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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE INVESTIGATION
OF FINANCIAL DISINCENTIVES TO
INVESTMENT IN ENERGY EFFICIENCY BY
IDAHO POWER COMPANY.
CASE NO. IPC-E- 04 -
IDAHO POWER COMPANY
DIRECT TESTIMONY
RALPH CAVANAGH
employment.
Please state your name, address, and
My name is Ralph Cavanagh.I am the Energy
Program Director for the Natural Resources Defense Council
NRDC"), 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 of Idaho's Utility Executive Course,
and I have been a Visiting Professor of Law at Stanford and UC
Berkeley (Boal t 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 Energy Center of Wisconsin , the National
Commission on Energy Policy, the Renewable Northwest proj ect
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 first 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, most recently
in 2004, as a witness for the Northwest Energy Coalition in
Case No. IPC-E- 03 -13.I am currently a member of Idaho
CAVANAGH , DI
IDAHO POWER COMPANY
Power s Integrated Resource Plan Advisory Council.
On whose behalf are you testifying?
I am testifying for Idaho Power Company
(hereafter either "Idaho Power" or "the Company"
) .
Are you being compensated for this testimony by
the Company, or have you or NRDC ever received any
compensation or financial contributions from the Company?
No, unless you count travel reimbursement for
meetings of the Company s Integrated Resource Plan Advisory
Council.
What is the purpose of your testimony in this
proceeding?
My testimony supports the Company s proposals
to (1) remove significant financial disincentives to sustained
investments in cost-effective energy efficiency and small-
scale "distributed" generating resources and (2) establish a
pilot test of performance-based incentives for the Company
energy efficiency programs.
What materials have you reviewed in preparation
for this testimony?
I have reviewed the testimony of Mr. Youngblood
and Mr. Gale in this proceeding.My testimony also owes much
to the workshops convened by this Commission following the
last Idaho Power Company rate case, at which I testified on
behalf of the Northwest Energy Coalition.The report
CAVANAGH, DI
IDAHO POWER COMPANY
submitted on behalf of the groups that participated in those
workshops is cited repeatedly in the testimony that follows.
The Final Report on Workshop Proceedings, Case No. IPC-04-
(February 14, 2005) is Exhibit No.
Summarize your conclusions and recommendations.
In May 2004 , the Idaho Public Utilities Commission
IPUC" or "Commission") opened a proceeding to address financial
disincentives for Idaho Power s energy efficiency investments and
performance-based incentives tied to the utility s success in
delivering cost-effective savings.Please refer to pages 68 and 69
of IPUC Order No. 29505, Case No. IPC-03-13.Subsequent
workshops yielded a report to the Commission, embraced by all
participants , which included the conclusions that "the workshop
participants agreed that material financial disincentives to the
implementation of DSM programs do exist,(Exhibit No.1, page
and called for detailed retrospective and prospective financial
analyses to "evaluate incorporation of a true-up mechanism into the
(Company s next) rate filing,(Exhibit No., pages 10 and 11)
along with pilot testing of a performance-based DSM incentive.
This testimony supports the Company s effort to
sustain the progress that the Commission set in motion with
its May 2004 order.
One of the Company s most important
responsibili ties involves integrated resource planning:
assembling a diversified mix of demand- and supply-side
CAVANAGH , DI
IDAHO POWER COMPANY
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. From a
customer s perspective, increases in throughput (above those
contemplated when rates were established) result
inappropriately in an over-recovery of fixed costs by the
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.
1 See,
g.,
Idaho Power, 2004 Integrated Resource Plan
(August 2004) 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 of returns on
investment only for owned (and rate-based) resources.
CAVANAGH , DI
IDAHO POWER COMPANY
To address all of these problems, I support the
Company s proposal 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 a general rate case proceeding. The true-ups
would either restore to the Company or give back to customers
the dollars that were under- or over-recovered as a result of
annual throughput fluctuations.I also support the
recommendation that the Commission approve a robust pilot test
of performance-based incentives reflecting the Company
independently verified success in delivering cost-effective
savings to its customers.
What is the basis for your conclusion that
Idaho Power s fixed cost recovery is strongly tied to its
retail sales volumes?
Like most utili ties, Idaho Power recovers most
of its fixed costs through the rates it charges per kilowatt
hour ("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 IPUC sets rates based on assumptions about
annual kilowatt-hour sales.If sales lag below those
assumptions, the Company will not recover its approved fixed-
CAVANAGH , DI
IDAHO POWER COMPANY
cost revenue requirement.By contrast , if the Company were
successful in promoting consumption increases above
regulators ' expectations , its shareholders would earn a
windfall in the form of cost recovery that exceeded the
approved revenue requirement.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.
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 " (t) he efficiency of practically every end
use of energy can be improved relatively inexpensively"
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
3 U.S. 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, DI
IDAHO POWER COMPANY
only independent of the customer sector , but also is found
irrespective of the particular end uses and technologies
involved. ,,Customers typically are demanding rates of return
of 40-100+ percent, and such expectations differ sharply from
those of investors in electric generation.Utili ties ' 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.These widely
documented market failures generate "systematic
underinvestment in energy efficiency," resulting in
electricity consumption at least 20-40 percent higher than
cost-minimizing levels.
There are many explanations for the almost
universal reluctance to make long-term energy efficiency
investments.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
4 National Association of Regulatory Utility Commissioners,
Least Cost Utility Planning Handbook, Vol. II , p. 11-
(December 1988) .
5 See M. Levine, J. Koomey, J. 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 U.s. Congress, Office of
Technology Assessment, Building Energy Efficiency , at pp. 73-
85 (1992).
CAVANAGH, DI
IDAHO POWER COMPANY
improvements that would mostly reward subsequent users.
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?
Certainly not.Instead, I urge increased
reliance on the very solution that the Commission and the
Company have endorsed through Idaho Power s use of integrated
resource planning: pursuit of cost-effective energy efficiency
through utility investments rather than punitive prices.
7 National Association of Regulatory Utility Commissioners,
note 4 above, p. 11-10.
CAVANAGH, DI
IDAHO POWER COMPANY
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.
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 Youngblood
Exhibit No.7) is $303 million , of which $270 million would be
recovered from variable demand and energy charges; energy
charges alone would account for $212 million.Every one
percent reduction in electricity use and demand on the
Company s system would cut fixed cost recovery by about $2.
million; every one 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.
