HomeMy WebLinkAbout20040224Cavanagh Direct.pdfWilliam M. Eddie (ISB# 5800)
ADVOCATES FOR THE WEST
O. Box 1612
Boise ID 83701
(208) 342-7024
fax: (208) 342-8286
billeddi eCfYrrnci .net
Idaho Public Utilities Commission
Office of the SecretaryRECEIVED
FEB 2 0 2004
Boise, Idaho
Express Mail:
1320 W. Franklin St.
Boise ID 83702
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-03-
DIRECT TESTIMONY OF RALPH CAVANAGH
ON BEHALF OF NW ENERGY COALITION
Background and Qualifications
PLEASE STATE YOUR NAME, ADDRESS, AND EMPLOYMENT.
My name is Ralph Cavanagh. I am the Energy Program Director for the Natural
Resources Defense Council, 71 Stevenson Street #1825 , San Francisco, CA 94105.
PLEASE OUTLINE YOUR EDUCATIONAL BACKGROUND AND
PROFESSIONAL EXPERIENCE.
I am a graduate of Yale College and Yale Law School, and I joined NRDC in
1979. I am a member of the faculty of the University ofldaho s Utility Executive Course, and I
have been a Visiting Professor of Law at Stanford and UC Berkeley (Boalt Hall). From 1993-
2003 I served as a member of the u.S. Secretary of Energy s Advisory Board. My current board
memberships include the Bonneville Environmental Foundation, the Center for Energy
Efficiency and Renewable Technologies, the Electricity Innovation Institute, and the Northwest
Energy Coalition. I have received the Heinz Award for Public Policy (1996) and the Bonneville
Power Administration s Award for Exceptional Public Service (1986). I appeared before the
Idaho Public Utilities Commission in 1987 as a Commission staff-sponsored witness on energy
conservation issues in case No. U-1500-165, and I am currently a member ofldaho Power
Integrated Resource Plan Advisory Council.
ON WHOSE BEHALF ARE YOU TESTIFYING?
I am testifying for the Northwest Energy Coalition and the Natural Resources
Defense Council (which has more than 2 500 individual members in Idaho).
Cavanagh, Ralph - Di
NW Energy Coalition
WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
My testimony identifies significant financial disincentives to sustained
investments in cost-effective energy efficiency and small-scale "distributed" generating
resources by the Idaho Power Company (hereafter "the Company ), and proposes a solution.
WHAT MATERIALS HAVE YOU REVIEWED IN PREPARATION FOR THIS
TESTIMONY?
I have reviewed the Company s Application in this proceeding and its responses t
the discovery requests of the Northwest Energy Coalition, which are cited below where relevant.
II. Summary of Conclusions and Recommendations
SUMMARIZE YOUR CONCLUSIONS AND RECOMMENDATIONS.
One of the Company s most important responsibilities involves what it calls
integrated resource planning : assembling a diversified mix of demand- and supply-side
resources designed to minimize the societal costs of reliable electricity supplies.! The Company
is effectively a resource portfolio manager for its customers, and in the volatile financial markets
of the early twenty-first century, the stakes and challenges have never been more daunting. Yet
the regulatory status quo undercuts sound portfolio management by penalizing utility
shareholders for reductions in electricity throughput over the distribution system, regardless of
the cost-effectiveness of any contributing energy-efficiency, distributed-generation or fuel
substitution measures.2 From customers ' perspective, increases in throughput (above those
I See Idaho Power 2002 Integrated Resource Plan (June 2002).2 This by no means exhausts the barriers to cost-effective resource portfolio management, and I hope for future
opportunities to work with the Commission and interested parties on the full range of issues. One example is the
way that the regulatory status quo penalizes shareholders for buying electricity from independent providers as
opposed to owning generation, since there is a prospect ofretums on investment only for owned (and rate-based)
resources.
Cavanagh, Ralph - Di
NW Energy Coalition
contemplated when rates were established) result inappropriately in an uncompensated over-
recovery of fixed costs by their utility. And from an integrated resource planning perspective, a
grave if unintended pathology of current ratemaking practice is the linkage of utilities' financial
health to retail electricity throughput. Increased retail electricity sales produce higher fixed cost
recovery and reduced sales have the opposite effect. To address all these problems, I recommen
that the Commission adopt a simple system of periodic true-ups in electric rates, designed to
correct for disparities between the Company s actual fixed cost recoveries and the revenue
requirement approved by the Commission in this proceeding. The true-ups would either restore t
the Company or give back to customers the dollars that were under- or over-recovered as a result
of annual throughput fluctuations.
