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HomeMy WebLinkAbout20040220Leckie Direct.pdfRECEIVED 2004 February 20 PM 4:59 IDAHO PUBLIC UTILITIES COMMISSION BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO INCREASE ITS INTERIM AND BASE RATES AND CHARGES FOR ELECTRIC SERVICE. ) CASE NO. IPC-O3- DIRECT TESTIMONY OF JOE LECKIE IDAHO PUBLIC UTILITIES COMMISSION FEBRUARY 20, 2004 Please state your name and business address for the record. My name is Joe Leckie.business address is 472 West Wa street, Boise, Idaho. By whom are you employed and in what capacity? I am employed the Idaho Public utili ties Commission (Commission) as an auditor in the utili ties Division. What is your educational and experlence background? ed from Bri Uni versi ty with a Bachelors of Science degree in Accounting.I worked for the accounting firm Touche Ross in its Los Angeles office for approximately one year.I then attended law school and graduated from the J. Rueben Clark School of Law at Brigham Young Uni versi ty with a Juris Doctorate degree. am licensed to practice law in the State of Montana and so for approx tely 5 years.I have been empl by the Commission as an auditor since March 2001.I have attended the annual regulatory studies program sponsored by the National Association of Regulatory utilities Commissioners (NARUC) at Michigan State Uni versi ty in August 2001. Would you please summarlze your test ease? CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff I will present Staff adjustments totalingYes. $4,563,686 to the Company-proposed test year revenue requirement in the following areas: (1 )Idaho Powe 's annualiz adjustments for the 2003 maJor plant additions in the last trimester of the year should not be allowed.This reduces revenue requirement by $1,953, 644. (2 )Idaho Power s known and measurable adjustment for 2004 major plant additions through May 2004 should be averaged us the l3-month average rate base methodology.This reduces revenue re rement $1,625,579. (3)Idaho Power capitalized improvements to Brownlee-Woodhead Park in the amount of $7 525,237.It is Staff's position that these improvements should not be included in rate base for this rate case, but rather deferred with other relicens costs for Hells Canyon. This deferral decreases revenue re rement by $866, (4 )Idaho Power capi tali zed $ 654,740 for defense of its position concerning a biological opinion prepared and submitted to FERC by the National Marine Fisheries Services (NMFS) in 1995.It is Staff's position that these costs should have been expensed in the years incurred, and should not have been capitalized and luded in rate base.Exc these costs from rate CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff base reduces revenue requirement by $68 405. (5)Idaho Power included in rate base the cost for a shareowners ' document management system in the amount 0 f $106, 275.It is Staff's posi tion that only one- half (1/2) the cost of the document system should be included in the rate base.This adjustment reduces the revenue requirement by $10,921. ( 6)Idaho Power s investment in the Bridger Coal Company is held through its subsidiary, Idaho Energy Resources Company (IERCO).This investment should be reduced for that is not used and useful.This reduces revenue requirement by $38,691. How were you able to determine the revenue requirement effect of each of the Staff recommendations presented in your testimony? I identified the plant accounts that would be changed by each adjustment, and then Staff witness ish det rement resultingthe effect on revenue re from these adj ustmen ts .See Staff Exhibit No. 113. Did you review other areas that do not have an effect on the revenue requirement? Yes, there were other aspects of rate base that I reviewed which did not effect the revenue requirement. These are as follows: (1 )Idaho Power s addition to rate base of the CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff Danskin Power facility in the amount of $52 484 209. Staff witness Sterling will discuss the addition of the Danskin Power facility in greater detail in his testimony. (2 )tal i za tion of additionalIdaho Powe ' securl costs in the amount of $728,766. (3)Idaho Power s adjustment for the Prairie Power Acquisition. (4 )The addition of the Nez Perce settlement in ra te base. (5)Idaho Power s account treatment in this case of ts asset retirement obli lon. ANNUALIZATION OF 2003 MAJOR PLANT ADDITIONS Please describe Idaho Power s annualization adjustment for the major plant additions that the Company placed into service in the last four months of 2003. During the last trimester of 2003, Idaho Power placed into service maj or plant additions with a total value of $23,161,303.Idaho Power cated in discussions with Staff that the basis for determining what would be a maj or plant addition are those proj ects