20080627Miller direct.pdf

E!
II: 31
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES
AN CHAGES FOR ELECTRIC SERVICE.
CASE NO. IPC-E-08-10
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
CATHERINE M. MILLER
1 Q.Please state your name and business address.
2 A.My name is Catherine M. Miller. My business
3 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
7 Director of Strategic Analysis.
8 Q.Please describe your educational background.
9 A.I graduated with high honors in 1991 from
10 Idaho State University, Pocatello, Idaho, receiving a
11 Bachelor of Business Administration degree in Accounting.
12 In 1998, I received a Master of Business Administration
13 degree from Boise State University in Boise, Idaho. I have
14 attended numerous seminars and conferences on accounting,
15 management, and finance issues related to the utility
16 industry. I have been a Certified Public Accountant
17 licensed in the State of Idaho since 1992.
18 Q.Please describe your business experience
19 with Idaho Power.
20 A.In 1991, I began my association with Idaho
21 Power Company as external auditor for Deloitte & Touche
22 LLP, the Company's external audit firm. I joined Idaho
23 Power Company in May of 1994 as a Tax Analyst in the Tax
24 Department where I was responsible for preparing monthly
MILLER, DI 1
Idaho Power Company
1 tax accruals, tax forecasts, tax returns, and tax analyses.
2 In August of 1996, I was promoted to a Business Analyst in
3 the Financial Research and Support Department. My duties
4 as a Business Analyst included the preparation of the
5 Company's financial forecasts and the preparation of a wide
6 range of financial and regulatory an~lyses. In February of
7 2001, I was promoted to Finance Team Leader III for the
8 Strategic Analysis Department. In that capacity, I became
9 responsible for overall financial support, forecast
10 activities, and non-regulated subsidiary accounting. Non-
11 regulated subsidiary accounting was eventually transferred
12 out of the Strategic Analysis Department.
13 In 2004, I was promoted to my current position of
14 Director of Strategic Analysis in the Corporate Planning
15 and Risk Management Department. I currently supervise two
16 departments, Strategic Analysis and Regulatory Accounting
17 and Support. Strategic Analysis prepares the Company's
18 consolidated financial forecasts, provides updates to
19 management, and prepares a wide range of financial analyses
20 as requested. Regulatory Accounting and Support is
21 responsible for all regulatory accounting and coordinates
22 Finance Department support of regulatory filings.
23 Q.What is the purpose of your testimony in
24 this proceeding?
MILLER, DI 2
Idaho Power Company
1 A.The purpose of my testimony is to request
2 that the Allowance for Funds Used During Construction
3 ( UAFUDCn) component of Construction Work in Progress
4 ( UCWipn) for the Hells Canyon relicensing proj ect be
5 included in base rates. My testimony will support the
6 Company's request to include $7.6 million in rates to
7 recover a portion of the AFUDC included in CWIP resulting
8 from relicensing expenditures for Hells Canyon. The
9 Company is only requesting that it be permitted to include
10 in rates the amount needed to offset the anticipated growth
11 in AFUDC for the Hells Canyon relicensing project. To
12 provide context for this proposal, i will provide an
13 overview of CWIP and AFUDC and discuss the recent State of
14 Idaho legislation permitting the inclusion of CWIP in rate
15 base. I will describe what costs have been capitalized as
16 CWIP for Hells Canyon relicensing and provide CWIP account
17 (Account 107) balances as of December 31, 2007. I will
18 present Idaho Power's proposal to collect AFUDC as it is
19 incurred, explain why the Company is seeking recovery, and
20 provide the Company's recommendation on future accounting
21 and rate treatment that would be instituted when the
22 Commission authorizes implementation of the Company's
23 proposal.
MILLER, DI 3
Idaho Power Company
1 OVERVIEW OF CWIP AN AFC
2 Q.As a preliminary matter, please explain the
3 relationship between CWIP and AFUDC.
4 A.CWIP represents the accumulation of all
5 costs associated with the construction of an asset,
6 including the cost of financing the construction
7 expenditures. Utilities record these costs in Account 107.