III. Eliminating Financial Disincentives for Idaho Power s Demand-Side Investments
a. The Nature ofthe Problem
WHAT IS THE BASIS FOR YOUR CONCLUSION THAT IDAHO POWER'
FIXED COST RECOVERY IS STRONGLY TIED TO ITS RETAIL SALES VOLUMES?
Like most utilities, Idaho Power recovers most of its fixed costs through the rates
it charges per kWh. In other words, a part of the cost of every kWh represents the system s fixed
charges for existing plant and equipment; the rest collects the variable cost of producing that
kilowatt-hour. After approving a fixed-cost revenue requirement, the Idaho PUC sets rates based
on assumptions about annual kilowatt-hour sales. If sales lag below those assumptions, the
Company will not recover its approved fixed-cost revenue requirement. By contrast, if the
Company were successful in promoting consumption increases above regulators' expectations , it
shareholders would earn a windfall in the form of cost recovery that exceeded the approved
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NW Energy Coalition
revenue requirement. And whether consumption ends up above or below regulators
expectations, every reduction in sales from efficiency improvements yields a corresponding
reduction in cost recovery, to the detriment of shareholders.
WHY RECOVER FIXED COSTS IN VOLUMETRIC CHARGES AT ALL?
WHY NOT SIMPLY MAKE THEM FIXED CHARGES?
Idaho Power is indeed proposing a move in that direction, but I agree with NWEC
witness Nancy Hirsh that the Commission should decline that invitation and substitute instead a
true-up mechanism, as described below. Note that recovering all or most fixed costs as fixed
charges would require radical changes in rate design; Attachment 1 to my testimony shows that
more than 56% of the Company s proposed revenue requirement from the five major customer
groups represents fixed costs of distribution, transmission and generation ($303 million out of
$541 million). Current fixed charges would recover less than five percent of this fixed-cost
revenue requirement ($13.2 million out of$303 million), and even the Company s proposed
increase in fixed charges would only recover about 17 percent ($51 million out of $303 million).
BUT DOESN'T CONTINUING TO RECOVER FIXED COSTS AS PART OF
VOLUMETRIC CHARGES MAKE ADDITIONAL CONSUMPTION LOOK MORE COSTLY
THAN IT SHOULD?
That amounts to contending that the Commission is suppressing societally
beneficial increases in electricity use through its rate structure, and I strongly disagree. The
rationale for integrated resource planning rests in part on the conclusion that extensive market
failures continue to block energy savings that are much cheaper than additional energy
production at today electricity prices. We would make a bad situation worse by reducing
Cavanagh, Ralph - Di
NW Energy Coalition
customers ' rewards for conserving electricity, which is precisely what would happen if the
Company shifted costs from volumetric to fixed charges. The ability of customers to reduce or
alter energy consumption should be viewed as an important element of the Company s resource
portfolio, and volumetric charges help ensure that customers will remain motivated to participate
fully in that role.
DESCRIBE THE EVIDENCE THAT MARKET FAILURES CONTINUE TO
BLOCK HIGHLY COST-EFFECTIVE ENERGY SAVINGS AT TODAY'S ELECTRICITY
PRICES.
Overwhelming evidence has been marshaled in recent years by the National
Research Council of the National Academy of Sciences, the u.S. Congress s Office of
Technology Assessment, the National Association of Regulatory Utility Commissioners, and the
national laboratories, among many others. Although "(tJhe efficiency of practically every end
use of energy can be improved relatively inexpensively"3 "customers are generally not
motivated to undertake investments in end-use efficiency unless the payback time is very short
six months to three years. . . The phenomenon is not only independent of the customer sector
but also is found irrespective of the particular end uses and technologies involved.4 Customers
typically are demanding rates of return of 40-100+%, and such expectations differ sharply from
those of investors in electric generation. Utilities' returns on capital average 12 percent or less.
The imbalance between the perspectives of consumers and utilities invite large, relatively low-
return investments in generation that could be displaced with more lucrative energy efficiency.
3 US. National Academy of Sciences Committee on Science
, Engineering and Public Policy, Policy Implications of
Greenhouse Warming, p. 74 (1991). A more recent review of energy-efficiency opportunities and barriers appears
in National Research Council Energy Research at DOE: Was it Worth It?(September 2001).
Cavanagh, Ralph - Di
NW Energy Coalition
These widely documented market failures generate "systematic underinvestment in energy
efficiency," resulting in electricity consumption at least 20-40% higher than cost-minimizing
levels.
