20080107Gale rebuttal.pdf

.t.'''l:
esIDA~PORtI
An IDACORP Company
BARTON L. KLINE
Senior Attorney
January 4, 2008
Jean D. Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
P. O. Box 83720
Boise, Idaho 83720-0074
Re: Case No. IPC-E-07-8
General Rate Case Filing
Dear Ms._Jewell:
Please find enclosed for fiing an original and nine (9) copies of the Company's
testimony and exhibits of Wiliam Avera, Steven R. Keen, Lori Smith, Gregory W. Said,
Timothy Tatum, Maggie Brilz, Patrick Harrington, Jeff McCormick and John R. Gale along
with one copy of each designated as the "Reporter's Copy." A compact disk containing the
direct testimony and exhibits of the above-named Idaho Power Company witnesses is also
enclosed.
The Company wil send a copy of this filng to all parties on the attached Service
List.
i would appreciate it if you would return a stamped copy of this letter for my file in
the enclosed stamped, self-addressed envelope.
Very truly yours,r')~u" ~'0
\í
\
Barton L. Kline
BLK:sh
Enclosures
P.O. Box 70 (83707)
1221 W. Idaho St.
Boise. ID 83702
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 4th day of January, 2008, I served a true
and correct copy of the within and foregoing document upon the following named
parties by the method indicated below, and addressed to the following:
Commission Staff
Weldon Stutzman
Deputy Attorney General
Idaho Public Utilties Commission
472 W. Washington (83702)
P.O. Box 83720
Boise, Idaho 83720-0074
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FAX
-X Email Weldon.stutzmanCâpuc.idaho.gov
Neil Price
Deputy Attorney General
Idaho Public Utilties Commission
472 W. Washington (83702)
P.O. Box 83720
Boise, Idaho 83720-0074
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Industrial Customers of Idaho Power
Peter J. Richardson, Esq.
Richardson & O'Leary
515 N. 2ih Street
P.O. Box 7218
Boise, Idaho 83702
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Don Reading
Ben Johnson Associates
6070 Hil Road
Boise, Idaho 83702
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i Email dreading((mindspring.com
Idaho Irrigation Pumpers
Association, Inc.
Eric L. Olsen
Racine, Olson, Nye, Budge & Bailey
P.O. Box 1391
201 E. Center
Pocatello, Idaho 83204
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Anthony Yankel
29814 Lake Road
Bay Vilage, OH 444140
Kroger Co. I Fred Meyer and Smiths
Michael L. Kurtz
Kurt J. Boehm
Boehm, Kurtz & Lowry
36 East Seventh Street, Suite 1510
Cincinnati, Ohio 45202
The Kroger Co.
Attn: Corporate Energy Manager (G09)
1014 Vine Street
Cincinnati, Ohio 45202
Micron Technology
Conley Ward
Michael C. Creamer
Givens Pursley
601 W. Bannock Street
P.O. Box 2720
Boise, Idaho 83701
Dennis E. Peseau, Ph.D.
Utility Resources, Inc.
1500 Libert Street SE, Suite 250
Salem, OR 97302
Department of Energy
Lot Cooke
Arthur Perry Bruder
Office of the Attorney General
United States Department of Energy
1000 Independence Ave., SW
Washington, DC 20585
Routing Symbol GC-76
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Dennis Goins
Potomac Management Group
5801 Westchester Street
P.O. Box 30225
Alexandria, VA 22310-8225
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Dale Swan
Exeter Associates
5565 Sterrett Place, Suite 310
Columbia, MD 20904
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aansari (§ exeterassociates.com
~¿C'Barton L. Kline
401/
t.
JAN -4 PM 4: 19
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPAN FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC SERVICE
TO ELECTRIC CUSTOMERS IN THE
STATE OF IDAHO.
CASE NO. IPC-E-07-8
IDAHO POWER COMPAN
DIRECT REBUTTAL TESTIMONY
OF
John R. Gale
1 Q.Please state your name and whom you are
2 representing.
3 A.My name is John R. Gale, commonly addressed
4 as Ric Gale, testifying on behalf of Idaho Power Company
5 ("Idaho Power" or "the Company") .
6 Q.Are you the same Ric Gale that presented
7 direct testimony before the Idaho Public Utilities
8 Commission (" the Commission") in this docket?
9 A.Yes;
10 Q.Is your role in developing the Company's
11 rebuttal testimony in this case the same as it was in the
12 presentation of the direct case?
13 A.Yes. My role in the development of the
14 Company i s rebuttal testimony was to oversee, manage and
15 coordinate the Company i s rebuttal.
16 Q.Please identify the Company's rebuttal
17 witnesses and summarize the issues they will address.
