20070611Gale Direct.pdf

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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 ELECTRIC CUSTOMERS IN THE STATEOF IDAHO.
CASE NO. IPC-O7-
IDAHO POWER COMPANY
DIRECT TESTIMONY
JOHN R. GALE
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Please state your name and business address.
My name is John R. Gale and my business
address is 1221 West Idaho Street, Boise, Idaho.
By whom are you employed and in what
capaci ty?
I am employed by Idaho Power Company (the
Company) as the Vice President of Regulatory Affairs.
please describe your educational background
and business affiliations.
I received a BBA in 1975 and an MBA in 1981
from Boise State University.I maintain a close affiliation
with the university and serve on the College of Business and
Economics ' Advisory Council and on the Board of Directors of
the Alumni Association.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 Rates and Regulatory Affairs Committee , which is
the committee that is concerned primarily with regulatory
issues and ratemaking methods.I am the current Vice Chair
of this commi ttee.
please describe your work experience.
From 1976 to 1983, I was employed by the
State of Idaho primarily as an analyst in the Department of
Employment.In October 1983, I accepted a posi tion at Idaho
Power Company as a Rate Analyst in the Rate Department.
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Idaho Power Company
ini tially worked on rate design tariff administration , and
line extension issues.In March 1990,I was assigned to the
Company s Meridian District Office where I held the position
of Meridian Manager , which was a one-year cross training
posi tion established to provide corporate employees with an
extensive field experience.I returned to the Rate
Department in March 1991 and in June I was promoted to
Manager of Rates.In July 1997 I was named General Manager
of Pricing and Regulatory Services.In March 2001,I was
promoted to Vice President of Regulatory Affairs, my current
posi tion.
As Vice President of Regulatory Affairs,
oversee and direct the acti vi ties of the pricing and
Regulatory Services Department.These acti vi ties include
the development of jurisdictional revenue requirements,the
oversight of the Company s rate adjustment mechanisms,the
preparation of class cost-of-service studies,the
preparation of rate design analyses, and the administration
of tariffs and customer contracts.In my current position
I have the primary responsibili ty for policy matters related
to the economic regulation of Idaho Power Company.I have
testified frequently before the Idaho Public Utili ties
Commission (the Commission) on a variety of rate and
regulatory matters.I have also testified before or
submi tted direct testimony to the regulatory commissions in
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Nevada and Oregon , the Federal Energy Regulatory Commission
(FERC) , and the United States Senate Committee on Energy and
Na tural Resources.
What role did you play in the preparation of
the general rate case?
My role in the preparation of the general
rate case was to oversee, manage , and coordinate the filing
and to make the policy decisions related to regulatory
matters in consultation with Mr. LaMont Keen, our Company
President and Chief Executive Officer , along wi th other
senlor officers wi thin Idaho Power.
What was your interaction with the other
Company witnesses?
I discussed the content and preparation of
the wi tnesses ' testimony and exhibits.Ms. Maggie Brilz
(Director of Pricing), Mr. Greg Said (Manager of Revenue
Requirement), and Mr. Barton Kline (Senior Regulatory
Attorney) assisted me in this process.Wi th each successive
general rate filing during the 2000s , Ms. Brilz - in the
area of rate design - and Mr. Said - in the area of revenue
requirement - have increasingly assumed leadership roles in
the development of Idaho Power Company s positions and
recommendations related to their areas of responsibili ty.
Please provide an overVlew of the Company
general rate case filing.
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Idaho Power Company
The Company begins the presentation of its
case wi th Mr. LaMont Keen the Chief Executive Officer of the
Company.He addresses Idaho Power s current financial
si tua tion and need for general rate relief.
The next witness is Mr. William Avera, who
has been retained by the Company as the return on equi
(ROE) expert.Mr. Avera also performed this function for
Idaho Power in the last three general rate cases in Idaho
and has also testified on the Company s behalf before the
Oregon Public Utility Commission and the FERC.Mr. Avera
discusses risk factors relevant to Idaho Power Company,
performs calculations of ROE appropriate for the Company
using standard financial methodologies, and recommends a
reasonable ROE range appropriate for Idaho Power.In thi
proceeding, Mr. Avera s ROE range is from 11.2 to 12.
percent.
Mr. Steven Keen, Idaho Power Company s Vice
President and Treasurer, builds on Mr. Avera
recommendations by more specifically addressing the relevant
risk factors impacting the Company.Mr. Keen selects an
11.5 percent ROE point estimate as the appropriate cost of
equity, supports the cost of Idaho Power s long-term debt,
and includes the long-term debt and the 11.5 percent ROE in
the test year capital structure to derive the Company
proposed overall rate of return.
