20060130Gale direct.pdf

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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-O4-
IDAHO POWER COMPANY
DIRECT TESTIMONY
JOHN R. (RIC) GALE
Please state your name and business address.
My name is John (Ric) Gale and my business
address is 1221 West Idaho Street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed by Idaho Power Company ("Idaho
Power" or "the Company ) as the Vice President of Regulatory
Affairs.
What is your educational background and
business affiliations?
I received a BBA in 1975 and an MBA in 1981
from Boise State Uni versi ty.I maintain a close affiliation
with the university and serve on the College of Business and
Economics ' Advisory Council.I have also attended the Public
Utilities Executive Course at the University of Idaho.
I am an active member of the Edison Electric
Institute s Economic Regulation and Competition Committee
(ERCC), which is the committee that is concerned primarily
with regulatory issues and ratemaking methods.I am the
current Vice Chair of the ERCC.
Please describe your work experience.
In October 1983, I accepted a position as Rate
Analyst with Idaho Power Company.In March 1990, I was
assigned to the Company s Meridian District Office for one
year where I held the position of Meridian Manager.In March
1991, I was promoted to Manager of Rates.In July 1997, I was
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Idaho Power Company
named General Manager of Pricing and Regulatory Services.
March of 2001 , I was promoted to Vice President of Regulatory
Affairs.As Vice President of Regulatory Affairs, I am
responsible for the overall coordination and direction of the
Pricing & Regulatory Department , including development of
jurisdictional revenue requirements and class cost-of-service
studies, preparation of rate design analyses, and
administration of tariffs and customer contracts.In my
current position , I am also responsible for policy matters
related to the economic regulation of Idaho Power Company.
What is the purpose of your testimony in this
proceeding?
I am supporting the application for
implementation of a true-up mechanism of the type described by
Company witnesses Cavanagh and Youngblood that would be
applicable to Idaho Power Company s Residential Service
(Schedule 1) and to Small General Service (Schedule 7)
cus tomers .This true-up mechanism would be titled "Fixed Cost
Adjustment" or FCA.The proposed FCA would track costs and
revenues beginning January 1, 2006 and would adjust rates up
or down each June 1 (beginning June 1, 2007) coincidentally
with the timing of the Company s Power Cost Adjustment ("PCA"
and seasonal rate changes.
Please describe the series of events leading up
to Idaho Power s filing an application to implement a Fixed
GALE, DI
Idaho Power Company
Cost Adjustment.
In 2003, Mr. Ralph Cavanagh met with Idaho
Power's senior management to discuss several opportunities
where the Company and the environmental community could work
together productively to achieve mutually beneficial results.
One of these items was the potential implementation of a true-
up mechanism that would remove the economic disincentive to
energy efficiency efforts by Idaho Power.Mr. Cavanagh
formally proposed this type of mechanism on behalf of the
Advocates for the West during the Company s last general rate
case, Case No. IPC-03-13.The Commission addressed this
issue in its rate case order by initiating a separate docket
to investigate disincentives to energy efficiency, Case No.
IPC-04-15.The Company s FCA Application is a continuation
of IPC-04-15.
What was Idaho Power s initial position
regarding the need for a true-up mechanism?
Ini tially, Idaho Power believed that other
energy efficiency disincentives needed to be addressed as a
matter of priority before entertaining the concept of a new
mechanism.Addi tionally, the Company was in a capabili ty-
building mode, so that the amount of energy efficiency
obtained was limited until the infrastructure was put into
place.Finally, Idaho Power desired to make significant
progress on its rate design for customer classes that was
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Idaho Power Company
kilowatt-hour metered only, believing that significant
movement in the rate design would address the same issues that
a true-up mechanism would.
How has this position evolved?
In the last several years Idaho Power has
reestablished a complete energy efficiency effort in terms of
personnel, budgets and programs.The Company instituted the
Energy Efficiency Advisory Group, which has proven to be a
productive method to engage customers, environmental advocates
and technological experts in the development of Idaho Power'
energy efficiency emphasis and effort.The Commission-
approved Energy Efficiency Rider has provided a steady funding
supply to carry out energy efficiency and demand response
initiatives.Additionally, the Company s Integrated Resource
Planning process has incorporated the demand-side activities
in an increasingly meaningful way.Finally, the Idaho
Commission has been supportive of cost recovery of the dollars
invested in energy efficiency.All these developments have
helped remove the initial disincentives to Idaho Power
initiating extensive energy efficiency activities.
