20080107Said rebuttal.pdf

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zoiia JAN -4 PH 4: 30
¡ iDAHO PUBLIC
UTiLITIES COMM1SS1Oi\
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-07-08
IDAHO POWER COMPAN
DIRECT REBUTTAL TESTIMONY
OF
GREGORY W. SAID
1 Q.Please state your name.
2 A.My name is Gregory W. Said.
3 Q.Are you the same Gregory W. Said that
4 previously submitted direct testimony in this proceeding?
5 A.Yes, I am.
6 Q.What is the purpose of your rebuttal
7 testimony?
8 A.i will address what I believe are incorrect
9 or inappropriate assumptions and conclusions related to the
10 "matching" of test year 1) rate base, 2) expenses and 3)
11 revenues contained in the testimonies of Commission Staff
12 Wi tnesses Lobb and Carlock and Micron Witness Peseau.I
13 will discuss how the directions given to other Staff
14 witnesses by Mr. Lobb and Ms. Carlock were inconsistent,
15 resulting in erroneous computations in the Staff's
16 determination of the Company's revenue requirement as
17 contained in the testimony of Staff Witnesses English and
18 Stockton. i will respond to Ms. Carlock's contention that
19 the Company did not adequately address the impact of
20 regulatory lag. i will respond to Staff Witness Sterling's
21 assertion that high gas prices benefit Idaho Power i s
22 customers. I will address Staff Witness Hessing's load
23 growth adjustment recommendations. Finally, I will discuss
24 how the combination of recommendations made by the Staff
25 witnesses, if accepted by the Commission, will result in
SAID, Di-Reb 1
Idaho Power Company
1 rates that will preclude the Company from an opportunity to
2 earn a fair rate of return as required by law.
3 Q.At page 15 of her testimony, Staff Witness
4 Carlock states that "the matching principle is another long
5 established, ratemaking concept where costs and revenues
6 must match." Do you agree with Ms. Carlock's statement?
7 A.Yes. However, I believe the Staff has
8 incorrectly matched revenues, expenses and rate base in its
9 proposed July 1, 2006 through June 30, 2007 test year.
10 Q.Please describe how the Company went about
11 matching costs and revenues in its filed 2007 test year.
12 A.The Company forecasted revenues for the 12
13 months ending December 2007 and expenses for the 12 months
14 ending Decemer 2007 based upon plant forecasted to be in
15 service by the end of December 2007 with annualization to
16 reflect plant as if it was in service for the entire year.
17 Normalized power supply expenses were determined for the
18 2007 test year reflecting annualized generation plant in
19 service and annualized power supply contracts, including the
20 Horizon Wind project which was originally scheduled to be
21 on-line on January 1, 2008. The Horizon Wind project
22 actually began providing electricity on November 27, 2007
23 and was fully operational on December 28, 2007. The Company
24 also included an annualizing adjustment for a general wage
25 adjustment of 3 percent which in reality became a 3.25
SAID, Di-Reb 2
Iæho Power C~pany
1 percent increase implemented on Decemer 15, 2007. The
2 Company included no investments, expenses, or revenues
3 beyond January 1, 2008, so rates established in 2008 as a
4 result of this proceeding will be ultimately based upon a
5 period that is historic to the time the rates will be in
6 effect.
7 Q.Please describe your understanding of how the
8 Staff matched expenses, revenues and rate base in its July
9 2006 through June 2007 test year.
10 A.The Staff accepted the Company's. forecasted
11 revenues for the 12 months ending December 2007, but
12 "matched" those revenues with expenses for the 12 months
13 ending June 2007. The only exception to this "matching" was
14 in the area of power supply expenses. Staff's power supply
15 expenses were initially similar to the Company's forecast of
16 power supply expenses for a test year ending December 2007,
17 but Staff reduced these expenses by $6 million from the
18 Company's estimate for reasons unrelated to matching. Other
19 than power supply expenses, no other expenses were adjusted
20 to reflect changes beyond June 2007. In fact, some expenses
21 in Staff's test year were further reduced based upon Staff
22 adjustments. Plant additions of greater than $2 million
23 beyond June 2007 were "proforma" adjusted into the test
24 year, but again no corresponding expenses were included.
