to a
continuing stream of litigation in both the courts and before various regulatory agencies each
year " and that the $352 544 legal costs for the refund cases occurred in the test year and is
representative of its annual legal expenses. Idaho Power implied the Commission, by not
including the refund case litigation in recoverable expenses, is not allowing the Company to
recover normal legal expenses that occur each year. Idaho Power argues in its Petition that "
their very nature, each legal proceeding is unique " and because these legal expenses occurred
during the test year, it is unreasonable for the Commission to exclude them from test year
expenses. Petition for Reconsideration p. 20. At the least, the Company asserts the Commission
should amortize recovery of the refund case litigation over a five-year period, just as it did for
the Company s consultant fees expenses.
The Commission did allow as recoverable costs the usual and normal legal expenses
it anticipates the Company will incur each year. Although the Commission did not allow
recovery in rates of the refund litigation costs
, "
the maj ority of legal costs incurred in 2003
remain in the test year expenses for recovery.Order No. 29505 p. 28. As we explained, the
refund litigation expenses are unusual and extraordinary, partly due to their "relationship with
trading activities.Id.The FERC cases came about because of the trading practices of
wholesale energy brokers, including IDACORP Energy, a sister subsidiary of IDACORP. Idaho
Power was put in the unusual position of having to defend its interests against the interests of an
affiliated corporate entity. The Company s involvement in the cases arose because of the
activities of IDACORP Energy and IDACORP, making the resulting litigation expense
extremely unusual. The Commission concluded it is inappropriate to ask ratepayers to pay these
extraordinary legal expenses, in addition to the usual legal expenses Idaho Power incurs each
year. The Commission declines to reconsider its decision to disallow recovery of the refund
litigation cases expenses.
The third accounting issue relates to the Commission s decision to eliminate from the
test year all pro forma adjustments the Company made for incentive pay. Idaho Power limits its
request for reconsideration to the removal of the capitalized portion of the incentive pay and does
not ask for reconsideration of the decision to eliminate the operating expense portion. The
ORDER NO. 29547
Company s test year rate base included $7 741 747 for incentive pay expenses incurred prior to
the test year. Idaho Power notes the Commission s decision would require it to immediately
record a reduction in earnings in that rate base amount. The Company asks for approval to create
a regulatory asset in the amount of $7 741 747 to be amortized, without interest, over a 20-year
period. The Company assumes this treatment, if allowed, would permit it to add $387 088 to its
annual expenses.
Although the Company disagrees with the decision, Idaho Power does not ask for
reconsideration of the merits of the Commission s decision on incentive pay. Instead, the
Company states that the Commission s decision "will have an immediate and substantial impact
on the Company s earnings.Petition for Reconsideration p. 23. In other words, Idaho Power
does not direct attention to factual or legal errors regarding removal of the incentive pay from the
test year, and instead asks for relief from the consequences of the decision. The Commission
appreciates the concern the Company expressed regarding removal of the capitalized portion of
the incentive pay, but that by itself does not provide a basis for reconsidering the decision. The
Company s request for additional relief on reconsideration is therefore denied.
4. Clarification of DSM Program for Schedule 19 Customers.
Idaho Power also asks the Commission to clarify its intent regarding a Demand Side
Management program for Schedule 19 customers. Noting testimony that the Company currently
does not administer a conservation program for Schedule 19 customers, we stated in Order No.
29505 that "the Commission would like the Company to develop and present a conservation
program targeted specifically to Schedule 19 customers.Order No. 29505 p. 63.The
Commission provided some guidance for an appropriate program, suggesting it should allow
Schedule 19 customers to determine appropriate energy conservation improvements to their
own facilities and receive matching funds from their contributions to Energy Efficiency Rider
program to install the improvements." Order No. 29505 p. 63. The Commission deliberately left
flexibility in development of the details for the program, asking the Company to "work with the
Schedule 19 industrial customers to develop a proposal to submit to the Commission.Id.
In response to questions presented by Idaho Power in its Petition, the Commission
provides additional guidance for a Schedule 19 conservation program, but still intends that the
Company develop a program in conjunction with the customers and Staff. The program should
enable Schedule 19 customers to propose conservation improvements at their facilities and
ORDER NO. 29547
receIve matching funds from the Energy Efficiency Rider program to install them. The
Commission intended the customer to pay one-half the cost and receive matching funds for the
other one-half cost, but not in an amount greater than the customer s contributions to the Energy
Efficiency Rider program. For this program, the customers' contributions will be counted from
June 1 , 2004 forward. The Commission did not intend for the program to bypass the Energy
Efficiency Advisory Group, nor does the Commission believe it will be necessary to issue
order approving the program. With this additional guidance, we are optimistic the Company will
soon develop an energy efficiency program for Schedule 19 customers.
CONCLUSION
Given the significance of the income tax expense adjustment made by the
Commission in Order No. 29505, the Commission grants reconsideration on the issue to provide
the Company and other parties an opportunity to present new evidence regarding the use of a
five-year average to calculate the Company s income tax expense. The Company and Staff are
directed to propose a procedural schedule to complete the reconsideration process within the
statutory time constraints. The Commission also grants reconsideration to adjust the revenue
requirement stated in Order No. 29505, increasing it to $27 997 805 , to correct the computational
errors the Company identified in its Petition for Reconsideration. The Company is directed to
work with Staff to spread the amount in rates, on or before August 1 , 2004. Finally, the
Commission grants reconsideration for the purpose of providing additional guidance for a
Schedule 19 conservation program, and that information is included in this Order.
The Commission denies reconsideration of the other issues identified in the Petition
for Reconsideration.
ORDER
IT IS HEREBY ORDERED that Idaho Power s Petition for Reconsideration
granted to allow the Company and parties an opportunity to present new evidence regarding the
use of a five-year average to calculate the Company s income tax expense. The Commission
will approve a procedural schedule proposed by the parties to complete the hearing on
reconsideration within the time provided by statute.
IT IS FURTHER ORDERED that reconsideration is granted to correct the
computational errors identified by the Company in its Petition.Idaho Power s revenue
requirement is increased to $27 997 805 with correction of the computational errors.
ORDER NO. 29547
IT IS FURTHER ORDERED that reconsideration is granted for the purpose of
providing additional guidance for a Schedule 19 conservation program, and that information is
included in this Order.
IT IS FURTHER ORDERED that reconsideration is denied on the three-year
recovery of additional tax assessment, disallowance of Refund Litigation Expenses, and removal
of the capitalized portion of incentive pay.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this /3 f4'..
day of July 2004.
, PRESIDENT
ARSHA H. SMITH, COMMISSIONER
ATTEST:
vld/O:IPCEO313 ws reconsideration
ORDER NO. 29547