20070531final_order_no_30325.pdf

Office of the Secretary
Service Date
May 31, 2007
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO IMPLEMENT POWER
COST ADJUSTMENT (PCA) RATES FOR
ELECTRIC SERVICE FROM JUNE 1, 2007
THROUGH MAY 31, 2008
ORDER NO. 30325
CASE NO. IPC-07-
On April 13, 2007, Idaho Power Company filed its annual power cost adjustment
(PCA) Application. Since 1993 the PCA mechanism has permitted Idaho Power to adjust its
rates upward or downward to reflect the Company s annual "power supply costs." Because of its
predominant reliance on hydroelectric generation, Idaho Power s actual cost of providing
electricity (its power supply cost) varies from year to year depending on changes in Snake River
streamflows and the market price of power. The annual PCA surcharge or credit is combined
with the Company s "base rates" to produce a customer s overall energy rate.
In this year s PCA Application, Idaho Power calculates that its annual power costs
have increased $30.7 million above the normalized PCA rates. In the prior PCA year, customers
received an average 19.34% rate credit due to favorable water conditions. In contrast, the
forecast for water conditions this year is poor. The Company estimates that the change in water
conditions will contribute to a $77.5 million increase in revenues from existing PCA rates. The
combination of the coming year s surcharge and the expiration of the previous year s credit
cause an average increase in the PCA rates of 14.5%.
On April 18, 2007, the Commission issued a Notice of Modified Procedure soliciting
public comment regarding the PCA Application. The Commission received written comments
from seven residential customers, the Industrial Customers of Idaho Power (ICIP), and the
Commission Staff. On May 17, 2007, Idaho Power filed a reply to the ICIP comments. After
reviewing the Application and the comments, we approve the PCA Application and authorize
new rates to be effective on June 1 , 2007.
THE PCA MECHANISM
The annual PCA mechanism is comprised of three major components. First, PCA
rates are adjusted to compensate for the forecast in Snake River streamflows and storage. In
years of abundant snowpacks and streamflows, the Company s power supply costs are usually
ORDER NO. 30325
lower because of correspondingly plentiful relatively inexpensive, hydro-generation.
Conversely, when streamflows or snowpacks are low, Idaho Power must rely increasingly upon
its other thermal generating resources and purchased power from the regional market. The
Company s other thermal generating resources (coal and natural gas plants) and purchased power
are typically more costly than the Company s hydro-generation. Under the PCA mechanism, the
Company may recover 90% of the difference between the projected power costs and the
approved base power costs. Order No. 25880.
Second, because the PCA includes forecasted costs, the preceding year s forecasted
costs are "trued-up" to account for actual costs. Third, is the "true-up of the true-up.Idaho
Power uses "normalized" power sales (measured in kilowatt hours (kWh)) from the ensuing PCA
year as the denominator to computing the true-up of the true-up. Over- or under-recovery is
balanced with the following year s true-up. Consequently, ratepayers will pay for the actual
amount of power sold by Idaho Power to meet native load requirements - no more or no less.
Order No. 29334 at 4. Thus, ratepayers receive a rate credit when power costs are low, and are
assessed a surcharge when power costs are high. For example, last year s abundant streamflows
and snowpack resulted in a PCA rate decrease of nearly 20%; this year s below-normal
streamflows contribute to a proposed 14.5% increase in PCA rates.
THE PCA APPLICATION
A. The PCA Components
This year s PCA Application includes the forecasted costs based on water conditions;
a true-up of last year s forecasted costs to reflect actual costs; and the true-up of the 2006-2007
PCA year true-up (the true-up of the true-up). This year s water forecast for April through July
inflows at Brownlee Reservoir is 3.3 million acre-feet (mat). The Company reports the 30-year
average inflows at Brownlee is 6.3 maf. In other words, this year s water forecast is roughly half
the 30-year average. Application at 3, Exh. 2.
1. The Water Forecast.Based upon the projected water inflow and replacement
power costs, the Company calculates that the projected power supply costs are $129.23 million
for the 2007-2008 PCA year (June 2007 to May 31 , 2008). The projected power costs equal
9575 cents per kWh. The 0.9575 cents per kWh estimate is 0.2098 cents per kWh above the
Commission s approved normalized base of 0.7477 cents per kWh. Consequently, the Company
ORDER NO. 30325
is proposing a surcharge of 0.1888 cents per kWh (90% of 0.2098 cents) for the power cost
projection component. Application at 3; Schwendiman Dir. at 4-
2. The True-. Idaho Power reports that the difference between last year s forecast
costs and actual costs (the true-up) results in a surcharge to customers of $15,090 267. Id. at 4.