25 The power supply expense associated with the purchase of
SAID, Di-Reb 3
Idaho Power Company
1 energy from the Horizon wind project was included in the
2 Staff's test year expenses, but the general wage adjustment
3 was not.
4 Q.Would you describe the Staff test year
5 methodology as being consistent with the matching principal
6 Ms. Carlock described in her testimony?
7 A.No. Staff reaches forward in time to capture
8 the revenue growth envisioned in the Company's test year
9 ending December 2007, but only reaches forward in time to
10 capture a portion of expenses related to fuel and purchased
11 power. This mismatch drives down the Company's revenue
12 requirement by artificially understating expenses
13 necessarily incurred to produce the additional revenues that
14 Staff included.
15 Q.What percentage of total expenses are fuel
16 and purchased power expenses?
17 A.From the data contained in the Company's
18 filing, fuel and purchased power expenses in 2006 were
19 approximately $398.5 million out of $753.8 million total
20 operating expenses or 52.9 percent. Corresponding values
21 from the Company's 2007 test year are normalized fuel and
22 purchased power expenses of $278.2 million out of $672.-3
23 million total operating expenses or 41.4 percent.
24 Q.Mr. Lobb states on page 16 of his testimony
25 that" including variable power supply costs in revenue
SAID, Di-Reb 4
Idaho Power Company
1 requirement more than offsets new customer revenue". Do you
2 agree?
3 A.No. This statement suggests that "matching"
4 has been achieved when only 41.4 percent of expenses are
5 updated to year-end levels while 100 percent of revenue
6 changes by year-end are captured. Ignoring increases in
7 58.6 percent of total expenses while including 100 percent
8 of revenue increases is counter to Staff's stated objective
9 of proper matching.
10 Q.When referring to plant additions, Mr. Lobb
11 states on page 10 of his testimony that "post-test year
12 additions have been included in the test year as if they
13 have been in service for the entire period." Is this a
14 correct representation of what Staff has done?
15 A.No. What Mr. Lobb describes is usually
16 referred to as "annualization" and is a common ratemaking
17 convention that this Commission has regularly accepted in
18 the past. However, the Staff did not annualize plant
19 additions to represent those additions as if they had been
20 in service for the entire period. Instead, as described in
21 Ms. Carlock's testimony on page 15, "Plant placed in service
22 beyond the test year ending June 30, 2007 has been pro formed
23 into the results of operations to match the in service date
24 between July and Decemer, 2007." As a result, plant
25 additions are reflected in rate base for only a portion of a
SAID, Di-Reb 5
Idaho Power Company
1 year, for example 2 out of 12 months. Reflecting plant in
2 service for only a portion of the test period is
3 inconsistent with prior Commission direction1 and counter to
4 Mr. Lobb's stated direction (Lobb Direct page 13 lines 19-
5 23) to continue using a methodology previously approved by
6 the Commission to address the Company's desire to reduce
7 regulatory lag.
8 Q.Dr. Peseau, at page 22 of his testimony
9 states that "Idaho Power adds more to rate base than the
10 total capi tal expendi tures on those assets, by assuming they
11 are in service for 15 months of a 12 months test period."
12 Is he correct?
13 A.No. It is unclear how Dr. Peseau came to
14 this conclusion, but the Company only reflected assets as if
15 they were in service for the full 12 month period of the
16 test year.
17 Q.Ms. Carlock states on page 17 of her
18 testimony that "the need to further reduce regulatory lag in
19 this case is also not adequately addressed in this case."
20 Is Ms. Carlock accurately describing the record in this
21 case?