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Idaho Power Company
Ms. Lori Smith, the Company s Vice President
of Finance and Chief Risk Officer , next testifies to the
financial inputs that are the starting point for the 2007
tes t year.Ms. Smith describes the preparation of the test
year forecast and the system adjustments to the test year
data associated with deductions to certain expenses not
allowed in rates, annualizing adjustments to expenses and
rate base, and other adjustments to revenues, expenses, and
rate base related primarily to past Commission orders.
Mr. Said provides the normalized net power
supply expenses for the test year and addresses the
requisi te changes to the Company s Power Cost Adjustment
(PCA) as a result of changing the normalized net power
supply expenses in Idaho Power Company s base rates,
including the Company s recommendation for the Load Growth
Adjustment Rate incorporated in the PCA.Addi tionally, Mr.
Said supports the calculation of offsetting revenues
associated with the annualizing adjustments made to the test
year.Mr. Said also testifies as to regulatory lag impacts
on the Company s ability to earn its authorized return in
2008.
Ms. Celeste Schwendiman , a Senior Pricing
Analyst, incorporates Ms. Smith's financial data, Mr. Steven
Keen s overall rate of return recommendation, and Mr. Said'
normali zed net power supply expenses , along wi th other
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Idaho Power Company
selected inputs and prepares the jurisdictional separation
study (JSS).The JSS, as its name states, separates system
values for rate base , revenues , and expenses for each state
and the federal jurisdiction through an assignment and
allocation process that is described in detail in Ms.
Schwendiman s testimony.One result of the JSS is the Idaho
retail jurisdictional revenue requirement, which is the
Company s best representation of its expected annual cost to
serve its Idaho retail customers.The 2007 Idaho
jurisdictional revenue requirement is $681.8 million.
order to obtain this amount, Idaho s annual retail revenues
will need to increase by $63.9 million or 10.35 percent.
Mr. Timothy Tatum, a Senior Pricing Analyst,
uses the Idaho retail jurisdictional output from the JSS as
developed by Ms. Schwendiman and further separates costs by
customer class and special contract in preparing four class
cost-of-service studies.Two of the studies prepared by Mr.
Tatum present the more traditional cost-of-service approach
used by Idaho Power in past proceedings , while the other two
studies modify the traditional approach in a manner that
allocates the costs of the Company s generation peaking
facili ties differently than its base-load resources.
these four studies, Mr. Tatum recommends the approach termed
3CP/ 12CP" be used as the appropriate starting point for
rate spread (the process of spreading the Idaho
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jurisdictional revenue requirement to the customer classes
and special contract customers) and rate design (the
ul timate calculation of rates for customers) .
Ms. Brilz supports the Company s position on
the appropriate rate spread to the customer classes and
special contract customers and proposes price changes to the
customer classes that are consistent wi th the Company
ratemaking objectives and that recover the Company s Idaho
revenue requirement.Ms. Brilz also addresses changes to
Idaho Power s General Rules and Regulations included in the
Company s tariffs.
My testimony concludes the Company s direct
case and focuses on the regulatory policy matters associated
wi th this filing.
What are the regulatory policy matters
relevant to the Company s request?
In my view, the important regulatory policy
decisions related to this general rate case filing are:(1)
the selection of a forecast test year (2) test year
adjustments,(3) the rate spread approach , and (4) the rate
design proposals.Of these, the most fundamental policy
decision in the Company s filing is the decision to use a
forecast test year.Because of the importance of this
particular policy matter to the Company s financial health
and abili ty to finance electric plant in the future, all
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other policy matters - including the forecast test year
approach - have purposefully been undertaken wi th a
conservati ve approach.
What is the Company s test year?
The Company s test year is the 12 months
ending December 31 , 2007.
Why did you choose 2007 as the test year?
Using a test year of 2007 to establish rates
for 2008 provides the most recent information available as
to the Company s expected expenses and investments, while
enabling the Commission and parties to the case an
opportuni ty to see how most of 2007 is actually developing
in terms of investments and expenses prior to an order being
issued.
What distinguishes the approach taken in
developing the 2007 test year proposed by the Company in
this proceeding from the approach taken in 2003 and 2005?
In both 2003 and 2005, Idaho Power filed for
general rate relief on test years that combined six months
of actual information with six months of forecast
information.This approach is commonly referred to as a
split test year The 2007 filing is a full 12-month
forecasted test year.
Has the Company previously always filed a
spli t test year?
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Idaho Power Company
No.To the best of my knowledge , 2003 was
the first time that the Company filed wi th anything other
than an historical test year.By historical test year I
mean that all information was based on actual results.
Certainly the two earlier filings with which I have personal
knowledge - the 1983 and 1993 test years - were based on an
historical test year.
Why did the Company move to the split test
year approach in 2003?
