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Home My WebLink About20040426Post Hearing Brief.pdfL:'CE!VED r~,t,..:,~ , :' r::- f' 0"-' !\Pf( 26 pJ~ 10: Lawrence A. Gollomp United States Department of Energy 1000 Independence Avenue SW Washington, D.c. 20585 (202) 586-4219 email: lawrence. gollomp0)hq.doe. gov. " . i~,-",,\l;i'ii"""\uf1.i:iL_;,;L~ ) " "HI,. BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE APPLICA nON OF IDAHO POWER COMPANY FOR AUTHORITY TO INCREASE ITS INTERIM AND BASE RATES FOR CHARGES FOR ELECTRIC SERVICE CASE NO. IPC-03- BRIEF OF THE UNITED STATES DEPARTMENT OF ENERGY April 23 , 2004 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 FOR CHARGES FOR ELECTRIC SERVICE CASE NO. IPC-03- BRIEF OF THE UNITED STATES DEPARTMENT OF ENERGY Comes now the United States Department of Energy (DOE) on behalf of its Idaho National Engineering and Environmental Laboratory (DOE/INEEL) and Mountain Home Air Force Base, both of whom are customers of Idaho Power Company (IPC), and through its attomeyrespectfully submits this Brief in the above-captioned docket. DOE's Brief will focus on cost-of service and revenue spread issues. COST- OF-SERVICE IPC witness Brilz conducted a cost-of-service study for the test year ending December 31 2003. Two major issues arise with respect to Ms.Brilz s cost study: the choice of a methodology to allocate demand-related production costs and the classification of steam and hydro production costs. 1. Allocation Methodology In its cost analysis, IPC allocated and/or directly assigned its costs to functional segments of its retail electric business.(Tr.2217). In allocating demand-related production costs to major customer classes, IPC used a weighted 12-month coincident peak (W12CP) methodology.This methodology develops class allocation factors using the simple average of seasonal allocators derived from two different costing approaches-a traditional 12CP methodology and a methodology that weights class monthly coincident peak demands by IPC's estimated generation-related marginal cost. Although IPC's methodology is subject to criticism for departing from prior Commission orders (See Micron witness Peseau, Tr.2456-2462), it appears to yield reasonable results. As shown in DOE Exhibit 401 , class allocation factors under the W12CP are reasonably similar to allocation factors under three other allocation methodologies for all classes except the Irrigation class. These other methodologies include a weighted 5CP (W5CP) methodology using coincident peak demands only in IPC's five capacity deficit months , an unweighted 12CP methodology, and an unweighted 5CP methodology. DOE recommends that IPC's W12CP allocation methodology should be adopted. Cost Classification. In its cost study, IPC classified steam and hydro production costs as demand- and energy-related costs.IPC set the energy-related component of these costs equal to the Idaho jurisdictional load factor (55.26 percent), with the residual (1 - load factor) classified as demand-related costs.(Tr.2217) DOE urges the Commission to reject IPC's classification proposal. IPC' proposed classification proposal suffers from at least two defects. First, the proposal arbitrarily assumes that higher load factor customers receIve a disproportionate share of the cheaper energy benefits of baseload and intermediate capacity without paying a proportionate share of the higher capital costs of such capacity-particularly if demand-related capacity costs are allocated on the basis of peak demands. Second, the classification scheme arbitrarily assumes that IPC's system load factor somehow identifies the portion of generation plant costs that are supposedly energy-related costs. Neither assumption is intuitively obvious or empirically supported in this case. As explained in DOE witness Goins ' direct testimony, hydro and steam production plant costs should be classified as demand-related costs.(Tr.2223). However, ifthe Commission believes that part of these costs should be classified as energy-related costs, then they should be classified using a methodology that is consistent with the weighted 12CP allocation methodology that IPC has proposed and that DOE supports. Dr. Goins presented such a methodology in his direct testimony.(Tr.2236). Under this alternative classification scheme, the percentage of IPC's hydro and steam production plant costs classified as energy- related costs would equal the ratio of IPC'weighted energy allocators in non- capacity deficit months-that , all months other than June, July, August November, and December-to the weighted 12-month allocator. This approach provides an intuitive and measurable linkage between the energy cost of production plant and high load factor energy use. Using this approach, 49. percent of IPC's hydro and steam production plant costs would be classified as energy-related costs instead of 55.26 percent as recommended by IPc.