The PCA true-up component also includes several additional items previously approved by the
Commission. Id. These additional items include the customer benefits associated with
settlement of the Valmy plant outage, reduced power costs associated with the new Bennett
Mountain power plant, and the sale of SO2 emission credits (including tax benefits) of $76.
million. Schwendiman Dir. at 5-7. Last year the emission credits were ordered to be included in
the PCA true-up. Order No. 30041. The Company also proposes to include the known after-tax
benefit of $27 million that would normally be included in next year s PCA case in this year
true-up. The proposed true-up balance of $15,090 267 is then divided by the estimate of total
jurisdictional sales in 2007 of 13,475,244 MWh. Idaho Power witness Celeste Schwendiman
calculates that the true-up portion of the PCA rate is a surcharge of 0.1120 cents per kWh. Id.
3. The True-Up of the True-. The third PCA rate element is the "true-up of the
true-up.Last year the Company over-collected $7 941 094 of the PCA deferral balance.
Schwendiman Dir. at 7. Dividing this amount by the projected 2007 Idaho jurisdictional sales of
13,475 244 MWh results in a PCA true-up ofthe true-up rate credit of 0.0598 cents per kWh. Id.
Combining the three components - the projected power costs surcharge of 0.1888
cents, the true-up component surcharge of 0.1120 cents and the true-up of the true-up credit of
0598 cents - results in a proposed PCA rate surcharge for the 2007-2008 PCA year of 0.2419
cents per kWh. This represents an increase of 0.6108 cents from the existing PCA credit rate of
3689 cents per kWh. Id. at 8.
4. The Rate Proposal.Idaho Power proposes to implement the PCA rates on June 1
2007. The proposed PCA rate represents an "overall" average percentage increase of 14.5% but
due to the fixed cents adjustment, each customer class will receive a different percentage
Increase. The Table below shows the proposed increases in the PCA rates for the major
customer classes:
ORDER NO. 30325
Customer Group Proposed Percentage
(Schedule)PCA Rate Increase
Residential (1)0.2419t 11.0%
Small Commercial (7)0.2419t
Large Commercial (9)0.2419t 16.
Industrial (19)0.2419t 22.
Irrigation (24-25)0.2419t 14.
The PCA rates for Idaho Power s three special contract customers would also increase: Micron
- 26.7%; Simplot - 29%; and the Department of Energy at INL - 28.4%. Staff Atch. G. The
Company s Application included the proposed PCA tariff in Schedule 55.
THE COMMENTS
1. Public Comments. The Commission received seven comments from customers.
Four customers opposed the rate increase. Two customers suggested that some of the requested
revenue increase be placed into base rates to mitigate the volatility of future PCA rate increases
and decreases. Finally, one customer complained that the Company s information about the
PCA rate increase was confusing.
2. Staff Comments.The Staff conducted an audit of all actual revenues and
expenses that occurred during the PCA year. The Staff sought to verify the revenues and costs
associated with several programs including: Purchasing water from Lucky Peak reservoir; the
cloud seeding program; fuel expenses for coal and natural gas; power purchases/sales; emission
credit from SO2 allowances; and PURP A purchases from qualifying facilities. The Staff also
examined the settlement credits from Order No. 29600 (two months), Bennett Mountain power
plant credit (two months) and the risk management operating plans. Staff analysis did not find
any unreasonable transactions and the Company s power transactions were made with an
assortment of credit-worthy partners on a timely basis. Staff Comments at 4-
The Staff also agreed with the Company s proposal to include the known and
measurable tax benefit of $27 million from the sale of SO2 credits. Id. at 6. Although the tax
benefit would normally be credited in next year s PCA, the benefit amount is known now and
should be included in this PCA year.
The Staffs calculations for the three PCA components agreed with Idaho Power
calculations. Staff calculated that the 2007-2008 PCA rate should be 0.2419 per kWh as
ORDER NO. 30325
shown in Staff Attachment C. Staff recommended that the Commission approve the PCA rates
as filed by the Company.
3. Industrial Customers' Comments. The Industrial Customers of Idaho Power
(ICIP) agreed with the Company s calculations and "does not object to the Commission
approval of the (PCA) application." ICIP Comments at 2. However, ICIP asked that the new
PCA rates be made "subject to refund" and that the Commission initiate a proceeding to modify
the PCA mechanism. In particular, ICIP asserted that the PCA mechanism should be adjusted to
reduce the volatility in the increases and decreases in the PCA rates. Id. at 3.
ICIP suggested that the Commission open a docket to consider adding a "balancing
account" to the PCA mechanism. The balancing account mechanism would retain a "year-to-
year negative or positive balance that could be offset by subsequent years.Id. at 4. If results
from the PCA mechanism exceeded the positive or negative thresholds in the balancing account
then PCA rates would be adjusted accordingly. Any amounts remaining in the balancing account
would accrue interest for both positive and negative balances.