18 A.Mr. William Avera and Mr. Steven Keen will
19 cover rate-of-return issues including the items Staff
20 witnesses Carlock and English identified as risk-reducing
21 factors. They will not address Staff i s testimony concerning
22 the Fixed Cost Adjustment ("FCA"), which I will cover
23 because of my knowledge of the FCA and the process involved
24 inputting it in place. Ms. Lori Smith will address the
25 accuracy or reasonableness of the Company i s 2007 forecast
GALE, DI REB 1
Idaho Power Company
1 test year and the harmful economic impact to the Company if
2 Staff's revenue requirement recommendations are adopted.
3 She will also respond to the proposed disallowance of the
4 capitalized pension amount and other Staff expense
5 adjustments. The Company will introduce two new witnesses
6 in rebuttal: Mr. Jeff McCormick, the Company's Audit
7 Director i and Mr. Patrick Harrington, the Company's
8 Corporate Secretary. Mr. McCormick will testify to the
9 Company's audit processes and respond to a number of the
10 issues raised by Staff witness Vaughn in her testimony. Mr.
11 Harrington will respond to Staff's proposal to disallow
12 certain legal expenses. Mr. Said will address revenue
13 requirement issues, including the proper matching of
14 revenues, expenses, and rate base. Mr. Said will also rebut
15 the Staff and intervener positions on the Load Growth
16 Adjustment Rate ("LGAR") in the Power Cost Adjustment
17 ("PCA"). Mr. Tatum will address several misunderstandings
18 intervener witnesses Peseau and Reading have regarding the
19 Company's cost-of-service studies and speak to Idaho Power's
20 willingness to explore other approaches. Ms. Brilz will
21 rebut mischaracterizations by interveners regarding
22 distributed generation and time-of-use pricing and will
23 support cost-of-service as a starting point for rate design.
24 Finally, I will discuss the impact of
25 regulatory lag, support the use of the forecast test year,
GALE, DI REB 2
Idaho Power Company
1 address Staff's concerns with its ability to audit a
2 forecast year, and address the need for a true-up when a
3 forecasted test year is used.
4 Q.Have you read the direct testimony submitted
5 by the Idaho Public Utili ties Commission Staff and other
6 interveners to this case?
7 A.Yes, I have read the testimony of all the
8 Staff and intervener witnesses. However, my rebuttal
9 testimony responds primarily to Staff witnesses Randy Lobb,
10 Terri Carlock, and Donn English; Micron Technology witness
11 Dennis Peseau; and Industrial Customers of Idaho Power
12 witness Don Reading. Lack of a direct response on my part
13 or the Company to other witnesses should not be construed as
14 acceptance of their positions.
15 Q.Referring to Mr. Lobb's testimony, on page 9,
16 he noted that the Company did not specifically define the
17 term regulatory lag in its direct testimony. Please do so
18 now.
19 A.I define regulatory lag as the difference
20 between the time period when test-year costs are incurred
21 and the time period when rates are implemented to recover
22 those costs. A few examples of past Idaho Power filings
23 should help illustrate regulatory lag. The Company filed a
24 general rate case on June 30 i 1994 based upon a test year
25 ending December 31, 1993, Case No. IPC-E-94-5 ("the 94-5
GALE, DI REB 3
idaho Power Company
1 Case"). Rates were implemented as a result of that docket
2 on February 1, 1995. In the 94-5 Case there was a lag of 25
3 months from the start of the cost period (January 1, 1993 to
4 December 31, 1993) to rate implementation. The Company
5 filed its next general rate case on October 16/2003, Case
6 No. IPC-E-03-13 (" the 03-13 Case"). This filing was based
7 upon six months of actual data January through June 30, 2003
8 and six months of forecast information for July through
9 December 2003. Rates were implemented as a result of that
10 docket on June 1, 2004 or 17 months after the start of the
11 cost period. Our most recent general rate request, Case No.
12 IPC-E-05-28 ("the 05-28 Case"), used a similar test year
13 approach as the 03-13 Case.
14 Q.Please describe the regulatory lag for the
15 two different test year proposals in this case.
16 A.The original schedule for this case would
17 have produced a rate change in January 2008, so the
18 Company's 2007 test year would have had rates in place 12
19 months after the start of the cost period. The Staff's
20 proposed test year ending June 30, 2007 would have a
21 corresponding 18-month lag between the start of the cost
22 period and the implementation of rates. The Commission
23 granted a Company-requested delay to this proceeding, which
24 has added about 7 more weeks to the regulatory lag.
25 Q.Is regulatory lag economically helpful or
GALE, DI REB 4
Idaho Power Company
1 harmful to a utility?
2 A.The economic impact of regulatory lag could
3 be ei ther helpful or harmful depending upon the
4 circumstances in which a utility finds itself. As I stated
5 in my direct testimony in this case, the impact of
6 regulatory lag is dependent upon the situation. If costs
7 are not going up faster than rates, then the utility is not
8 harmed and may be helped by lag. As I also stated in my
9 direct testimony, Idaho Power is not currently experiencing
10 the circumstances where regulatory lag is beneficial.
11 Rather, Idaho Power is currently experiencing circumstances
12 where regulatory lag is economically harmful.