8 In Idaho, since the mid-1980s, CWIP has not been included
9 in rate base on a current basis and, as a result, financing
10 costs are capitalized and included in the CWIP account
11 (Account 107). These capitalization costs are known as
12 AFUDC and are considered a component of CWIP.
13 When the plant is completed and placed in service,
14 the total cost of the plant including AFUDC is moved to a
15 specific plant in service account. This is commonly
16 referred to as placing an asset in rate base. Once in rate
17 base, the Company begins recovering the costs (including
18 AFUDC) of the plant. In effect, during construction, Idaho
19 Power is allowed to earn a return on CWIP by accruing
20 AFUDC. However, the cash recovery does not occur until the
21 associated plant is placed in rate base. Because new
22 electric generation and transmission plants often have very
23 long construction periods and require significant funding,
MILLER, DI 4
Idaho Power Company
1 the delay in recovering financing costs has become a very
2 significant issue for Idaho Power and its customers.
3 Q.How has the Idaho Commission treated CWIP
4 and AFUDC in the pas t?
5 A.It is my understanding that with the
6 concurrence of the Commission, the 1984 Idaho Legislature
7 codified Idaho Code § 61-502A prohibiting the Commission
8 from setting rates for any utility that grants a return on
9 CWIP or property held for future use and which is not
10 currently used and useful in providing utility service
11 except upon its finding of an uextreme emergency. n When
12 CWIP was excluded from rate base, the Commission was
13 required to allow the accumulation of AFUDC computed in
14 accordance with generally accepted accounting principles
15 ( uGAApn) .
16 Q.Is it now permissible under Idaho law for
17 the Commission to allow a utility to place CWIP in base
18 rates and, in effect, allow the utility to earn and collect
19 a return on it before the plant is fully constructed?
20 A.Yes. While I am not an attorney, I have
21 been advised by legal counsel that in 2006 the Idaho
22 Legislature amended Idaho Code § 61-502A to give the
23 Commission broader authority to approve and set just,
24 reasonable, and fair rates for utility facilities under
MILLER, DI 5
Idaho Power Company
1 construction. The Legislature intended the amendment to
2 give the Commission latitude to allow recover of CWIP in
3 rate base to facilitate construction of facilities to meet
4 growing customer demands. According to the Statement of
5 Purpose of House Bill 694, the Commission Umay grant a
6 utility a return on construction work in progress or
7 property held for future use which is not currently used in
8 providing utility servicen if it explicitly finds that
9 doing so will serve the public interest. The House Bill's
10 Statement of Purpose also noted that the legislative
11 changes uwill help ensure that development of energy and
12 other utility facilities meet the growing needs of Idaho
13 citizens at a reasonable cost. n The most important
14 difference with this new law is that the Company is now
15 allowed to collect financing costs incurred during the
16 construction period which improves cash flows.
17 Q.As a financial analyst, why is cash flow
18 important to Idaho Power?
19 A.When Idaho Power is in a period of
20 significant construction, collecting financing costs
21 improves cash flow, which leads to the improved cash flow
22 coverage ratios that are necessary to maintain Idaho
23 Power's credit strength and its ability to access external
24 markets for funding construction activities. The
MILLER, DI 6
Idaho Power Company
1 importance of cash flow and credit strength is discussed in
2 greater detail in Mr. Steven Keen's testimony. The
3 legislation allows for this cash flow improvement.
4 Q.Do hydroelectric relicensing expenses for
5 existing facilities like the Hells Canyon Complex qualify
6 as CWIP?
7 A.Yes. The Hells Canyon Complex is the
8 backbone of Idaho Power's hydro generation and with a
9 nameplate capacity of 1,167 MW, contributes nearly two-
10 thirds of the Company's low-cost, emission- free hydro
11 generation capacity. Idaho Power's 50-year operating
12 license for the three-dam Hells Canyon hydroelectric
13 complex expired on July 31, 2005, and has been renewed
14 annually by the Federal Energy Regulatory Commission
15 (uFERcn) pending the outcome of Idaho Power's relicensing
16 application. Absent a new license to continue operating
17 the Hells Canyon Complex, Idaho Power would have to
18 construct new generation facilities or otherwise secure
19 replacement power. Analogous to a retrofit of a coal-fired
20 plant to comply with new air quality standards, over the
21 past ten years, Idaho Power has invested significant
22 amounts to mitigate the externalities associated with the
23 Hells Canyon dams such that the FERC will grant Idaho Power
24 a new operating license.
MILLER, DI 7
Idaho Power Company
1 THE CURNT CWIP ACCOUNT BACE
2 Q.When did the Company begin incurring Hells
3 Canyon relicensing costs and what types of costs have been
4 included in Account 107?
5 A.The Company began incurring Hells Canyon
6 relicensing costs in 1999. In addition to AFUDC, other
7 costs capitalized in Account 107 with respect to the Hells
8 Canyon relicensing effort include labor, materials,
9 purchased services, and other expenses.