CAVANAGH, DI
IDAHO POWER COMPANY
But the losses get even worse 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,wi th 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 s impact on fixed cost recovery is
then about 2.7 million dollars, followed by 5.4 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 more than forty 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
generation.
less costly energy efficiency for more costly
What makes you think utilities can sustain
cost-effective energy efficiency programs equivalent about
one percent system consumpt ion?
Recent history in Wisconsin and Cal i f ornia
proves as much. In 1993 , as reported by the Public Service
B This reflects the most recent reported annual statewide
savings (220,277 MWh for 2003 and 239,257 MWh for 2004). See
CAVANAGH, DI
IDAHO POWER COMPANY
Commission of Wisconsin itself, statewide savings reached 621
gigawatt-hours, or about 1.2 percent of statewide electricity
use.The California Public Utilities Commission recently
adopted comparable electricity savings targets for
California's utilities.These targets represent 1.08 percent
of system load in 2007 for the state s three principal
utili ties, ramping up to 1.13 percent in 2013.
comparison, for 2004 and 2005, annual savings targets
represented about 0.85 percent of those utilities ' system
loads.Moreover , given previous levels of energy efficiency
investment in the two states and comparative electricity
prices, I would expect Idaho Power to have untapped energy
efficiency opportunities at least equal to Wisconsin s and
California s, in relative terms.
Would cost-effective distributed generation
programs have the same kind of adverse effect on Company
earnings?
Wisconsin Public Benefits Program, Annual Report, July 1, 2003
to June 30, 2004
, pp.
9 PSC-reported savings are from Wisconsin's Environmental
Decade Institute, Energy Efficiency Crisis Report , p. 1
(1999); statewide electricity consumption data for 1993 are
from State of Wisconsin , Department of Administration
Wisconsin Energy Statistics 2004 , p. 46.10 See California Public Utilities Commission, Decision No. 04-
09-060 (September 23, 2004).11 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.
CAVANAGH , DI
IDAHO POWER COMPANY
Yes.Adding distributed generation on the
customer s side of the meter reduces retail kilowatt-hour
sales and has adverse effects on fixed-cost recovery that are
identical (per kWh of lost retail sales) to those described
above.
Why not just calculate the lost fixed-cost
recovery associated with cost-effective energy efficiency
programs and restore the funds to the utility?
This should not be done for at least three
First, the calculations themselves would be hugelyreasons.
contentious and the rate impacts potentially significant
since each year's savings and lost revenues would persist over
decades, with very significant financial consequences for all
involved (recall that almost half of the retail value of
kilowatt-hours represent "lost revenues" for this purpose) .
Second, the system would create additional perverse incentives
for utili ties, since the most lucrative programs would be
those that looked good on paper while saving little or nothing
in practice (allowing double recovery of "lost revenues
) .
Finally, the system would be inherently inequitable and
asymmetrical, since the utility would be recovering its "lost
revenues " from energy efficiency gains without being required
to give up its "found revenues" from growth in sales
associated with economic expansion elsewhere on the system.
CAVANAGH, DI
IDAHO POWER COMPANY
These and related considerations figure
strongly in a recent report by independent auditors to the
Oregon Public Utility Commission , which evaluated the state'
most recent experience with true-up mechanisms and recommended
them as clearly superior to lost revenue adj ustments, noting
also that "with only lost revenue adjustments, the utility is
discouraged from backing more general conservation efforts,
such as pleas from the Governor to reduce consumption during
an energy crisis, or proposals to improve energy efficiency
standards embedded in building codes." 12
How would you propose to remove the financial
disincentives described in earlier sections of your testimony?
To begin with, 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:
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"(Exhibit No.2) .The state regulatory
community has more than two decades of experience with such
mechanisms, which involve a simple comparison of actual sales
12 D.
Hansen & S. Braithwait, A Review of Distribution Margin
Normalization as Approved by the Oregon Public utilities
Commission for Northwest Natural (March 2005), pp. 67-68.
CAVANAGH, DI
IDAHO POWER COMPANY
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, as the case
may be.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?
No, because consumption does not fluctuate
enough from year to year to require disruptive true-ups.Even
aggressi ve conservation programs will not reduce loads by more
than about one percent per year , as discussed above, and even
under the extraordinary conditions prevailing in some recent
years, Idaho Power s total retail electricity sales never
dropped by more than 2. 3 percent (Exhibit No.3); indeed
since 1984 , there was only one year (2002) in which systemwide
retail sales did not increase.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 or less than 1.5 mills - one
and one-half tenths of a cent - per kilowatt-hour) .
contrast, the Company s Power Cost Adj ustment has increased
rates by as much as 12 mills per kWh in recent years (with
five rate increases of two mills or more since May 1998)
CAVANAGH , DI
IDAHO POWER COMPANY
(Exhibit No.4) .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.
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 (Exhibit No.7), and assuming that current fixed
charges are not increased, about $270 million annually must be
recovered from energy and demand charges.Thi s means that
about $2.7 million would be lost or gained for every one
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 about 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 about eight
CAVANAGH , DI
IDAHO POWER COMPANY
million dollars to compensate for a three percent reduction in
consumption and associated fixed cost recovery.Wi th total
system revenues of $572 million (assuming that the Company
request is granted), this implies a system average rate
increase of about 1.5 percent 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 (Exhibit
No.3) .As shown in the illustrative calculation above, rate
impacts up or down under a true-up mechanism would necessarily
be modest as long as corrections occur on a regular basis and
balances do not accumulate over multiple years.
These conclusions draw further support from the
simulation exercise that Idaho Power conducted at the request
of the workshop participants.The Idaho Power report
described in detail in Mr. Youngblood's testimony, indicates
tha t the Company s proposed true-mechanism would have
resulted in extremely modest annual rate adjustments for each
customer class over the past decade under reasonable
assumptions about energy efficiency progress, with adjustments
moving in both directions over the years for each class, as
predicted above.Typical impacts for residential and small
commercial customers would have been on the order of a dollar
CAVANAGH, DI
IDAHO POWER COMPANY
per month in bill reductions or increases, and even less in
many of the years covered by the simulation.The Company
concludes, and I agree, that the proposed mechanism can
accommodate a three percent cap on annual rate impacts to any
customer class without creating a risk of accumulating
significant unrecovered or unrefunded balances over time.
Wouldn ' t the proposed mechanism guarantee Idaho
Power profits and reduce its incentives to minimize costs and
pursue operating efficiencies?
No.The Company s incentives to minimize costs
are not affected by this mechanism since, with or without the
true-up, the Company keeps any operating savings that it
achieves between rate cases and absorbs any overruns.The
true-up guarantees only recovery of an authorized revenue
requirement, not any particular level of earnings.
