20050526Final Order No 29789.pdf

Office of the Secretary
Service Date
May 26, 2005
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC SERVICE
TO TAKE INTO A CCO UNT IN CO ME
TAXES IN COMPLIANCE WITH ORDER
NO. 29601
ORDER NO. 29789
CASE NO. IPC-05-
On April 13, 2005 , Idaho Power Company filed an Application with the Commission
requesting approval of changes to base rate schedules in response to a Commission Order issued
in Case No. IPC-03-, the Company s last general rate case. Following the Commission
grant of Petitions for Reconsideration in that prior case, the Commission issued Order No. 29601
approving a Stipulation resolving calculation of the Company s income tax expense for
ratemaking purposes in that case. In the present Application, Idaho Power asserts that its
Application is a compliance filing in accordance with Order No. 29601 , requiring only
Commission Order for the proposed rates to become effective June 1 , 2005.
BACKGROUND
The Commission issued final Order No. 29505 on May 25, 2004, concluding Idaho
Power s rate increase request. Among the many contested issues determined by the Commission
in that Order was the calculation of income tax expense that would be allowed. The Commission
directed the Company to calculate its income tax expense using a five-year average of historic
income tax payments. The Company had proposed to use existing statutory tax rates. Use of the
average tax expense reduced Idaho Power s annual revenue requirement by $11 505 677.
Idaho Power filed a Petition for Reconsideration challenging the Commission
determination to use an average tax rate rather than the statutory tax rates. On reconsideration
the Company argued that use of an average tax year could violate normalization requirements of
the Internal Revenue Code. The Company offered to present new evidence on the normalization
issue. Because of the significance of the income tax adjustment made by the Commission in
Order No. 29505, the Commission granted reconsideration on the issue and provided the parties.
an opportunity to present new evidence. Order No. 29547. Thereafter, the Company and Staff
began discussing possible settlement of the tax rate issue, and eventually submitted a Stipulation
ORDER NO. 29789
to the Commission to resolve the tax expense calculation.
Stipulation and approved it in Order No. 29601.
The Commission reviewed the
ORDER NO. 29601
The terms of the Stipulation were set forth and reviewed by the Commission in Order
No. 29601. For the period June 2004 through May 31 , 2005 , Idaho Power would compute and
record monthly in a regulatory asset account an amount equal to the additional revenue the
Company would have received through its energy rates if its revenue requirement had been
determined using the statutory income tax rates rather than the five-year historic average rates.
In addition, the Stipulation provided that the Company would include $11 504 677 in its base
rates after June 2005. The Company would not, however, seek to recover in its revenue
requirement any deficiency assessed by the Internal Revenue Service related to a one-time
adjustment associated with capitalized overhead cost tax method change for the years 1987
through 2000.
The Commission noted Idaho Power s argument that use of the proxy tax rate
violates principles against retroactive ratemaking and that violation of the IRS's normalization
requirements could result in serious consequences to the Company. The Commission expressed
concern about the uncertainty created by a resulting IRS challenge and the risks that litigation
could pose to ratepayers. The settlement ensured that ratepayers will benefit from accumulated
depreciation and pay no tax deficiency assessment for the one-time capitalized overhead tax
method change for the years 1987 through 2000. The Commission also noted that avoiding
protracted litigation likely resulting from use of the historic tax rate would lower the cost
ratepayers will ultimately pay for Idaho Power to borrow money to finance ongoing operations.
The Commission also noted that all parties in the rate case either signed the Stipulation or did not
actively oppose it.
The Stipulation approved in Order No. 29601 contains three primary components
related to the tax rate issue. First, Idaho Power s annual revenue requirement would increase by
the amount it had been reduced by use of the average tax rate, but the Company would not
immediately include the increase in rates. Instead, for the period June 2004 through May 2005
the Company would record each month in a regulatory asset account the revenue the Company
would have received had the statutory tax rates been used. Second, the regulatory asset would
then be recovered in rates during June 2005 through May 2006, requiring a one-year temporary
ORDER NO. 29789
adjustment in rates. Finally, Idaho Power s base rates would be adjusted on June 1 , 2005 to
recover the $11 504 677 difference in revenue requirement resulting from application of the
statutory tax rates.
DISCUSSION
There was no dispute in Case No. IPC-03-13 that Idaho Power s income tax
expense is a usual business expense to be included in the Company s revenue requirement. The
Company simply would not have an opportunity to earn its authorized return if its unavoidable
tax obligations were excluded from rates. The Commission s objective, when evaluating a
utility s tax expense in a test year, is to ensure that the tax expense included for recovery is not
larger than necessary to pay actual tax amounts. Thus, the Commission initially accepted Staffs
recommended five-year average as a reasonable predictor of the Company s tax liability in the
future. As the Stipulation and Order No. 29601 demonstrate, however, using the particular
historical average for Idaho Power presented significant risk of litigation and adverse
consequences. The Commission accordingly approved settlement of the tax issue as a reasonable
determinate of the Company s actual tax costs in that case, while providing significant benefit to
ratepayers.
Staff reviewed the Company s Application to ensure it complies with Order No.
29106. Exhibit 3 of the Company s Application shows the calculation of the regulatory asset.
The $11 638 229 regulatory asset Idaho Power has accrued at a rate of $.92209 per MWh
includes interest at one percent. Because April and May 2005 are projections, Idaho Power
proposes to true up the actual recovery and accrual of the regulatory asset that would be reflected
in the Power Cost Adjustment (PCA) next year (June 2006).
To recover the regulatory asset of $11 638 229, Idaho Power proposed a rate based
upon the projected Idaho jurisdictional sales of 12 453 880 MWh. The Company allocated the
income tax expenses to customer classes and special contract customers based on revenues
associated with each class/customer, resulting in a uniform increase of 2.20% over base rates.
This temporary one-year base rate increase will expire on May 31 , 2006. To recover the base
rate change of $11 504 667 on a going-forward basis, the Company proposed to apply a uniform
increase of 2.25% to each customer class and special contract customer with a uniform
percentage increase to the demand and energy billing components.
ORDER NO. 29789
The Commission finds that Idaho Power s filing complies with the Commission
decision and directive in Order No. 29601. The Commission therefore approves the Application
with regard to the amount of the regulatory asset subject to recovery. We will not approve
specific rate spread or rate design in this case, however, because the Commission is also
considering other cases affecting the Company s base and PCA rates. The filing in this case and
in Case Nos. IPC-05-10 (Bennett Mountain) and IPC-05-15 (the 2005 PCA) shall be
consolidated into new rates effective June 1 , 2005. After reviewing the record in the other cases
the Commission will approve new rates in Case No. IPC-05-, taking into account the base
rate increase authorized in this case.
ORDER
IT IS HEREBY ORDERED that the filing made by Idaho Power Company complies
with the Commission s previous Order No. 29601 and is therefore approved. The Commission
will approve new rates in Case No. IPC-05-15 effective June 1 2005.
IT IS FURTHER ORDERED that the temporary one-year base rate increase shall
expire on May 31 , 2006.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7)
days after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code 9 61-626.
ORDER NO. 29789
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this r:1.
day of May 2005.
MARSHA H. SMITH, COMMISSIONER
ATTEST:
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D. Jewell
Commission Secretary
bls/O:IPCE0514 ws
ORDER NO. 29789