22 A.No. Ms. Carlock ignores Exhibi t 31 which is
23 the Company's quantification of a 2008 revenue requirement,
24 based on an assumption of Commission approval of the
1 Order No. 29505 issued in Case No. IPC-E-03-13, May 15, 2004.SAID, Di-Reb 6
Idaho Power Company
1 Company's 2007 revenue requirement. I presented Exhibit 31
2 in my direct testimony in this case. Restating the
3 conclusion from my direct testimony, rates for 2008, based
4 upon the 2007 test year, will be inadequate for the Company
5 to earn its authorized rate of return under normal
6 conditions with revenues falling $23.3 million short of the
7 2008 revenue requirement. Ms. Carlock does not address this
8 quantification or the underlying analyses contained in
9 Exhibit 31.
10 Q.Micron witness Peseau states that "Mr. Said
11 acknowledges, if Idaho Power's proposed rates go into effect
12 on January 1, 2008, those rates would produce annual
13 revenues of $695,423,270, roughly $14,000,000 more than its
14 claimed revenue requirement." Do you agree with this
15 statement?
16 A.No. As I have just stated, 2008 revenues
17 would fall short of the 2008 revenue requirement by $23.3
18 million. Dr. Peseau i s characterization of my statements is
19 a comparison of 2008 revenues to a 2007 revenue requirement,
20 something that I did not do in my testimony.
21 Q.Dr. Peseau goes on to state that based upon
22 this $14 million difference between 2008 revenues and the
23 2007 revenue requirement, the Company would be overearning
24 from the first day rates would go into effect. Please
25 comment.
SAID, Di-Reb 7
Idaho Power Company
1 A.Dr. Peseau is wrong in his conclusion. He
2 quotes from his Exhibit S02, the report to the Iowa
3 legislature from the Iowa utili ties Board, as to the
4 importance of matching costs and revenues, but then engages
5 in the same mismatch behavior as Staff. He compares the
6 revenues from one period (2008) to the revenue requirement
7 of a different period (2007). Simply stated, revenue
8 requirement is equal to the expenses associated with a
9 particular test year plus a return component on assets held
10 during the same test year. Comparing one year's revenue to
11 a separate year's revenue requirement is a clear mismatch.
12 Another error in Dr. Peseau' s assessment set out on page 6
13 of his direct testimony is his statement that increased
14 revenues received throughout 2008 as a result of load growth
1S in 2008 must be offset by an equal amount of expenses "in a
16 single day" in order for the Company not to overearn its
17 revenue requirement. Suggesting that an annual revenue
18 change must be offset by a one-day expense change is another
19 clear mismatch.
20 Q.Have you reviewed the revenue requirement
21 quantification performed by Staff Witness English?
22 A.Yes, I have.
23 Q.Please describe the differences between the
24 Staff quantification of the Idaho jurisdictional revenue
25 requirement and the Company quantification of the Idaho
SAID, Di-Reb 8
Idaho Power Company
1 jurisdictional revenue requirement.
2 A.As an aid to my description of the
3 differences between the Staff quantification of the Idaho
4 jurisdictional revenue requirement and the Company
5 quantification of Idaho jurisdictional revenue requirement,
6 I prepared Exhibit 66 as a reference tool. I have
7 simplified the Idaho jurisdictional revenue requirement
8 quantification into four primary drivers: 1) rate base,
9 2) rate of return, 3) expenses, and 4) revenues. Referring to
10 row 1 of Exhibit 66, Staff has quantified test year Idaho
11 jurisdictional rate base to be $1.81 billion while the
12 Company has quantified test year Idaho jurisdictional rate
13 base to be $1.88 billion, a difference of $74.8 million.
14 Row 2 of Exhibit 66 shows the Staff recommendation of a
15 7.864 percent overall rate of return compared to the Company
16 recommendation of an 8.561 percent overall rate of return.
17 Multiplying the Idaho jurisdictional rate base by the
18 recommended overall rate of return produces the recommended
19 Idaho jurisdictional return component of revenue
20 requirement. As shown on line 3 of Exhibit 66, the Staff
21 quantifies an Idaho jurisdictional return of $142.2 million
22 based upon the rate base and rate of return drivers while
23 the Company quantifies an Idaho jurisdictional return of
24 $161.2 million based upon the same two drivers of revenue
25 requirement.
