20080627Smith direct.pdf

Ii: 36
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES
AND CHAGES FOR ELECTRIC SERVICE.
)
)
) CASE NO. IPC-E-08-10
)
)
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
LORI SMITH
1 Q.Would you please state your name, business
2 address, and present occupation?
3 A.My name is Lori Smith and my business
4 address is 1221 West Idaho Street, Boise, Idaho. I am
5 employed by Idaho Power Company (~Idaho Power" or
6 ~Company") as Vice President of Corporate Planning and
7 Chief Risk Officer.
8 Q.What is your educational background?
9 A.I graduated in 1983 from Boise State
10 University, Boise, Idaho, receiving a Bachelor of Business
11 Administration degree in Information Sciences. In 1999, I
12 was awarded the designation of Chartered Financial Analyst.
13 In 2008, I completed a two-part course in Decision Analysis
14 and Decision Quality in Organizations at the Stanford
15 Center for Professional Development. I have also attended
16 numerous seminars and conferences related to utility
17 accounting, corporate finance, and risk related topics.
18 Q.Would you please outline your business
19 experience?
20 A.From 1983 to 1986, I was employed by Idaho
21 Power Company and assigned to the Materials Management
22 Department. From 1986 to 1994, I served as a Financial
23 Accountant and later as a Budget Accountant. I was
24 promoted to Business Analyst in 1994. In 1996, I was
SMITH, DI 1
Idaho Power Company
1 promoted to Strategic Analysis Team Leader. In 2000, I
2 assumed the position of Director of Strategic Analysis. In
3 2003, I was named Director of Strategic Analysis and Risk
4 Management. In 2004, I was promoted to the position of
5 Vice President of Finance and Chief Risk Officer. In 2008,
6 I assumed my current position as Vice President of
7 Corporate Planning and Chief Risk Officer.
8 Q.What are your duties as Vice President of
9 Corporate Planning and Chief Risk Officer?
10 A.My responsibilities include the oversight of
11 corporate development, strategic planning, and risk
12 management processes for Idaho Power Company. Corporate
13 development includes acquisitions, divestitures, and joint-
14 ventures. Strategic planning includes development of
15 analyses, strategies, and operating plans. Risk management
16 includes activities related to managing market, credit,and
17 operational risk exposure from an enterprise perspective.
18 I am tasked with ensuring the best use of Idaho
19 Power's resources by defining and planning the Company's
20 strategic and long-range goals. I am also responsible for
21 the analysis of the financial impacts of regulatory
22 strategy to ensure successful implementation and provide
23 meaningful insight into strategic alignment, offer return-
24 enhancing decision support, and identify opportunities for
SMITH, DI 2
Idaho Power Company
1 revenue growth. I direct the development of operational
2 forecasts and analysis both long- and short-term. In
3 addition, I am the corporate board representative for Ida-
4 West Energy and IDACORP Financial Services. I have
5 subsidiary leadership responsibilities that include setting
6 goals and defining investment criteria and performance
7 requirements. I direct the acti vi ties related to the
8 organization's market .risk and credit exposure to protect
9 against adverse movements in net power supply costs.
10 Finally, I am responsible for designing, developing, and
11 implementing an Enterprise Risk Management process for
12 IDACORP, Inc., and Idaho Power Company.
13 Q.What is the purpose of your testimony in
14 this proceeding?
15 A.The purpose of my testimony is three-fold.
16 First, I will present the Company's historical actual
17 audited financial information for the twelve-month period
18 ended December 31, 2007. My testimony also identifies
19 certain adj ustments to operating expenses and rate base
20 that result in an adjusted historical actual twelve-month
21 period ended December 2007. Second, my testimony will
22 present the methodologies used to adjust historical 2007
23 financial data to test year 2008 levels. Third, I will
24 present the traditional and other ratemaking adj ustments
SMITH, DI 3
Idaho Power Company
1 also used in the development of the Company's proposed 2008
2 test year. The adjusted historical actual twelve-month
3 period ended December 31, 2007, was the basis by which the
4 Company's proposed 2008 test year was developed and is
5 discussed in the latter part of my testimony.
6 Q.Please describe the types of adjustments you
7 have made to the 2007 actual data.
8 A.The adjustments to 2007 actual data to
9 arrive at the 2007 adjusted actual data are what I describe
10 as standard regulatory adjustments. These adjustments
11 included removing structures and certain properties within
12 Plant Held for Future Use for which the use is uncertain
13 (e.g., subject to being split or possibly removed prior to
14 the utilization of the property) as well as removal of
15 other expenses as previously directed by the Commission.