13 Q.Mr. Lobb expressed his concern that the Staff
14 should be able to view audi table information as part of
15 their review of the reasonableness of a test year. Other
16 Staff witnesses, including Ms. Carlock, echoed this concern.
17 Please respond.
18 A.I take the expressed concerns seriously.
19 During the discovery phase of the current case it became
20 readily apparent that Staff wanted to evaluate the test year
21 by looking at historic data, while it was our hope in the
22 filing of our case that Staff would test the validity of the
23 forecast. It is my contention that the correct test year
24 for this case is the Company's proposed January 1, 2007 to
25 December 31, 2007.
GALE, DI REB 5
Idaho Power Company
1 In future filings, I believe that we can
2 accommodate both the Staff 1 s desire to audit historical
3 information and the Company's need to have a more current
4 test year so that both goals can be obtained either through
5 better understanding of the Company's forecasting methods or
6 other forecasting alternatives. One potential alternative
7 is to create a forecast test year through the escalation of
8 data from a historical test year. The ultimate forecast may
9 not be dramatically different than one produced by the
10 method the Company used in this case, but there would be a
11 starting point to audit.
12 Q.Why did you not use that approach for the
13 2007 test year?
14 A.Prior to making the filing, Idaho Power gave
15 much thought to how it would present its initial forecast
16 test year. Our conclusion was that the best data available
17 is the same financial information that we use to manage the
18 Company. Our rationale was that most of 2007 would be known
19 at the time the Commission would issue an order. As it
20 turned out, with the Company's requested scheduling delay,
21 all of 2007 has occurred and actual 2007 data will soon be
22 fully available. In short, the forecast test year we filed
23 in this case is now in the past.
24 Q.On page 13 of his testimony, Mr. Lobb noted
25 that reduced Company returns could increase borrowing costs
GALE, DI REB 6
Idaho Power Company
1 that ultimately will raise customer rates; however, he
2 believes that implementing a forecast test year might have a
3 higher impact on customer rates than the increased financing
4 costs. Please respond.
5 A.I trust that Mr. Lobb is not comparing a
6 higher rate impact on customers (as a result of
7 appropriately addressing regulatory lag) against increased
8 financing costs (as a result of not appropriately addressing
9 regulatory lag). In my mind that would be illegitimately
10 improving the customers' short-term economic condition at
11 the expense of the Company and its shareholders. If
12 instead, Mr. Lobb is balancing potential overstated costs as
13 a result of poor forecasting, it is my belief that the
14 forecasting concerns of the Staff can be overcome in time
15 through increased familiarity wi th the Company's forecast
16 method, a different approach to developing the forecast, or
17 through an inclusion of a subsequent true-up to actual rate
18 base and expenses.
19 Q.In her direct testimony, Staff witness
20 Carlock makes reference to and quotes from the Bluefield and
21 Hope United States Supreme Court decisions which she
22 represents as establishing the legal standards for
23 determining fair and reasonable rates of return. Has the
24 Idaho Supreme Court also addressed the legal standards to be
25 applied by the Commission in setting just and reasonable
GALE, DI REB 7
idaho Power Company
1 rates?
2 A.Yes 1 I am aware of two cases, both of which
3 involve the predecessor to Rocky Mountain Power, Utah Power
4 & Light Company, in which the Idaho Supreme Court considered
5 the legal standards applicable to establishing utility rates
6 in Idaho. The first case, Agricul tural Products Corporation
7 v. Utah Power & Lighti and the Idaho Public Utilities
8 Commission (Ag Products Case) was decided in 1976. The
9 second case, which involved Utah Power & Light Company v.
10 The Idaho Public Utili ties Commission (the Utah Power &
11 Light Case), was decided in 1981. In the Utah Power & Light
12 case, 102 rd. 282 (1981), the Court stated:
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"This Court's scope of review on appeal in
cases of this type is to determine only if the
Commission regularly pursued its authority and
whether the constitutional rights of the utility
were violated by the fixing of rates which wereunj us t , unreasonabl e and thus conf i s ca tory." (Page
284) .
"Test year data should be adjusted for
known and measurable changes where the changes are
shown to be reliable and certain. The Commission
should include in the rate base all items whichare proven with reasonable certainty to be
justifiably used by the utility in providing
services to its customers." (Page 284).
"Our purpose is not to analyze each step of
the rate-setting process to determine whether the
regulatory agency was correct in its decision, but
to look at the overall effect of the rate fixed to
determine whether the return to the utility is
reasonable and just. As the Supreme Court of the
Uni ted States stated in Federal Power Commissionv. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct.
281, 88 L.Ed. 333 (1944): "It is not theory but
the impact of the rate order which counts. If the
GALE 1 DI REB 8
Idaho Power Company
1 total effect of the rate order cannot be said to
2 be unjust and unreasonable, judicial inquiry under
3 the Act is at an end. The fact that the method4 employed to reach that result may contain
5 infirmities is not then important." (Page 286).
67 While I am not an attorney, I am familiar
8 with the ratemaking concepts the Idaho Supreme Court
9 discussed in these cases and my reading of these two cases
10 indicates to me that the Commission must set rates to
11 provide Idaho Power with a reasonable opportunity to be
12 fairly compensated, taking into consideration Idaho Power 1 s
13 revenues and expenses and the investment that Idaho Power
14 has made to provide electric service during the period of
15 time that the proposed rates will be in effect.
