20081203Gale Rebuttal.pdf

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200a DEC -3 PH 3: 46
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 REBUTTAL TESTIMONY
OF
JOHN R. GALE
1 Q.Please state your name and whom you are
2 representing.
3 A.My name is John R. Gale, commonly addressed
4 as Ric Gale, testifying on behalf of Idaho Power Company
5 ( "Idaho Power" or "the Company").
6 Q.Are you the same Ric Gale that presented
7 direct testimony before the Idaho Public Utilities
8 Commission ("the Commission") in this docket?
9 A.Yes.
10 Q.What was your role in developing the
11 Company's rebuttal testimony in this case?
12 A.My role in the development of the Company's
13 rebuttal testimony was to oversee, manage, and coordinate
14 the Company's rebuttal.
15 Q.Have you read the direct testimony submitted
16 by the Idaho Public Utili ties Commission Staff and other
17 Intervenors in this case?
18 A.Yes, I have. As a result of that review,
19 there are five maj or issues that I wish to respond to:( 1)
20 the proper test year to be used in this proceeding, (2) the
21 proposed labor expense disallowances to the cost of service
22 determination, (3) the inclusion of Construction Work in
23 Progress ("CWIP") as a policy matter in the Company's
24 revenue requirement, (4) Staff's proposal regarding an
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Idaho Power Company
1 energy efficiency prudency review, and (5) the Company's
2 position on energy affordability as it relates to this
3 proceeding.
4 THE TEST YEA
5 Q.Staff Witness Randy Lobb's testimony
6 references Idaho Power "continually" changing test year
7 methodology, which he attributes to the Company's effort to
8 reduce the impact of regulatory lag. Is this conclusion
9 correct?
10 A.I take a small exception to the
11 "continually" changing label, but understand why it was
12 used. While methods have changed starting with the 2003
13 test year ,they have changed purposefully and with the
14 intent to make a transition from historical to forward test
15 year at a pace that was acceptable to the Commission and
16 our customers. The assertion that the Company's focus on a
17 more current test year to reduce regulatory lag is correct.
18 I have testified a number of times, including my direct
19 testimony in this case, as to why this is important.
20 Q.Please define your use of the term
21 regula tory lag.
22 A.I define regulatory lag as the difference
23 between the time period when test-year costs are incurred
24 and the time period when rates are implemented to recover
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Idaho Power Company
1 those costs. As I stated in my direct testimony in this
2 case, the impact of regulatory lag is dependent upon the
3 situation. As I also stated in my direct testimony, Idaho
4 Power is not currently experiencing the circumstances where
5 regulatory lag is beneficial.
6 Q.Mr. Lobb's testimony discusses the Staff's
7 approach to the test year and references the workshops that
8 occurred following the conclusion of the Company's last
9 general rate case. Please respond to his assessment.
10 A.I am encouraged with the conceptual progress
11 that has been accomplished since our last rate case. Mr.
12 Lobb indicates on page 11 of his testimony that "Staff
13 generally accepts the Company proposed 2008 test year that
14 begins with actual 2007 calendar year costs updated through
15 December 31, 2008." He also states on pages 11 an~ 12 that
16 the "Staff supports some but not all of the Company's
17 proposed escalation of expense and capital accounts on the
18 basis of a CAGR." Additionally, on page 12, "Staff agrees
19 that the methodology used by the Company in this case, an
20 escalator applied to historic account totals, is superior
21 to the fully budgeted future test year proposed by the
22 Company in its last general rate case." These statements
23 by the leader of the technical Staff signify progress on
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Idaho Power Company
1 acceptance of the concept of using a more current test year
2 and are consistent with the workshop outcomes.
3 The primary disagreement between Staff and the
4 Company in this case arises out of the respective methods
5 used to escalate 2007 accounts into 2008. The disagreement
6 surfaces in several major areas, including normalized net
7 power supply expenses, operating expense escalation, and
8 test year labor expense. Mr. Said, Ms. Smith, and I
9 provide the Company rebuttal to these areas respectively.
10 The other significant difference between Staff and Idaho
11 Power related to revenue requirement has to do with the
12 appropriate return on equity, where Mr. Steven Keen and Dr.
13 William Avera provide Idaho Power's rebuttal, and the
14 method and amount of CWIP to be included in test year
15 costs, which Ms. Catherine Miller addresses from a
16 technical perspective.
17 Q.If all the adjustments proposed by the Staff
18 and Intervenors are adopted by the Commission, will Idaho
19 Power have a reasonable opportunity to earn its authorized
20 return?
21 A.Unfortunately no. Putting aside whether the
22 return on equity is 11.25 percent, 10.25 percent, or points
23 in between; to constitute just and reasonable rates, the
24 application of the approved rates to the customer loads
GALE, DI REB 4
Idaho Power Company
1 during the time period when the rates are in effect must
2 give the Company a reasonable opportunity to earn whatever
3 return is authorized. My concern with the totality of the
4 Staff case is that Idaho Power will not have that
5 opportunity under the current and near-term circumstances
6 to earn whatever the Commission determines as the
7 authorized return in this case.