SAID, Di-Reb 9
iæho Power Company
1 Line 4 of Exhibit 66 shows the Staff
2 quantification of the third revenue requirement driver,
3 Idaho jurisdictional expenses, as $669.4 million while the
4 Company quantification of Idaho jurisdictional expenses is
5 $678.9 million, a difference of $9.6 million. The final
6 revenue requirement driver, revenues, is shown on line 5 of
7 Exhibit 66. Staff and Company quantifications of revenues,
8 because they are both based upon the same time frame,
9 calendar year 2007, are essentially identical at $801
10 million. The revenue numers reflect the Idaho
11 jurisdictional allocation of 1) firm jurisdictional sales,
12 2) system opportunity sales, 3) other operating revenues and
13 4) IERCo operating income.
14 The remainder of the rows on Exhibit 66 are
15 entirely computational. Line 6, net income, is equal to
16 line 5, revenues, minus line 4, expenses. Line 7, the
17 earnings deficiency, is equal to line 3, return minus line
18 6, net income. Line 8 is the constant, 1.642, which is the
19 net-to-gross táx multiplier. Line 9, the Idaho
20 jurisdictional revenue deficiency is equal to line 7, the
21 earnings deficiency times line 8, the net-to-gross tax
22 multiplier (the amount it takes to make the Company whole
23 for income tax purposes). The Staff quantifies the Idaho
24 jurisdictional revenue deficiency as $17.5 million while the
25 Company quantifies the Idaho jurisdictional revenue
SAID, Di-Reb 10
Idaho Power Company
1 deficiency as $63.9 million.
2 Q.What are the primary reasons for the
3 difference between the Staff's computation of Idaho
4 jurisdictional rate base and the Company's computation of
5 Idaho jurisdictional rate base?
6 A.I have identified three primary reasons that
7 the Staff's computation of Idaho jurisdictional rate base is
8 different from the Company's computation of Idaho
9 jurisdictional rate base. The first reason, as I have
10 previously discussed, is that while Mr. Lobb states that he
11 directed his staff to include post-test year rate base
12 additions in the test year as if they have been in service
13 for the entire period, Ms. Stockton did not do so. The
14 second reason is that the Staff has recommended the removal
15 of previously capitalized pension benefits. The third
16 reason, as I have also previously discussed, is the
17 mismatching of rate base to revenues.
18 Q.Have you quantified the impact on Idaho
19 jurisdictional rate base of Staff Witness Stockton's failure
20 to annualize post test year rate base additions in a manner
21 consistent with previous Commission orders and Mr. Lobb's
22 stated direction?
23 A.Yes. Under my direction and supervision,
24 Exhibit 67 was created to quantify the impact on Idaho
25 jurisdictional rate base if Ms. Stockton had annualized post
SAID, Di-Reb 11
Idaho Power Company
1 test year rate base additions in a manner consistent with
2 previous Commission orders and Mr. Lobb's stated direction.
3 Correcting for the Staff's incorrect annualizing adjustments
4 would add $45.4 million to rate base.
5 Q.Have you quantified the impact on Idaho
6 jurisdictional rate base of the Staff recommendation to
7 exclude previously capitalized pension benefits from Idaho
8 jurisdictional rate base?
9 A.Yes. Under my direction and supervision,
10 Exhibit 68 was created to quantify the impact on Idaho
11 jurisdictional rate base if Staff had followed prior
12 practice and included previously capitalized pension
13 benefits in Idaho jurisdictional rate base. Inclusion of
14 previously capitalized pension benefits would add $5.4
15 million to Idaho jurisdictional rate base.
16 Q.After correcting for the Staff's incorrect
17 annualizing of rate base additions and quantifying the
18 impact of excluding previously capitalized pension benefits
19 from rate base, what is the remaining difference in
20 quantification of Idaho jurisdictional rate base that you
21 attribute to mismatching?