There are many explanations for the almost universal reluctance to make long-term
energy efficiency investments.6 Decisions about efficiency levels often are made by people who
will not be paying the electricity bills , such as landlords or developers of commercial office
space. Many buildings are occupied for their entire lives by very temporary owners or renters
each unwilling to make long-term improvements that would mostly reward subsequent users.
And sometimes what looks like apathy about efficiency merely reflects inadequate information
or time to evaluate it, as everyone knows who has rushed to replace a broken water heater
furnace or refrigerator.
Market failures like these mean that energy prices alone are a grossly insufficient
incentive to exploit a continental pool of inexpensive savings: "a 2-year payback customer
paying average rates of 7 cents/kWh can be expected to forego demand-side measures with costs
of conserved energy of more than 0.9 cents/kWh.? That is , energy prices would have to
increase about eightfold to overcome the gap that typically emerges in practice between the
perspectives of investors in energy efficiency and production, respectively.
ARE YOU ADVOCATING PUNITIVELY HIGH ELECTRICITY RATES AS
A SOLUTION TO THESE MARKET FAILURES?
4 National Association of Regulatory Utility Commissioners. Least Cost Utility Planning Handbook. VoL II, p. II-
(December 1988).5 See M. Levine, 1. Koomey, 1. McMahon, A. Sanstad & E. Hirst Energy Efficiency Policy and Market Failures.
20 Annual Review of Energy and the Environment 535 536 & 547 (1995).6 An extensive assessment appears in US. Congress, Office of Technology Assessment Building Energy Efficiency,
at pp. 73-85 (1992).7 National Association of Regulatory Utility Commissioners, note 4 above, p. II-10.
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NW Energy Coalition
Certainly not, any more than I advocate changes in rate structure that would
reduce rewards for saving electricity. Instead, I urge increased reliance on the very solution that
the Commission and the Company have endorsed through Idaho s use of integrated resource
planning: pursuit of cost-effective energy efficiency through utility investments rather than
punitive prices.
WHAT WOULD HAPPEN TO THE COMPANY'S PROSPECTS FOR
RECOVERING AUTHORIZED FIXED COSTS IF IT WERE TO EXPLOIT THE HUGE
POTENTIAL FOR COST-EFFECTIVE ELECTRICITY SAVINGS?
Although the societal and customer benefits would be significant, including
avoided pollution and savings in both generation purchases and grid infrastructure investment
every additional unsold kilowatt-hour would reduce the company s fixed cost recovery and
undercut shareholder welfare, unless the Commission changed current ratemaking policies.
Until this problem is solved, Idaho Power will lag in both aspirations and achievements on the
demand side.
b. The Potential Magnitude of the Problem
HOW SUBSTANTIAL ARE POTENTIAL SHAREHOLDER LOSSES FROM
REDUCED KILOWATT-HOUR SALES?
The Company s proposed fixed cost revenue requirement for the five major
customer groups (see Attachment 1 to this testimony (Exhibit 601)) is $303 million, of which
$290 million would be recovered from variable demand and energy charges if current fixed
charges are retained; energy charges alone would account for more than $235 million. Every
one percent reduction in electricity use and demand on the Company s system would cut fixed
Cavanagh, Ralph - Di
NW Energy Coalition
cost recovery by about $3 million; everyone percent increase would have the opposite effect.
Since many efficiency measures last ten years or more, these one-year impacts must be
multiplied at least tenfold when assessing shareholder interests.
But the losses get even worse in the context of multi-year programs initiated under a
long-term resource plan. Consider a five-year program that pursues annual savings equivalent
to one percent of system load, with each year adding new savings equivalent to the savings
achieved during the previous year, and all savings persisting for at least five years. The first
year impact on fixed cost recovery is then about three million dollars, followed by six million
dollars in the second year (as an equal amount of savings is added), and so on: the automatic
five-year loss to shareholders from this steady-state utility investment program would be
about forty-five million dollars, with shareholder losses continuing to escalate in succeeding
years as initial electricity savings persisted (with some gradual erosion) and more savings were
added. Note that the shareholders would be absorbing these losses even as society gained from
substituting less costly energy efficiency for more costly generation.
WOULD THE COMPANY'S PROPOSED INCREASE IN FIXED CHARGES
SOLVE THIS PROBLEM?
, the losses would drop by less than fifteen percent. 8 In the hypothetical five-
year scenario , losses would still exceed thirty-seven million dollars. As noted earlier, I
emphatically do not advocate still higher fixed charges as a partial solution; as explained further
below, modest rate true-ups offer a full solution without distorting rate structures.