What about the Company s incentive to provide
good customer service?
The current linkage of utili ties' financial
health to retail energy use is itself antithetical to good
customer service.Given Idaho Power's multitude of untapped
cost-effective energy efficiency opportunities, giving
utilities an incentive to promote increased electricity and
gas use undermines key elements of good customer service;
removing such an incentive is clearly a step in the right
direction.But I also join the Company in recommending, as
CAVANAGH, DI
IDAHO POWER COMPANY
explained below , that the Commission supplement the true-
mechanism with
penalties tied
improve energy
purchases.
a pilot test of performance-based rewards and
to the Company s success in helping customers
efficiency and avoid more costly generation
Is there relevant recent experience in
neighboring states?
The most extensive recent activity with which I
am familiar is in California, Oregon , Washington, and
Wisconsin.California has embraced a true-up policy for all
its investor-owned utilities, covering fixed costs of
delivering both electricity and natural gas; 13 in California
today, utilities' recovery of fixed costs is completely
independent of retail sales.Not coincidentally, California
utilities are conducting the nation s most aggressive energy
efficiency programs (measured in savings as a percentage of
retail electricity and natural gas use) .
Oregon s PUC adopted a true-up mechanism for
PacifiCorp in 1998, covering fixed costs of electricity
13 In 2001, the California legislature enacted Public Utilities
Code section 739.10, directing the PUC to "ensure that errors
in estimates of demand elasticity or sales do not result in
material over- or under-collections.The PUC has responded
by reestablishing true-up mechanisms covering retail sales of
both electricity and natural gas.
CAVANAGH, DI
IDAHO POWER COMPANY
distribution. Initial rate impacts of the Oregon
Alternative Form of Regulation" were extremely modest for all
classes, and (as predicted) adjustments went in both
directions; the largest annual rate increase for any class was
9 percent, the largest annual rate reduction was 0.
percent and, out of a total of fifteen true-ups from 1999 -
2001, seven resulted in rate reductions and eight resulted in
rate increases.More recently (in 2002), the Oregon PUC also
adopted a modified true-up mechanism for Northwest Natural
Gas; an independent evaluation concluded in March 2005 that
the mechanism was "effective in altering Northwest Natural'
incentives to promote energy efficiency" and should be
retained, although the authors recommended removing some
rather complex features that were not relevant to the
mechanism s primary purpose. The Oregon Commission adopted
an order in August 2005 adopting a stipulation that simplified
the mechanism and extended it for another four years.
The Wisconsin Public Service Commission
determined in July 2005 that utilities ' financial
disincentives were inappropriately constraining statewide
energy efficiency development , and that "the time is right to
14 Oregon PUC, Order No. 98-191 (May 5, 1998) (covering 1998 -
2001). Rate impact data were supplied to me by PacifiCorp
Paul Wrigley.
15 D. Hansen & S. Braithwait A Review of Distribution Margin
Normalization as Approved by the Oregon Public Utilities
Commission for Northwest Natural (March 2005), pp. 67-68.16 Oregon PUC, Order No. 05-934 (UG 163, August 25, 2005).
CAVANAGH, DI
IDAHO POWER COMPANY
fully explore true-up mechanisms and performance-based
incentives. ,,Those efforts are now underway as Alliant, one
of the state s principal utilities, convenes multi-party
workshops to seek consensus on proposals to present to the
Wisconsin Commission as part of Alliant' s next rate case.
The Washington Utilities and Transportation
Commission adopted a true-up mechanism for puget Power in
1991.The mechanism guaranteed the Company recovery of an
authorized level of fixed-cost "revenue per customer" prior to
its next rate case.As the Commission determined at that
time:
(T) he revenue per customer mechanism
does not insulate the Company from
fluctuations in economic conditions, because
a robust economy would create additional
customers and hence, additional revenue.
Furthermore, the Commission believes that a
mechanism that attempts to identify and
correct only for sales reductions associated
with Company-sponsored conservation programs
may be unduly difficult to implement and
moni tor.The Company would have an incentive
to artificially inflate estimates of sales
17 Public Service Commission of Wisconsin, Order No. 6680-UR-
114 , p. 55 (July 2005) .
CAVANAGH, DI
IDAHO POWER COMPANY
reductions while actually achieving little
conservation.
The Commission implemented puget' s revenue-per-
customer cap by "set (ting) up a deferred account allowing a
reconciliation of revenue and expenses that would be subj ect
to hearing and review." 19
But didn ' t the Washington Commission
subsequently repudiate this revenue-per-customer mechanism?
No, and I can underscore that response based on
my own involvement throughout the process.In its initial
review of the mechanism that it had adopted two years earlier,
the Commission in 1993 "accept (ed) the parties
representations " that the revenue-per-customer system had
achieved its primary goal - the removal of disincentives to
conservation investment," and concluded that "puget has
developed a distinguished reputation because of its
conservation programs and is now considered a national leader
in this area. ,,Based on these findings, the Commission
granted a three-year extension of the revenue-per-customer
16 Docket No. UE- 901183 -, Third Supplemental Order (April 10
1991), p. 10. The Commission also determined that the
mechanism did not constitute retroactive ratemaking, and that
it was "fair , just and reasonable" even though it did not
perfectly match costs and rates: "even under the current
system of ratemaking, costs and rates will diverge immediately
following implementation of a rate change.Id., at p. 10.
19 Id., at p. 10.
20 See Washington UTC, Eleventh Supplemental Order , Docket No.
UE-920433, p. 10 (September 21, 1993).
CAVANAGH, DI
IDAHO POWER COMPANY
mechanism.In 1995, as part of a litigation settlement
proposal intended to create no precedent, puget and several
other parties filed a request with the Commission to terminate
a complex package of rate adj ustment mechanisms that included
the revenue-per-customer mechanism (along with a controversial
approach to allocating risks of hydropower fluctuations).The
Commission approved that request, but the proposal itself
expressly reserved the right of all parties to bring forward
in the future "other rate adjustment mechanisms, including
decoupling mechanisms, lost revenue calculations (and)
similar methods for removing or reducing utility disincentives
to acquire conservation resources.In 2 0 0 4 , the Washington
Commission invited the state s utilities and other
stakeholders to reopen consideration of a true-up mechanism
in its order approving a settlement proposal by NRDC, the
Commission staff , and PacifiCorp. On December 7, 2005, NRDC
and PacifiCorp filed a joint proposal to create such a
mechanism, and the matter is now pending before the
Commission.