22 A.Of the $74.8 million difference between the
23 Staff and Company quantifications of Idaho jurisdictional
24 rate base, $45.4 million is the result of the Staff's
25 annualization error, $5.4 million is the result of the Staff
SAID, Di-Reb 12
Idaho Power Company
1 recommendation to exclude previously capitalized pension
2 benefits, and the remainder, $24.0 million is the result of
3 Staff mismatching rate base with revenues.
4 Q.Has the Company completed its accounting for
5 electric plant in service as of November 2007?
6 A.Yes. Ms. Smith has informed me that the
7 electric plant in service balance as of Novemer, 2007 is
8 greater than the amount the Company constructed as the end-
9 of-test year 2007 electric plant in service balance in
10 Exhibi t 30.
11 Q.Does the end-of Novemer 2007 electric plant
12 in service balance suggest that the Company's 2007 test year
13 rate base amount is appropriate?
14 A.Yes, the higher level for the actual Novemer
15 2007 electric plant in service balance suggests that the
16 Company's forecast of 2007 rate base is appropriate. In
17 fact, the Company's forecasted test year rate base is
18 probably too low.
19 Q.Based on this information what should the
20 Commission conclude with regard to the appropriate Idaho
21 jurisdictional rate base?
22 A.At a minimum, the Commission should correct
23 for the Staff error in annualization of rate base additions.
24 In addition, the Commission should consider Company witness
25 Smith's testimony supporting the inclusion of previously
SAID, Di-Reb 13
Idaho Power Company
1 capitalized pension benefits in rate base and finally, the
2 Commission should consider Company wi tness Smith's rebuttal
3 testimony describing the accuracy of the Company's
4 forecasted 2007 test year rate base when compared to actuals
5 to date in 2007 to appropriately match test year rate base
6 to tes t year revenues. Simply by correcting these three
7 errors in the differences between the Staff's quantification
8 of the Idaho jurisdictional rate base, the Commission should
9 arrive at a value near $1.88 billion for Idaho
10 jurisdictional rate base.
11 Q.What should the Commission conclude with
12 regard to the appropriate rate of return for the Company?
13 A.Staff's quantification bf the appropriate
14 overall rate of return is 7.864 percent. The Company's
15 application requested an overall rate of return of 8.561
16 percent. Mr. Steve Keen and Mr. Avera have pointed out the
17 shortcomings of Staff's proposed rate and the Commission
18 should conclude that an overall rate of return closer to
19 8.561 is appropriate.
20 Q.Has Mr. Steve Keen identified additional
21 Staff mismatching with regard to the overall rate of return?
22 A.Yes. Mr. Steve Keen has informed me the
23 Staff has mismatched capital structure costs. Those
24 mismatches are discussed by Mr. Steve Keen.
25 Q.What are the primary reasons for the $9.6
SAID, Di-Reb 14
Idaho Power Company
1 million difference between the Staff's computation of Idaho
2 jurisdictional test year expenses and the Company's
3 computation of Idaho jurisdictional test year expenses?
4 A.I have identified two primary reasons for the
5 $9.6 million difference between the Staff's computation of
6 Idaho jurisdictional test year expenses and the Company's
7 computation of Idaho jurisdictional test year expenses. The
8 first is the Staff recommendation that test year normalized
9 power supply expenses be reduced by $6 million. The
10 remaining $3.6 million is related to Staff's mismatch of
11 expenses to rate base and revenues.
12 Q.Mr. Sterling states on page 4 of his
13 testimony that "High gas price actually benefit Idaho Power
14 and its ratepayers in most years." Is he correct?