8 See Attachment I (Exhibit 601) (Company s proposed fixed charges would still leave more than $250 million/year
in fixed charges to be recovered in energy and demand charges).
Cavanagh, Ralph - Di
NW Energy Coalition
WHAT MAKES YOU THINK UTILITIES CAN SUSTAIN COST-EFFECTIVE
ENERGY EFFICIENCY PROGRAMS EQUIV ALENT TO ABOUT ONE PERCENT OF
SYSTEM CONSUMPTION?
The California Energy Commission has already recommended more ambitious
targets for California s utilities. Proposed electricity savings targets are 1.08% of system load in
2007, ramping up to 1.13% in 2013. By comparison, for 2004 and 2005, the savings targets
already adopted for California s investor-owned utilities represent about 0.85% of system load.
The Northwest Power Planning Council staffs latest estimate of cost-effective and achievable
regional potential is of the same magnitude, even though it largely excludes the industrial
sector.!O Moreover, given previous levels of energy efficiency investment in the two states and
comparative electricity prices, I would expect Idaho to have untapped energy efficiency
opportunities at least equal to California , in relative terms.
WOULD COST-EFFECTIVE FUEL SUBSTITUTION AND DISTRIBUTED
GENERATION PROGRAMS HAVE THE SAME KIND OF ADVERSE EFFECT ON
COMP ANY EARNINGS?
Yes; substituting efficient gas applications for electricity, or adding distributed
generation on the customer s side of the meter, reduces retail kilowatt-hour sales and has
9 See CEC Staff Report Proposed Energy Savings Goals for Energy Efficiency Programs in California.(Publication
#100-03-021: October 27, 2003). The recommended annual energy savings target in 2007 is 3 000 GWh (1.08% of
load) and 3 400 GWh in 2013 (1.13% ofload). The annual energy savings for the 04-05 programs are from
California Public Utilities Commission, D.03-12-062 (2003); the demand forecast for 2004-05 is from CEC
California Energy Demand 2003-2013 Forecast ( Publication #100-03-002: 2003), Appendix A.
10 The Council staff estimates the achievable, cost-effective regional energy efficiency potential at 3200 average
MW over the next 20 years, equivalent to just under one percent of current system loads per year, and this figure
assumes only a five percent improvement in average industrial sector efficiency over that period. Personal
communication with Tom Eckman, Northwest Power Planning Council, February 6 2003.
Cavanagh, Ralph - Di
NW Energy Coalition
adverse effects on fixed cost recovery that are identical (per kWh oflost retail sales) to those
described above.
c. The Solution: Removing Disincentives with Rate True-Ups
IF YOU OPPOSE HIGHER FIXED CHARGES, HOW WOULD YOU
PROPOSE TO REMOVE THE FINANCIAL DISINCENTIVES DESCRIBED IN EARLIER
SECTIONS OF YOUR TESTIMONY?
I support the joint recommendation of the Natural Resources Defense Council
and the Edison Electric Institute to the National Association of Regulatory Utility
Commissioners in November 2003: "To eliminate a powerful disincentive for energy efficiency
and distributed-resource investment, we both support the use of modest, regular true-ups in rates
to ensure that any fixed costs recovered in kilowatt-hour charges are not held hostage to sales
volumes.!! The state regulatory community has more than two decades of experience with
such mechanisms, which involve a simple comparison of actual sales to predicted sales
followed by an equally simple determination of actual versus authorized fixed cost recovery
during the period under review. The difference is then either refunded to customers or restored
to the Company. Note that the true-up can go in either direction, depending on whether actual
retail sales are above or below regulators' initial expectations.
WOULD THE TRUE-UPS INTRODUCE SIGNIFICANT NEW VOLATILITY
IN ELECTRICITY RATES?
, because consumption does not fluctuate enough from year to year to require
disruptive true-ups. Even aggressive conservation programs will not reduce loads by more than
about one percent per year, as discussed above, and even under the extraordinary conditions
11 Letter to NARUC Commissioners from the Edison Electric Institute and the Natural Resources Defense Council
November 18 2003, p. 3 (see Attachment 2 (Exhibit 602)).