By 2003 Idaho Power could see the upward
ramping of costs for a sustained period of time.It was
becoming apparent that the combination of a growing customer
base and higher marginal costs for most aspects of our
business was going to push costs higher.In thi
environment, regulatory lag becomes a significant issue to
the Company.The Company believed that moving to a full
forecast test year at that time was too bold a step and
instead chose the split year approach, which reduced
regulatory lag by six months yet still provided access to
the actual information prior to a final order by the
Commission.Addi tionally, Idaho Power believed that the use
of a split year could provide a bridge to a full forecast
year in the future.
Did the Company accomplish its regula tory
obj ecti ves by using a six-month actual/six-month forecast
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Idaho Power Company
test year in 2003 and 2005?
In part, Idaho Power was able to take a SlX-
month bite out of regulatory lag by implementing rates on
June 1 , 2004 and June 1 , 2006 that corresponded to cost
periods beginning January 1, 2003 and January 1, 2005.
the other hand, the Company was not successful in ei ther
2003 or 2005 in gaining the Commission s acceptance of the
test year as filed as in both instances the forecast
information was trued up to actual results as part of the
rate determination.Essentially, the historical test year
remained in place.
Why is movlng away from the use of a
historical test year important?
Ul timately, Idaho Power needs a test year
approach that is both timely and reflective of the costs
tha t the Company can reasonably expect to incur going
forward.An historical test year is by defini tion not
timely and may not be a reflection of costs going forward.
As an example of how actual costs might not be reflective of
reasonably expected ongoing costs, one could look at Idaho
Power s actual net power supply costs for almost any one
year and conclude that - although the dollars may represent
what actually occurred that year - it would not be
appropriate for setting future rates.Similarly, a test
year based on a reasonable forecast may be more indicative
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Idaho Power Company
of the costs the Company will be experlenclng during the
time rates are in place.
Why is regulatory lag such a critical lssue
to Idaho Power at this time?
To begin with , I would like to reiterate that
it is important to more parties than just Idaho Power.
Mr. Keen notes in his testimony, it is also extremely
important to those who invest and lend money to the Company
testimony.From the Company s standpoint, during periods of
escalating costs where marginal costs are higher than
average costs, new rates are already inadequate by the time
they go into place.This impact is pointed out in Mr.
Said's testimony.If this situation continues for a
prolonged period of time , the Company will be denied a
reasonable opportunity to earn its authorized rate of
return.
Is regulatory lag always harmful to a
utili ty?
No.The impact of regulatory lag is
dependent upon the si tuation - if costs are not going up
faster than rates, then the utility is not harmed and may
even be helped by lag.Unfortunately, Idaho Power is not in
that situation and will not likely be for the foreseeable
future.Idaho Power rates - even with the split test year
approach pursued in 2003 and 2005 - trail the start of the
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Idaho Power Company
cost period they are intended to reflect by 17 months.
Is the Company s approach to preparing its
2007 test year similar to its approach in preparing the 2005
test year used in the last rate case?
Yes it is.Idaho Power has taken the same
approach to putting together the 2007 test year information
as it did in putting together the 2005 test year , with the
exception that the inputs are derived using 12 months of
forecast data instead of six months of forecast data.Since
the current filing comes so soon after the last general rate
case , which in turn came quickly after the 2003 general rate
case, it would be accurate to view this filing as a true-
of the Company s expenses and investments since 2005.
Please describe the significant adjustments
made to the 2007 test year.
The annualizing adjustments to rate base for
2007 are related to electric plant-in-service items closing
to book during 2007.These items and their related impacts
(such as depreciation and property tax) were included for
the full 12 months.The Company has made its typical
adjustments to the test year operating revenues consistent
wi th previous Commission orders.Opera ting revenues are
primarily restated through the normalizing adjustments to
the Company s net power supply expenses as a result of
mul tiple water condi tions discussed by Mr. Said.Other
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known changes to tariffs or contracts were also included
ei ther in the test year revenues or adjustments to the test
year.Sales revenues for the test year 2007 were based on
estimated weather normalized retail sales for 12 months.
In response to the Commission s past
directive to identify all increased revenues associated with
annualized plant investment,Idaho Power proposes in Mr.
Said's testimony a specific methodology to compute
offsetting revenues in its 2007 test year for annualized
plant items.A description of the methodology for computing
offsetting revenues is contained in Mr. Said's testimony.
Are there any additional decisions related to
the development of the Company s revenue requirement that
are of significance?