The ICIP recognized that the use of a balancing account over several years could
result in a PCA rate "so large that it would cause rate shock." Id. at 5. Consequently, the ICIP
recommended that the positive balance should be collected over a number of years and suggested
a three-year recovery/payout period. Thus, surcharges and credits would be passed on to
customers during a three-year period.
The ICIP also recommended that the Commission re-examine the PCA's "soft" rate
cap. ICIP explained that when PCA rates are predicted to exceed 7% of the Company
normalized base revenues, the Company is required to make a filing with the Commission "for
the purpose of determining whether a means to defer a percentage of that year s power supply
cost recovery should be investigated." Order No. 24806 at 14. To reduce the volatility of PCA
rates, the ICIP recommends that the 7% threshold should be based upon the difference from the
prior year s PCA rate - not the difference between the Company s normalized base revenues and
the PCA rate. ICIP Comments at 6-7. For example, rather than reduce PCA rates 27% last year
for Schedule 19 Industrial Customers, the soft cap would have allowed the Commission to
determine whether some of last year s credit should have been retained in a balancing account to
mitigate this year s 22% increase for the same industrial customers. "The ICIP's goal is to allow
ORDER NO. 30325
this year s 22% increase for the same industrial customers. "The ICIP's goal is to allow the
Company to receive the revenue it needs, and the customers to receive the credits they are
entitled to in a manner that results in a smoother payout." Id. at 5.
4. Idaho Power Reply. In its reply comments, Idaho Power requested that the
Commission reject the ICIP's recommendations to make the new PCA rates subject to refund
and initiate a docket to adjust the PCA methodology. Idaho Power insisted that making the PCA
increase subject to refund is fundamentally unfair, especially in light of the fact that the ICIP did
not make such a suggestion last year when its members received a 27% PCA rate decrease.
Reply Comments at 2-3. While the Company recognizes that the Commission may initiate a
proceeding at any time to examine the PCA methodology, making any changes retroactive will
produce more contentious proceedings and be viewed negatively by the financial community.
Id. at3.
Idaho Power also asserted that ICIP's balancing account concept is not new. The
Company noted that the Commission rejected the balancing account concept when it initiated the
PCA mechanism in 1992. The Company observed that the Commission s Order No. 24806
found that a "forecast and true-up" mechanism is preferable to a balancing account mechanism
advocated by the ICIP in 1992. Idaho Power also pointed out that the Order stated customers are
aware of changing streamflow conditions and understand the impact they have on the cost
generating electricity. A PCA (mechanism) that adjusts rates to reflect projected stream flows for
the coming year should be understandable to ratepayers and send short-term price signals to
ratepayers more reflective of actual conditions than rates set using normalization." Order No.
24806 at 8-
COMMISSION FINDINGS
After reviewing the PCA Application and the comments filed in this case, we find it
is reasonable to grant Idaho Power s Application to increase the PCA rate. We note that no
commenter objected to the PCA calculations and the rates such calculations produce. We find
the PCA rate of 0.2419t per kW is fair, just and reasonable.
We also decline ICIP's recommendations. As noted above, the existing PCA
methodology contains a true-up mechanism so that customers will pay no more or no less than
the PCA requires.We further find that the current PCA methodology with its true-up
mechanism provides customers with timely "price signals" so that customers have the
ORDER NO. 30325
opportunity to adjust their usage given higher PCA rates. Moreover, the Public Utilities Law
does allow the Commission to spread large PCA rate increases over several years, if necessary.
Idaho Code ~ 61-1501. We also note that industrial customers may smooth out these changes
implementing their own retention or deferred accounts. They might consider using established
base rates when setting their budgets and holding money saved in a PCA credit year to be used in
a future PCA surcharge year. Consequently, we decline ICIP's recommendation to initiate a
proceeding or to make the PCA rate increase subject to refund.
ORDER
IT IS HEREBY ORDERED that Idaho Power Company s PCA Application is
approved.
IT IS FURTHER ORDERED that from June 1 2007 through May 31 , 2008, the PCA
rate shall be 2419t per kWh for all customer classes and the three special contract customers.
IT IS FURTHER ORDERED that the PCA rate contained in this Order shall be
effective for service on June 1 2007. The Company s proposed PCA tariff Schedule 55 included
in its Application is approved.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. IPC-07-
may petition for reconsideration within twenty-one (21) days of the service date of this Order
with regard to any matter decided in this Order or in interlocutory Orders previously issued in
this Case No. IPC-07-10.Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~ 61-
626.
ORDER NO. 30325
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this 31
day of May 2007.
MARSHA H. SMITH, COMMISSIONER
MACK A. REDF
~,,~~"
, C MMISSIONER
ATTEST:
'le D. Jewell
Commission Secretary
bls/O:IPC-07-IO dh2
ORDER NO. 30325