21 I~, p. 10 (concluding that "the PRAM/decoupling experiment
should continue for at least another three-year cycle
) .
~ Docket No. UE- 921262 Joint Report and Proposal Regarding
Termination of the periodic Rate Adjustment Mechanism (April
20, 1995).23 See Washington UTC v. PacifiCorp, Docket No. UE-032065,
Order No. 06, pp. 29-30 (October 2004) (inviting PacifiCorp,
following discussion with other parties, to "propose a true-up
mechanism , or some other approach to reducing or eliminating
any financial disincentives to DSM investment"
) .
CAVANAGH, DI
IDAHO POWER COMPANY
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 Exhibit No.2. ~
Is a true-up mechanism sufficient incentive to
ensure that utilities invest aggressively in cost effective
energy efficiency opportunities?
24 See also National Commission on Energy Policy, Reviving the
Electricity Sector (Fall 2003), p. 3: "Regulated distribution
companies can be compensated independently of increasedelectrici ty sales (for example, utili ties' fixed-cost recovery
can be made independent of retail electricity use, through the
mechanism of small periodic upward or downward adj ustments
distribution rates) .
CAVANAGH, DI
IDAHO POWER COMPANY
I would describe it as necessary but not
sufficient, over the long term , because the true-up removes a
disincentive to investment but does not create an earnings
opportuni ty .Such an opportunity is needed for its own
conservation programs, in order to avoid an inherent bias
toward generation and grid investments that can earn returns
for shareholders.I recommend basing the incentive on
verified performance rather than total dollars expended.
What type of earnings opportunity would you
recommend?
I recommend a performance-based incentive
system tied directly to independent verification of savings
and net benefits delivered by the Company s programs. For
performance exceeding a threshold specified by the Commission,
in terms of verified savings and net benefits to customers
from its programs, the Company should be allowed to keep a
fraction of those net benefits at least comparable to the
risk-adjusted reward on an equivalent investment in generation
or grid assets; exemplary performance should qualify for
higher rewards, subj ect to assurance that , in all cases,
utility customers are clearly collective beneficiaries based
on their retained share of system-wide dollar savings.
25 The longstanding Wisconsin tradition of independent
verification of program savings is reaffirmed in the Report of
the Governor s Task Force, note 6 above , at p. 22 (discussing
"independent third-party measurement and evaluation
requirements
) .
CAVANAGH , DI
IDAHO POWER COMPANY
Conversely, performance that failed to meet a threshold
specified by the Commission should result in a penalty
calculated by reference to net system benefits foregone.
Are there precedents for performance-based
incentives of this kind for utility investments in energy
efficiency?
California instituted such incentives more than
a decade ago as part of an effort to revitalize energy
efficiency investment.The program received a strongly
posi ti ve evaluation from independent auditors, 26 which included
the following findings:
Shareholder incentives are necessary to
achieve a sustained level of aggressive DSM
activity, and to ensure enthusiasm and
commitment to quality rather than compliance
behavior.They are necessary to diminish
the gap between the private value of DSM to
a utility (without the opportunity to earn)
and DSM's societal value, so that DSM is
implemented appropriately.By increas ing
the value of DSM to a utility, DSM benefits
26
Wisconsin Energy Conservation Corporation, Final Report:
Evaluation of DSM Shareholder Incentive Mechanisms (Prepared
for the California Public Utilities Commission: January
1993) .
CAVANAGH, DI
IDAHO POWER COMPANY
that would otherwise not be captured will be
attained.
California is now in the process of
reinstituting performance-based incentives as part of its
effort to accelerate energy efficiency progress, as described
earlier.The Wisconsin Public Service Commission strongly
signaled its interest in creating such incentives in the most
recent Alliant rate case (July 2005) .
How would you resolve the questions that you
posed regarding the design of a true-up mechanism , and what
specific true-up mechanism do you recommend that the
Commission adopt in this proceeding?
In testimony submitted in the Company s last
rate case , I encouraged the Commission to "provide a
reasonable period (three to six months) for the Company and
interested parties to seek as much consensus as possible on
design recommendations for the Commission s consideration.
predicted 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
27 Id., p. E-
26 See note 25 above and accompanying text.
CAVANAGH , DI
IDAHO POWER COMPANY
that will help the Commission achieve a swift and sound
resolution. ,,
The workshops that the Commission convened
certainly met those expectations, although they did not result
in unanimous agreement on a preferred solution.Based in part
on the workshop deliberations and record, I support the
Company s recommendations, which reflect the final proposal
that was developed over the course of the workshops submitted
and summarized in the parties ' report to the Commission
(Exhibi t No.1, page 8).
What criteria did you apply in reaching this
conclusion?
In addition to the other considerations
reviewed earlier in this testimony, I specifically applied
the criteria developed and approved unanimously by the
participants in the Commission s workshops on these very
issues:
Stakeholders are better off than they
would be without the mechanism,
Cross-subsidies are minimized across
customer classes,
Financial disincentives are removed,
The acquisition of all cost-effective
DSM are optimized,
IPUC Case No. IPC-03-13.
CAVANAGH , DI
IDAHO POWER COMPANY
Rate stability is promoted,
The mechanism is simple,
Administrative costs and impacts of the
mechanism are known, manageable , and
not subj ect to unexpected fluctuation,
Short and long term effects to
customers and Company are monitored,
Perverse incentives are avoided, and
10.A close link between mechanism and
desired DSM outcomes is established.
How would you recommend that the Commission
proceed in developing performance-based incentives, as
described earlier in your testimony?
As noted earlier , in May 2004 , the Commission
opened a proceeding to address financial disincentives for
Idaho Power s energy efficiency investments and performance-
based incentives tied to the utility s success in delivering
cost-effective savings.Subsequent workshops yielded a report
to the Commission, embraced by all participants, which
included the conclusions that "the workshop participants
agreed that material financial disincentives to the
implementation of DSM programs do exist," and called for pilot
testing of a performance-based DSM incentive.Consistent with
the Final Report on Workshop Proceedings, I support the
approval of a robust pilot program to test the concept.
CAVANAGH, DI
IDAHO POWER COMPANY
Does this conclude your testimony?
Yes, it does.
CAVANAGH , DI
IDAHO POWER COMPANY
: T;
. .. ' . '::". '(' ,; :;
C"
BEFORE THE
j, '
i\ji':::.:) cc:\,\\ss:D.:
IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-O4-
IDAHO POWER COMPANY
EXHIBIT NO.
