20080107Harrington rebuttal.pdf

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IDAHO PUBUC
UTILITIES COMMISSIO;.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPAN FOR
AUTHORITY TO INCREASE ITS RATES
AN CHAGES FOR ELECTRIC SERVICE
TO ELECTRIC CUSTOMERS IN THE STATE
OF IDAHO.
CASE NO. IPC-E-07-8
IDAHO POWER COMPAN
DIRECT REBUTTAL TESTIMONY
OF
PATRICK A. HARRINGTON
1 Q.Please state your name and business address.
2 A.My name is Patrick A. Harrington and my
3 business address is 1221 West Idaho street, Boise, Idaho.
4 Q.By whom are you employed and in what
5 capacity?
6 A.I am employed by Idaho Power Company as a
7 Senior Attorney and the Corporate Secretary.
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Q.Please describe your educational background?
A.In 1982 I received a Bachelor of Science
10 Degree in Political Science from the University of Idaho.
11 In 1985, I received a Juris Doctorate from the University of
12 Idaho College of Law.
13 Q.Please describe your business experience with
14 Idaho Power Company.
15 A.I started my employment with Idaho Power
16 Company in 1986 as a staff attorney. In 2003 I was promoted
17 to Senior Attorney. In 2007 the Company's Board of
18 Directors elected me Corporate Secretary. In that capacity
19 I am responsible for maintaining a numer of corporate
20 records and monitoring compliance with various rules and
21 regulations applicable to public companies.
22 Q.What is the scope of your testimony in this
23 proceeding?
24 A.In his direct testimony, Staff witness Donn
25 English recommends that the Commission remove approximately
HAINGTON, DI-REB 1
Idaho Power Company
1 $208,000.00 in legal expenses from the total amount of
2 utility expense Staff included in its test year. i will
3 explain why Mr. English's recommended disallowances are
4 inappropriate and should not be accepted by the Commission.
5 i will explain why I believe that the Commission should look
6 at legal expenses as a whole rather than piecemeal as
7 recommended by Mr. English. Finally, to support my
8 contention that legal expenses should not be considered on a
9 piecemeal basis, i will discuss some examles of major legal
10 issues the Company will be addressing in the next few years.
11 Q.What are the legal expenses Mr. English
12 addresses in his testimony?
13 A.The legal expenses Mr. English addresses in
14 his testimony are the fees charged by outside legal counsel
15 performing legal services for Idaho Power. The expenses
16 addressed by Mr. English do not include the costs of Idaho
17 Power's in-house legal counselor work performed by in-house
18 attorneys.
19 Q.Mr. English removed approximately $208,000.00
20 in legal expenses incurred by Idaho Power during Staff's
21 proposed July 1, 2006 - June 30, 2007 test year. Compared
22 to a total expenditure of approximately $7,500,000.00 for
23 legal expenses during calendar year 2007, this is a fairly
24 small adjustment. Why does the Company feel it is necessary
25 to address this small amount of money?
HAINGTON, DI - REB 2
Idaho Power Company
1 A.I recognize that the amount in question is
2 small when compared to the total amount of legal expense.
3 However, as Mr. English notes in his testimony, the
4 Commission has, on several occasions in the past reduced
5 total legal expense during a test year on the grounds that a
6 particular legal expense is non-recurring and therefore
7 should be excluded. As I discuss later in my testimony,
8 Idaho Power is currently involved in some significant
9 regulatory proceedings and litigation that will extend over
10 a period of years and I would not like to see the
11 elimination of certain non-recurring legal expenses
12 misrepresent the fact that the Company's overall legal
13 expenses have increased substantially and are expected to
14 continue to increase for the foreseeable future.
15 Q.Mr. English indicates that disallowing non-
16 recurring expense items is a normal ratemaking convention.