16 These Commission-directed adjustments include the removal
17 of general advertising expenses, specific memberships and
18 contributions, certain management expenses, and other
19 exclusions that, although justified, may appear
20 inappropriate for regulatory recovery. Also removed is the
21 unamortized portion of the Electric Plant Amortization
22 Adjustment associated with the Prairie Power Rural Electric
23 Cooperative purchase, plant deemed not used and useful at
24 Bridger Coal, the operating portion of Financial Accounting
SMITH, DI 4
Idaho Power Company
1 Standard 87 Pension expense, the financial impacts of the
2 Energy Efficiency Rider revenues and expenses, and,
3 finally, the removal of specific intervenor funding
4 amortization that was included in the 2007 test year for
5 recovery.
6 Q.Please describe the methods you developed to
7 further adjust 2007 data to 2008 test year levels.
8 .A.There are three primary methods that were
9 developed and applied to adjust 2007 financial data to test
10 year 2008 levels: compound growth rates, known and
11 measurable adjustments, and annualizing adjustments.
12 Q.Please describe how compound growth rates
13 were applied.
14 A.Where appropriate, methodologies to address
15 growth were applied to the 2007 adjusted actuals. Compound
16 growth rates were either three- or five-year compounded
17 annual growth rates and were applied to investments less
18 than $2 million and certain O&M expenses and annualizing.
19 Known and measurable adjustments were made for scheduled
20 investments of greater than $2 million. Anualizing
21 adjustments are those adjustments that are made to certain
22 expense and rate base items to reflect them as though they
23 have been in existence for the entire year, or at year-end
24 levels. These include year-end payroll, incentive pay, the
SMITH, DI 5
Idaho Power Company
1 2009 salary structure adjustment, depreciation expense and
2 reserve, plant placed in service during 2008 in excess of
3 $2 million with the associated property taxes and
4 insurance, and the Company-directed spending containment.
5 Q.Will you be supporting any of the
6 normalizing adjustments to the 2008 forecasted test year?
7 A.No. Ms. Schwendiman will address the
8 normalizing adjustments to sales and revenues and Mr. Said
9 will address the normalization of power supply costs.
10 HISTORICA 2007 TEST YE DATA WITH ADJUSTMTS
11 Q.What are the components of the historical
12 actual financial information that you are sponsoring?
13 A.In referring to these components in my
14 testimony, I will use the account names from the
15 Commission-approved Uniform System of Accounts (~USA").
16 The components include the following items: (1) other
17 operating revenues, (2) other revenues and expenses, (3)
18 operation and maintenance expenses, (4) property insurance
19 expenses, (5) regulatory commission expenses, (6)
20 depreciation and amortization expenses, (7) amortizations,
21 adjustments, gains, and losses, (8) regulatory debits, (9)
22 taxes other than income taxes, (10) Idaho Energy Resources
23 Company (~IERCo") Statement of Income and Rate Base
24 Components, (11) electric plant in service and related
SMITH, DI 6
Idaho Power Company
1 items, (12) materials and supplies, (13) deferred
2 conservation programs, (14) other deferred programs, (15)
3 plant held for future use, (16) deferred income taxes, (17)
4 customer advances for construction, and (18) certain
5 deductions from operating and maintenance expenses.
6 Q.Are you sponsoring exhibits in this
7 proceeding?
8 A.Yes. I am sponsoring Exhibits No. 29
9 through 34. The work papers supporting my testimony and
10 exhibits have also been included with the Company's general
11 rate case filing.
12 Q.Would you please describe Exhibit No. 29?
13 A.Exhibit No. 29 is a compilation of the
14 Company's supporting schedules for the adjusted historical
15 actual data for the twelve-month period ended December
16 2007. Page 1 of Exhibit No. 29 reflects the detail for
17 Other Operating Revenues - Accounts 451, 454, and 456.
18 Page 2 reflects the detail of Other Revenues - Account 415
19 and Expenses 416. Pages 3 through 6 reflect the Operations
20 and Maintenance Expenses (~O&M") by USA account.
21 Q.Please describe the adj ustment you have made
22 to operations and maintenance expense on Exhibit No. 29,
23 page 6, lines 16 and 20.
SMITH, DI 7
Idaho Power Company
1 A.Account 926 - Employee Pension and Benefits
2 on line 20 is where FAS 87 Pension expense is recorded. It
3 is then offset in Account 922 - Administrative Expenses
4 Transferred-Credit on line 16 and then spread among all
5 accounts in which labor is charged. The temporary effect
6 of this adjustment is to remove FAS 87 Pension expense from
7 these accounts so that when escalated for 2008 the FAS 87
8 Pension expenses are not escalated as well. The net effect
9 of this adjustment results in a zero impact to the revenue
10 requirement. I discuss the complete removal of the FAS 87
11 Pension expense, in accordance with Commission Order No.
12 29505, included in operations and maintenance expenses
13 later in my testimony.