RALPH CAVANAGH
Final Report on Workshop Proceedings
William M. Eddie ISB #5800
ADVOCATES FOR THE WEST
O. Box 1612
Boise, Idaho 83701
Phone: (208) 342-7024
FAX: (208) 342-8286
l~~CEI t...D
,,\... - ,
FiLED
zans fEE 14 PM it: 04
". "i"', f;;: !:~ I
:' '. :; "
:. , U C,
' "- \ ,
UTILIY1ES" COht"11SS10H
Attorney for NW Energy Coalition
Express Mail Address
1320 W. Franklin Street
Boise, Idaho 83702
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE INVESTIGATION
OF FINANCIAL DISINCENTIVES TO
INVESTMENT IN ENERGY EFFICIENCY BY
IDAHO POWER COMPANY
CASE NO.IPC- E-04-
FINAL REPORT ON WORKSHOP
PROCEEDINGS
INTRODUCTION
This is a final report to the Idaho Public Utilities Commission on the workshop
proceedings undertaken in the above-captioned matter. This Final Report is intended to provide
the Commission with an overview of the workshops and the issues discussed, and the
recommendations of the workshop participants. Attached hereto are summaries of all five (5)
workshops, which provide substantially more detail.
The workshops were successful in that they included an open and well-infonned
discussion of the nature and'extent of fixed-cost revenue losses caused by demand-side
management (DSM) programs, and possible means to neutralize those losses or create other
incentives for strong perfonnance in DSM programs. The participants in the workshops came to
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 1
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH , IPC
PAGE 1 OF 13
a general consensus that Idaho Power should apply to the Commission to undertake a
performance-based incentive pilot to allow the Company to fully recover fixed-cost losses and
to possibly acquire incentive benefits achieved by its two residential programs covering the new
construction market segment. These two programs are: (i) ENERGY STAR
(&)
Homes
Northwest, its residential new construction energy efficiency program, and (2) Rebate
Advantage for New Manufactured Homes, its program directed at the manufactured housing
market. In addition, it was the general consensus of the workshop participants that the potential
impacts of a broader fixed cost true-up mechanism should be simulated until Idaho Power s next
general rate case.
BACKGROUND
On May 25 , 2004, the Idaho Public Utilities Commission (Commission) in Order No.
29505 (Idaho Power Company general rate case No. IPC-03-13) detennined that a separate
proceeding to assess financial disincentives inherent in Company-sponsored conservation
programs is appropriate and should proceed by infonnal workshops." The Commission s Order
provided in relevant part as follows:
The Commission specifically directs the parties (Idaho Power, NW Energy
Coalition, Industrial Customers of Idaho Power (ICIP) and Commission Staff) to
address possible revenue adjustment when annual energy consumption is both
above and below nonnal. The parties should also consider how much adjustment
is necessary to remove DSM investment disincentives and whether (and to what
extent) perfonnance-based incentives such as revenue sharing could or should be
incorporated into the resolution of this issue. The Commission is interested in
proposals that could provide Idaho Power the opportunity to share and retain
benefits gained from efficiencies, especially... technologies... In short, the
Commission believes opportunities exist for improvements in operating efficiency
that would benefit the Company shareholders and its customers, and we
encourage the parties to creatively consider the options for a perfonnance-based
mechanism to present to the Commission. The parties to the agreement are
directed to propose a workshop schedule and initiate a proceeding. (emphasis
added)
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 2
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 2 OF 13
Order No. 29505 at pp. 68 69.
As a follow up to the Commission s Order, the NW Energy Coalition on June 18 , 2004
fonnally requested that a proceeding be initiated and that a workshop schedule be established.
The Commission in Order No. 29558 established this docket to investigate financial
disincentives that hinder Idaho Power s investment in cost-effective energy efficiency resources.
The Commission stated that the scope of the investigation should be focused on true-up
mechanisms and performance based ratemaking.
As directed by the Commission, the participating parties provided a written status report
to the Commission on December 15 , 2004 to update the Commission on the status of the
investigative workshops.
PROCESS
The parties participated in five workshops to date: August 24, September 27 , November
8, December 1 , and December 13, 2004. These workshops included presentations by
participants, group discussion, and sensing for areas of agreement and disagreement. Susan
Hayman (North Country Resources) facilitated the workshops.Workshops were designed in
cooperation with four designated workshop coordinators representing each of the four major
interests at the table (Idaho Power Company, Idaho Public Utilities Commission Staff, Industrial
Customers of Idaho Power, and Northwest Energy Coalition).Copies of all workshop
summaries are provided as attachments to this Final Report.
PARTICIPANTS
The following people attended one or more workshops, received meeting materials and
summaries, and were considered active workshop participants:
INVESTIGATNE WORKSHOP FINAL REPORT, Page 3
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH , IPC
PAGE 3 OF 13
Name and Affiliation Name and Affiliation
IPUC Staff
Lynn Anderson
Randy Lobb
Terri Carlock
David Schunke
Scott Woodbury
Nortbwest Enerl!V Coalition
Nancy Hirsh, NW Energy Coalition
Bill Eddie, Advocates for the West
Ralph Cavanagh, Natural Resources Defense
Council
Bart Kline
Maggie Brilz
Darlene Nemnich
Greg Said
Tim Tatum
Mike Youngblood
Industrial Customers ofIdabo Power
Peter Richardson, Industrial Customers ofldahoPower
David Hawk, J .R. Simplot Co
Don Reading, Ben Johnson Associates
Idabo Power
Ric Gale
Other Interested Parties
Brad Purdy, Community Action Partnership
Association
ofldaho
Laura Nelson, IPUC Policy Strategist
NATURE AND EXTENT OF LOST FIXED COST REVENUES
The underlying problem addressed in the workshops was described in the Direct
Testimony of Ralph Cavanagh submitted in case number IPC-03-13: Successful
implementation of DSM programs generally results in fewer sales 'of kilowatt-hours and/or
reductions in demand for energy than would occur without the programs. Because Idaho Power
primarily recovers its fixed costs of service as a portion of kilowatt-hour sales and/or demand
charges, many DSM programs result in reduced fixed-cost revenue recovery.
The workshops first focused on identifying the nature and extent of fixed-cost revenue
recovery impacts associated with varying levels of DSM investment by Idaho Power. These
impacts are highly dependent on the type, level and effectiveness of DSM programs. ~~lH'~YT NO.