that will close in the last four months of 2003 and the cost of which will equal or exceed two million dollars.The maj or plant additions included the Bridger rewind proj ect for a total cost of $8,661,463 and the Brownlee-Oxbow ssion 1 for a total cost of $14,499,8 O.These CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff plant additions are included in the month-end Electrical Plant in Service (EPIS) account balances for the months when they are placed in serVlce, and are included in the 13-month avera The annualiz adjustment ofprocess. $19,779,389 is the difference between the total costs of the plant additions treated as if they were in service the full 13 months and the amount of the plant additions actually included in the average rate base calculation. Does Staff accept this annualizing adjustment? No, Staff obj ects to this adjustment to rate base because the annualiz adjustment as proposed Idaho Power is not consistent with Commission-approved methodology for calculating an average-year rate base. The annualizing adjustment proposed by Idaho Power would treat these plant additions for averaging purposes as if they were in service for the whole 13 months and not just a portion of the year.This adjustment has the same effect as if Idaho Power were us the year-end balance for these additions to plant in determining rate base. Why should these year-end values for major plant addi tions not be included in rate base? Because the Commission has consistently ordered the use of an average rate base in Idaho Power s last two rate proceedings, Case Nos. U-1006-265 and PC-E-94- the 1984 rate case (U-1006-265) , the ssion stated: CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff (T) he company calculated an average test-year 1984 rate base from ending monthly balances beginning December 1983 through December 1984...Order No. 20610 at 49.In the 1994 rate case (IPC-E-94-5) , the Commission again a l3-month average rate base by stating: IPCo proposed a 1993 test year and a rate base comprised of the average of 13-monthly balances for the period ending December 31, 1993, rather than a year-end rate base. Noparty obj ected to the use of a 1993 test year and an average rate base. Accordingly, we find the use of a 1993 test year and an average rate base to be reasonable and appropriate in this case. Order No. 25880 at In this present case Idaho Power agaln asks to have rates determined using an average rate base.Yet if Idaho Power is allowed to annualize these plant additions, the average rate base will be skewed toward an end-of-year rate base without reflecting any customer benefits from the investment.This would create a mismatch between investment and test year expenses fits that the average-year rate base methodology is designed to Has the Commission previously addressed the issue of the average rate base as opposed to an end-of-year rate base? Yes, the Commission previously addressed this issue in a Washington Water Power Company (WWP) rate case, Case No. U-1008-23 , and again in a Boise Water CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff Corporation (BWC) rate case, Case No. U-1025-5l.In the WWP case, the Commission stated: The average rate base provides a better of revenues and expenses wi fewer chances for error or omissions. Therefore, we find it is fair, just and reasonable to require Water Power to utilize an average rate base the same as every other major uti ity that we regulate in Idaho. Order No. 20267 at 10. In Order No.2 0592 issued in the 1986 Boise Water rate case (U-1025-51) , the Company proposed to use an average rate base only if some of the additions to plant were included at year-end levels.The Company maintained that the additions included at year-end levels were non-revenue producing or expense savlng.In denying Boise Water s request to add specific additions to plant at year-end levels, the CoIT~ission stated: The Company technically correct" calculation of average rate base is anaberrat Not only does t appear to betheoretically incorrect, but it isimpractical to administer. In terms of cash flow all depreciable investments are revenueproducing. In addition , the di fficul ty andsubj ecti ve decision-ma process in determining what classes of property are or are not " revenue produc "" expensesaving" presents a quagmire into which 'v'ledecline to step. We again adopt Staff's recommended average year rate base. Order No. 20592 at 12-13. CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff The treatment Boise Water requested to determine rate base is essentially the same treatment Idaho Power is asking for in this case when it proposes adding to rate base the annuali ed cost of the addi tions to ant. Has the Commission cited any other reasons for limi ting exceptions to using average-year rate base? In both cases cited above the CommissionYes. identified low inflation and the size of plant additions as factors further limiting deviation from an average-year rate base.The Commission stated that "additions must be so large as to unreasonably distort the mat of its revenues, expenses and rate base.Order No. 20592 at 13. What has the inflation rate been over the last three years? The inflation rate, measured by the percent change in the consumer prlce index, over the past three years has averaged 1.