14 Q.Would you please describe pages 7 through 13
15 of Exhibit No. 29?
16 A.Page 7 of Exhibit No. 29 reflects the detail
17 of Property Insurance Expense -Account 924. Page 8 shows
18 the detail of Regulatory Commission Expenses - Account 928.
19 Pages 9 and 10 include Depreciation and Amortization
20 Expense by plant account. Page 11 of Exhibit No. 29
21 presents the Prairie Power acquisition amortization
22 adjustment. Page 12 reflects Regulatory Debits - Account
23 407.3 for Professional Fees amortization that was created
24 by Order No. 29505. Page 13 shows the detail of Taxes
SMITH, DI 8
Idaho Power Company
1 Other Than Income Taxes.
2 Q.Please explain the adj ustments you have made
3 to page 13 of Exhibit No. 29, Taxes Other Than Income, to
4 arrive at the adjusted 2007 actuals.
5 A.The sum of lines 1, 2, and 20 on page 13,
6 column 1, of Exhibit No. 29 for Federal UnemploYment,
7 Social Security, and State UnemploYment taxes respectively
8 are eliminated by line 23, column 1, the State and Federal
9 payroll loading. The payroll loading effectively removes
10 these amounts from Taxes Other Than Income and spreads them
11 over all accounts that receive labor charges. Therefore,
12 the adjustment on page 13, column 2, lines 1, 2, 20, and 23
13 eliminates these expenses in their entirety from this
14 schedule as they have no impact to the revenue requirement.
15 Q.Would you please describe page 14 of Exhibit
16 No. 29?
17 A.Page 14 of Exhibit No. 29 develops the net
18 earnings from IERCo that are added to the booked operating
19 income for rate making purposes.
20 Q.How does the Company treat IERCo's earnings
21 and investment for rate making purposes?
22 A.The primary purpose of IERCo is to mine the
23 coal that fuels the Jim Bridger thermal power plant in
24 Wyoming. Consistent with prior Commission orders, the
SMITH, DI 9
Idaho Power Company
1 Company treats IERCo' s coal operations as a part of its
2 utility operation and accordingly adds the current year
3 IERCo earnings to electric operating income and the
4 investment in IERCo to the net electric rate base.
5 Accordingly, the interest expense (line 13, page 14 of
6 Exhibi t No. 29) on notes payable to Idaho Power Company has
7 been added back to IERCo' s Net Income from Operations.
8 Additionally, the notes payable (column 3, line 14, page 24
9 of Exhibit No. 29) to Idaho Power Company have been added
10 to IERCo's rate base in determining the Company's net
11 investment in IERCo to be included in total system rate
12 base.
13 Q.Why have you made these adj ustments to
14 IERCo' s net earnings and rate base in this proceeding?
15 A.These adjustments were made to increase
16 IERCo' s rate base for notes payable to Idaho Power in the
17 amount of $14,794,368 and the associated interest expense
18 adjustment net of income tax of $545,915 to allow IERCo' s
19 rate base and earnings to reflect only the cash required to
20 fund IERCo operations for the year 2007. If IERCo were to
21 use these funds to make a distribution of earnings to the
22 Company, or if the Company were to actually fold IERCo into
23 its own operations, the result would be the same as
24 presented herein.
SMITH, DI 10
Idaho Power Company
1 Q.Would you please describe the data contained
2 on pages 15 through 24 of Exhibit No. 29?
