20080530final_order_no_30563.pdf

Office of the Secretary
Service Date
May 30, 2008
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, 2008
THROUGH MAY 31 , 2009
ORDER NO. 30563
CASE NO. IPC-08-
On April 15 , 2008, 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 requests a PCA rate increase. The rate
increase would increase existing rates by approximately $87.1 million or 12.8% on average. The
Company s request is composed of a small forecast credit, a large true-up to last year s forecast
surcharge and a small true-up of the true-up surcharge. The large true-up surcharge is due to an
extremely poor forecast last year.
On April 25, 2008, the Commission issued a Notice of Modified Procedure soliciting
public comment regarding the PCA Application. The Commission received written comments
from nine residential customers, the Industrial Customers of Idaho Power (ICIP), Idaho Irrigation
Pumpers Association, Inc., Micron Technology, the Department of Energy, and the Commission
Staff. On May 23 , 2008, Idaho Power filed a reply to the Staff and intervenor comments. After
reviewing the Application and the comments, we approve an increase of existing rates by $73.
million which produces an average increase to Idaho Power s customers of 10.7%. We authorize
the new rates to be effective on June 1 , 2008.
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. 30563
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
balanced with the following year s true-up. Consequently, ratepayer reimbursement to Idaho
Power is based on actual power supply costs incurred - no more and no less. Thus, ratepayers
receive a rate credit when power costs are low, and are assessed a surcharge when power costs
are high.
THE peA APPLICATION
In its filing the Company proposes a "one-year deviation" from the Commission-
approved 90/10 "sharing" of abnormal power supply costs. The Company proposes that the
entire variation be assigned to customers. For the remainder of this PCA year, the Company is
requesting that all deviations in net power supply and PURP A project expenses be recoverable
at 100 percent for both forecast and true-up purposes." Said Dir. at 6. Under the Company
proposed 100% alternative, the forecast rate component would represent a decrease of 0.1314
cents per kWh. Schwendiman Dir. at 9. If approved, the Company s proposal not to share the
forecast cost savings would result in a one-time credit to customers of $1.8 million more than the
traditional 90/10 sharing. However, neither the Staff nor the Company can determine the impact
of not sharing next year s true-up because the impact cannot be completely known until the end
of the true-up period next March. The amount deferred for next year s true-up could either
increase or decrease customer rates.
Idaho Power also proposes an administrative change to its tariff format. The change
would remove the PCA rate currently shown on each schedule where it applies, but would
reference Schedule 55 where the PCA rate is shown. It would also reference other rate schedules
ORDER NO. 30563
that adjust the rates shown on that schedule. This change would allow the Company to avoid re-
filing all of its schedules each time the PCA rate changes.
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 5.4 million acre-feet (mat). Staff reports the average inflow at
Brownlee (1928-2005) to be 5.39 maf. In other words, this year s water forecast is slightly more
than average. Staff Comments at 3.
1. The Water Forecast.Based upon the projected water inflow and expected power
prices, the Company calculates that the projected power supply costs are $108.8 million for the
2008-2009 PCA year (April 1 , 2008 to March 31 , 2009). The projected power costs equal
7641 cents per kWh. The 0.7641 cents per kWh estimate is 0.1314 cents per kWh below the
Commission-approved normalized base of 0.8955 cents per kWh. Consequently, the
Commission-approved (90/1 0 sharing) methodology would allow for a credit of 0.1183 cents per
kWh (90% of 0.1314 cents) for the power cost projection component. Application at 3. A 100%
one-year deviation would allow for a credit of the entire 0.1314 cents per kWh for the power cost
projection component. Id. at 4.
2. The True-. Idaho Power calculates the true-up component of the PCA as
9844 cents per kWh (excluding SO2 credit) reflecting actual net PCA costs above last year
forecast. Id. at 4.
3. The True-Up of the True-. The third PCA rate element is the "true-up of the
true-up." Last year the Company under-collected $4.9 million of the PCA deferral balance. Id.
at 4. This results in a PCA true-up of the true-up rate component of 0.0361 cents per kWh. Id.
Combining the three components - the forecast rebate, the true-up surcharge and the
true-up of the true-up surcharge - results in a proposed PCA rate for the 2008-2009 PCA year.
The calculation using a 90/10 sharing methodology results in a proposed PCA surcharge of
9022 (-.1183 + .9844 + .0361) cents per kWh. The calculation based on a 100% one-year
deviation results in a proposed PCA surcharge of 0.8891 (-1314 + .9844 + .0361) cents per
kWh.
ORDER NO. 30563
4. The Rate Proposal.Idaho Power proposes to implement the PCA rates on June 1
2008.