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NW Energy Coalition
prevailing in some recent years, Idaho Power s retail electricity sales never dropped by more
than two percent.!2 My assessment of recent trends in Idaho Power s system sales indicates that
the largest plausible annual impact of a true-up mechanism would be less than two percent of
retail rates (e.,less than 1.5 mills per kilowatt-hour). By contrast, the Company s Power Cost
Adjustment has increased rates by as much as 12 mills per kWh in recent years (with five rate
increases of two mills or more since March 1998).13 The need for rate adjustments can be
reduced further by integrating cost-effective energy efficiency targets into the forecasts
developed for purposes of setting retail rates in this proceeding.
EXPLAIN YOUR CONCLUSION ABOUT THE PLAUSIBLE RATE IMPACT
LIMITS OF A TRUE-UP MECHANISM.
A true-up mechanism would give back or restore the difference between
authorized fixed cost recovery and actual recovery based on actual sales. Assuming that the
Commission approves the Company s requested fixed cost revenue requirement of$303 million
for the five major customer classes (see Attachment 1 (Exhibit 601)), and assuming that current
fixed charges are not increased, about $290 million annually must be recovered from energy and
demand charges. This means that about $2.9 million would be lost or gained for everyone
percent by which sales diverged from assumptions used to set rates.
Under these assumptions, a "worst case" annual rate impact of a true-up mechanism
would come in a year comparable to 2002, when retail sales dropped by two percent at a time
when the Company was just beginning to ramp up energy efficiency programs. Assuming that
such impacts were added to those of robust efficiency programs with savings equivalent to one
percent of system-wide consumption, the true-up mechanism would still only have to restore
12 See Attachment 4 (Exhibit 604), which provides normalized annual electricity sales since 1992. Normalized
retail kWh sales (exclusive of special contracts) dropped by two percent in 2002 after increasing in every year since
1993 (with an average annual growth rate over 1993-2002 of about two percent).
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NW Energy Coalition
about $8.7 million to compensate for a three percent reduction in consumption and associated
fixed cost recovery (and less if the initial forecast had anticipated the energy-efficiency
impacts). With total system revenues of $537 million (assuming that the Company s request is
granted), this implies an average rate increase of 1.5% for the true-up under worst-case
conditions. Under more typical circumstances in which consumption increases outpaced
efficiency impacts, of course, the true-up could easily result in a modest rate reduction.Since
1993, electricity use on the Idaho Power system has increased by an average of about two
percent annually (see Attachment 4 (Exhibit 604)). As shown in the illustrative calculation
above, rate impacts up or down under a true-up mechanism will necessarily be modest as long as
corrections occur on a regular basis and balances do not accumulate over multiple years.
STATES?
IS THERE RELEV ANT RECENT EXPERIENCE IN NEIGHBORING
The most recent regional experience with this type of true-up mechanism came in
Oregon with PacifiCorp s "Alternative Form of Regulation " which was adopted in 1998.
Initial rate impacts of the Oregon mechanism were extremely modest for all classes, and (as
predicted) went in both directions:
1999 2000
Residential:39%+ 1.90%
Small General Service:60%22%
General Service:83%31 %
Large General Service:+0.61 %+0.33%
Irrigation:+0.45%+0.25%
13 See Attachment 3 (Exhibit 603).
2001
+ 1.85%
+0.06%
+0.09%
30%
20%
Cavanagh, Ralph - Di
NW Energy Coalition
I should note also that PacifiCorp s recent General Rate Case filing in Washington includes
testimony by CEO Judi Johansen endorsing a similar mechanism:
The Company s objectives in filing this rate case (include) eliminat(ing) financial
disincentives to promoting energy efficiency improvements throughout the company
service territory. . . From a least-cost planning perspective, the problem with current
ratemaking practice is the linkage of utilities' financial health to retail electricity
throughput. Increased retail electricity sales produce higher fixed cost recovery and
reduced sales have the opposite effect. To remove a conservation disincentive, we would
propose that the parties agree to and the Commission endorse the adoption of a simple
system of periodic true-ups to electric rates, designed to correct for the disparities
between utilities' actual fixed cost recoveries and the revenue requirement approved by
this Commission. The true-ups would either restore to the utilities or give back to
customers the dollars that were under- or over-recovered as a result of annual throughput
fluctuations. IS
California has embraced this policy for all its investor-owned utilities, and New York State
regulators are conducting a rulemaking on the issue, with a decision slated for spring of 2004.
In New York, proponents of a true-up mechanism form a diverse coalition of over 80
stakeholders, including Carrier Corporation, Johnson Controls, the Real Estate Board of New
York, the Power Authority, and the New York Attorney General.
14 Oregon PUC, Order No. 98-191 (May 5, 1998) (covering 1998 - 2001). These rate impact data were supplied to
the author by PacifiCorp s Paul Wrigley.