3 A.Pages 15 through 24 of Exhibit No. 29
4 reflect the development of all the components applicable to
5 the combined system rate base of the Company for the year
6 2007. Page 15 reflects the balance by month and the
7 thirteen-month average of Electric Plant in Service -
8 Account 101. Page 16 reflects the balance by month and the
9 thirteen-month average of Accumulated Provision for
10 Depreciation - Account 108. Page 17 reflects the balance
11 by month and the thirteen-month average of Accumulated
12 Provision for Amortization - Account 111. Page 18 reflects
13 the balance by month and the thirteen-month average of
14 Materials and Supplies - Accounts 154 and 163. Page 19 and
15 Page 20 of Exhibit No. 29 reflect the balance of the
16 Company's Conservation and Other Deferred Programs. For
17 these programs the Company includes the December 31, 2007,
18 ending balance in rate base consistent with prior orders of
19 this Commission. Page 21 reflects the year-end balance of
20 Plant Held for Future Use - Account 105.
21 Q.Would you please describe in more detail
22 Other Deferred Programs on Page 20 of Exhibit No. 29?
23 A.Yes. Previous Commission-approved programs
24 included on page 20 of Exhibit No. 29 are the American
SMITH, DI 11
Idaho Power Company
1 Falls Bond Refinancing costs, the 2003 Incremental Security
2 Costs and Intervenor Funding costs that resulted from the
3 following Idaho cases: (1) the 2005 general rate case
4 (IPC-E-OS-28), (2) the load growth adjustment case
5 (IPC-E-06-Q8), and (3) the fixed cost adjustment case
6 (IPC-E-04-l5). The American Falls Bond Refinancing is
7 being amortized over the life of the American Falls bond
8 and will be fully amortized in 2025. The 2003 Incremental
9 Security Costs that were incurred as a result of concerns
10 relating to the September 11, 2001, attacks are being
11 amortized over 5 years and will be fully amortized in 2008.
12 The Intervenor Funding cost is being amortized over one
13 year and wiii be fully amortized in 2009.
14 Also, included on this exhibit are Oregon's and the
15 FERC's jurisdictional portion of unrecovered costs of the
16 Grid West Loans.
17 Q.Could you also describe in more detail Plant
18 Held for Future Use - Account 105 on page 21 of Exhibit No.
19 29?
20 A.Yes. As it did in its 2007 general rate
21 case (IPC-E-07-08), the Company has included Plant Held for
22 Future Use as part of its 2007 actual costs. Idaho Code
23 Section 6l-502A allows the Commission to set rates for
24 utilities that include a rate of return on property held
SMITH, DI 12
Idaho Power Company
1 for future use if the Commission makes an explicit finding
2 that such a return is in the public interest. In preparing
3 this case, the Company performed a review and identified
4 those parcels of land included in Account 105, Plant Held
5 for Future Use, that are anticipated to be used in their
6 entirety for operating property in the future. As a result
7 of this review, $1,642,753 in this account has been moved
8 to rate base and the 2007 year-end balance of $3,365,527
9 has been reduced by $1,642,753 in column 2, line 33 to
10 arrive at an adjusted year-end balance of $1,722,774.
11 Q.Why is the acquisition of these properties
12 in the public's interest?
13 A.Purchasing land for substations and other
14 facili ties prior to the time the facilities are constructed
15 benefits the Company and ultimately the customer. With the
16 increased growth in Idaho Power's service territory, it has
17 become increasingly difficult and expensive to compete with
18 developers to acquire strategically located properties. In
19 addition to the financial benefits, early acquisition of
20 these properties reduces opposition and assists local
21 planners by identifying where Idaho Power' s infrastructure
22 will be located.
23 Q.Would you please describe the remaining
24 pages in Exhibit No. 29?
SMITH, DI 13
Idaho Power Company
1 A.Page 22 of Exhibit No. 29 reflects the
2 balance at the beginning and end of 2007 and the average
3 balance for Accumulated Deferred Income Taxes - Accounts
4 190, 282, and 283. Page 23 reflects the balance by month
5 and the thirteen-month average balance of Customer Advances
6 for Construction - Account 252. Page 24 reflects the
7 balance by month and thirteen-month average of the rate
8 base components for IERCo consistent with prior Commission
9 orders.
10 Q.Would you please describe Exhibit No. 30?
11 A.Exhibit No. 30 reflects the detailed support
12 of deductions from the O&M expense of the Company for
13 general advertising expenses, certain memberships and
14 contributions, senior management expenses, and
15 miscellaneous other expenses. These adjustments have been
16 made by the Company consistent with prior orders of the
17 Commission and are responsive to concerns raised during the
18 2003 general rate case, Case No. IPC-E-03-l3.
19 Q.Would you please describe in more detail
20 pages 2 through 9 of Exhibit No. 30?
21 A.In light of some of the concerns expressed
22 in the 2003 rate case, the Company has put processes in
23 place to review and screen its accounting records to
24 identify memberships and contributions in an effort to
SMITH, DI 14
Idaho Power Company
1 properly identify, account for, and share the costs of
2 each. All contributions and one-third to one hundred
3 percent of certain memberships have been removed. This
4 screening process is consistent with Idaho Power's last two
5 general rate case filings. Additionally, senior management
6 expenses have been reviewed and adjusted by (1) removing
7 one hundred percent of charges to the Arid Club and Oregon
8 jurisdiction direct charges, (2) removing one - third of
9 Edison Electric Institute (~EEI") expenses, and (3)
10 allocating the balance of expense account charges of senior
11 management between Idaho Power and IDACORP on the basis of
12 how their payroll is charged. Seven officers had no
13 further allocation based on payroll as their expenses are
14 reviewed monthly for proper allocation between IDACORP and
15 Idaho Power, thus not requiring further allocation.
16 Lastly, the Company has reviewed all expense account
17 charges to O&M in an effort to identify and exclude charges
18 from regulatory recovery based on prior concerns expressed
19 in other filings based solely on the name of the business
20 establishment. While many of these expense account charges
21 are legitimate business expenses, out of an abundance of
22 caution, they were removed. These reductions are
23 consistent with the Commission Order No. 29505 in Case No.