17 Do you disagree?
18 A.My legal practice at Idaho Power does not
19 involve ratemaking. I am not familiar with many of the
20 ratemaking conventions that may be common practice in
21 setting utility rates. That being said, it is my
22 understanding that the intent of a utility rate case is to
23 set rates based on a level of expense that is most likely to
24 match the level of expense the utility will actually incur
25 during the period of time that the rates are in effect.
HAINGTON, DI - REB 3
Idaho Power Company
1 Stated another way, the amount of expense attributed to
2 legal fees in a test year should be based on the legal
3 exense the Company can expect to incur during the period of
4 time that the newly set rates are in effect. Using that as
5 my assumption, Mr. English's exclusion of non-recurring
6 legal expenses does not reflect the reali ty of how legal
7 expenses are incurred by businesses like Idaho Power.
8 Acceptance of these exclusions will result in rates being
9 set at a level that will not allow the Company to recover
10 all of the legal expenses it will incur during the period
11 when those rates are in effect.
12 Q.Please elaborate.
13 A.Mr. English has identified legal fees
14 associated with cases which he excludes because he has
15 determined they are non-recurring, extraordinary exenses.
16 He states that removing the expenses associated with cases
17 that are not expected to reoccur in the future is a norml
18 ratemaking convention.
19 The fact is, legal expenses for any business
20 of any size are a recurring series of "extraordinary"
21 events. Any business, Idaho Power included, is continually
22 faced with litigation, new or revised statues and regulatory
23 oversight requirements. Like other businesses, Idaho Power
24 is continually presented with a stream of legal issues, each
25 of which must be dealt with on a case-by-case basis. Each
HAINGTON, DI-REB 4
Idaho Power Company
1 case or regulatory proceeding, or response to a regulation
2 inquiry is unique and extraordinary, but as a group they
3 represent an ongoing, ordinary expense of operating a
4 business. The application of the regulatory convention of
5 excluding expenses incurred to address non-recurring or one-
6 time issues in a test year really should not apply to legal
7 expense because this approach does not reflect the fact that
8 new or expanded legal proceedings or requirements will
9 invariably arise which will involve equal or greater legal
10 expenses than the concluded matters. In short, it is not
11 appropriate to exclude old (i. e. completed) legal matters
12 without factoring in new or expanded legal matters which
13 will take their place.
14 For example, Mr. English removed $58,057.00
15 for legal fees pertaining to the merger of PacifiCorp and
16 MidAerican Holding Company. He excluded this amount
17 because "a merger of this magnitude will not likely occur
18 every year and it would be inappropriate for the Company to
19 recover this amount anually." While we certainly would not
20 expect that MidAerican would acquire PacifiCorp again, it
21 is virtually certain that other regulatory requirements will
22 be initiated at the FERC or the SEC in 2008 and legal fees
23 will be incurred to respond to and comply with these
24 regulatory requirements.
25 Q.Can you provide any examples of such new
HAINGTON, DI-REB 5
Idaho Power Company
1 regulatory requirements?
2 A.Yes. In one matter I am directly involved
3 with, the Securities and Exchange Commission implemented new
4 regulations in 2007 requiring public companies to make
5 exhaustive new disclosures relating to executive
6 compensation. The SEC rules require multiple tables
7 detailing every possible element of executive compensation,
8 and also require a new "Compensation Discussion and
9 Analysis" (CD&A) section describing how the company arrived
10 at its executive compensation levels and why each element of
11 executive compensation is offered. This new executive
12 compensation disclosure required a 51-page addition to the
13 Company's 2007 proxy statement, complete with 34 pages of
14 compensation data and 17 pages of CD&A analysis. Idaho
15 Power expended significant legal fees to make sure that it
16 was in full compliance with the new SEC requirements. In
17 2008 we will use our best efforts to mitigate the costs
18 associated with CD&A but in all likelihood continuing legal
19 expenses will be necessary.