(1. 6 in 2001; 2.4% in 2002, and 1. 9 in 2003) This is relat ly low historical levels.See Staff witness Carlock's Exhibit No. 144. Is it Staff's position that the last trimester maj or plant additions are large enough to unreasonably distort the matching of Idaho Power s revenues, expenses and rate base? On a cumulat basis, Staff believes the plant CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff addi tions do represent a significant mismatch between Idaho Power s revenues, expenses and rate base.That is we propose in this case, and the Commission has in previous cases, use of an average-year rate base. While the Commission has identified large plant addi tions as one factor to consider in allowing deviation from average-year , it has also noted that all plant investment has some "revenue producing " and "expense saving " effects that are difficult if not impossible to identi Order No. 20592 at -13.In its deviation from average year rate base, Idaho Power proposes only increases in depreciation , taxes and insurance as its adjustments to reflect the effect of these rate base addi tions.staff believes that Idaho Power has failed to show the benefits it will receive for making these investments; instead it has shown only the increase in expenses.To the extent the benefits are unknown or cannot be properly measured as has been indicated in prlor commission orders, the investment and the costs should not be included in rates at year-end levels. How does the annualizing adjustment proposed by Idaho Power change the average-year rate base? By allowing daho Power to add the annualiz adjustment to the average rate base, Idaho Power has CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff effectively weighted the average to reflect the plant addi tions at the end-of-year value.To stay true to the averaglng methodology, there lS no need to make any ustment to the average result.The last trimester maj or plant additions should be included in the average ra te base without distortion. In what way does the annualizing adjustment distort the average rate base? It distorts the average rate base by reflecting plant as if it were In service the entire year when in fact the plant is only in service four (4) months or less of the year. Why should Idaho Power not be allowed to earn a rate of return on these plant additions as if they were In rate base for the entire year? The Company s earnings should be based on test year plant additions when they occur because Staff believes, and the has ously det that an average-year rate base is a better measure for matching rate base to test year revenues and expenses. addi tional specific plant additions are treated as year- end rate base, as is done with the annualizing adjustment, then the test year revenues and expenses will not match average rate base adjusted for the year-end additions. What is the best method to match the test year CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff revenues and expenses to the rate base in this case? The best way to match the rate base and revenues and expenses is to allow Idaho Power a true l3-month average rate base any annualizthout al adjustment. What other changes to Idaho Power s adjustments would be necessary if the Commission accepted Staff' recommendation and denied the annualizing adjustments? Idaho Power has increased its test year expenses for this annualiz adjustment through an increase to annual cia tion expense by $ 4 98, 4 7, prope tax expense $120, 654, annual lnsurance expense $4,834, and accumulated depreciation by $249 214.Each of these respecti ve expense amounts increased Idaho Power would need to be reduced to reflect the appropriate test year expense.The accumulated depreciation amount would also need to be reduced by $249,214. 