THE COMMENTS
1. Public Comments. The Commission received nine comments from customers.
All nine customers opposed the rate increase. One customer suggested that a portion of the
increase be used to purchase time-of-day metering equipment to allow customers the option of
adjusting their use around peak load times and offsetting their bills accordingly.
2. Staff Comments. Staff s calculation of the forecast rate component agrees with
Idaho Power s calculation when the abnormal costs are not shared but assigned 100% to
ratepayers (i., 100% one-year deviation). However, Staff recommends that the 90/1 0 sharing
be continued. Staff maintains that the 90/10 methodology represents a type of Performance
Based Ratemaking (PBR) that aligns the interests of shareholders and ratepayers. In Staffs
opinion, it keeps the Company economically involved in power supply decisions.
Although Staff calculates the same forecast rates, with and without sharing, that the
Company calculates, Staff recommends that this year s power supply cost forecast be assumed to
be normal. Therefore, the forecast rate would be zero. The forecast for Brownlee inflow is very
near normal (i.e., 5.4 maf versus 5.39 mat). Staff believes it is counterproductive to return
money to ratepayers based on a forecast that may prove to be inaccurate and then have to put an
increased true-up rate in place the following year to recover the money previously credited.
The Staffs true-up calculation differed with Idaho Power regarding distribution of
the base power supply costs in the PCA deferral and true-up calculations. Staff recommends a
flat distribution. A flat or level distribution for the PCA deferral reduces earnings volatility and
in Staffs opinion, minimizes arguments to eliminate the 90/10 sharing. In addition, the true-up
amount used by the Company to calculate the true-up rate did not include the SO2 sales credit of
approximately $16.5 million which was determined after it filed.
Staffs calculation of the true-up of the true-up matched that submitted by the
Company.
Based on the foregoing, Staff calculated that the 2008-2009 PCA rate should be
7864 (0.000 + 0.7503 + 0.0361) cents per kWh. Staff also suggested that issues such as
sharing methodology, forecasting methodology, the distribution of power cost deferrals, and load
growth adjustment rates would be appropriate topics for workshops following this case.
ORDER NO. 30563
3. Industrial Customers' Comments.The Industrial Customers of Idaho Power
(ICIP) opposed the use of a 100% recovery mechanism. ICIP emphasizes that the 90/1 0 sharing
methodology is utilized to "achieve the goal of earnings stability while still providing an
adequate incentive for efficiency." Order No. 24086. ICIP maintains that it would be unfair to
shift 100% of the risk associated with power supply decisions on to the ratepayers.
In addition, ICIP suggests, based on the large increase in the PCA rate and its impact
on high load factor customers, that the Commission spread this year s PCA balance over a three-
year period. ICIP argues that because the current year s PCA is driven by the true-up from last
year s inaccurate projection of power supply costs, it is reasonable "to spread the impact of that
aberration over a three year time frame." ICIP Comments at 7.
4. Irrigators ' Comments The Idaho Irrigation Pumpers Association Inc.
(Irrigators), oppose the use of a 100% recovery mechanism absent a more thorough review of the
consequences of such a decision. The Irrigators stress that 90/10 sharing serves as both a stick
and a carrot to ensure that costs are maintained as low as reasonably possible. They emphasize
that a change to the long-standing 90/1 0 methodology is not appropriate for Modified Procedure
in a PCA rate case. However, the Irrigators support the idea of a workshop to further explore
alternative methodologies.
5. Micron Comments . Micron Technology, Inc. (Micron) opposes Idaho Power
request for 100% recovery of power supply and PURPA expenses. Micron argues that 90/10
sharing ensures that Idaho Power is properly motivated to minimize power supply costs. Micron
further insists that a one-year deviation, allowing Idaho Power to pick-and-choose 100%
recovery on a case-by-case basis, is the worst of all possible outcomes for ratepayers and makes
no sense as a matter of regulatory policy.
6. Department of Energy.The Department of Energy (DOE) opposes use of a 100%
recovery mechanism. DOE maintains that a more thorough discussion of Idaho Power
proposal is appropriate for its general rate case filing. DOE recommends scrutinizing the
magnitude of the increased costs that the waiver would shift to customers, the role of hedging,
the possible multi-year effect, and the time of some of the Company s perceptions and actions.
DOE asserts that, absent additional information regarding the full effect of Idaho Power
requested deviation, the request should be denied.
ORDER NO. 30563
7. Idaho Power Reply. In its reply comments, Idaho Power restates the merit of its
100% one-year deviation proposal. The Company maintains that the 90/1 0 methodology is not
currently providing symmetry because of the prolonged drought. The Company further asserts
that when power supply expenses are not symmetrical over time then the PCA is not providing
just, reasonable, and sufficient rates as required by Idaho Code 9 61-502.