16 Q.Are there any similarities between the
17 utility load and resource conditions that existed when the
18 Ag Products and Utah Power & Light cases were decided and
19 today's conditions?
20 A.Yes, similar to the situation that exists
21 today for Idaho Power 1 in the late 19701 s and early 1980' s
22 Utah Power & Light's loads were growing rapidly and the
23 costs of construction for new infrastructure were also
24 increasing rapidly.
25 In the Utah Power & Light case, the Idaho
26 Supreme Court found that if the utility's rate base and
27 expenses were increasing faster than the utility's revenues,
28 the Commission is obligated to determine an appropriate
GALE, DI REB 9
Idaho Power Company
1 method to compensate for the detrimental effects of
2 regulatory lag and ensure that the utilityl s rates would be
3 sufficient during the period of time in which the rates
4 would be in effect.
5 Q.Please refer again to Ms. Carlock's testimony
6 on page 3 where she quoted from the United States Supreme
7 Court decision in the Bluefield Water Works case. Is there
8 language in that quotation that is pertinent to your
9 testimony?
10 A.My focus is on the first part of the
11 quotation contained in Ms. Carlock's testimony, which
12 states, "A public utility is entitled to such rates as will
13 permit it to earn a return on the value of the property.../f I
14 believe that the Bluefield case indicates that rates, costs,
15 and returns have to be assessed in the relevant time period.
16 If rising investments and expenses exceed rate changes upon
17 their implementation, earnings are eroded and the
18 opportunity to earn an authorized return is lost. This
19 situation is compounded when the LGAR proposed by the Staff
20 eliminates recovery of expenses necessarily incurred to
21 serve load growth at a higher rate than the Company's
22 average rate.
23 Q.If all the adjustments proposed by the Staff
24 are adopted by the Commission, will Idaho Power have a
25 reasonable opportunity to earn its authorized return?
GALE, DI REB 10
Idaho Power Company
1 A.No, putting aside whether the return on
2 equity is 11.5 percent, 10.25 percent, or something else; to
3 constitute just and reasonable rates, the application of the
4 approved rates to the customer loads during the time period
5 when the rates are in effect must give the Company a
6 reasonable opportunity to earn whatever return is
7 authorized. My concern with the totality of the Staff case
8 is that Idaho Power will not have that opportunity under the
9 current and near-term circumstances to earn whatever the
10 Commission determines as the authorized return in this case.
11 Q.Paraphrasing Ms. Carlock's testimony on page
12 17, she stated that she does not believe a case has been
13 made demonstrating the potential harm to the Company
14 resulting from regulatory lag. Do you think that Ms.
15 Carlock has accurately described the Company's case?
16 A.No. The harmful impact of regulatory lag was
17 clearly demonstrated in the Company's direct case in the
18 Company's Exhibit No. 31, the 2008 Jurisdictional Separation
19 Study. Exhibit No. 31 shows that even if the full amount of
20 rate relief requested by the Company was granted by the
21 Commission, continued load growth and additions of new
22 infrastructures would result in Idaho Power being
23 immediately revenue deficient by $23.3 million in 2008.
24 While I believe the Company demonstrated the adverse impact
25 of regulatory lag in its direct case, in rebuttal, Mr. Said
GALE, DI REB 11
Idaho Power Company
1 (through his Exhibit No. 66), Mr. Steven Keen (through his
2 reporting of actual Company equity returns), and Ms. Smith
3 (through her hypothetical and practical calculations) have
4 all provided conclusive evidence of the harmful impact of
5 regulatory lag as a result of the circumstances under which
6 Idaho Power currently finds itself.
7 Q.Staff witness Kathy Stockton on page 21 of
8 her testimony discussed the difficulty that Staff had in
9 auditing the test year proposed by the Company, saying that
10 it was difficult to obtain documentation from the Company in
11 a timely manner. Please respond to her concern.
12 A.It is Idaho Power's intention to provide
13 adequate, appropriate and timely responses to the Staff and
14 other parties during the discovery phase of a regulatory
15 proceeding. This intention was a maj or factor in our
16 requested delay in the case schedule, so that the parties to
17 the case could complete and digest the Company's rate case
18 filing. Our discovery team is professional, experienced,
19 and diligent. In the current proceeding, we have processed
20 over 300 combined audit and data responses containing
21 thousands of pages of information. The two different test
22 year approaches taken by the Company and the Staff added
23 another layer of complexity to an already labor intensive
24 activity. We know that there were instances when the
25 Company did ask Staff to narrow down what we considered
GALE, DI REB 12
Idaho Power Company
1 overly broad requests. Idaho Power does not make these
2 types of requests lightly or routinely, but only does so
3 when the responses to the requests are extremely voluminous
4 or time consuming. As an example, one audit request
5 regarding backup information for work orders would have
6 taken approximately 20 working days to answer as requested.
7 We also know that there is a natural tension between the
8 Staff's perception of our capabilities and our actual
9 ability to deliver information wi thin a tight time frame.
10 The Company is committed to improving the discovery process
11 going forward and will meet with Staff and others
12 immediately following this proceeding to explore ways to
13 improve the audit and data request process.