15 A.No. It is inappropriate to suggest that the
16 Company or its customers benefit from rising gas costs at
17 the same time that the Company is adding natural gas-fired
18 generation resources to its system in order to provide
19 adequate service in the future. Mr. Sterling does, however,
20 recognize that gas price assumptions included in AURORA
21 power supply simulations are a primary driver of modeled
22 market prices for electricity. The Company has repeatedly
23 stated and the Commission has repeatedly recognized that
24 within the Northwest, hydro conditions are also a primary
SAID, Di-Reb 15
Idaho Power Company
1 driver of market prices for electricity. 2 Low water
2 conditions, droughts, tend to drive electricity prices in
3 the Northwest up while abundant water tends to drive
4 electricity prices in the Northwest down. The Company
5 believes that AURORA modeling considers the gas price
6 influence on electric market prices too heavily and the
7 water condition influence on electric market price too
8 lightly. In order to correct for this modeling deficiency,
9 the Company differentiates gas price assumptions by water
10 condition. Mr. Sterling has removed this differentiation
11 suggesting that "Idaho Power assumed high gas prices are
12 associated with low water conditions and that low gas prices
13 occur when water conditions are high." The Company has been
14 open and forthright in stating that this is not the Company
15 assumption, but rather a means of correcting for a modeling
16 deficiency. 3 Because AURORA modeling does not adequately
17 reflect water condition impacts on electric market prices,
18 higher gas price assumptions result in higher projected
19 market prices under all conditions. This results in
20 artificially high surplus sales revenues which reduce the
21 Company's revenue requirement. This may be why Mr. Sterling
22 believes that high gas prices are a benefit to Idaho Power i s
23 customers. In my opinion, by taking advantage of this
2 Order No. 24806 issued in Case No. IPC-E-92-25 and Order No. 30047 issued in
Case No. IPC-E-06-07 are two examples.
3 See pages 6 and 7 of Greg Said's direct testimony in Case No. IPC-E-03-13.
SAID, Di-Reb 16
Idaho Power Company
1 AURORA modeling deficiency, Staff is looking solely for an
2 opportunity to reduce the quantification of normalized power
3 supply expenses rather than to properly quantify normalized
4 power supply expenses.
5 Q.Please describe the remaining $3.6 million
6 difference in quantification of test year expenses that you
7 characterize as a result of mismatching expenses to rate
8 base and revenues.
9 A.Some of the mismatching of expenses are
10 related to Staff witness Vaughn's removal of expense items
11 which are addressed by other Company rebuttal witnesses and
12 the remainder of the mismatching results from necessary
13 adjustments to expenses that would result from correction to
14 the annualization of plant additions that I discussed
15 earlier in my rebuttal testimony.
16 Q.Please explain how a change in rate base
17 effects a change in expenses as well.
18 A.An example of how a change in rate base
19 effects a change in expenses is the effect of annualization
20 on depreciation. As a result of annualizing post-test
21 year rate base additions in the test year as if they have
22 been in service for the entire period, monthly depreciation
23 expenses change to correspond to the annualization of rate
24 base.
25 Q.What should the Commission conclude with
SAID, Di-Reb 17
Idaho Power Company
1 regard to the appropriate level of test year expenses?
2 A.Staff quantified the appropriate level of
3 test year expenses to be $669.3 million. The Company
4 quantified the appropriate level of test year expenses to be
5 $678.9 million. The Commission should reject Mr. Sterling's
6 adjustment to the power supply expenses as filed by the
7 Company and should approve expenses equal to the Company
8 proposed level to correct for incorrect annualization and
9 matching problems contained in Staff recommendations.
10 Q.Are there any mismatches of expenses and
11 revenues related to taxes that have not been addressed by
12 you or any other Company witnesses?
13 A.Yes, I consul ted wi th Idaho Power's Corporate
14 Tax Director, Gene Marchioro. He informed me that Ms.
15 Stockton utilized many of the Company's test year tax
16 computations which are specific to the Company's filed test
17 year and matched them inappropriately with Staff's proposed
18 test year. Mr. Marchioro informed me that federal income
19 taxes, interest charges, IERCO taxable income, the Idaho
20 Investment Tax Credit Adjustment were all based upon the
21 Idaho Power filed test year and are inappropriately used by
22 Staff.
23 Q.Are there any other errors contained wi thin
24 the Staff quantification of expenses that you would like to
25 mention?