24 IPC-03-l3.
SMITH, DI 15
Idaho Power Company
1 Q.Would you please describe Exhibit No. 32?
2 A.Exhibit No. 32, lines 1 through 3 reflect
3 the unamortized portion of the Electric Plant Acquisition
4 Adjustment associated with the Prairie Power Rural Electric
5 Cooperative purchase in July 1992.
6 Line 4 of Exhibit No. 32 reflects a decrease to
7 Investment in Associated Companies (IERCo) - Account 123,
8 for a portion of plant deemed not used and useful at the
9 Bridger Coal per Commission Order No. 29505.
10 Lines 5 through 9 of Exhibit 32 reflect FAS 87
11 Pension Expense to be removed from Administrative Expenses
12 Transferred-Credit - Account 922, which removal is
13 consistent with Commission Order No. 29505.
14 Lines 10 and 11 of Exhibit No. 32 remove the income
15 statement impact of the Energy Efficiency Rider (formerly
16 DSM Rider) accounting effecting Other Electric Revenues -
17 Account 456 and Customer Assistance Expenses Account 908 in
18 accordance with Commission Order No. 30189.
19 Lines 12 through 14 of Exhibit 32 record the
20 decrease of amortization expense included in Regulatory
21 Commission Expenses - Account 928, for amounts included in
22 the 2007 test year that resulted from Commission Order Nos.
23 3 0 035, 3 0215, and 3 0267 .
SMITH, DI 16
Idaho Power Company
1 Lines 15 and 16 of Exhibit No. 32 are adjustments to
2 the 2008 test year and are discussed later in my testimony.
3 Q.Would you please describe in more detail the
4 adjustment to Exhibit No. 32 related to pension expense
5 removal?
6 A.Yes. Exhibit No. 32, line 5 shows
7 $4,238,191 total FAS 87 Net Periodic Pension Cost that the
8 Company reported in the Company's financial statements
9 prior to receiving Commission Order No. 30333 allowing for
10 the deferral of this cost as a regulatory asset. The
11 operating expense percentage of 64.89 percent is then
12 applied to the total FAS 87 cost less the premium expense
13 to arrive at the operating expense portion of $2,683,699 on
14 line 9 of Exhibit No. 32 to be removed from this case. In
15 accordance with Generally Accepted Accounting Principles
16 (~GAAP"), the Company capitalized the remaining period cost
17 of $1,452,068 related to pension.
18 2008 TEST YEA METHODOLOGIES
19 Q.In your above testimony, you describe the
20 various adjustments that were made to the 2007 historical
21 actuals to arrive at the 2007 adjusted actuals. Do these
22 same adjustments need to be made in 2008?
23 A.No. These adj ustments are standard rate
24 making adjustments based on prior Commission orders and are
SMITH, DI 17
Idaho Power Company
1 adjustments to charges included in the 2007 actuals. By
2 removing them from 2007 actuals prior to applying the
3 various methodologies to arrive at the Company's proposed
4 2008 test year data, the same adjustments are already
5 accounted for.
6 Q.Do you have an exhibit that identifies the
7 methodologies that were applied to actual adj usted
8 historical 2007 results to arrive at the proposed test year
9 2008 levels?
10 A.Yes. Exhibi t No. 33, pages 1 through 2,
11 provides the actual methodologies and multipliers to the
12 2007 adjusted actual historical data discussed above.
13 Q.Have the data and the associated adjustments
14 made to your exhibits and supporting schedules been
15 calculated on a total system basis?
16 A.Yes.
17 Q.How was the 2008 test year selected for this
18 proceeding?