CASE NO. IPC-04-
R. CAVANAGH, IPC
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 4 PAGE 4 OF 13
workshop proceedings, IPUC Staff analyzed expected fixed-cost revenue losses over a 9-year
period (with 2 assumed intervening rates cases) under the level of DSM investment
recommended in the Northwest Power and Conservation Council's Fifth Plan. The Fifth Plan
level of DSM investment is approximately equal to savings on the order of 0.5% per year
(including Northwest Energy Efficiency Alliance efforts, fuel conversions, building codes
appliance standards, and other DSM for which utilities have limited, little, or no control). Under
Staffs contention that except for 6-month regulatory lag any future fixed-cost revenue losses
from installed efficiency measures are "zeroed out" after each assumed rate case, the 9-year total
fixed-cost revenue loss is $54.6 million.The present value of the $54.6 million is about
$39 million, and the levelized loss is $6 million per year.
IPUC Staff conducted a similar 9-year analysis under the level ofDSM investment
anticipated under Idaho Power s 2004 Integrated Resource Plan. The 2004 IRP DSM plan does
not include efficiency gains achieved under regional efforts such as NEEA, code changes, or
other advancements, but does include a substantial increase in utility-managed DSM programs.
Again assuming that any future fixed-cost revenue losses from installed efficiency measures are
zeroed out" after each rate case, the Staff-quantified 9-year total fixed-cost revenue loss is
$3 million; the present value is about $2 million; and the levelized value is about $0.3 million per
year. This $0.3 million amount is illustrative of the Staff-calculated fixed-cost revenue losses
expected under potential levels ofDSM activity identified by Idaho Power s 2004 Integrated
Resource Plan (IRP).
However, as the discussion ofNWPCC's Fifth Plan partly demonstrates , the amount of
fixed-cost revenue losses would be much higher if the calculation accounted for other energy
efficiency advances undertaken outside ofldaho Power s programs and for persisting energy
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 5
EXHIBIT NO.
CASE NO. IPC-04-
R. CAVANAGH, IPC
PAGE 5 OF 13
efficiency measures across rate cases. In the workshops, NRDC and NWEC contended these
analyses understated potential losses from aggressive Idaho Power DSM programs. For
example, Ralph Cavanagh ofNRDC reviewed with the group the basis for the conclusion in his
filed testimony that programs saving just one percent of system-wide electricity consumption
annually would eliminate about $45 million in fixed-cost recovery within just five years. And
NRDC/NWEC contended that even regular rate cases could not remove the continuing adverse
effects oflong-tenn electricity savings on the Company s balance sheet.
The amount of fixed:...cost losses incurred under all of these scenarios varies by customer
class due to the differing fixed costs of service for each class, and the amount of fixed costs
recovered from energy and/or demand charges that vary with consumption. More than other
classes, the fixed costs of serving the residential and small commercial customers are recovered
through variable energy charges - and DSM programs for this class result in the largest fixed
cost revenue losses. Moreover, in the residential class, energy usage per customer generally has
been declining in recent years from a high mark of an average 14,474 kWh customer/year in
1991 to 12 635 kWh customer/year in 2003.
POTENTIAL MECHANSIMS TO ADDRESS LOST FIXED-COST REVENUES
In light of the expected loss of fixed-cost revenues from DSM programs described above
the workshop participants agreed that material financial disincentives to the implementation of
DSM programs do exist. However, not all participants agreed that restoration of lost fixed-cost
revenues - such as through an annual true-up mechanism - would directly result in additional or
more effective investment in DSM programs by Idaho Power.The Commission s order
initiating this matter identified possible solutions to address the disincentives to investment in
DSM programs created due to lost fixed-cost revenues, including a true-up mechanism to restore
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 6
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 6 OF 13
lost fixed costs, as well as performance based mechanisms to allow Idaho Power Company to
share some of the benefits of successful DSM programs.
The workshop participants came to agreement on a set of criteria to evaluate different
approaches to address lost fixed-cost revenues incurred by the Company due to successful DSM
programs, or to provide incentives for DSM programs. The criteria are:
1. Stakeholders are better off than they would be without the mechanism.
2. Minimize cross subsidies across customer classes.
3. Removes financial disincentives.
4. Optimizes the acquisition of all cost-effective DSM.
5. ,Promotes rate stability.
6. Simple mechanism.
7. Administrative costs and impacts of the mechanism are known, manageable, and
not subject to unexpected fluctuation.
8. Monitors short and long term effects to customers and company.
9. Avoids perverse incentives.
10. Close link between mechanism and desired DSM outcomes.
These criteria generally governed the workshop participants consideration of
mechanisms to address the lost fixed-cost revenues issue. For example, so-called "lost revenue
recovery" mechanisms limited to DSM savings can be criticized because they turn program
evaluation into a high-stakes adversarial process , and because they create an incentive for a
utility to fashion a program that "looks good on paper " but does not actually perform well.
Likewise, a mechanism that simply trues up a utility s recovery of its authorized fixed-
cost revenue requirement may be easy to implement and monitor, but only removes the financial
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 7
EXHIBIT NO.
CASE NO. IPC-04-
R. CAVANAGH, IPC
PAGE 7 OF 13
disincentive to DSM while other barriers may remain. For that reason, a true-up mechanism on
its own may not drive a utility to acquire all cost-effective DSM available in its territory.
addition, a true-up mechanism may shift the current allocation of risks from changes in sales due
to weather, economic shifts, or technological advances.
The workshop participants gave careful consideration to two mechanisms: a true-up
mechanism to ensure that Idaho Power reco\;ered no more or less than its authorized fixed-cost
revenue requirement; and a pilot program to provide an incentive to the Company to achieve
substantial cost-effective savings in one important category ofDSM programs.
True-up mechanism: The Natural Resources Defense Council and NW Energy
Coalition proposed a true-up mechanism to restore lost fixed-cost revenues to Idaho Power. The
starting point for the proposal was the fixed-cost revenue requirement and retail rates approved
by the Commission for Idaho Power s most recent rate case. The fixed-cost revenue requirement
would then be automatically adjusted annually (until reestablished in the next rate case) as
follows: (a) for the Industrial and Agricultural sectors, the fixed cost revenue requirement would
be adjusted to reflect the same rate of increase (or decrease) shown for retail electricity sales, net
of any DSM programs, in the load forecast section of Idaho Power s latest Integrated Resource
Plan; or (b) for the Residential and Commercial sectors, the fixed cost revenue requirement
would be adjusted to reflect the actual changes in annual customer count for the residential and
commercial sectors (in other words, the fixed cost revenue requirement per customer would
remain fixed until the next rate case). Concurrent with each annual power cost adjustment case
true ups would occur by customer class based on any divergence between the total fixed-cost
revenue recovery that forecast sales of kilowatt-hours and demand charges (for Agricultural and'
Industrial sectors) or actual customer growth (for Residential and Commercial) would have
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 8
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 8 OF 13
delivered versus the fixed-cost revenues actually recovered through actual sales. Idaho Power
would continue to absorb the risk or benefits of purely weather-related effects on fixed-cost
revenue recovery, as it does now. Actual sales would be weather-normalized before making the
annual true-up calculation. The-maximum annual average rate impact of the true up mechanism
for any customer class would be capped at 2% annually, with any additional amounts carried
overto the next year s true up.
