20040524Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DON HOWELL
DATE:MAY 21 , 2004
RE:IDAHO POWER'S PCA APPLICATION, CASE NO. IPC-04-
On April 15 , 2004, Idaho Power filed its annual PCA Application. The Company
PCA Application contained two recommendations. First, the Company requested that the
existing PCA rates that were scheduled to expire on May 16, 2004 be extended until May 31
2004. Second, the Company proposed to continue the current PCA rates for the 2004-2005 PCA
year except for the anticipated "credit" decreases in PCA rates for Schedule 7 (small general
service), Schedule 19 (industrial service), and Schedule 24 (irrigation) customers.
In Order No. 29478 issued April 22, 2004, the Commission approved Idaho Power
request to continue the current PCA rate through May 31 , 2004. Order No. 29478 also solicited
public comment regarding Idaho Power s proposal to continue the existing PCA rates for another
year with the exception of the three classes noted above. Interested persons were required to file
comments with the Commission no later than May 14, 2004. On April 28, 2004, the
Commission granted intervention to Micron Technology.
THE PCA APPLICATION
In this year s PCA Application, Idaho Power forecasts inflows at Brownlee Reservoir
at approximately 3.13 million acre feet (mat). This is approximately 50% below the 30-year
average of 6.3 maf. Based upon the projected water flow and replacement power costs, the
Company calculated that the projected power supply costs for the 2004-2005 PCA year are
$129 823 425. This equals 1.0092~ per kWh. The projected power cost is 0.2777~ per kWh
higher than the Commission s approved base ofO.7315~ per kWh. Consequently, the Company
proposes to collect 0.2499~ per kWh (90% ofO.2777~).
DECISION MEMORANDUM
The Company also calculated that the difference between last year s forecasted costs
and the actual costs (the true-up) is 0.3661~ per kWh. Finally, the third PCA rate element is the
new "true-up of the true-up.Last year Idaho Power collected all but $556 693 of the deferral
balance. Dividing this amount by the 2003 Idaho jurisdictional sales of approximately
096 872 MWh results in a PCA true-up of the true-up rate element of 0.0046~ per kWh.
Combining the projected power cost of 0.2499~, the true-up component of 0.3661~ and the true-
up of the true-up of 0.0046~, results in a total PCA rate for the 2004-2005 PCA year of 0.6206~
per kWh. If approved, this would be an increase of 0.0167~ above the existing PCA rate of
6039~ per kWh.
Although the Company determined that the 2004-2005 calculated PCA rate could
slightly increase, customers in Schedules 7, 19 and 24 would experience a decrease in existing
rates. As the Commission is aware, last year s PCA included recovery of the deferred cost from
prior years for these three customer classes. Elimination of all but a small portion of prior year
deferral recovery means that their PCA rates should decrease.
Because the Company anticipates that a general rate case will result in an increase in
the Company s base rates, Idaho Power requested that the Commission "keep the overall PCA
rate at the same level as last year (0.6039~ per kWh)." App. at 5. Idaho Power proposed this
unique rate treatment" to avoid the adverse consequences for most customers of having both
their base rates and PCA rates increase in 2004. Consequently, the Company is proposing that
the current PCA rate schedule remain the same except for the proposed decreases for Schedules
, 19 and 24 customers. The table below shows the Company s proposed PCA rates.
Current Proposed Overall Energy Rate Overall Energy Rate Overall %
Customer Grou PCA PCA with Current PCA .6Yi1h Pro osed PCA Decrease
Residential (1)6039 6039 778 778
Small Commercial (7)8447 5850 179 916 66%
Large Commercial (9)6039 6039 176 176
Industrial (19)8217 5817 604 364 66%
Irrigation (24)1.3159 5228 035 242 15.75%
All prices shown in cents per kWh. The "Overall Energy Rate" is the current effective energy rate including both
the base rate and PCA rate. As indicated in the text, the Company anticipates that the base rate will increase as a
result of the current general rate case.
DECISION MEMORANDUM
THE COMMENTS
In response to the Commission s Notice of Modified Procedure, the Commission
received comments from the Commission Staff and one customer. On May 18 , 2004, Idaho
Power filed a Reply to the Staff s Comments. The one customer stated that there should not be a
PCA increase this year but also argued that there should be a rate reduction for all customers.
The Staff Comments and Reply Comments are discussed in greater detail below.
A. Staff Comments
The Staff s Comments reviewed the Company s PCA calculations and contained two
other recommendations. In general, the Staff recommended that the Commission adopt the
Company s proposal to continue current PCA rates but adjust the PCA credits for the Schedules
, 19 and 24 customers as discussed below.
1. Reviewing the Calculations. First, the Staff examined the Company s calculations
regarding the three PCA elements. The Staff confirmed the Company s forecast calculation to
be 0.2499~/kWh. The Staff next reviewed Idaho Power s calculation of the PCA true-up. The
Staff agreed that Idaho Power under-collected power supply costs by $44 285 289. The true-up
rate component for the PCA was calculated by both the Staff and the Company to be
3661~/kWh. The Staff also agreed with the Company s calculation regarding the true-up of the
true-up. Including the appropriate carrying charge, the Staff and Company calculated that last
year s PCA rates under-recovered the true-up amount by $556 693. This results in a true-up of
the true-up component of 0.0046~/kWh.
The sum of these three components listed above produces a calculated PCA rate of
6206~/kWh. (0.2499 + 0.3661 + 0.0046). Staff Comments at 3. The Staff agreed with the
Company that customers in Schedules 7, 19 and 24 are entitled to a credit as a result of last
year s stipulation. Staff Comments at 3 , Atch. C , ll. 16-18. The Staff also agreed with the
Company s proposal to continue the existing PCA rate.