20 Another example of dramatically increased
21 compliance obligation and activity - and attendant legal
22 expense - is in the area of FERC regulation. As FERC
23 Chairman Joseph T. Kelliher stated during opening remarks at
24 a Novemer 14, 2007 Conference on Enforcement Policy:
25 FERC has long had an enforcement26 program, but the focus of that program
HAINGTON, DI - REB 6
Idaho Power Company
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was changed dramatically by the Energy
Policy Act of 2005, which granted us a
greater role in meeting market
regulation . . . and in assuring bulk
power system reliability. The new law
also gave us stronger enforcement
authority through enhanced civil penalty
authority. FERC has been exercising its
new enforcement tools for two years, but
the public results have been visible foronly the past ten months. This
conference is a good opportunity to
review these resul ts . . . and to
consider possible changes in FERC
enforcement policy that could improve
compliance.
My goals for this conference are (among
other things). . . to identify the
importance of developing strong
compliance programs. . . It is a
personal priority for me as Chairman to
strengthen compliance programs in the
regulated community. . . . Many aspects
of our enforcement program are new."
The point here is that while a certain numer
28 of legal matters will be brought to a close each year (such
as the PacifiCorp-MidAerican acquisition or a resolved29
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lawsui t or a completed Commission inquiry), other legal
matters will invariably arise or be expanded at the same
32 time. The clear trend is that the added expense of new
33 legal matters is significantly greater than the eliminated
34 expense from concluded matters leading to an upward trend in
35 outside legal fees for the Company.
36 Q.Have you prepared an exhibit that supports
37 your assessment that legal expenses are trending upward?
38 A.Yes. At my request, the Company's accounting
HAINGTON, DI-REB 7
Idaho Power Company
1 department prepared a chart showing legal expenses during
2 the 2002-2007 period. Exhibit 63 shows the annual legal
3 expense for calendar years 2002 through 2007. The line
4 entitled Purchased Services is the line that shows the
5 expenses for outside legal services. As Exhibit 63 shows,
6 the Company's outside legal expenses have grown steadily
7 over that time period and dramatically over the past two
8 years.
9 Q.Looking forward, does the Company anticipate
10 increasing levels of legal expenditures during the period in
11 which the rates set in this case will be in effect?
12 A.Yes. Idaho Power expects that legal expenses
13 will continue to increase over time as the Company is faced
14 with additional challenges that require significant legal
15 involvement such as the increased emphasis on FERC oversight
16 and compliance I referred to earlier.
l7 Q.Besides the examples of enhanced FERC
18 compliance and increased SEC disclosure you mentioned
19 previously, could you please provide some other examples of
20 present or anticipated compliance activity or litigation
21 that cause you to believe legal expenditures will continue
22 to increase?
23 A.Yes. One of the best examples is in the area
24 of water administration and water rights litigation. Idaho
25 Power believes that it will continue to face multiple legal
HAINGTON, DI-REB 8
Idaho Power Company
1 challenges to its existing rights to use water for
2 hydrogenation. From 2000 through 2005, and ~ontinuing
3 through 2007, below-normal precipitation in the Snake River
4 Basin has exacerbated a developing water shortage in Idaho,
5 manifested by declining Snake River base flows and declining
6 levels in the Eastern Snake Plain Aquifer, a large
7 underground aquifer in Southeastern Idaho that discharges
8 water to the Snake River upstream from many of Idaho Power's
9 hydroelectric proj ects. These drought conditions together
10 with what appears to be the over-appropriation of the water
11 resources within the Snake River basin have resulted in
12 competing demands for a finite resource. Idaho Power holds
13 water rights for power generation at each of its
14 hydroelectric generating facilities and while these water
15 rights are subordinate to some upstream consumptive uses,
16 Idaho Power believes it is in its customers' best interest
-17 for the Company to vigorously defend its water rights
18 against unjust claims or demands that may result in the
19 reduction of flows in the river that would otherwise be
20 available for hydroelectric generation. This is not a
21 situation where the Company is trying to increase the
22 availability of water for hydroelectric generation. The
23 Company is simply trying to protect its water rights in an
24 effort to maintain its hydrogenation at current levels.