19 A.In order to meet the legal requirement that
20 rates be fair, just, reasonable, and sufficient, the
21 Commission must establish a test year that most closely
22 reflects the investment and expense levels that will exist
23 at the time new rates are implemented. At this time, the
24 Company believes that a 2008 test year best satisfies that
SMITH, DI 18
Idaho Power Company
1 requirement. In response to the concerns Staff expressed
2 regarding the Company's filing of a forecasted 2007 general
3 rate case in Case No. IPC-E-07-08 and their desire that the
4 Company provide auditable data as the starting point for
5 the forecasted test year, the Company explored multiple
6 alternatives to establish methodologies to adjust auditable
7 historic data to establish the 2008 test year that would be
8 representative of the Company's anticipated levels of
9 spending. As discussed in the March 12, 2008, future test
10 year workshop, the consensus objective is the development
11 of a test year that provides a normalized level of rate
12 base and expenses to establish just and reasonable rates
13 and timely rate relief. The Company's expectation is that
14 Staff will be able to review and audit the 2007 adjusted
15 historical actual expenditures as the basis upon which to
16 evaluate the 2008 test year presented by the Company.
17 Q.What methodologies did the Company consider
18 as appropriate candidates for developing the 2008 test
19 year?
20 A.The Company considered using 2007 actuals,
21 averaging, trending, and indexing. Ultimately, the Company
22 determined that for auditing purposes, trending based on
23 2007 actual data would provide Staff with a smoother
24 transition to the 2008 test year. The Company, in
SMITH, DI 19
Idaho Power Company
1 accordance with Staff's request, minimized the number of
2 methodologies while still maintaining the validity of the
3 data used to develop the 2008 test year.
4 Q.Have you provided a detailed description of
5 the methodologies and multipliers used to adjust 2007
6 financial data to the 2008 test year?
7 A.Yes. Each methodology is included in the
8 detailed Methodology Manual with a summary of the
9 multipliers my department provided to Pricing and
10 Regulatory Services (Exhibit No. 34). The methodologies
11 are applied to the 2007 adjusted actual results included in
12 the cost of service modeling with the exception of the
13 methodologies applied to rate base and rate base-related
14 items.
15 Q.Did you use 2007 actuals as a methodology to
16 apply to the financial inputs?
17 A.Yes. The Company reviewed the individual
18 accounts included in revenue, expense, and rate base to
19 determine the appropriate level of spending and revenues
20 that are anticipated for 2008 and, where appropriate, used
21 2007 actuals for the 2008 test year instead of a trending
22 multiplier. The accounts and descriptions for which 2007
23 adjusted historical actuals were used include:(1) Account
24 454 - Transformer and Distribution Rentals, (2) Account 456
SMITH, DI 20
Idaho Power Company
1 - Antelope Facilities Charges, (3) Account 415 - Hydro
2 Services Revenues, Water Management Services Revenues and
3 Joint Use Revenues for both Idaho and Oregon, (4) Account
4 416 - Hydro Services Expenses, Water Management Services
5 Expenses and Joint Use Expenses for both Idaho and Oregon,
6 (5) Account 565 - Transmission of Electricity by Others,
7 . (6) Account 924 - Property Insurance Expense, (7) Account
8 406 - Amortization of Electric Plant Acquisition Adjustment
9 for Prairie Power, (8) Account 408. l-Shoshone-Bannock
10 Licenses, (9) Account 182304 - FERC Grid West Expense, and
11 (10) Account 105 - Plant Held for Future Use (except for
12 the expected acquisition of the Lakeshore substation
13 property included as a Known and Measurable Adjustment to
14 the 2008 test year) .
15 Q.Was the Methodology Manual reviewed by Idaho
16 Power's management?
17 A.Yes. The Methodology Manual has been
18 reviewed and approved by senior managers of Idaho Power
19 from Pricing and Regulatory Services, Finance, Power
20 Supply , Delivery , Administrative Support business units,
21 and the Corporate Planning Department.
22 Q.Is the rationale for determining the various
23 growth rates included in the Methodology Manual?
24 A.Yes.
SMITH, DI 21
Idaho Power Company
1 Q.Please summarize the methodologies included
2 in Exhibit No. 33.
3 A.The methodologies applied to the various
4 accounts are listed in column 2 of Exhibit No. 33. Each of
5 the methodologies is described in more detail wi thin the
6 Methodology Manual. To develop the Method Manual, the
7 Company performed a review of each group of accounts
8 included within the test year and based upon specific
9 knowledge and analysis of that account grouping, either
10 used 2007 actuals or applied another methodology to that
11 account that represents the most appropriate level of
12 anticipated spending.
13 Besides 2007 actuals, other methodologies include
14 application of the three- or five-year compounded annual
15 growth rate, which is the average growth rate over the
16 number of years that represents a steady level of growth
17 from the beginning period to the ending period and smoothes
18 out uneven amounts within these years.