SAID, Di-Reb 18
Idaho Power Company
1 A.Yes. Review of Staff Exhibit 113 revealed
2 that Staff removed $15.7 million of DSM related expenses.
3 However, in Staff's 13 month beginning balance, there was
4 only $4.7 million of Demand Side Management (DSM) expense.
5 In short, Staff removed $11.0 million more than what
6 existed.
7 Q.What should the Commission conclude with
8 regard to the appropriate level of test year revenues?
9 A.Provided that the Commission adjusts rate
10 base and test year expenses to match, the $801.2 million of
11 revenues proposed by the Company are appropriate for the
12 revenue requirement determination.
13 Q.At page 16 of his testimony, Staff Witness
14 Hessing states the Company proposes "use of an incremental
15 cost approach" to the load growth adjustment rate
16 determination" instead of the marginal cost approach
17 required by the Commission in its final order in Case No.
18 IPC-E-06-08. " Have you reviewed the final order Mr. Hessing
19 is referring to?
20
21
A.Yes. That order is Order No. 30215.
Q.What was the Company's request in Case No.
22 IPC-E-06-08?
23 A.The Company reques ted a change in the
24 methodology used to determine the load growth adjustment
25 rate (LGAR) within the power cost adjustment (PCA).
SAID, Di-Reb 19
Idaho Power Company
1 Specifically, the Company requested that the LGAR be based
2 upon embedded costs.
3 Q.Did the Commission approve a change in
4 methodology to determine the load growth adjustment rate
5 based upon embedded cos ts?
6 A.No. As Mr. Hessing has pointed out in his
7 testimony, the Commission ordered that the load growth
8 adjustment rate should be determined using updated marginal
9 cost analysis studies.
10 Q.Does Order No. 30215 definitively establish
11 what the Commission meant by the term "marginal cost
12 analysis studies"?
13 A.No. On page 3 of Order No. 30215, the
14 Commission states "The current load growth adjustment
15 multiplier of $16. 84/MW used in the PCA true-up calculation
16 is a marginal cost based rate determined in 1993 when the
17 PCA was instituted. It was calculated by averaging the fuel
18 costs of the Company's two highest operating cost base-load
19 resources, Boardman and Valmy, which were the Company-owned
20 resources deemed in 1993 most likely to be dispatched to
21 meet additional loads."
22 Later on page 3, the Commission states
23 "Alternatively, the Company proposes a load adjustment
24 factor of $17.15, a numer that reflects the marginal cost
25 of Company-owned resources and the occasional operation of
SAID, Di-Reb 20
iæho Power Company
1 the Company's combustion turbine units."
2 On page 5 of Order No. 30215, the Commission
3 discusses "a marginal cost approach that compares two AURORA
4 runs of power supply expenses".
5 Based upon my reading of Commission Order No.
6 30215, the Commission recognized a numer of "marginal" cost
7 analysis study methodologies.
8 Q.Do you believe that the Company's
9 recommendation of a $29.16 per megawatt-hour load growth
10 adjustment rate based upon what you have referred to as an
11 "incremental cost analysis" is consistent with the
12 Commission intent when it directed the Company to use a
13 "marginal cost analysis"?
14 A.Yes. Mr. Hessing assumes that only one
15 marginal cost analysis method exists even though a numer of
16 marginal cost analysis methodologies are referenced in Order
17 No. 30215. The specific marginal cost analysis methodology
18 that I described in my direct testimony in this case is the
19 marginal cost analysis method recommended by Mr. Hessing.
20 However, in my opinion, the incremental cost methodology
21 that I also described in my direct testimony should also be
22 considered a marginal cost analysis consistent with the
23 intent of Order No. 30215.
24 Q.Does Mr. Hessing discuss the revenue impact
25 on the Company of serving additional load?
SAID, Di-Reb 21
Idaho Power Company
1 A.Yes, at page 10 of his testimony, Mr. Hessing
2 points out that residential revenues "near 6ç/kWh" and high
3 load factor class revenues at "about 3ç/kWh" would not
4 offset marginal power supply costs at over 6ç/kWh ($60/MW).