At the same time , Idaho Power has tried to
implement changes to its pricing for Schedule 1 and Schedule 7
customer classes with very limited success.Frankly, the
Commission has not shown an appetite for changes to the rate
design that significantly increases the monthly customer
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Idaho Power Company
charge.
disincentives
Returning to the docket that dealt with
to energy efficiency, Case No. IPC-E-04-15.
Please describe the status of this proceeding.
Following the Company s general rate case, the
Commission Staff, customer groups, other interested parties
and the Company embarked upon a workshop process to
investigate disincentives that may keep Idaho Power from
investing fully in energy efficiency activities.The group
met five times over a five-month period and filed a summary
report called "Final Report on Workshop Proceedings Final
Report) on February 15, 2005.The Final Report is Company
Exhibi t No., which has already been introduced by Mr.
Cavanagh.The effort resulted in two action items - (1) the
development of a true-up simulation to track what might occur
if a decoupling type mechanism were initiated at Idaho Power
and (2) advocacy for the filing of a pilot energy efficiency
program that would incorporate both performance incentives and
lost revenue " adj ustments .The filing of the Final Report
was the last action in the Case No. IPC-E-04-15.Since the
docket remains open and the Company s application is directly
related to the Final Report's conclusions, Idaho Power has
made its current request under the same docket number.
What was done to follow up on the two action
items?
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Idaho Power Company
Idaho Power has simulated the true-up mechanism
specified in the workshops and in the Final Report.Mr.
Youngblood sponsors the simulation as Exhibit No.6 and
testifies to its results.The Company also filed a pilot
energy efficiency program with the Idaho Public Utilities
Commission on February 18, 2005 that contained both incentive
and lost revenue elements.The filing was later withdrawn by
the Company after consulting with the workshop parties because
some concerns surfaced on the appropriateness of lost revenue
recovery on that particular pilot.
In his testimony, Mr. Cavanagh continues to
advocate for a pilot energy efficiency program that might
contain incentive elements.Do you agree with his
recommendation?
Yes.It is consistent with the recommendations
of the workshop group and also provides an opportunity to test
the impact of incentives in a pilot environment.Our
difficulty thus far has been finding a good program to test.
The Company will continue to work with Staff and the other
parties to Case No. IPC-E- 04 -15 to explore possible pilot
programs to test.
Did Idaho Power enlist the assistance of an
outside expert to review various true-up mechanisms?
Yes.The Company engaged Mr. Eric Hirst to
perform an analysis of decoupling for Idaho Power.Mr.
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Idaho Power Company
Youngblood's testimony also describes the Company
collaboration with Mr. Hirst on this issue.
What is the underlying problem that a true-up
mechanism is trying to address?
Basically, when a utility recovers a
significant portion of its fixed costs through variable rates,
it is not in the utility s economic interest to embark on any
programs or initiatives that reduces the amount of energy
sold.
situation?
How does a true-up mechanism help this
A true-up mechanism disconnects (or decouples)
the fixed cost recovery from the energy rates and recouples
the fixed cost recovery to some other variable such as the
number of customers served by the utility.The utility
becomes economically indifferent to decreases in energy sales.
As a result, the disincentive to act in ways that decrease
energy consumption is removed.
Are there potential concerns that might be
raised when a new rate adjustment mechanism is implemented?
Yes.A chief concern of the Company is that
when any new rate adjustment mechanism is introduced there is
the potential for unintended consequences - something
unforeseen in the development of the mechanism that causes the
mechanism to not work as designed or intended.There are
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Idaho Power Company
other possible negatives to the introduction of a true-up
mechanism, such as (1) a true-up mechanism may take the
pressure off efforts to better align prices and costs through
rate design (2) a true-up mechanism may be countercyclical
a region s economic cycle, and (3) a true-up mechanism may
introduce potentially large rate swings.Most of these
concerns can be mitigated by the design of the mechanism
itself.