Idaho Power emphasizes that the 90/1 0 sharing is not its only incentive to act
prudently. The Company is bound by statute to establish just and reasonable rates, charges, rules
and regulations. Idaho Code 99 61-301 and 61-303. The Company points out that its risk
management policies exist to ensure that Idaho Power makes prudent power purchase decisions.
At a minimum, Idaho Power supports continuing the dialogue regarding PCA methodology in a
workshop setting.
Idaho Power also replied to Staffs recommendation to levelize and redistribute base
power supply expenses included in the PCA true-up calculations. Although the Company does
not oppose Staffs recommendation, Idaho Power suggests distribution of the annual power
supply expenses to months based on the 2007 monthly-normalized loads. The Company
contends that this approach would match the monthly shape of power supply expenses to the
monthly shape of revenues resulting from normalized loads.
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 find a PCA rate
of 0.7864 cents per kWh is fair, just, and reasonable. (The PCA rate represents an "overall"
average percentage increase but, due to the fixed-cents adjustment, each customer class will
receive a different percentage increase.) See Attachment A.
We decline Idaho Power s proposal for a one-year deviation from the 90/10 sharing
methodology. While we agree that the Company has other incentives to keep its power supply
costs as low as possible, sharing has been a feature of the PCA since its inception. A change of
this magnitude should not be considered as part of the annual PCA review. Therefore, the
Commission finds the continued use of90/10 sharing an appropriate feature of the PCA.
We also decline ICIP's recommendation to spread the PCA balance over a three-year
period. As stated by the parties in this case, Idaho has experienced unprecedented drought and
ORDER NO. 30563
forecasts for water are, at best, uncertain. It is simply too risky, and potentially compounds the
problem, to seek recovery from ratepayers across three future years.
The Commission further finds a zero forecast rate appropriate. Rather than pass a
minimus rate decrease on to customers through a forecast rate, we find it more advantageous to
wait until power supply cost savings actually occur. These savings can and will be captured in
next year s true-up.
We decline Idaho Power s suggestion, at this time, to distribute base power supply
expenses based on 2007 monthly-normalized loads (i., true-up calculation). The Company
submitted this proposal for the first time in its reply comments, and did not submit any of the
necessary documentation to perform the proper calculations. The Commission finds that level
distribution for the PCA deferral is reasonable in the interim, until the issue can be more fully
evaluated. The level distribution adequately reduces earnings volatility and reduces arguments
to eliminate 90/10 sharing. In addition, the level distribution for deferral reduces the true-up
surcharge in this PCA period by $15 million. This is in addition to the $16.5 million reduction
due to SO2 credits previously ordered by this Commission. Order No. 30529.
The Commission remains concerned about the increased use of the natural-gas-fired
peaking plants, as indicated in Idaho Power s filings in this case. In previous Orders, the
Commission has noted concerns with the volatility of natural gas prices. We are also
increasingly concerned with the persistent high price of natural gas this year. Recognizing the
interplay between running gas-fired plants and purchasing power in the market, where gas-fired
generation is on the margin, the Commission desires more detailed information about Idaho
Power s daily decisions to run its gas-fired peakers or purchase wholesale power in order to meet
load and/or make off-system sales. Thus, the Commission directs Idaho Power to either provide
this information in its monthly PCA Deferral Report or devise an alternative way of making this
information available to the Commission.
The Commission further finds that Idaho Power s proposed administrative tariff
changes are appropriate. Referencing Schedule 55 instead of including the actual PCA rate on
each schedule avoids unnecessary schedule re- filing each time the PCA rate changes.
With respect to further evaluation of the PCA mechanism, Staff, Idaho Power, and
the Irrigators all proposed workshops to address issues such as sharing methodology, forecasting
methodology, the distribution of power cost deferrals, and load growth adjustment rates. We
ORDER NO. 30563
support these proposals and direct Idaho Power to schedule such workshops as soon as
practicable.
ORDER
IT IS HEREBY ORDERED that from June 1 2008 through May 31 , 2009, the PCA
rate shall be 0.7864 cents 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 , 2008. The Company must submit a revised tariff consistent with
this Order.
IT IS FURTHER ORDERED that Idaho Power schedule workshops at its earliest
convenience to address the issues discussed herein.
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-08-
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-08-07.Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 9 61-
626.
ORDER NO. 30563
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this :l9y.J\
day of May 2008.
~p-
MACK A. REDFORD, P
MARSHA H. SMITH, COMMISSIONER
ATTEST:
O:IPC-08-07 ks dh
ORDER NO. 30563
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