14 Q.Turning to Mr. English, to what area of his
15 testimony will you be responding?
16 A.I will address the recommendation to lower
17 the Company's rate of return because the Company has
18 implemented the FCA.
19 Q.Briefly describe the FCA.
20 A.On January 27, 2006, idaho Power filed an
21 application and testimony favoring an annual Fixed-Cost
22 Adjustment that "decouples" or separates utility sales from
23 revenue in order to remove the economic disincentive for the
24 utility to invest in energy efficiencies. On March 12,
25 2007, the Commission issued Order No. 30267 authorizing a
GALE, DI REB 13
idaho Power Company
1 three-year pilot of the FCA for residential and small
2 general service customers. This true-up mechanism annually
3 adjusts rates up or down to recover or refund the difference
4 between the fixed costs authorized by the Commission in the
5 previous general rate case and the fixed costs the utility
6 actually recovers from customers during the calendar year.
7 Once this proposed rate mechanism is fully
8 implemented, Idaho Power will be less impacted by decreases
9 in energy sales, thus removing the disincentive for the
10 Company to aggressively pursue opportunities to reduce
11 electric consumption.
12 Q.Why are you addressing this matter instead of
13 Mr. Steven Keen or Mr. Avera?
14 A,I have been the leading Company advocate of
15 the FCA and have shepherded it through several years of
16 workshops into its current implementation as a Commission-
17 approved pilot program.
18 Q.Please respond to Mr. English's
19 recommendation to reduce the Company 1 s rate of return
20 because of the implementation of the FCA.
21 A.I am troubled by this recommendation from a
22 number of reasons. First, the FCA is a three-year pilot
23 program that is just finishing its first year of existence.
24 The pilot only applies to a subset of the Company's
25 customers, residential and small general service.
GALE, DI REB 14
Idaho Power Company
1 Second, the FCA is a decoupling program that
2 replaces one pricing mechanism with another, essentially a
3 rate per customer for a rate per kilowatt-hour. One of the
4 items to be gleaned from the pilot is to determine whether
5 or not this is a better pricing mechanism. At the end of
6 the third quarter of 2007, the FCA was actually recording a
7 rate credit to the Idaho retail customers, thus making Idaho
8 Power shareholders worse off than if the mechanism was not
9 in place. I freely admit it is too soon to judge the
10 ultimate merits of the FCA. It is also premature to start
11 adjusting the Company's rate of return due to the presence
12 of the FCA.
13 Third, the FCA was implemented in order to
14 remove a disincentive to Company investments in energy
15 efficiency and demand-side measures. Mr. English 1 s
16 recommendation is precisely why the environmental groups
17 that participated in the workshops advocated that it does
18 not make sense to remove one disincentive and create another
19 one.
20 Q.Mr. English and Dr. Peseau both discussed an
21 employee wage adjustment to reflect a test year incentive
22 amount that is appropriate to include in the Company's
23 revenue requirement. Please summarize their respective
24 positions.
25 A.Mr. English adjusted the Company's payroll to
GALE 1 DI REB 15
idaho Power Company
1 reflect the targets as proposed by the Company 1 while noting
2 that the target amount has increased from 3.5 percent in the
3 2005 test year to 4 percent in the current test year. He
4 expressed a potential concern if the upward trend continues.
5 On the other hand, Dr. Peseau proposes the disallowance of
6 two-thirds of the target incentive on the basis that two of
7 the components produce benefits that fall primarily to
8 shareholders.
9 Q.Would you speak to Mr. English's concern
10 regarding an increasing target levels for employee
11 incentives?
12 A.In 2005, i daho Power had jus t two components
13 to the customer-based employee incentive 1 one for customer
14 satisfaction and one for budget management. Both of these
15 components were targeted at 1.75 percent for a total
16 customer-based target incentive of 3.5 percent. The Company
17 included the target amount in its 2005 revenue requirement
18 in the 05-28 Case. The parties to the 05-28 Case ultimately
19 settled the case and the Commission approved the settlement
20 stipulation through Order No. 30035. The settlement
21 included the following provision:
22 The parties agree conceptually that it is
23 reasonable to include employee pay-at-risk or employee
24 incentive component in test-year revenue requirements so
25 long as such incentive component is based on goals that
GALE, DI REB 16
Idaho Power Company
1 benefit customers and the amounts payable for achieving the
2 goals are limited to reasonable "target" or medium goals.
3 Senior management pay-at-risk is appropriately excluded from
4 the test year revenue requirement.
5 The Company wanted to include an electric
6 service reliability component when it originally set up the
7 customer-based employee incentives; however, the Company
8 could not establish a reasonable measure in time for 2005.
9 Idaho Power was able to establish an electric service
10 reliability incentive in 2006, thus increasing the customer-
11 based components from two to three and expanding the total
12 target percentage amount from 3.5 percent to 4 percent.
13 As an officer in the Company, I can report
14 that the customer-based incentive piece for 2008 is also
15 targeted at 4 percent and we have no plans at this time to
16 change the target percentage in the future, although the
17 whole incentive package is reviewed annually.