Rather than actual implementation, the workshop participants agreed to a "Simulation" of
the true-up proposal to help illuminate its potential impacts under the criteria described above.
The Simulation would include both retrospective and prospective components by using the fixed-
cost revenue requirements approved in the 1994 and 2004 rate cases as starting points. It would
apply an assumed level of-efficiency savings of 0.5% annually (roughly equivalent to the level of
savings achievable under the NWPCC's Fifth Plan) each year starting in 1994 and 2004.
To illuminate the impacts of the true-up proposal, the Simulation would calculate the: (1)
annual rate impact to each customer class for the true-up; (2) the impact ofDSM savings on the
PCA; (3) the annual impact to average customer bill amounts (assuming the 0.5% annual
efficiency savings and the annual net benefit estimates developed in the energy efficiency
assessment provided as an addendum to the 2004 IRP); and (4) total impact of true-up
mechanism to IdaCorp shareholders.
Pilot Incentive: At the group s request the IPUC Staff developed a strawman proposal
for a performance based Pilot Incentive.Staff chose to target the ENERGY STARiID Homes
Northwest program for the strawman and at the group s request, Idaho Power and IPUC Staff
later collaboratively refined it into a proposal. This DSM program, which was included in the
Company s 2004 IRP, offers an incentive to builders to achieve a standard of 30% energy
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 9
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 9 OF 13
savings over and above existing code requirements. The original program proposal targeted a
specific number of homes in which to achieve these savings in 2005. With further refinement
Idaho Power adopted a MWH reduction target, encouraging the company to achieve even greater
savings as well as putting the focus of the program on energy savings rather than a specific
number of homes. The energy target to be achieved through this program in 2005 is a reduction
of I ,070 annual MWH. The Idaho Energy Division conducts quality assurance for the program
and NEEA provides builder training.Under the Pilot Incentive, Idaho Power would recover
fixed-cost revenues lost due to the validated energy savings provided by the program, and earn
an additional incentive if the energy savings achieved by the program exceed 100% of the
targeted savings. As described below, Idaho Power is expected to submit an application to the
Commission to implement this program.
The ENERGY ST AR(!i) Homes Northwest program was chosen for the Pilot Incentive
because residential rates have a high fixed-cost component recovered through variable energy
charges and because it is a relatively small program so any potential unanticipated impacts of the
Pilot Incentive will be small. Also, this program is projected to be very cost effective and its
results are expected to be relatively easy to monitor. The workshop participants also agreed to
recommend adding Idaho Power s Energy Efficient Manufactured Home Incentives program to
the Pilot Incentive. The targeted savings for this project is 555 annual MWH.
RECOMMENDATIONS OF THE WORKSHOP PARTICIPANTS
Idaho Power Company anticipates filing an application with the Commission to
implement the pilot program described above. The workshop participants are supportive ofthe
pilot as described in the workshops, but reserve their rights to comment on the proposal as filed
with the Commission.
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 10
EXHIBIT NO.
CASE NO, IPC-04-
R. CAVANAGH, IPC
PAGE 10 OF 13
In addition, Idaho Power has agreed to implement a Simulation of the true-up mechanism
proposed by NRDC and NW Energy Coalition, as described, above, until Idaho Power s next
general rate case. This action does not require action by the Commission; however, the results of
the Simulation will be provided to workshop participants and the Commission
contemporaneously with each annual PCA filing. Idaho Power will work with workshop
participants as the Company prepares its next rate case filing to analyze the results ofthe
Simulation and evaluate incorporation of a true-up mechanism into the rate filing.
This Final Report to the Commission has been reviewed and approved by Commission
Staff and Idaho Power Company.
Dated this 14th day of February, 2005.Respectfully submitted
William Eddie
"--
Attorney for NW Energy Coalition
INVESTIGATIVE WORKSHOP FINAL REPORT, Page 11
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 11 OF 13
CERTIFICATE OF SERVICE
I hereby certify that on this 14th day of February 2005 , true and correct copies of
the foregoing FINAL REPORT were delivered to the following persons via hand delivery
(for Commission recipients) and u.S. Mail (for all others):
Jean Jewell
Commission Secretary
Idaho Public Utilities Commission
472 W.Washington
Boise, ill 83702
Lawrence Gollomp
Assistant General Counsel
S. Dept. of Energy
1000 Independence Ave., SW
Washington, DC 20585
Scott Woodbury
Deputy Attorney General
Idaho Public Utilities Commission
472 W.Washington
Boise, ID 83702
Dean Miller
McDevitt & Miller
O. Box 2564
Boise, ill 83701
Barton Kline
Idaho Power Company
O. Box 70
Boise, ill 83707-0070
Conley Ward
Givens Pursley
601 W. Bannock St.
O. Box 2720
Boise, ill 83701-2720
John R. Gale
Idaho Power Company
O. Box 70
Boise, ill 83707-0070
Brad Purdy
2019N. 17th St.
Boise, ill 83702
Peter Richardson
Richardson & O'Leary
O. Box 1849
Eagle, ill 83703
Michael Kurtz
Kurt J. Boehm
Boehm, Kurtz & Lowry
36 E. Seventh St., Suite 2110
Cincinnati, OH 45202
Don Reading
Ben Johnson Associates
6070 Hill Road
Boise, ID 83703 \;vi
William Eddie
Randall Budge
Racine, Olson, et al.
201 E. Center
O. Box 1391
Pocatello, ill 83204-1391
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 12 OF 13
William M. Eddie ISB #5800
ADVOCATES FOR THE WEST
O. Box 1612
Boise, Idaho 83701
Phone: (208) 342-7024
FAX: (208) 342-8286
Attorney for NW Energy Coalition
Express Mail Address
1320 W. Franklin Street
Boise, Idaho 83702
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE INVESTIGATION
OF FINANCIAL DISINCENTIVES TO
INVESTMENT IN ENERGY EFFICIENCY BY
IDAHO POWER COMPANY
CASE NO.IPC- E-04-
A TT ACHMENTS TO FINAL
REPORT ON WORKSHOP
PROCEEDINGS
Attached hereto are summaries of all five (5) workshops conducted in the above matter.