15 See pp. 3 & 6 of the Direct Testimony of Judith A. Johansen, Washington Utilities and Transportation Commn v.
PacifiCorp, Docket No. UE-032065 (December 2003).
16 See California Public Utilities Code section 739.10; New York Public Service Commission, Order Instituting
Proceeding, Case 03-0640 (Proceeding on Motion of the Commission to Investigate Potential Electric Delivery
Rate Disincentives Against the Promotion of Energy Efficiency, Renewable Technologies and Distributed
Generation (May 2, 2003)).
Cavanagh, Ralph - Di
NW Energy Coalition
WHY DON'T MORE STATES HAVE TRUE-UP MECHANISMS IN PLACE
TO ELIMINATE DISINCENTIVES FOR UTILITY INVESTMENT IN DEMAND-SIDE
RESOURCES?
A strong trend in that direction was interrupted in the mid-1990s by a stampede
toward an industry restructuring model (pioneered in California) that denied utilities any
substantial role in resource planning or investment. On that theory, there was no reason to worry
about utilities ' energy efficiency incentives , because utilities would be transferring their resource
management responsibilities to unregulated participants in wholesale and retail electricity
markets. The Western electricity crisis of 2000-2001 has discredited that model, which in any
case never took hold in Idaho. Most states are now restoring full or at least significant utility
responsibility for resource portfolio management, and interest in true-up mechanisms is reviving,
as illustrated by Attachment 2 (Exhibit 602) (Letter from Edison Electric Institute and Natural
Resources Defense Council to NARUC).
WHAT ARE THE MOST IMPORTANT DESIGN ISSUES THAT THE
COMMISSION NEEDS TO RESOLVE IN CREATING A TRUE-UP MECHANISM FOR
IDAHO POWER?
Once the Commission has approved an initial fixed-cost revenue requirement and
established retail rates based on an estimate of retail sales, several basic questions remain to be
resolved:
17 See also
National Commission on Energy Policy, Reviving the Electricity Sector (Fa112003), p. 3: "Regulated
distribution companies can be compensated independently of increased electricity sales (for example, utilities ' fixed-
cost recovery can be made independent of retail electricity use, through the mechanism of small periodic upward or
downward adjustments in distribution rates).
Cavanagh, Ralph - Di
NW Energy Coalition
How will the approved fixed cost revenue requirement be adjusted between rate
cases to reflect changing conditions, including system growth (options include
adjustments to reflect inflation or customer growth)?
For purposes of calculating and applying the true-ups, will the Commission merge
all five major customer classes or treat each one separately?
Will annual retail sales be adjusted for weather-driven fluctuations before the true
ups are calculated?
How often will true-ups occur, and will they be capped at some level ofmaximu
annual rate impact, with balances carried forward as necessary?
IV. Specific Recommendations for the Commission
HOW WOULD YOU RESOLVE THE QUESTIONS THAT YOU HAVE JUST
POSED, AND WHAT SPECIFIC TRUE-UP MECHANISM DO YOU RECOMMEND THAT
THE COMMISSION ADOPT IN THIS PROCEEDING?
Each question is straightforward and an abundance of analysis and experience
shows that there is more than one reasonable solution.!8 Rather than proposing my own
resolution here, I recommend that the Commission make the basic policy decision that a true-up
mechanism to eliminate financial disincentives for demand-side solutions is in the public interest
The Commission could then provide a reasonable period
(~,
three to six months) for the
Company and interested parties to seek as much consensus as possible on design
18 See, e., E. Hirst, Statistical Recoupling: A New Way to Break the Link Between Electric-Utility Sales and
Revenues (Oak Ridge National Laboratory: September 1993); S. Carter, Breaking the Consumption Habit:
Ratemaking for Efficient Resource Decisions, Electricity Journal (December 2001), pp. 66-74; 1. Eto, S. Stoft & T.
Belden, The Theory and Practice of Decoupling (Lawrence Berkeley National Laboratory: January 1994); Marnay
& Comnes, Ratemaking for Conservation: The California ERAM Experience (Lawrence Berkeley National
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NW Energy Coalition
recommendations for the Commission s consideration. I believe that if the Commission resolves
the fundamental policy question, the Company and other interested parties will be able either to
identify a preferred solution with wide support, or at minimum to narrow and frame the issues in
ways that will help the Commission achieve a swift and sound resolution.
DOES THAT CONCLUDE YOUR TESTIMONY?
Yes.