Yes,there are several decisions that are
described and supported in Mr. Said's testimony that I
believe warrant additional emphasis.The first is the
inclusion of the Horizon Wind purchased power agreement and
the additional purchased power agreements from Qualifying
Facili ties in the development of the Company s net power
supply expenses.The Company s decision to include these
reflects an expectation that these contracts will be a
contributing part of the resource portfolio by the start of
2008.This decision is also a conservative one from a
customer standpoint in that the net effect of including the
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contracts is to lower net power supply costs.The Company
also took a conservative approach in its inclusion of Plant
Held for Future Use, which is also described and supported
by Mr. Sa i d .This proceeding is the first instance Idaho
Power has included these expenses since legislative changes
have enabled the Commission to allow Plant Held for Future
Use in rate base.The Company followed a prescribed and
thoughtful approach in determining which properties to
include in the test year.
Turning to an adj us tmen t tha t wa s no t made,
how did Idaho Power address pension costs in its 2007 test
year?
In Idaho Power s 2003 general rate case,
Order No. 29505 reduced Idaho Power pension plan expenses to
zero and stated that the issue could be reevaluated in the
next general rate proceeding (page 21) .Because the
circumstances have not materially changed,the Company has
not made an adjustment to include a normalized level of
pension costs for the 2007 test year.At some point in the
in termedia te future,Idaho Power will once again be making
cash contributions related to funding pension costs.On or
before that time, we will recommend to the Commission an
appropriate ratemaking treatment of pension costs going
forward; however , at this time there is no revenue
requirement impact in the current filing related to penSlon
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expense.
Do you believe the filed test year lS
representative of the Company s investments, revenues, and
expenses and appropriate for ratemaking purposes?
Yes.I believe it is a reasonable estimate
of the Company s cost to serve our Idaho retail customers
and can be relied upon to set rates for the relevant time
period beginning January 1 , 2007 and will be understated for
the time period beginning January 1 2008.
What has been Idaho Power s policy with
regard to rate spread and rate design proposals?
Idaho Power has consistently advocated for
rate spread among the customer groups and for component
prlclng wi thin the customer groups to be primarily cost-
based.Idaho Power s approach in this case is to once agaln
spread the revenue requirement to the customer classes and
special contract customers based upon cost-of-service
resul ts subj ect to some constraints on the total percentage
impact to the customer groups.The specifics of the
proposed rate spread and an exhibit delineating the target
revenue requirements are contained in Ms. Brilz ' s testimony.
Idaho Power s rate structure proposals in this case are
purposefully not dramatic in light of the Company s forecast
test year proposal and a series of other rate actions
unrelated to the general rate case.However , as the officer
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responsible for regulatory matters , it is reasonable to
expect that Idaho Power will evaluate existing and potential
ra te designs in light of Idaho Power energy efficiency
and conservation ini tiati ves and wherever possible make
proposals consistent wi th these ini tiatives in the next
general rate filing.
Idaho Power has stated on a number of
occasions that the Company is in the middle of what may be a
serles of general rate actions.Why is this the case?
The Company has to address the rising capi tal
and operating and maintenance costs associated wi th its
service territory growth and replacement of existing
infrastructure described by Mr. LaMont Keen and other
Company witnesses.The Company also will be faced wi th the
relicensing costs re~ated to the Hells Canyon Complex , along
with the implementation of its Integrated Resource Plan,
which will necessi tate investments in demand-side resources,
supply-side resources, and transmission construction.
Compliance costs are increasing for Idaho
Power and other utili ties, as they must conform to the legal
requirements of the Sarbanes-Oxley Act of 2002 (pertaining
primarily to financial reporting) and the FERC' s Standards
of Conduct Rules (pertaining to interactions between a
utili ty ' s energy affiliate business function and its
transmission business function).Both of these new
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requirements increase costs through additional monitoring,
audi ting, and reporting as well as the separation - and
sometimes duplication - of business functions.
Costs are also anticipated to increase as
Idaho Power plans to maintain and improve its service to
customers during a time when much of its workforce is
reaching retirement age.To a large extent, we do not know
now how these costs will manifest themselves - increasing
competitive bidding for essential jobs, more extensive use
of apprentice-type arrangements , dual filling of key
posi tions , retention incentives (the reverse of early
retirement programs) etc.
What is the Company s regulatory strategy
during this time of increasing costs?
As stated on a number of occasions,Idaho
Power plans to file for rate relief more frequently and in
smaller percentage terms than has been our custom in recent
This strategy will help the Company adjustdecades.
revenues to keep pace wi th increasing costs, while avoiding
the large increases that accumulate when rates are not kept
Finally,from my standpoint,I would like to seecurren t .
some of the controversy removed from general rate cases
through improved familiarity and understanding of the issues
and the ability to reach some sustained resolution when
possible.
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your oplnlon that the granting the
rate relief proposed the Company the public
interest?
Yes.
Does this conclude your testimony?
Yes,does.
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Idaho Power Company