2004 MAJOR PLANT ADDITIONS KNOWN AND MEASUREABLE ADJUSTMENTS Please describe Idaho Power s known and measurable adj ustment for the 2004 maj or plant additions. Idaho Power evaluated current construction projects in 2004 and determined that there were some maJor ant proj ects that would close before the end of 2004.that "maj or " proj ects wouldIdaho Power det CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff be those with a cost of approximately $2 000 000 or more. These proj ects included upgrades to the Brownlee-Oxbow transmission line and the star, Valli vue, Midrose and Goshen transmission stations.Idaho Power s proposed adjustment is an increase to rate base of $18,388,690. part of the known and measurable adjustment, Idaho Power also includes increases in test year expenses of $447,375 for depreciation 112 , 1 71 for property taxes, and $ 8 , 199 for insurance.Addi tionally, accumulated depreciation is increased by $223,688. I s there any legal basi s for inc this known and measurable adjustment in rate base? Idaho Code ~6l-502A prohibits granting a return on construction work in progress in rate base with the exception of short-term construction work in progress. The statute states as follows: Except upon its f of an extreme emergency, the commi ssion is herebyi ted in any order ssued after theeffective date (February 29, 1984J of this act from setting rates for any utility that grants a return on construction workin progress (except short termconstruct work in progress) or property held for future use and which is not currently used and useful in proviutili ty service. As used in this section short-term construction work in progress means construction work that has begun and will be comp eted in not more than twelve(12) months. Except as authorized by thissection, any rates granting a return onconstruct work in progress short-term construction work in progress) CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff or property held for future use are herebydeclared to be ust, unreasonable, unfair, unlawful and illegal. When construction work in progress is excluded from the rate base, the commission must allow a just, fair and reasonable allowance for funds used dur construction or similar account to be accumulated, computed in accordance with generally accepted accounting principles. From the information provided by Idaho Power, the 2004 maj or plant additions meet the definition of short-term construction work in progress because the proj ects will have begun and be completed wi thin the twelve (12) month period. is Staff questioning this adjustment? The problem with this adj ustment is not whether it could be included in rate base, because the statute clearly allows its inclusion.Instead, it is a question of how the cost of these proj ects should be included in comput the 13-month average rate base.I dah Code ~61-502A does not scuss how short-term construction work in progress will be included to set rates.The Commission has repeatedly stressed the importance of matching addi tions to rate base with revenues and expenses associated with those plant additions.The additions must also be known and measurable.If the total amount of the ant additions is added to the average rate base, it wil be as if they were In s ce through out the entire 13 CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff months of the average.The plant additions were not in service during any of the test year and therefore the revenues and expenses for the test year only reflect Idaho Power s business acti vi as if the ant were not in servlce.This treatment is not fair to the ratepayers. One possible solution is to make all known and measurable adjustments to revenues and expenses for these addi tions.When plant investments are made, revenues and/ or expenses also change; some expenses increase (i. e. , depreciation, insurance, and taxes) but other expenses decline (i. e., maintenance or power y) . Revenues often increase from transactions such as energy sales to customers, off-system sales, transmission revenues (firm or non-firm), or ancillary services.staff has been unable to identify any attempt by Idaho Power in its testimony or exhibits to quantify customer benefits that resul t from these additions to ant. Another poss Ie solution is to 1 ude the dollar amount of the additional plant in the l3-month averaging process as an addition to the last month's total before dividing by thirteen (13).This would treat the plant additions as if they were in service at the end of the year, and then include them in the averaglng calculation for the average rate base.The average rate base would reflect these tions to Idaho Power s plant, CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff and the revenues and expenses would more closely match the ra te base.Adding plant completed after the end of the test year as if it were in service the entire period is directly to the overage rate base methodology. The average rate base methodology includes plant added during the test year in rate base only for the period of the year it was actually in service. Has the Commission examined this issue in any prevlous cases? To Staff's knowledge, the Commission has never ruled that the short-term construction work in progress should be included in the sum of the months before being di vided the number of months when an average rate base is used.This issue does not appear to have ever been addressed