10 Q.How does AFUDC apply to hydro relicensing
11 and why is it capitalized in Account 107?
12 A.Relicensing activities are financed from
13 internally generated funds and funds raised from external
14 sources including short-term debt, long-term debt, and new
15 equity. As a result, the Company incurs financing costs.
16 The Company is permitted to accrue and capitalize these
17 financing costs to Account 107 as AFUDC during the project
18 period. AFUDC is calculated monthly using a rate followed
19 by the Commission and determined by the FERC formula (CFR
20 18, Part 101, Subchapter C, Electric Plant Instruction 3
21 (A) (17), as amended by a FERC letter dated December 30,
22 1981). Once the construction project is completed, both
23 the construction costs and AFUDC are closed to plant as an
24 asset. Once included in rate base, AFUDC is typically
MILLER, DI 8
Idaho Power Company
1 recovered over the life of the asset through depreciation
2 expense and a return on investment is earned.
3 Q.What was the December 31, 2007, CWIP balance
4 for Hells Canyon relicensing costs?
5 A.Accumulated Hells Canyon relicensing costs
6 and its AFUDC have been recorded as CWIP in Account 107.
7 As of December 31, 2007, the Hells Canyon relicensing costs
8 included in FERC Account 107 totaled $95.6 million. Of
9 that amount, financing costs as represented by AFUDC were
10 $27.9 million or 30 percent of the total.
11 IDAHO POWER'S PROPOSAL
12 Q.Please describe Idaho Power's proposal to
13 currently recover financing costs (AFUDC) associated with
14 Hells Canyon relicensing.
15 A.Current Idaho law allows the Company to earn
16 and collect its return on CWIP by including CWIP in base
17 rates. I believe the law's intent is to provide the
18 Company support in the form of cash collections during the
19 project period. Idaho Power's proposal is in line with
20 that intent. At this time, Idaho Power is not requesting
21 the inclusion of CWIP in rate base to currently earn and
22 collect its return. Rather, the Company is requesting
23 payment of estimated financing costs at the same time that
24 they will be incurred in 2009. Those collections will
MILLER, DI 9
Idaho Power Company
1 offset Hells Canyon plant additions when included in rate
2 base at a future date. Ef fecti vely, the request allows for
3 the true-up for differences between actual calculated AFUDC
4 and any collections from customers. This proposal simply
5 requests that the Commission allow customers to pay
6 financing costs on Hells Canyon relicensing expenditures as
7 they occur. As the Company is currently seeking to only
8 recover AFUDC for Hells Canyon relicensing, I believe this
9 proposal is the most simple and straightforward
10 administratively.
11 Q.Why is the Company requesting recovery of
12 AFUDC as it is incurred for Hells Canyon relicensing
13 expendi tures?
14 A.From 1999 through 2007, the Company has
15 incurred $95.6 million of costs for the relicensing of
16 Hells Canyon. Over those eight years, the Company has been
17 solely responsible for acquiring funds to support
18 relicensing activities and has borne the financing costs of
19 doing so as represented by $27.9 million of accumulated
20 AFUDC captured in Account 107. Although AFUDC is recorded
21 as income for income statement purposes in accordance with
22 GAAP, the Company does not receive cash recovery until the
23 asset becomes a part of rate base. The ongoing growth of
24 AFUDC, as demonstrated later in my testimony, is a serious
MILLER, DI 10
Idaho Power Company
1 concern for the Company as it builds to a significant
2 portion of the expected future increase in rate base. By
3 collecting financing costs currently, customers will, in
4 effect, pay those costs as they are incurred and reduce or
5 smooth future rate impacts. For the Company, current cash
6 collection strengthens cash coverage ratios which help to
7 maintain credit strength through a period of significant
8 project spending and facilitate funding for future
9 investment.
10 IDAHO POWER'S REQUEST
11 Q.What amount is the Company requesting for
12 recovery?
13 A.The Company is requesting that $7.6 million
14 be included in base rates to fund the ongoing financing
15 costs associated with the Hells Canyon relicensing project.
16 Q.Why $7.6 million?
17 A.$7.6 million is the amount needed to offset
18 the anticipated annual growth of AFUDC. That collection
19 will reduce the future rate impact resulting from the
20 eventual inclusion of Hells Canyon relicensing costs in
21 future rate base.
22 Q.Have you prepared or supervised the
23 preparation of an exhibit relating to the collection of
24 financing costs related to Hells Canyon relicensing?