18 Q.Do you agree with Dr. Peseau's contention
19 that two of the three incentive components included by Idaho
20 Power in its test year are of primary benefit to the
21 shareholders?
22 A.No. These components are customer-based
23 incentives. I am in agreement with Dr. Peseau that
24 shareholder-based incentives should be removed from revenue
25 requirement and Idaho Power routinely removes any employee
GALE 1 DI REB 17
Idaho Power Company
1 profit-related or earnings incentives from it test year.
2 The Company also removes from its revenue requirement any
3 incentives paid to or targeted for its senior management,
4 whether shareholder-based or customer-based. Consistent
5 with the 05-28 Case Settlement, only target levels of
6 customer-based incentives are requested to be included in
7 rates. As stated previously, these customer-based
8 incentives are customer satisfaction, budget management, and
9 reliability. Dr. Peseau proposes to remove from the test
10 year the budget management and electric service reliability
11 components. I believe we all could agree that budget
12 discipline is an important management activity and an
13 appropriate area to incent employees. In the current
14 environment, in which the Company is in the position of
15 managing rising costs to the best of its ability and filing
16 rate cases everyone to two years, the benefits of budget
17 management are reflected in rates on an ongoing basis.
18 Regarding electric service reliability, Dr. Peseau points to
19 shareholder benefits in the form of lower power supply costs
20 stemming from increased reliability. In discussing this
21 conclusion with our operational personnel responsible for
22 managing the reliability incentive, I found that there
23 simply is not a relationship between network reliability and
24 lower power supply costs. Further 1 even if Dr. Peseau's
25 contention was true, such benefits would flow through to the
GALE, DI REB 18
idaho Power Company
1 Idaho customers in the PCA.
2 Q.On page 9 of his testimony, in support of his
3 argument that regulatory lag may not adversely impact
4 utili ties, Dr. Peseau refers to the hiatus of general rate
5 case filings by Idaho Power Company prior to its filing of
6 the 03-13 Case in 2003. Dr. Peseau concludes with a
7 statement regarding his lack of awareness of any constraints
8 on Idaho Power that might have impacted its ability to file
9 for general rate relief. Please respond to Dr. Peseau' s
10 conclusion.
11 A.Idaho Power actually was constrained in its
12 ability to file for general rate relief prior to 2003. Mr.
13 LaMont Keen addressed these circumstances at length
14 beginning on page 3 of his direct testimony in the 03-13
15 Case. At that time I had worked on that section of
16 tes timony wi th Mr. Keen and can speak to it now. As
17 mentioned previously, Idaho Power f~led the 94-5 Case in
18 June of 1994 and the Commission issued its final order in
19 February of 1995. Following the 94-5 Case, idaho Power
20 filed for the inclusion in rates of the Twin Falls
21 hydroelectric plant upgrade, which the Commission authorized
22 in August of 1995. This was essentially a single item rate
23 matter that was incrementally added on to the recently
24 completed 94-5 Case.
25 Also in 1995, the Commission approved a rate
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Idaho Power Company
1 moratorium and earnings stability stipulation proposed by
2 Idaho Power and various intervener parties, Case No. IPC-E-
3 95-11. One of the provisions of the stipulation was that
4 Idaho Power would not file for a change to base rates prior
5 to January 2000. As many remember, the western energy
6 crisis began to manifest itself in the second half of 2000
7 and into 2001. As a primary result of that crisis, Idaho
8 Power had several annual PCA adjustments that were more than
9 $200 million above base rates, representing rate increases
10 that averaged more than 40 percent above base rates.
11 Although Idaho Power did not have a legal or regulatory
12 restriction on filing general rate increases in addition to
13 these PCA rate changes, as a practical and political matter,
14 it was simply not possible to do so.
15 Q.Dr. Peseau discussed forecast test years at
16 length in his testimony in part by referring to his Exhibit
17 No. 502, which is the Iowa Utili ties Board report to the
18 Iowa General Assembly entitled Review of Utility Ratemaking
19 Procedures dated January 2004. In his testimony Dr. Peseau
20 indicated that Exhibit No. 502 equates a historic test year
21 with a "traditional" test year. Is that an accurate
22 representation?
23 A.Dr. Peseau' s testimony paraphrased sections
24 of Exhibit No. 502 to draw an incorrect conclusion that the
25 historical test year is the "traditional" test year. In
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Idaho Power Company
1 fact the use of forecast test years has been common in
2 numerous states since at least the 1970s. Idaho is
3 surrounded by states, including Oregon, California, Utah,
4 and Wyoming, that authorize their Commissions to adopt
5 future test years to determine representative levels of
6 revenues, expenses 1 rate base and capital structure.
7 Accordingly, many utili ties in these states are filing rate
8 proceedings with forecast test years. The Oregon Commission
9 has, for many years 1 viewed the future test year as the
10 appropriate choice of test year. The Utah legislature has
11 recently amended existing legislation and statutorily
12 mandates that the Utah Commission give serious consideration
13 to the adoption of the very same type of forecast test year
14 period that Idaho Power is proposing in the instant case.