by the Commission.However , the rationale used by the Commission in the 1986 Boise Water Corporation rate case (U-1025-51) cited in the annualiz adjustment scuss above would The has the general axiom that the average rate base provides a better matching of revenues and expenses and necessitates fewer adjustments, thereby reducing the chances for error or omission.See also Washington Water Power Company rate case U-1008-234, Order No. 20267 at I f the short -term construction work in progress is reflected for the full year and not luded in the average, it skews the CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff matching between the average rate base and the revenues and expenses.Including short-term construction work in progress in the average rate base rather than for the full year decreases the chance that known and measurabl adjustments to revenues and expenses will be missed. Does Staff have a recommendation for the treatment of the short-term construction work in progress? Yes, Staff recommends that the closing balances for the proj ects be included in the December 2003 plant balance in the l3-month average rate base.This would treat the ant additions as if they were included into the rate base average as of the end of December 2003. Would this treatment address any other potential problems? When a true average rate base is utilizedYes. that includes the closing cost balances for short-term construction work in progress in the sum of the monthly totals for the avera process, Idaho Power has no incenti ve to delay the closing of proj ects beyond the ending month of the average rate base period.A delay would allow the plant to be included at the end-of-year value instead of average rate base value.It is unreasonable and unfair to the ratepayers to have some ant costs at average rate base values and some at end-of-year rate base values. CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff I f the 2004 maj or plant additions are included in the average rate base calculation before dividing by 13 as proposed by Staff, what would the adjustment be? The known and measurable ustment to rate base would be decreased by $16,974,175.See Staff Exhibit No. 114.The following known and measurable adjustments to expense accounts would remain the same: depreciation in the amount of $447 375 , property taxes in the amount of $112,171, and lnsurance expense in the amount of $8,199. Accumulated depreciation would increase $223,688 to $447,375. I f the Commission accepts Idaho Power s proposal to include 2004 maj or plant additions as if in service for the full year as a known and measurable adjustment, does Staff have recommendations specific to this methodology? Yes, the accumulated depreciation should reflect a whole year of depreciation and should be the same amount as the eciat expense in the first year that the plant is included in rate base. BROWNLEE-WOODHEAD PARK What is Staff's proposed adjustment for the Brownlee-Woodhead Park? Staff recommends that the cost of the park improvements be deferred at this time and reviewed with the relicens costs for the Hells Canyon Complex.The CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff total cost of the park improvements is $7 525 237 , and depreciation has accumulated in the amount of $853,653. Annual depreciation expense for this proj ect in 2003 was $146,617. Why does Staff think the cost should be deferred and reviewed in conj unction with all the Hells Canyon Complex relicensing costs in the future? This park was developed under the terms of the original FERC license approved in 1955 and Exhibit R (recreational use) approved in 1974.As required the terms of the ori and amended license, Idaho Power was responsible for providing recreational oppo ties and developing a recreational plan.As a condition of FERC' approval of Idaho Power s plan, Idaho Power was obligated: ... to cooperate with Federal , State, and local agencies in providing for imum public recreational development and use at the project, and reservation of lands for such development and use as may be needed in the future. Order Approving Exhibit R, 51 C. 1327, 1974 WL 11874, C., April 16 1974 (NO. PROJ. 1971). After the initial development of Woodhead Park, Idaho Power in conjunction with the Idaho Department of Parks and Recreation determined in 1991 that Woodhead Park needed to be expanded and improved.daho Power developed a plan to the park to its current status and CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff submitted that plan to FERC for approval and an amended license.In its application for FERC approval dated November 7, 1990, Idaho Power stated, "This expanSlon will ficantly enhance recreational ies at the proj ect, well in advance of the proj ect relicensing process. "staff Exhibit No. 115 , page The relicensing process was a consideration