Given the potential positives and negatives,
what is the Company proposing?
the Company is proposing a limited
implementation of a true-up mechanism to two customer classes
- Schedule 1, Residential Service , and Schedule 7, Small
General Service - that would start for accounting purposes on
January 1, 2006.Rates would adjust annually on June 1 at the
same time as the PCA and seasonal rates change.These two
customer classes would recouple fixed costs to customer counts
and the energy usage would be weather-normalized in the same
manner as the Company employs for its rate proceedings.Idaho
Power proposes a monthly deferral that would operate , in terms
of reporting and the application of a carrying charge, similar
to the PCA.Finally, the Company proposes a cap on any upward
rate change of three percent that could be implemented at the
option of the Commission - again, similar to the seven percent
provision provided for in the PCA.
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Idaho Power Company
Schedule
Why limit the mechanism to Schedule 1 and
Idaho Power wants to take an incremental
approach to the introduction of a true-up mechanism in order
to gain some experience and to avoid some exposure to
potential unintended consequences.Schedule 1 and Schedule 7
are a logical place to start in that these two customer
classes present the most fixed cost exposure (in percentage
terms) and, because they recouple fixed cost revenue to
customer counts, they avoid the recoupling complications
associated with larger customer groups.Addi tionally, because
neither rate schedule has a demand charge, the calculations
are simpler.
What is the importance of starting the
accounting on January 1 , 2006?
There are two advantages in using a calendar
year for tracking an FCA deferral.One is that the numbers
tie directly to the numbers reported in the Company s FERC
Form 1 Report, which is particularly important for consistency
in reporting the number of Schedule 1 and Schedule 7
The second advantage is that weather can becustomers.
normalized on a calendar-year basis as opposed to split-year
report ing .
Why are you then proposing to wait until June
1, 2007 to change rates?
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Idaho Power Company
The five-month intervening time period between
the end of the FCA accounting period and the start of the rate
period allows ample time for the books to close, the FERC Form
1 to be filed, and the FCA rate application to be filed,
reviewed, and authorized.The June 1 date is especially
desirable because it allows the Company annually to change
customer rates once for the PCA , FCA, and the summer season.
proposal?
2006.
When will rates first change under your
June 1, 2007 based on data for calendar year
Why recouple to customer count?
Energy usage correlates well to customer counts
for the Schedule 1 and Schedule 7 customer classes.Customer
counts are straightforward and easy to determine.For
purposes of the FCA calculation , the Company proposes to use
the same customer counts as reported in FERC Form
Why does the Company propose to weather-
normalize the energy consumptions for Schedule 1 and Schedule
The Company historically has assumed risks
associated with weather-related changes in sales we seek no
change in that risk allocation, which obviously does not
affect the Company's incentives to promote and invest in
energy efficiency.
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Idaho Power Company
Why are you proposing a cap to potential rate
increases and how will it be implemented?
The cap is proposed to mitigate some of the
potential negatives - such as an economic downturn - that
might occur with the introduction of a new rate mechanism.
The proposed cap is intended to work exactly like the cap
provided in the PCA.Accordingly, the Commission at its
discretion and judgment can impose the cap or let the rate
change as calculated.Historically, under the PCA mechanism,
the Commission has been reluctant to impose the cap for
various reasons, including the dilution of the price signal
and the fear of another high-cost year.Nevertheless, the cap
is there as a tool for the Commission s potential use.
Why is the deferral being set up similarly to
the PCA deferral?
The PCA has been in place since 1993.One of
the outstanding characteristics of the PCA has been its
symmetrical approach to benefits and costs.The mechanism has
been well tested in a variety of water/cost scenarios and has
proven to work well for all concerned.Accordingly, Idaho
Power believes in applying the same tried and true method to
the FCA.
Is it your opinion that the implementation of a
FCA as proposed by the Company is in the public interest?
Yes.The FCA proposal provides an opportunity
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Idaho Power Company
to conservatively test the concept of a true-up mechanism and
the removal of a disincentive to energy efficiency activities.
The proposal will properly incent the Company to look for
economic opportunities to reduce load.The proposal
incrementally addresses the customer classes that are the
simplest to administer and that have the largest relative
exposure to problems with fixed cost recovery.In addition,
safeguards have been added to protect against the unintended.
Finally, the deferred aspect of the FCA is mirrored after
another mechanism that has been successful since 1993.
Does this conclude your testimony?
Yes.
GALE, DI
Idaho Power Company