Laboratory: March 1990); Oregon PUC, Order No. 98-191 (May 5, 1998) (establishing a true-up mechanism for
PacifiCorp ).
Cavanagh, Ralph - Di
NW Energy Coalition
ATTACHMENT 1 TO DIRECT TESTIMONY OF RALPH CAVANAGH:
IDAHO POWER RESPONSE TO NWEC DISCOVERY REQUEST #1
(RECOVERY OF FIXED COST REVENUE REQUIREMENT
UNDER CURRENT AND PROPOSED RATE STRUCTURE)
REQUEST NO.1: For each customer class , how much of the proposed
2003 Test Year revenue requirement represents distribution 'and customer fixed costs
transmission fixed costs, and generation fixed costs , respectively? For each customer
class , how much of those fixed costs would be recovered from: (1) volumetric energy
charges; (2) demand charges; and (3) fixed charges, respectively? How would the
numbers change if fixed charges were set at existing levels rather than at the
company s proposed levels?
RESPONSE TO REQUEST NO.1: The requested information is
enclosed.
The response to this request was prepared by Maggie Brilz , Pricing
Director, Idaho Power Company, in consultation with Barton L. Kline , Senior Attorney,
Idaho Power Company.
EXHIBIT
0 ~
IDAI-IO POWER COMPANY
CASE NO. IPC-O3-
FIRST PRODUC1'ION REQUEST
NW ENERGY COALITION
ATTACI-IMENT TO
RESPO NSE TO
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ATTACHMENT 2:
LETTER TO NARUC COMMISSIONERS FROM THE EDISON ELECTRIC INSTITUTE
AND THE NATURAL RESOURCES DEFENSE CQUNCIL (NOVEMBER 2003)
EXHIBIT
Go~
EDISON ELECTRIC
INSTITUTE
HRDC
THE EARTH S BEST DEFENSE
November 18, 2003
Dear NARUC Commissioners
At your invitation, we conducted a lively debate at the 2002 Annual Meeting on utilities
futUre role in "electric resource portfolio management." Many of you encouraged us toreturn with joint recommendations on the fonnidable challenges associated with choosing
and managing balanced portfolios of electricity and grid resources for customers unable
or unwilling to do this themselves. Here we are again.
While details vary among states, EEl and NRDC agree that among most distribution
companies' most crucial and challenging responsibilities is meeting their systems ' 10ng-term needs for grid enhancement, generation and demand-side resources. Distributioncompanies need not own the resources involved, and an active portfolio management rolefor distribution companies is entirely consistent with effor'"..s to promote competitivewholesale generation markets. Indeed, as NARUC's members know well, manyparticipants in such markets increasingly are calling for more long-tenD distributioncompany investments to help overcome a capital availability crisis that affects all
elements of the power system, from grids to generators to end-use efficiencies.
Weare deeply concerned, howeyer, about an increasingly obvious mismatch betweenthese important societal needs and the tools available to utilities, other marketparticipants and regulators. We also believe we need clear workable frameworks forresource portfolio procurement, and we are committed to working together with
NARUC's members to secure them.
THE CHALLENGES
Utility-based resource portfolio management faces a host of challenges, including but notlimited to the following:
1. Misaligned incentives.a. Traditional regulation does not create any clear performance-based incentive tomanage comprehensive electric resource portfolios effectively; at best, utilitiescan hope to recover the costs of long-term contracts with generation anddemand-side service providers, with no opportunity to earn a reward for
addressing risks in minimizing the long-tenD cost of reliable service.For energy efficiency and distributed generation options specifically, today
rate regulation typically penalizes any such utility investments - however cost-
Page 2
effective - by linking much or all of utilities' fixed cost recovery to their retail
electricity sales volumes.
Traditional rates of return from a cost-of-service framework do not reflect
significant new risks (outlined in part below).
It is difficult to negotiate symmetrical incentives that reward long-term
performance and will not be revisited or withdrawn when utilities do well.
2. Major new risks in honoring service obligations in restructured markets:a. Volume Risk: in states with retail competition loads are far more variable
because of customer switching; and
Price Risk: wholesale prices are increasingly volatile, most customers don
like being exposed to such volatility, and many utilities have divested their
own generation in response to market forces and/or direction from regulators
and legislatures.
3. Illiquidity in wholesale markets: lack oflong-tenn deals impedes temporal diversity,
and lack of derivative products obstructs some kinds of risk hedging.
4. Uncertainty regarding the duration of the supply obligation: some states have
reframed portfolio management as "Provider Of Last Resort" (POLR) service, which
was originally intended to be part of a transitional strategy but now is being recast as
a renewed and extended obligation.