when Idaho Power filed this Application.The plan submitted was a maj or reconstruction and enhancement to the existing facility, expanding the park from 17.5 acres to 65 acres. Idaho Power acknowl that " (u)and enhancing Woodhead Park will help meet recreational use demands for the vicinity for many years to come and will glve the recreationalist a higher quality experience. (See Idaho Power s Protection , Mitigation and Enhancement Proposal for Woodhead Park; Staff Exhibit No. 115, page 18. )It is reasonable to conclude that Idaho Power is ful that these tional will facilitate a smoother relicensing process. What was Idaho Power s preliminary original cost estimate for the construction of the park's reconstruction and enhancements? Idaho Power originally estimated the cost to be between $4 and $5 million.(See Idaho Power s Protection, Mi tiga t and Enhancement sal for Woodhead Park; CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff staff Exhibit No. 115 , page 20. Is Idaho Power depreciating the park improvements? Idaho Powe r is iat the enhancements to the park in the current amount of $146,617 per year. this rate, the park will be fully depreciated in approximately 50 years.The 331 structures and Improvements Account where these items are booked has a life of 100 years.At the end of 2003, Idaho Power has accumulated depreciation on the park in the amount of $853,653. At this rate of depreciation, will the park' enhancements be completely depreciated at the termination date of the current license? The current license expires July 31 , 2005.No. At the time of the license expiration, only approximately of the total cost of the proj ect will have been ciated. Why does Staff think that the cost of the park should be deferred and included with the relicensing proj ect costs? The extent of the park reconstruction and enhancements were meant to exceed the life of the current license term.In Idaho Power s Depreciation Case, IPC-E-03-7, Idaho Power filed its case CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff depreciation rates for hydro assets to the license period. Staff did not agree with the linkage but this Idaho Power posi tion supports the rationale that Idaho Power invested the cost of $7,525,237 fo long-term s to the recreational facility that beyond the current license life with the expectation that the improvements would benefit the relicensing process. Does the use of the park generate revenues? Yes, Idaho Power reported annual revenues in 2003 in the amount of $137,236. What are the expenses for the operation of the park? In 2003 , Idaho Power reported operating expenses in the amount of $46,751 and maintenance expenses in the amo un t 0 f $ 141 , 642 .The total expenses during 2003 for the park were $188,393, producing a deficit. Are the ratepayers be asked in this rate case to pay the cost of s defi Yes, in the amount of $51,157 plus the annual depreciation in the amount of $146 616.staff believes it is reasonable for customers to pay the depreciation expense in rates but believes the Company should investigate raising park fees to cover annual operating expenses. BIOLOGICAL OPINION CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff Please explain the nature of the biological oplnlon prepared for the Hells Canyon Complex and what staff recommends regarding inclusion of these costs into rate base? According to Idaho Power, this expenditure was the total cost Idaho Power expended to defend itself from a biological opinion prepared and submitted to FERC by the National Marine Fisheries Services (NMFS).In March 1995 NMFS prepared and submitted to FERC a biological report that concluded Idaho Power s He Is Canyon Complex opera tion ices would red cies Act specles.Idaho Power opposed NMFS's conclusions and defended its operational practices.The costs reported by Idaho Power for its defense in this matter totaled $654 740; most of these costs were attorney fees incurred in 2000 and 2001.Idaho Power has capitalized this amount and included it in its proposed rate base. Staff ects to the on of s amount on the basis that these costs are an expense and should be booked as an expense.There is no indication that these costs will benefit some future period, nor lS there any authorization from the Commission that would allow these expenses to be deferred.Because the expenditure of these costs re ated to an immediate challenge to its mode of operation in the Hells Canyon Complex on or before 2001, CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff the benefits of this expense do not carry beyond Idaho Power s defense in that one matter.Wi thout some benefit that would extend into the test year and beyond, it is not reasonable for Idaho Powe to capi tali ze these expenses and include them in rate base. What is the effect on rate base if these costs are not