(Tr.2237). REVENUE SPREAD In spreading its proposed base rate increase among customer classes, IPC set a 25-percent limit on the rate increase to Schedule 24 Irrigation Service customers instead of the 67. percent increase indicated by its cost-of-service study. Two undesirable results occur under IPC's proposed revenue spread. First, the proposed spread perpetuates a $25 million annual subsidy paid to Irrigation customers by all other customer classes. Second, IPC's revenue spread moves rates for Residential (Schedule 1) and Small General Service (Schedule 7) customers farther from cost of service and dramatically increases the subsidy these classes pay to Irrigation customers under present rates. For example, the subsidy paid by Residential customers increases from about $6.9 million under present rates to more than $12.1 million under IPC's proposed rates. This outcome is directly related to IPC's decision to set a 25- percent limit on the rate increase for Schedule 24 Irrigation customers. As noted throughout the hearing, the Irrigation subsidy issue has been a long-standing issue before the Commission. The time has come to make a meaningful move to eliminate or at least mitigate the Irrigation subsidy. Various approaches to deal with the Irrigation subsidy issue were raised by intervenors. DOE recommends raising Irrigation rates by twice the average system rate increase granted by the Commission. This approach would reduce the Irrigation subsidy to about $19 million at IPC's requested revenue level. (Steps allocate IPC's allowed base rate increase are delineated in DOE Exhibit 403. Kroger witness Higgins (Tr.2251-2253) and Micron witness Peseau (Tr.2268-2271) recommend systematic long-term approaches to eliminate the Irrigation subsidy. If the Commission rejects DOE's revenue spread proposal, then we urge the Commission to adopt either the Kroger or the Micron systematic approach. The continuation of the Irrigation subsidy is not only unfair to other customers, but also hinders IPC's efforts to develop cost- based rate programs to encourage efficient electricity usage by all customers. CONCLUSION Based upon the testimony and analyses presented by DOE witness Goins DOE respectfully requests that the Commission: 1) Approve IPC's weighted 12CP methodology to allocate demand-related production and transmission costs, and its weighted energy-related cost allocation methodology. 2) Reject IPC's classification of hydro and steam production plant costs as demand-and energy-related costs. 3) Approve the classification of all hydro and steam production plant costs as demand- related costs. 4) Reject IPC's proposed revenue spread. 5) Adopt witness Goins' recommendation to spread the allowed revenue increase such that rates for Schedule 24 customers are increased by twice the average system rate Increase. spectfu La Gollomp Assistant General Counsel United States Department of Energy Dated: April 23 , 2004 CERTIFICATE OF SERVICE I hereby certify that I have this 23rd day of April, 2004, served the foregoing Post- Hearing Brief of the United States Department of Energy in Case No. IPC-03-13 by overnight delivery to the following: Barton L. Kline Monica Moen Idaho Power Company 1221 W. Idaho Street Boise, Id 83707-0070 Don Reading Ben Johnson Associates 6070 Hill Road Boise, ID 83703 Lisa Nordstrom Weldon Stutzman Deputy Attorney Generals Idaho Public Utilities Commission 472 W. Washington Street Boise, Idah09 83702 Anthony Yankel 29814 Lake Road Bay Village, OH 44140 Jeremiah J. Healy United Water Idaho Inc. 8248 W. Victor Road Boise, ID 83719-0420 Peter J. Richardson, Esq. Richardson & O'Leary 99 E. State Street Suite 200 Eagle, ID 83616 Nancy Hirsh Northwest Energy Coalition 219 First Avenue South, Suite 100 Seattle, W A 98104 Randall C. Budge, Racine, Olson, Nye, Budge& Bailey Chartered 201 E Center Street Pocatello, ID 83204-1391 Conley E. Ward Givens Pursley LLP 601 W. Bannock Street Bosie, ID 82701 Dean J. Miller McDevitt & Miller LLP 420 W. Bannock Street Boise, ID 83701 Brady M Purdy Attorney at Law 2019 N.17th Street Bosie, ID 83702 William M. Eddie Advocates for the West 1320 W. Franklin Street Boise, ID 83701 Michael L. Kurtz, Esq Kurt J. Boehm Esq Boehm Kurtz & Lowry 36 E. Seventh Street Suite 2110 Cincinnati, Ohio 45202 John R. Gale Vice President - Reg Affairs Idaho Power Company 1221 W. Idaho Street Boise, ID 83707-0070 Dennis F. Peseau Utility Resource Inc. Suite 250 1500 Liberty Street, SE Salem, OR 97302 CERTIFICATE OF SERVICE Michael Karp 147 Appaloosa Lane Bellingham, W A 98229 Thomas M. Power Economics Department Liberal Arts Bldg. Room 407 University of Montana 32 Campus Drive Missoula, MT 59812 Assistant General Counsel United States Department of Energy