5 If the Commission adopts Mr. Hessing's recommendation for
6 the load growth adjustment rate, the Company will find
7 itself in the bizarre situation of crediting customers
8 through the PCA at a rate that is greater than the revenue
9 that it receives from any customer class other than small
10 general service customers. Crediting customers at a rate
11 that is greater than what they pay while at the same time
12 requiring the Company to serve those same customers using
13 power supply resources that are more expensive than average
14 system cost is irrational and severely damages the Company's
15 opportunity to earn its authorized overall rate of return.
16 Q.Based upon Mr. Hessing's recommendation of a
17 $62.79 per megawatt-hour load growth adjustment rate, what
18 would the Company estimate the impact to be given a "normal"
19 2008 condition?
20 A.AS per my direct testimony in this case,
21 based upon the information contained in Exhibit 36, the
22 Company expects that a "normal" 2008 condition would result
23 in load growth of 273,425 megawatt-hours served at an
24 additional expense of $7.9 million. A load growth
25 adjustment rate of $62.79 per megawatt-hour would remove
SAID, Di-Reb 22
Idaho Power Company
1 $17.2 million (273,425 megawatt-hours * $62.79 per megawatt-
2 hour = $17,168,356) from PCA consideration. This $17.2
3 million adjustment would remove $9.3 million more than the
4 incremental cost of serving load growth.
5 Q.How does this $17.2 million PCA adjustment
6 compare to the Staff recommendation for a revenue increase
7 in this case?
8 A.Staff recommends a general rate increase in
9 Idaho that would increase jurisdictional revenues by $17.5
10 million, but a load growth adjustment rate that will
11 immediately remove $17.2 million of recovery from the PCA
12 mechanism in 2008. This is not a rational result.
13 Q.Looking at the combination of Staff's
14 recommendations in this case, in your judgment will the
15 Company be able to earn a fair rate of return as required by
16 law?
17 A.In my opinion, no. I have stated in my
18 direct testimony, based upon anticipated growth in rate base
19 and expenses, even with approval of Company proposed rates,
20 the Company would expect to fall short of its authorized
21 overall rate of return under normal conditions. As shown on
22 page 1 of Exhibit 31, the Company would expect to earn a
23 7.86 percent overall rate of return, 0.7 percentage points
24 below an authorized 8.56 percent overall rate of return.
25 Establishing a test year revenue requirement based on
SAID, Di-Reb 23
Idaho Power Company
1 inappropriate annualization and mismatched rate base,
2 expenses and revenues as proposed by Staff results in
3 further erosion of the Company's ability to recover its
4 authorized overall rate of return. Add to that the Staff's
5 proposed load growth adjustment rate, which removes power
6 supply expenses at a rate that is greater than the rate at
7 which the Company receives addi tional revenues from load
8 growth, and it is virtually certain that the Company will
9 not have an opportunity to earn a fair overall rate of
10 return.
11
12
Q.Does this conclude your rebuttal testimony?
A.Yes, it does.
SAID, Di-Reb 24
Idao Power Company
1 2 3 4
Staff Company Gap
1 Rate Base 1,807,849,061 1,882,670,920 74,821,859
2 Rate of Return 7.864%8.561%
3 Return 142,171,058 161,175,457 19,004,399
4 Expenses 669,364,817 678,949,369 9,584,552
5 Revenues 800,906,946 801,181,308 274,362
6 Net Income 131,542,129 122,231,939
7 Earnings Deficiency 10,628,929 38,943,518 28,314,589
8 Tax Multiplier 1.642 1.642
9 Revenue Deficiency 17,452,701 63,945,257 46,492,556
Exhibit No. 66
Case No. IPC-E-07-08
G. Said, IPCo
Page 1 of 1
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Exhibit No. 68
Case No. IPC-E-07-08
G. Said. IPCo
Page 1 of 1Q) .1i: 0::Z .,N