allowed? Idaho Power has included $654 740 in its proposed rate base amount.This amount has not been depreciated and there is no accumulated depreciation in Account 108.Therefore, the total book value of $654,740 for the biological opinion should be removed from rate base. SHAREOWNERS' DOCUMENT MANAGEMENT SYSTEM What is the adjustment Staff proposes for Idaho Power s addition to rate base for a proj ect entitled Shareowners ' Document Management System?" Idaho Power is see to add $106,275 to rate base for the total cost of a "Shareowners ' Document Management System.Because IDACORP is the only entity wi th enough shareowners to require a shareowners ' document management system (Idaho Power Company s only shareholder is IDACORP) , the benefits of this asset flow mostly to I DACORP .Therefore, it is not reasonable to assign all of the cost of Staff iss system to the ratepayers. CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff recommending that the cost of this system be shared equally between the ratepayers and the shareowners.This is the same treatment as that used to allocate Board of Directors ' fees.(See Idaho Power s Response to IPUC Audit Request # 30; Staff Exhibit No. 116. Idaho Power closed the work order on this project in 2000 and booked accumulated depreciation on this asset though December 31 , 2003 , in the amount of $33,332.The net book value of the asset is $72,943. One-half of the ori cost, or $53,137, should be removed from Idaho Power s proposed rate base. Addi tionally, the full depreciation booked on Idaho Power s books should remain with Idaho Power as accumulated depreciation. Are there other adjustments that should be made if one-half of the net book value of this asset is excluded from Idaho Power s proposed rate base? Idaho Power has det tha t the annual depreciation for s asset in 2003 is $14,949 and has included this amount in its annual depreciation expense. Staff has recalculated the annual depreciation expense for this asset over the remaining life of five (5) years in the amount of $14,589.Idaho Power s annual depreciation expense should be reduced by $ 7 ,295 for DACORP' s one- hal share of the iated expense. CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff IERCO INVESTMENT What is Idaho Power s involvement and interest In the IERCO investment? The IERCO investment represents Idaho Power one-third interest in the Bridger Coal Mine.The Bridger Coal Mine is jointly owned with PacifiCorp, which owns the other two-thirds interest.The IERCO account balance represents Idaho Power s net investment in the one balance. Please explain the adjustment Staff proposes to Idaho Power s IERCO investment. Staff is proposing that the Company rest in the IERCO investment be reduced by $280 937. October 2003, Staff conducted an audit of the property in service records at the Bridger Coal Mine.Tha t audi t consisted of verifying and comparing a sampling of the personal property on the books of the Bridger Coal Mine wi th the property on site and in service.the course of that property in service audit, Staff found specific assets that were not used and useful at the time of the audit. This adjustment represents the plant in service and accumulated depreciation (or net book value) of specific assets as of November 30, 2003, divided one- rd to represent Idaho Power s share of net book value. CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff The total book value for the mine as of November 30 , 2003 lS $842,810.This represents a combination of $4,111,232 In plant with $3,268,421 in accumulated depreciation. (See staff Exhibit No. 117. What specific assets did Staff find that were not used and useful? The following assets were not being used in the mining operation:The dragline #100 and the bulk lube system, dragline monitoring, and inergin fire system for the ine #100; two (2)62 yard buckets, #163 and #164; a Hitachi shovel, #202; a lowboy tractor, #791; and a 1995 Ford Truck, #1792. What caused Staff to believe the property was not used and useful? The dragline was sitting idle on mine property and mine employees indicated to Staff that the dragline was for sale.The two buckets were also si idle on the property and employees ca ted to Staff that the buckets were not being used anymore.When asked, mine employees informed Staff that the Hitachi shovel was retired.The Lowboy tractor and the 1995 Ford Anfo Truck were in the mine " junk yard" area used to store damaged, non-functioning, and obsolete equipment and materials. Are there any other Staff adjustments related to s plant in service adjustment? CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff Yes, the mining company is currently expensing annual depreciation for these assets in the amount of $400,661.Idaho Power records one-third of this annual ciation expense as an element of its annual