Due to the volume of material, one original printed copy is provided to the Commission, together
with a computer disc providing electronic copies of the same. Additional computer discs can be
obtained by contacting the undersigned counsel.
Dated: February 14 2005
William M. Eddie
Attorney for NW Energy Coalition
EXHIBIT NO.
CASE NO. IPC-04-
R. CAVANAGH, IPC
PAGE 13 OF 13
' .,
?7 F, ~):n5
BEFORE THE )i iLl j k,::! C ;';:SSIO;;
IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-O4-
IDAHO POWER COMPANY
EXHIBIT NO.
RALPH CAVANAGH
Joint Recommendation of the Natural Resources Defense
Council and the Edison Electric Institute to the National
Association of Regulatory Utility Commissioners
IrIMr8 EDISON ELECTRIC
ILIULII INSTITUTE ~DC
TIlt Em"'s Bnt Dlft1151
November 18. 2003
Dear NARUC Commissioners
At your invitation, we conducted a lively debate at the 2002 Annual Meeting on utilities
futUre role in helectric resource portfolio management" Many of you encouraged us to
return with joint recommendations on the fonnidable challenges associated with choosing
and managing balanced portfolios of electricity and grid resources for customers unable
or unwiUing 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 ' long-
tenn needs for grid enhancement, generation and demand-side resources. Distribution
companies need not own the resources involved, and an active portfolio management role
for distn'bution companies is entirely consistent with efforts to promote competitive
wholesale generation markets. Indeed, as NARUC's members know well, many
participants in such markets increasingly are calling for more long-tenn distribution
company investments to help overcome a capital availability crisis that affects a11
el~ments of the power system, from grids to generators to end-use efficiencies.
We are deeply concerned, however, about an increasingly obvious mismatch between
these important societal needs and the tools available to utilities, other market
participants and regulators. We also believe we need clear workable frameworks for
resource 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 not
limited to the following:
1. Misaligned incentives.a. Traditional regulation does not create any c1ear perfonnance-based incentive to
manage comprehensive electrlc resource portfolios effectively; at best, utilities
can hope to recover the costs of long-tenD contracts with generation and
demand-side service providers. with no opportunity to earn a reward for
addressing risks in minimizing the long-term cost of reliable service.
For energ):',~fficie!,cy~nd d.i~trib\;lted generation options specifically, today
rate regulation typiCally penalizes any such utility investments - however cost-
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 1 OF 3
Page 2
effective u by linking much or aU of utilities' fixed cost recovery to their retail
electricity sales vo1umes.
Traditional rates of return from a cost-of-service framework do not reflect
significant new ris\cs (outlined in part below).
It is difficult to negotiate sy'mmetrlcal incentives that reward longutenn
performance and wi11 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 of long-term 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 fmd
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 management concepts, methods and t0015 (e.
g.,
Value-at-Risk, Cash Flow-at-Risk, measures of gas price volatility)
6. Expediting decisions: traditional trial-type adversarial planning proceedings take toolong 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 otTer these initial recommendations
and remain committed to ti~e1y solutions:
1. Get the incentives right: performance-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 shorty and long-
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH , IPC
PAGE 2 OF 3
Page 3
term investments in generation, demand-side resources and grid enhancements. A\so
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 of cost recovery: uncertainty of cost recovery
constrains adaptive rate design, and discourages investment in new infras1rUcture
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 \ 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 unbiase4 and fair for all parties, including utility
affiliates and independent suppliers. One illustration is the joint
NRDClPacificCorp/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-term results for a11 of their constituents, in both economic and
environmental tenDS.
Yours sincerely,
-0~.
David K. Owens
l ~~t
Ralph Cavanagh
EXHIBIT NO.
CASE NO. IPC-O4-
R. CAVANAGH, IPC
PAGE 3 OF 3
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BEFORE THE
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IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-O4-
IDAHO POWER COMPANY
EXHIBIT NO.
RALPH CAVANAGH
Idaho Power Company
Historical Customer and Energy Usage
...
Retail Sales
Idaho Growth in Idaho Growth in Avg Use/Cust Growth in
Year Customers Customer Count MWH Energy Usage Difference kWh Use/Cust
1972 168 242 999 528 23,772
1973 176 849 441 325 11.25,114
1974 185 115 863 173 26,271
1975 193 671 400 905 11.6.4%887
1976 202 816 791 354 28,555 2.4%
1977 212 629 116 342 28,765
1978 223 249 396 271 (0.4%)28,651 (0.4%)
1979 231 736 957 866 30,025
1980 238,937 014 445 (2.3%)29,357 (2.2%)
1981 243 830 273 846 29,832
1982 247 457 222 908 (0,7%)(2,2%)29,189 (2,2%)
1983 250 902 1.4%158 167 (0,9%)(2.3%)28,530 (2.3%)
1984 254 597 175 798 (1.2%)28,185 (1.2%)
1985 257 991 314 487 28,352
1986 260 319 374 735 (0.1%)28,330 (0,1%)
1987 262 717 459 102 28,392
1988 265 365 737 505 29,158
1989 269,256 034 421 29,839
1990 275,256 367 307 30,398
1991 281 360 514 896 (0.5%)30,263 (0.4%)
1992 289 013 695 622 (0.6%)30,087 (0,6%)
1993 298 411 981 236 30,097
1994 309 567 262 924 (0,6%)29,922 (0,6%)
1995 320 032 559 202 (0,2%)29,870 (0.2%)
1996 330 856 790 919 (1.0%)29,593 (0.9%)
1997 340 989 984 121 (1.1%)29.280 (1.1%)
1998 351 075 356 330 29,499
1999 361 479 637 730 (0.2%)29,428 (0.2%)
2000 371 583 997 104 29,595
2001 381 421 112 598 (1,6%)29,135 (1,6%)
2002 391,471 853 895 (2.3%)(5,0%)27,726 (4,8%)
2003 401 942 114 408 2.4%(0,3%)27,652 (0.3%)
EXHIBIT NO.
CASE NO. IPC-04-
R. CAVANAGH, IPC
PAGE 1 OF 1
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BEFORE THE J l\!_ii iL,; CC, ;;';!S510;1
IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-O4-
IDAHO POWER COMPANY
EXHIBIT NO.
RALPH CAVANAGH
Historical PCA Rate Changes
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