19 Another methodology listed in the Manual is
20 described as Known and Measurable. Known and Measurables
21 are those in which specific knowledge of that account
22 requires application of that knowledge to estimate the 2008
23 spending level. An example of Known and Measurables is
24 Account 454 - Substation Equipment for which the Company
SMITH, DI 22
Idaho Power Company
1 has specific facilities agreements that specify the
2 revenues to be received from customers.
3 Finally, normalization was used for all power supply
4 cost accounts. Power supply normalization is discussed in
5 detail in Mr. Said's testimony.
6 Q.Please provide an overview of the
7 methodologies included in the Methodology Manual (Exhibit
8 No. 34).
9 A.I will start with test year revenues. The
10 test year data reflects 2008 Other Operating Revenues
11 (Accts. 451, 454 & 456). With the exception of revenues
12 from substation equipment rents, transformer and
13 distribution rentals, station and line rentals, network
14 services and other Long Term Firm (~LTF"), point-to-point
15 transmission, and Antelope Substation revenues, all
16 operating revenuès were updated using a three-year
17 compounded annual growth rate.
18 The 2008 Other Operation and Maintenance expense
19 was based on a five-year compounded annual growth rate
20 methodology which excluded pension expense, third party
21 transmission, Energy Efficiency Rider, and compensation at-
22 risk incentives in its determination. Account 565 -
23 Transmission of Electricity by Others and Account 924 -
24 Property Insurance used 2007 actuals. Account 908 - Energy
SMITH, DI 23
Idaho Power Company
1 Efficiency Rider was removed in its entirety from the test
2 year.
3 Q.Is the five-year compounded growth rate
4 appropriate?
5 A.Yes. The five-year compounded growth rate
6 is the most appropriate method to estimate the Company 2008
7 test year operations and maintenance expense based on
8 continued growth in its service territory and the resulting
9 financial needs balanced with the forecasting objectives
10 identified by the Company, IPUC Staff, and Intervenors in
11 the forecast test year workshop held on March 12, 2008.
12 Q.What is the average five-year compounded
13 growth rate that the Company applied to determine 2008 test
14 year O&M expenses?
15 A.The average rate applied is 5.82 percent.
16 Q.Can the use of as. 82 percent compounded
17 annual growth rate be supported by comparison to other
18 growth measuring factors?
19 A.Yes. For example, the Consumer Price Index
20 (~CPI") and the Company's customer growth over the last
21 five years have grown at the combined rate of 6.27 percent.
22 This combined 6.72 percent growth rate covers the same
23 expenses as the average of all functional five-year
24 compound growth rates applied to the FERC operations and
SMITH, DI 24
Idaho Power Company
1 maintenance accounts, which is the source of the 5.82
2 percent growth rate the Company used.
3 Q.Please describe more fully how the Company
4 determined the 5.82 percent growth rate.
5 A.The Company's other operations and
6 maintenance in 2003, excluding pension, incentive, Energy
7 Efficiency Rider, and third party transmission expense was
8 $208.8 million dollars compared to the 2007 amount of
9 $261.9 million dollars. Therefore, the compounded annual
10 five-year growth in these expenses is 5.82 percent.
11 Q.How did you compute the 6.27 percent amount?
12 A.For a similar time frame, between 2003 and
13 2007, and indexed to a base 2003 starting point, the
14 combined growth of new customers and CPI is 6.27 percent.
15 Q.Is the use of the 5.82 percent growth rate
16 reasonable?
17 A.The Company's increase in operation and
18 maintenance expenses has been slower than the 6.27 percent
19 combined rate of increase for new customer growth and the
20 CPI. In my opinion, using the 5.82 percent compound
21 annual growth rate, on average, to adjust the operating
22 expenses, where applicable for 2007, is a reasonable
23 multiplier to include in the 2008 test year other
24 operations and maintenance expense and provides for just
SMITH, DI 25
Idaho Power Company
1 and reasonable rate relief in 2009.
2 Q.Please explain any other methods used to
3 escalate other expense items.
4 A.The 2008 depreciation, amortization expense,
5 and reserve were calculated on the monthly estimated plant
6 balances based on the rates authorized by Order No. 29363
7 for the months of January through July 2008 calculation.
8 For the August through December 2008 time period, the
9 proposed depreciation rates from the currently filed
10 depreciation case (IPC-E-08-06) were used.
11 The 2008 construction expenditures (~Construction")
12 were bifurcated into two separate and distinct parts, those
13 proj ects in excess of $2 million and those under $2
14 million. This separation is explained more fully in the
15 Methodology Manual (Exhibit No. 34). The projects in
16 excess of $2 million were reviewed by the individual
17 project managers who, based on actual expenditures for each
18 project through February 2008, estimated the costs to
19 complete and the in-service date of each project. After
20 analyzing the under $2 million projects (excluding
21 vehicles) closing to Electric Plant in Service as a group,
22 it was determined that a five-year compounded annual growth
23 rate be applied to closings under $2 million dollars.