15 Pacificorp uses the forecast test year in Oregon, Utah, and
16 Wyoming to establish jurisdictional revenue requirement.
17 Commissions and policy makers throughout the
18 country, and particularly in the West, are increasingly
19 recognizing that in an era of heavy construction, future
20 test years are necessary to allow utili ties a reasonable
21 opportunity to earn their authorized rate of return.
22 Utili ties that operate in a period of rapid expansion and
23 rate base growth will chronically underearn if test years
24 are historical in nature and fail to synchronize the
25 matching of expenses and revenues.
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Idaho Power Company
1 Q.Dr. Peseau argued in his testimony that the
2 states that routinely use a forward test year are almost
3 exclusively "highly populous states with very large public
4 commission staffs". He opined that the Idaho Staff is too
5 small to properly administer a forward test year. Do you
6 agree?
7 A.No, I would not characteri ze Wyoming, Utah,
8 and Oregon as states that that are "highly populous states
9 with very large public commission staffs". In researching
10 the application of forward test years in the west, it is my
11 understanding that the staff resource load is not increased,
12 but rather the focus of the staff investigation changes.
13 For example, there are five members of the
14 Public Service Commission of Wyoming staff assigned to the
15 Rocky Mountain Power general rate request docket. In
16 Oregoni the Public Utility Commission assigned approximately
17 the same number of Staff to the 2005 Idaho Power rate case
18 (which utilized a historic test year) as it did to the 2005
19 PacifiCorp rate case (which utilized a future test year) .
20 There also exists a classic Department of Energy study by
21 R. E. Miller which reports that the future test year method
22 has been found to reduce greatly the amount of time and
23 personnel resources involved in a rate case and to extend
24 the scope and quality of the analyses performed.
25 Q.Dr. Peseau spoke often in his testimony of
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Idaho Power Company
1 the importance of the "matching" principal. Do you agree
2 that the matching principal is important?
3 A.I agree that the effort to match investments,
4 capital return, expenses, and revenue in a test year is an
5 underlying principle that governs rate proceedings.
6 However 1 I also believe it is critical that the period in
7 which rates will be effective and the test year used to set
8 rates match each other. That is the essence of the
9 Bluefield case quotation contained in Ms. Carlock's
10 testimony that I discussed previously.
11 In practice, in every rate case, a test year
12 must be selected. Whether the test year selected is
13 historical, future or some hybrid, the most important
14 attribute of the selected test year should be that it
15 accurately reflects the best expectation of the conditions
16 that will prevail when the rates will be in effect. When
17 future conditions are expected to significantly differ from
18 historic experience, the only logical approach is to
19 forecast all of the components of revenue requirement.
20 Idaho Power has developed a forecast from the
21 bottom up, incorporated approved operating and capital
22 budgets which are in fact used to manage the business,
23 consistently applied assumptions and use of trends across
24 all aspects of the forecast, and finally the forecast
25 results compare to information provided to third parties. I
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idaho Power Company
1 am confident that in this instance a forecast test year is
2 reasonable in light of the whole record and that the Company
3 has reasonably demonstrated 100 percent of its capital and
4 expense reques ts .
5 Q.In your testimony, you spoke of the use of
6 the forecast test year as a tool to remove the detrimental
7 effects of regulatory lag. While the Iowa Utili ties Board
8 in its report to the Iowa General Assembly (Micron Exhibit
9 No. 502) recognized the eroding effects of regulatory lag on
10 a utility's revenue streami the Board chose not to recommend
11 a future test year option. Please explain why.
12 A.In its investigation the Iowa Utili ties Board
13 found that most concerns regarding the negative effects of
14 regulatory lag had been addressed by other Iowa statutes.
15 In fact Iowa has numerous statutes or "tools" in place that
16 exist to reduce the effect of regulatory lag. For example,
17 Iowa allows for updates of infrastructure investment nine
18 months beyond a test year and allows utilities to place
19 temporary rates into effect without Board approval wi thin
20 ten days of a filing for a general rate increase. The Iowa
21 Utilities Board has authority to allow for the automatic
22 adjustment of rates and charges for sudden and volatile
23 costs, and the Board has approved 100 percent recovery of
24 fuel and transportation costs for electricity generation.
25 In addition, the implementation of two new Iowa laws
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Idaho Power Company
1 allowing regulatory assurances for capital investment
2 decisions and for environmental improvements and the ability
3 to consider cost of capital changes after the test year
4 period go a long way to alleviate concerns related to
5 regulatory lag in Iowa and therefore are useful regulatory
6 "tools" . These regulatory tools would be very helpful to
7 have in Idaho given the current and forecasted energy and
8 economic situation.
9 Q.Dr. Peseau obj ects to the use of forecast
10 test years because he believes that utili ties will be
11 tempted to abuse the system. He calls this "systemic bias".
12 This Commission has often approved the use of a historical
13 test year adjusted for known and measurable changes. Does a
14 historical test year always produce a totally objective and
15 unbiased revenue requirement?
16 A.No. Every type of test year is subject to
17 criticism and objection if a rate increase is proposed.