MILLER, DI 11
Idaho Power Company
1 A.Yes. I supervised the preparation of
2 Exhibit No. 35.
3 Q.Please describe Exhibit No. 35.
4 A.On December 31, 2007, Hells Canyon
5 relicensing CWIP and associated AFUDC in Account 107
6 amounted to $67.7 million and $27.9 million respectively.
7 For the projected years 2008 and 2009: (1) no new capital
8 expenditures were assumed, although additional costs will
9 be incurred; (2) 2008 AFUDC additions were calculated on
10 the total Account 107 balance of $95.6 million for the year
11 ended December 31, 2007, and compounded monthly; (3) 2009
12 AFUDC additions were calculated on the total CWIP balance
13 of $102.8 million for the projected year ending December
14 31, 2008, and compounded monthly; and (4) AFUDC additions
15 were calculated using the actual 2007 average AFUDC rate of
16 7.19 percent. Without considering additional future
17 expenditures, it is estimated that 2008 and 2009 AFUDC will
18 be $7.1 million and $7.6 million, respectively. By year-
19 end 2009, the total accumulated AFUDC associated with 2007
20 Account 107 balances will be $42.7 million or 42 percent
21 ($42.7 million divided by $110.4 million) of the total.
22 The Company is requesting the collection of $7.6 million,
23 the 2009 estimated AFUDC.
MILLER, DI 12
Idaho Power Company
1 Q.If the Company is allowed to collect these
2 funds, how would the Company account for them?
3 A.Funds recovered during the Hells Canyon
4 relicensing construction period would be used to set up an
5 Account 254 Regulatory Liability.
6 Q.For rate making purposes, how does the
7 Company propose to treat the Regulatory Liability
8 established with funds collected for AFUDC?
9 A.Once the Hells Canyon operating license is
10 received and the Hells Canyon relicensing proj ect is placed
11 in service, the Company will include the accrued costs of
12 the proj ect in rate base. These costs will be reduced by
13 the Account 254 Regulatory Liability. Customers will
14 benefit in three ways. First, customer rates will be lower
15 because they would not pay the required return on what
16 would otherwise be a higher rate base balance. Second, for
17 cost of service purposes, the Regulatory Liability would be
18 amortized over the life of the plant asset. In this
19 manner, the funds collected flow back to the customers.
20 Q.Would there be any change to how actual
21 AFUDC associated with Hells Canyon relicensing is treated
22 for accounting purposes?
23 A.No. Financial accounting for Account 107
24 would remain the same. New Hells Canyon relicensing
MILLER, DI 13
Idaho Power Company
1 expenditures will continue to be recorded to Account 107.
2 AFUDC would be calculated and capitalized to Account 107
3 following the Company's standard practice.
4 Q.The CWIP balance for Hells Canyon
5 relicensing was $95.6 million as of December 31, 2007, of
6 which $27.9 million was AFUDC. Why is Idaho Power
7 concerned wi th the growth in AFUDC?
8 A.As discussed earlier in my testimony, Idaho
9 Power is requesting that $7.6 million of 2009 AFUDC
10 associated with Hells Canyon relicensing be included in
11 base rates. Without this collection and assuming no
12 additional investment, the Hells Canyon CWIP balance is
13 estimated to grow to $110.4 million by year-end 2009.
14 Under these assumptions, the growth is solely due to the
15 continued accumulation of AFUDC which threatens to dwarf
16 other relicensing costs. Over two years, absent my
17 proposal, the Hells Canyon CWIP balance attributable to
18 AFUDC would grow 53 percent from $27.9 million to $42.7
19 million and represent 40 percent of total Hells Canyon
20 relicensing CWIP balance by year-end 2009.
21 Q.Are there any other reasons why the current
22 collection of financing costs associated with CWIP for
23 Hells Canyon relicensing costs is beneficial for Idaho
24 Power and its customers?
MILLER, DI 14
Idaho Power Company
1 A.Investments for Hells Canyon relicensing
2 have been accumulating since 1999 and the benefits of
3 obtaining the new operating license are well understood.
4 Because Idaho Power's request estimates the 2009 AFUDC
5 accrual on actual December 31, 2007, CWIP balances for
6 Hells Canyon relicensing, Staff audit and review will be
7 eased and conj ecture eliminated. When the operating
8 license is received and the project closes to plant, actual
9 known amounts for expenditures and accrued AFUC will be
10 included in rate base offset by the known collections for
11 AFUDC. In effect, this becomes a true-up to actual amounts
12 for rate-making purposes.
13 Q.Does this conclude your testimony?
14 A.Yes, it does.
MILLER, DI 15
Idaho Power Company