SMITH, DI 26
Idaho Power Company
1 Taxes Other Than Income were based on a three-year
2 compounded annual growth rate with the exception of Real
3 and Personal Property taxes, Shoshone Bannock licenses,
4 Idaho regulatory commission fees, and Kilowatt Hour Taxes.
5 Finally, Materials and Supplies were based on a
6 three-year compounded annual growth rate. All other 2008
7 test year amounts were either 2007 actuals, or calculated
8 using a methodology based on specific knowledge of that
9 account. These exceptions are discussed in more detail in
10 the Methodology Manual (Exhibit No. 34).
11 Q.Please summarize how the 2008 test year
12 methodologies were applied to the 2007 historical actual
13 adjusted data.
14 A.The forecast process began with calendar
15 year 2007 historical actuals. Adjustments were then made
16 to expenses incurred in 2007 to arrive at an adjusted 2007
17 actual. These adjusted 2007 actuals were the basis upon
18 which the methodologies (2007 actual, or three- and five-
19 year growth rates, or known and measurable adjustments)
20 were applied. Anualizing, intervenor funding and spending
21 containment adjustments were made for all non-normalized
22 components for the test year 2008.
SMITH, DI 27
Idaho Power Company
1 ANALIZING AN OTHER ADJUSTMNTS TO THE 2008 TEST YEA
2 Q.Please summarize the annualizing and other
3 regulatory adjustments made to the 2008 test year.
4 A.The traditional regulatory adjustments the
5 Company has made for the 2008 test year are included on
6 Exhibit No. 31, pages 1 through 5, which I am also
7 sponsoring. This exhibit details the support to the 2008
8 annualizing adjustments. These adjustments reflect changes
9 to certain expense and rate base items to treat them as
10 though they have been in existence for a full year or to
11 year-end 2008 levels, whichever is applicable. These
12 include the operating expense adjustments for: (1) a
13 payroll annualizing increase of $2,593,733, (2) an
14 incentive decrease of $3,838,832 to remove incentive above
15 the normalized incentive target rate, (3) a 2009 salary
16 structure adjustment increase of $3,019,804 on Exhibit No.
17 31, pages 1 and 2, (4) the annualized accumulated reserve
18 adjustment of $227,404 and depreciation expense adjustment
19 of $471,026 on Exhibit No. 31, page 3, and (5) the 2008
20 major plant addition annualizing adjustment of $91,267,282
21 with the associated property tax adjustment of $337,000 and
22 insurance expense of $38, 971 on Exhibit No. 31, pages 4 and
23 5.
SMITH, DI 28
Idaho Power Company
1 Q.Have you made any other adjustments to the
2 2008 test year?
3 A.Yes. In addition to the annualizing
4 adjustments, the Company has made adjustments to Regulatory
5 Commission Expenses - Account 928 (Exhibit No. 32, lines 15
6 and 16) for the amortization of intervenor funding amounts
7 that had been previously deferred as a regulatory asset as
8 instructed by the Commission Order Nos. 30488 and 30508.
9 These orders directed the Company to defer treatment until
10 a future ratemaking procedure. The Company in the 2008
11 test year has assumed a one year amortization period.
12 Q.Please describe the purpose of the Known
13 Spending Containment adjustment on page 6 of Exhibit No.
14 31.
15 A.The negative impact of seven out of eight
16 years of below normal stream flows has continued to
17 deteriorate the financial position of the Company, as
18 evidenced by recent rating agency actions by Moody's and
19 Fitch Rating Agencies on June 3, 2008, and March 24, 2008,
20 respectively, more fully described in the testimony of Mr.
21 Steven Keen.
22 To respond to this situation the Company has
23 directed its senior management to find areas of spending
24 that can be deferred or eliminated. This spending
SMITH, DI 29
Idaho Power Company
1 containment directive has identified an estimated reduction
2 to Other Operations and Maintenance of $3,834,000 which is
3 identified in my Exhibit No. 31, page 6. These budget
4 reductions are in the deferral of hiring new positions
5 throughout the Company for 2008 and the deferral of certain
6 maintenance proj ects . Such deferral is not expected to
7 degrade service or reliability in the near term. The
8 reduction in other operations and maintenance expenses is
9 the most controllable expense reduction that can be quickly
10 implemented to offset the decline in earnings for 2008.
11 Q.Does this conclude your direct testimony in
12 this case?
13 A.Yes, it does.
SMITH, DI 30
Idaho Power Company