18 When an historical test year is proposed, the arguments
19 would simply shift from issues surrounding forecasting
20 technique to the choice of known and measurable adjustments.
21 Utili ties are often criticized in their choice of an
22 historic test year; opponents argue that the utility has an
23 incentive to exaggerate its costs in the period under
24 review. Every type of test year has its advantages and
25 challenges. Fortunately the standard for setting rates in
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idaho Power Company
1 Idaho is not perfection, as the idaho Supreme Court noted in
2 the Utah Power & Light case I quoted earlier.
3 Idaho Power is not asking for a blanket
4 acceptance of its forecast calculations but rather
5 acceptance of the concept of a forecast test year as being
6 an appropriate tool to provide timely recovery for the
7 increased level of expendi tures that are required to serve
8 the growing Idaho load.
9 Q,Dr. Peseau likens the forecasts required of a
10 future test year to audacious divining of the future. Do
11 you agree?
12 A.No. Regardless of which test year is
13 adopted, the ratemaking process is inherently prospective
14 and requires reliance upon proj ections. Whether the test
15 year is completely historical or based totally on forecasted
16 results, the ratemaking process requires an informed
17 determination of what conditions will prevail in the future.
18 Idaho Power has used its best financial and operational
19 information to construct its forecast test year and is well
20 aware that it is putting its credibility on the line.
21 Beginning with this rate filing, Idaho Power believes it can
22 establish its ability to present reliable test year
23 forecasts that will result in just and reasonable rates.
24 While Dr. Peseau may argue that perfection is the ultimate
25 goal with regard to forecasting, Idaho Power's goal is
GALE 1 DI REB 26
Idaho Power Company
1 considerably less lofty. Our goal is the production and
2 support of a reliable and reasonable test year forecast that
3 provides the Commission with information needed to establish
4 just and reasonable rates.
5 Goals aside, the fact remains that the
6 volatile environment in which electric utili ties operate
7 today and the increasingly capital intensive nature of their
8 business, indicates the need for new solutions, including a
9 reexamination of a regulatory process that would reject the
10 use of forecast test years in order to preserve the concepts
11 of comfort, convenience and administrative ease.
12 Q.Let's now move on to Dr. Reading's f orecas t
13 test year concerns. Beginning on page 2 of his testimony,
14 Dr. Reading notes that in the current case the Company
15 departed from prior practice by filing a full 12-month
16 forecast test year, while in the previous two cases, the
17 Company filed a six-month actual and a six-month forecast
18 test year. He points out in his testimony that in prior
19 cases the six months of forecast were "trued-up" at the end
20 of the case. Was it Idaho Power 1 s proposal in ei ther of
21 these prior cases to true-up the forecast periods?
22 A.No. The Company's test year proposal in both
23 instances was six-months actual and six-months forecast.
24 There was no proposal to true-up the forecast data. We
25 realized of course that the Commission would have the
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Idaho Power Company
1 benefit of seeing actual plant and expense information for
2 the six-months of forecast data and taking that information
3 into consideration before issuing a final order. However,
4 it was not our proposal and we never proposed that it was
5 necessary to true up ei ther tes t year. Ul tima tely the
6 inclusion of more recent plant and expense data in the final
7 order of the 03-13 Case and the 05-28 Case Settlement were
8 not objectionable to the Company.
9 Q.What is the Company's position on the notion
10 of a true-up to the proposed forecast test year?
11 A.i do not think that a true up of forecast
12 information is needed to set rates that are reflective of
13 the costs expected to be incurred during the time that the
14 rates are in place. Knowing how often the Company will be
15 before this Commission over the next five years, we
16 concluded that unreasonably inaccurate forecasting would
17 become readily apparent to all the parties. With the
18 challenge we have to earn authorized returns, any incentive
19 to "game" the forecast would be short-term gain and long-
20 term folly. However, as a practical matter, if true-ups
21 provide a comfort level to the Commission and customers that
22 would allow the Commission to accept a full forecast test
23 year, then Idaho Power stands qui te ready to accept the
24 symetrical application of a true-up to a forecast test
25 year.
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Idaho Power Company
1 Q.Please sumarize Idaho Power's rebuttal
2 position to the collective recommendations of the Staff.
3 A.This is idaho Power 1 s third general rate case
4 since 2003. We are planning a 2008 filing at this writing
5 and see the need for additional general rate cases in the
6 next several years as we meet the challenges of both our
7 industry and our service territory. As a result our
8 operations and results will be very transparent to both the
9 Commission and customers. The Company is seeking a
10 reasonable opportunity to earn its authorized rate of return
11 during this time period. It is the Company's opinion that
12 this opportunity can be best achieved through use of the
13 forecast test year proposed - January 1, 2007 to December
14 31, 2007 - to decrease the time period between cost
15 incurrence and rate implementation, and the establishment of
16 a moderate LGAR that will also allow the Company to better
17 match power supply expenses with PCA rate recovery.
18 Q.Have you concluded your direct rebuttal
19 testimony?
20 A.Yes.
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Idaho Power Company