HAINGTON, DI-REB 9
Idaho Power Company
1 In 2008 and 2009, a substantial amount of
2 legal expense will be incurred in the context of the Snake
3 River Basin Adjudication (SRBA). In early 2007 the Idaho
4 Department of Water Resources filed water right
5 recommendations with the SRBA Court for Basins 02 and 03,
6 the administrative water basins where substantially all of
7 Idaho Power's hydroelectric facilities are located. These
8 filings have placed all of Idaho Power's water rights at
9 those facilities, as well as all other water rights wi thin
10 those basins, at issue. Water right claimants continue to
11 file objections and responses to the Department's
12 recommendations and in the coming months the disputed claims
13 will be litigated before the SRBA Court.
14 It is this process that resulted in the Swan
15 Falls litigation, litigation initiated by the Company in
16 2007 to resolve a numer of questions regarding the
17 interpretation of the historic Swan Falls Agreement. This
18 litigation was filed in reaction to competing claims filed
19 in the SRBA by the State of Idaho to several of Idaho
20 Power's hydroelectric water rights on the Snake River. The
21 filing of these claims, as well as questions raised by other
22 water users about the meaning of the Swan Falls Agreement
23 made it imperative for the Company to file the litigation to
24 protect its water rights and obtain answers to those
25 questions.
HAINGTON, DI-REB 10
Idaho Power Company
1 Also in the water litigation area, in 2007
2 the Company filed suit against the United States Bureau of
3 Reclamtion in both the U. S. District Court here in Idaho
4 and the U.S. Court of Claims in Washington, D.C. seeking to
5 compel the Bureau to comply with a 1923 contract with Idaho
6 Power regarding the storage and release of water in American
7 Fall Reservoir. As is the case wi th the Swan Falls
8 litigation, the Company felt compelled to bring these
9 lawsuits to protect its existing hydrogenation water rights
10 and preserve the Company's low-cost hydrogenation at current
11 levels.
12 Idaho Power believes that conflicts over
13 water administration and distribution in Idaho will
14 continue. Undoubtedly the expense of addressing those legal
15 conflicts will be material. Nevertheless, Idaho Power
16 intends to do what is reasonably necessary to protect its
17 water rights and the legal principles related to the
18 administration of those rights.
19 Q.Please sumarize your recommendations to the
2 0 Commission?
21 A. In light of the growing demands for legal
22 services, I recommend that the Commission recognize that the
23 legal expense the Company incurs must be considered in its
24 levelized entirety and not piecemeal as Staff recommends in
25 this case. The Company should not be subj ect to a
HARINGTON, DI - REB 11
Idaho Power Company
1 continuing risk that individual cases will be selected for
2 disallowance on the grounds that they are extraordinary,
3 particularly given that it is extremely likely that the
4 Company's overall cost of legal expense will continue to
5 increase.
6 Q.Does this conclude your direct rebuttal
7 testimony in this case?
8 A.Yes, it does.
HAINGTON, DI-REB 12
Idaho Power Company
Legal O&M Expenses
2002 - 2007(ytd)
Cost Center Cost Element
Labor
Materials
Purchased Services
Accounti n9 Entris
Other Expenses
2002
1,272,959
12,640
2,053.532
2003
1,226,865
10,515
3,178,164
(92,632)
258.515
Actual O&M Expenses
2004 2005
1,950,169 1,583,172
9,374 9.131
2,944,985 3,192,363
(86,672) (106,092)
367,715 335,622
2006
1,922,824
23,547
4,193,925
(89,290)
375,643
2007. YTO 12121107
1,652,056
8,812
7,649,240
(5,553)
1,013,492
Exhibit No. 63
Case No. IPC-E-07-08
P. Harrington,lPCo
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