expenses. If the assets are deemed to be not used and useful and therefore subtracted from the Company s IERCO investment, the annual depreciation on these assets in the amount of $133 554 should also be excluded from the Company s annual expenses. DANSKIN POWER FACILITY You indicated that Staff also reviewed the rate base costs for the construction of the Danskin Power facili ty.What were the results of Staff's review? Idaho Power is asking that the total construction costs of the Danskin Power Facility in the amount of $52,484,209 be included in its rate base. revlew of work orders indicates that this amount was properly booked and should not be staff witnessusted. Sterling further discusses Danskin Power Facili in his testimony. SECURITY COSTS staff also reviewed Idaho Power s request to include its additional security costs.Does Staff have a recommendation conce those costs? Idaho Power is as for tional security CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff costs in the amount of $728 766 to be an addition to rate base.These costs were incurred Idaho Power for increased security at the Company s facilities following the S ember 11, 2001 terrorist attacks.The Commission approved the deferral of extraordinary security costs in its Order No. 28975.It appears that these costs are an appropriate and reasonable addition to rate base, and therefore Staff has no obj ection to their inclusion in ra te base. PRAIRIE POWER ACQUISITION AND NEZ PERCE SETTLEMENT Did you 100 at any other adjustments and addi tions to the rate base? Yes, I reviewed the Prairie Power Acquisition adjustment and the Nez Perce Settlement additions to rate base.Idaho Power purchased Prairie Power in 1992. part of that purchase, rate base was reduced by $422,264 for unamortized credits.The Nez Perce settlement was ewed and in 1996.by the appears that each adjustment is being properly treated and accounted for , and is an appropriate and reasonable adj ustment to rate base. IDAHO POWER'S ASSET RETIREMENT OBLIGATION (ARO) Did Staff review Idaho Power s asset retirement obligation? Yes, Staff ewed Idaho Power s treatment of CASE NO. IPC-03-02/20/04 (Di)LECKIE , J.Staff its asset retirement obligation ) in this rate case application.In doing this I relied upon the work of fellow Staff auditor Patricia Harms, who worked specifically on the account treatment of the ARO in Case No. IPC-E-03-1 and its presentation in Idaho Power books. What is the asset retirement obligation? Under statement of Financial Accounting Standards 143, entitled "Accounting for Asset Retirement Obligations (SFAF 143), entities are required to ze and account for certain AROs in a manner different from the way that Idaho Power and other public utili ties have traditionally recognized and accounted for such costs.Under the accounting method historically used by Idaho Power , the reasonable cost of removing a tangible long-lived asset at retirement is included in the calculation of depreciation rates and recovered over the useful 1 fe of the asset.Thi s is the method used for ratemaking purposes. However , under SFAS 143 , if a legally enforceable ARO as defined the Statement is deemed to exist,entity must separately account and report the liabili ty for the ARO (ARO Liabil i ty)its books.This recognl zes the entire cost removal up- front while ra tema the cost of removal is ation CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff expense over the life of the asset.Under SFAS 143 , at the same time the ARO Liability is recorded, a corresponding and equivalent asset is also recorded on the enti ty' s books s part of the cost of the associated tangible asset.The ARO Asset is then depreciated over the life of the associated tangible asset.As part of implementing SFAS 143, Idaho Power eliminated all removal costs from accumulated depreciation. What adjustments associated with SFAS 143 did Idaho Power make to its books for the rate case? Idaho Power ts financial statementsusted reducing plant in service (Account 101) by $1,577,314 and increasing Accumulated Depreciation (Account 108) $106,204,710.The $1,577 314 reduction to the plant account reverses the 13-month average of the amount it posted to Account 101 for the ARO Asset.The $106, 204, 710 increase in accumulated depreciation reverses the 13-month average of the removal costs that Idaho Power el from accumulated depreciation ($107,236,162) and the accumulated depreciation ($1 031 452) on the ARO Asset. Both the plant and accumulated depreciation adjustments are necessary to appropriately reflect rate base for ratemaking purposes. Does Staff agree with Idaho Power that this is the appropriate method to adjust for ARO? CASE NO. IPC-03-02/20/04 (Di)LECKIEStaff proceeding? Yes, it does. Does this conclude your direct testimony in this Yes, it does. CASE NO. IPC-03-02/20/04 LECKIEStaff (Di)