2. Adiusting the Credits In Order No. 29478 the Commission granted the
Company s request to continue the existing PCA rates for two weeks until May 31 , 2004.
Continuing the existing rate for two weeks would allow the new PCA rates to become effective
at the same time that the Company s base rates are to become effective on June 1 , 2004. By
continuing the existing rates for this two-week period, PCA costs for customers in the three
schedules (7, 19 and 24) will be over-collected. Staff estimates the total amount of over-
DECISION MEMORANDUM
collection for this two-week period to be $605 689. Staff Comments at 4, Attachment C, column
, lines 22-24. This "over-collection" will not be captured in the true-up of the true-up.
Consequently, Staff recommended slightly greater decreases (more credits) for customers in
these three schedules.
2. Valmy Investigation During the Staff s PCA audit, it became aware that a
significant amount of power purchased last year was attributable to an unexpected outage
Valmy s Unit 2. Valmy is jointly owned by Idaho Power and Sierra Pacific but is operated by
Sierra Pacific. After the Valmy unit was taken off-line for routine maintenance Company
personnel modified the control wiring which defeated specifically engineered protections
intended to prevent accidental energization of the generator. After the maintenance repairs were
completed, the unit was energized without reconnecting the generator breaker control wiring.
The generator sustained severe damage in excess of $2.5 million. The accident caused the
generator unit to be out of service from June 26 through September 8, 2002. Because of the
outage, Idaho Power was required to purchase replacement power at rates significantly higher
than the variable costs for Valmy. As outlined in the Staff s Comments and the Company
confidential audit report at Attachment F, the incident was caused by an apparent failure to
follow established safety procedures, a lack of proper supervision and training, and poor
communications between project personnel.
According to the Staff, the outage forced Idaho Power to purchase approximately
133.5 MW every hour, or forego additional power sales between June 26 and September 9. In
response to a Staff production request, the Company estimated that it spent approximately $6.
million for Valmy replacement power. However, Staff stated that this estimate was arrived
simply using the average daily Mid-C index price during the relevant period. The Company
estimate was not based on the actual price it paid for term purchases, running Danskin, or real-
time purchases used to replace Valmy power. Staff contended that the PCA was established to
adjust for changes in water conditions and variable energy market prices, but was not intended to
automatically flow through costs associated with this type of event. Absent the PCA, these
costs would not even be considered without special application from the Company.Staff
Comments at 8. The Staff recommended that the Commission initiate an investigation to
determine whether the costs for the V almy replacement power should be calculated and credited
to next year s PCA.
DECISION MEMORANDUM
In summary, The Staff recommended that the existing PCA rates be continued except
for the credits due Schedules 7, 19 and 24. The Staff recommended that the PCA rates for the
three schedules be adjusted to account for the over-collection of PCA rates due to the two-week
extension. Finally, the Staff recommended that the Commission open an investigation to review
the financial impacts of the Valmy incident. Staff proposes that the PCA rates become effective
June 1 , 2004, as proposed by the Company.
B. The Company s Reply
The Company first replied to the Staff s recommendation to provide additional credits
to Schedule 7, 19 and 24 customers based on the over-collection during the two-week period.
Based upon Staffs methodology, the Company recomputed the additional credits using actual
May 2003 sales. The Company calculated that the over-collection for the two-week period
totaled $476 826 (compared to the Staffs calculation of $605 689). Incorporating this
adjustment, the Company calculated that the effective PCA rates for Schedule 7 would be
5761~/kWh; the Schedule 19 rate would be 0.5731~/kWh; and the Schedule 24 irrigation rate
would be 0.5054~/kWh. Reply, Atch. 1. The Staff agrees with the Company s calculations and
proposed PCA rate adjustments.
The Company s Reply Comments also addressed the Staffs request for a Valmy
investigation. Although Idaho Power generally concurred with the Staff s summary of events
associated with the outage, it did not agree with the Staff s characterization of the purpose of the
PCA. The Company took issue with the Staff s characterization that the PCA "was established
to adjust for changes in water conditions and energy market prices. In other words, whether
related conditions and power supply costs were beyond the control of the Company.Reply
Comments at 2 quoting Staff Comments at 8. Idaho Power asserted that the Staff
characterization "unduly narrows the scope of the PCA, and in doing so, fails to acknowledge
that the Company s generating units often perform with a reliability that exceeds industry norms.
The Company believes that the PCA methodology as adopted intended to balance above-average
and below-average performance." Reply at 2.
The Company offered to provide the Commission with additional information
regarding last summer s outage "either informally or formally as part of a new docket." Id. at
DECISION MEMORANDUM
COMMISSION DECISION
1. Based upon the agreement of the Company and Staff, does the Commission find
that the projected power costs of 0.2499~, the true-up component of 0.3661~ and the true-up of
the true-up of 0.0046~ result in a PCA rate of 0.6206~/kWh? Although this rate represents an
increase of 0.0167~, does the Commission wish to continue the existing PCA rate of
6039~/kWh except for the Schedules 7, 19 and 24 customers?
2. Does the Commission find that the PCA credits for customers of Schedules 7, 19
and 24 should be adjusted to account for the two-week period? Based upon the Staff and
Company recalculation of the appropriate credit ($476 826), does the Commission find that the
appropriate rate for these schedules should be: Schedule 7 (0.5761 ~); Schedule 19 (0.5731 ~); and
Schedule 24 (0.5054~)?
3. Does the Commission wish to make the PCA rates effective June 1 , 2004?
4. Does the Commission wish to open an investigation regarding the replacement
power cost caused by the Valmy 2 outage? Does the Commission wish to use some other
process or procedure?
5. Anything else?
j)
dYl--
Don Howell
Vld/M:IPCEO409 dh2
DECISION MEMORANDUM