5. Analytical challenges in developing sound portfolios: portfolio managers must find
new tools and methods to evaluate regulated and unregulated resources with
significantly different asset lives and non-price attributes; Commissions need to gain
greater familiarity with new risk managementconcepts, methods and tools (e.
Value-at-Risk, Cash Flow-at-Risk, measures of gas price volatility)
6. Expediting decisions: traditional trial-type adversarial planning proceedings take too
long to identify and exploit opportunities.
7. Addressing the role of affiliates: no consensus yet exists on whether and how to
accommodate affiliate participation in resource portfolios.
NEXT STEPS
This daunting list of concerns is not an invitation to despair or for paralysis; solutions
must be found in the public interest. We offer these initial recommendations
and remain committed to timely solutions:
1. Get the incentives right: perfonnance-based incentives tied to objective benchmarks
have been tested for both demand- and supply-side resources; it's time to put them to
widespread use. Procurement plans filed by utilities with their regulators can be used
to establish these benchmarks, which should address cost-effective short- and long-
Page 3
tenn investments in generation, demand-side resources and grid enhancements. Also
to eliminate a powerful disincentive for energy efficiency and distributed-resource
investment, we both support the use of modest, regular true-ups in rates to ensure that
any fixed costs recovered in kilowatt-hour charges are not held hostage to sales
volumes. EEl believes regulators should explore new rate designs for collection of
the fixed costs of investments.
2. Provide reasonable assurance or cost recovery: uncertainty of cost recovery
constrains adaptive rate design, and discourages investment in new infrastructure
needed for security, reliability and environmentally sustainable service for all
customers. Moreover, extended rate freezes make impossible any true-ups to remove
energy efficiency disincentives (see item I above).
3. Provide opportunities for utilities to seek advanced regulatory approval for resource
portfolios under standards and criteria defined up front, with assurances that approved
commitments will not be revisited and disapproved after-the-fact.
4. Add objective risk management goals to the traditional utility resource procurement
mission of minimizing costs subjeCt to reliability and other constraints.
5. Establish frequent communications with Commissioners and staff, to keep up with
dynamic market changes and avoid surprising regulators.
6. Develop RFP processes that are unbiased and fair for all parties, including utility
affiliates and independent suppliers. One illustration is the joint
NRDC/PacificCorp/Calpine proposal Defining Electricity-Resource Portfolio
Management Responsibilities submitted to NARUC in July 2003.
Through these recommendations, we hope to help NARUC members achieve the best
possible long-tenn results for all of their constituents, in both economic and
environmental terms.
Yours sincerely,
J~.
David K. Owens
())f ~
Ralph Cavanagh
ATTACHMENT 3 TO DIRECT TESTIMONY OF RALPH CAVANAGH:
IDAHO POWER RESPONSE TO NWEC DISCOVERY REQUEST #2
(RATE IMPACTS OF POWER COST ADJUSTMENT MECHANISM)
REQUEST NO.2: For each customer class , please provide the annual
rate increase or decrease associated with the company s Power Cost Adjustment over
each of the last five years.
RESPONSE TO REQUEST NO.2: The requested information is
enclosed.
The response to this request was prepared by Maggie Brilz, Pricing
Director, Idaho Power Company, in consultation with Barton L. Kline , Senior Attorney,
Idaho Power Company.
EXHIBIT
bO~
IDAHO POWER COMPANY
CASE NO. IPC-O3-
FIRST PRODUCTION REQUEST
NW ENERGY COALITION
TT A CHMENT TO
RESPONSE TO
REQUEST NO.
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A TT ACHMENT 4 TO DIRECT TESTIMONY OF RALPH CA V ANAG H:
IDAHO POWER RESPONSE TO NWEC DISCOVERY REQUEST #3
(NORMALIZED RETAIL ELECTRICITY SALES, 1993 - 2002)
REQUEST NO.3: Please provide actual and normalized retail electricity
sales by customer class over each of the past ten years.
RESPO,"JSE TO REQUEST NO.The requested information is
enclosed.
The response to this request was prepared by Maggie Brilz , Pricing
Director, Idaho Power Company, in consultation with Barton L. Kline , Senior Attorney,
Idaho Power Company.
.'!I
EXHIBIT
601
IDAHO POWER COMPANY
CASE NO. IPC-O3-
FIRST PRODUCTION REQUEST
V.r
NW ENERGY COALITION
TT A CHMENT TO
RESPO NSE TO
REQUEST NO.
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