8 Q.On page 9 of Micron Witness Dennis Peseau' s
9 testimony in support of his argument that regulatory lag
10 may not adversely impact utilities, Dr. Peseau refers to
11 the hiatus of general rate case filings by Idaho Power
12 Company prior to its filing of the 03-13 Case in 2003. Dr.
13 Peseau states that he is unaware of any constraints on
14 Idaho Power that might have impacted its ability to file
15 for general rate relief. Is Dr. Peseau correct in his
16 recollection?
17 A.No. Dr. Peseau is not accurately describing
18 the historical facts. Idaho Power actually was legally and
19 practically constrained in its ability to file for general
20 rate relief prior to 2003. Mr. LaMont Keen addressed these
21 circumstances at length beginning on page 3 of his direct
22 testimony in Case No. IPC-E-03-13 ("the 03-13 Case"). At
23 that time I had worked on that section of testimony with
24 Mr. Keen and can speak to it now. The last full general
GALE, DI REB 5
Idaho Power Company
1 rate case filed with this Commission prior to the 03-13
2 Case was Case No. IPC-E-94-5 ("the 94-5 Case"). Idaho
3 Power filed the 94-5 Case in June of 1994 and the
4 Commission issued its final order in February of 1995.
5 Closely following the 94-5 Case, Idaho Power filed to
6 include the costs of the Twin Falls hydroelectric plant
7 upgrade in rates. The Commission authorized this rate
8 change in August of 1995. This was essentially a single
9 item rate matter that was incrementally added on to the
10 recently completed 94-5 Case.
11 Also in 1995, the Commission approved a rate
12 moratorium and earnings stability stipulation proposed by
13 Idaho Power and various Intervenor parties, Case No. IPC-E-
14 95-11. One of the provisions of the stipulation was that
15 Idaho Power would not file for a change to base rates prior
16 to January 2000. As many remember, the western energy
17 crisis began to manifest itself in the second half of 2000
18 and into 2001. As a primary result of that crisis, Idaho
19 Power had several annual Power Cost Adjustments ("PCA")
20 that were more than $200 million above base rates,
21 representing rate increases that averaged more than 40
22 percent above base rates. Although after 1999, Idaho Power
23 did not have a legal or regulatory restriction on filing
24 general rate increases in addition to these PCA rate
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Idaho Power Company
1 changes, as a practical and political matter, it was simply
2 not possible to do so.
3 Q.In his discussion of forecast test years,
4 Dr. Peseau refers to his Exhibit No. 702, which is the Iowa
5 Utilities Board report to the Iowa General Assembly
6 entitled Review of Utili ty Ratemaking Procedures dated
7 January 2004. In his testimony, Dr ~ Peseau indicates that
8 Exhibit NO.702 shows that a historic test year equates to a
9 "traditional" test year. Does Exhibit No. 702 support Dr.
10 Peseau's conclusion?
11 A.Dr. Peseau's testimony paraphrased sections
12 of Exhibit No. 702 to draw an incorrect conclusion that the
13 historical test year is the "traditional" test year. In
14 fact, the use of forecast test years has been common in
15 numerous states since at least the 1970s. Idaho is
16 surrounded by states, including Oregon, California, Utah,
17 and Wyoming, .that authorize their Commissions to adopt
18 future test years to determine representative levels of
19 revenues, expenses, rate base and capital structure.
20 Accordingly, many utilities in these states are filing rate
21 proceedings with forecast test years. The Oregon
22 Commission has, for many years, viewed the future test year
23 as the appropriate choice of test year. Utah law
24 statutorily mandates that the Utah Commission give serious
GALE, DI REB 7
Idaho Power Company
1 consideration to the adoption of a future test year
2 period. PacifiCorp uses a future test year in Oregon,
3 Utah, and Wyoming to establish jurisdictional revenue
4 requirement.
5 Commissions and policy makers throughout the
6 country, and particularly in the West, are increasingly
7 recognizing that in an era of heavy construction, future
8 test years are necessary to allow utilities a reasonable
9 opportunity to earn their authorized rate of return.
10 Utilities that operate in a period of rapid expansion and
11 rate base growth will chronically under earn if test years
12 are historical in nature and fail to synchronize the
13 matching of expenses and revenues.
14 Q.Dr. Peseau argued in his testimony that the
15 states that routinely use a forward test year are almost
16 exclusively "highly populous states with very large public
17 commission staffs." He opined that the Idaho Staff is too
18 small to properly administer a forward test year. Do you
19 agree?
20 A.No. I would not characterize Wyoming, Utah,
21 and Oregon as states that are "highly populous states with
22 very large public commission staffs." In researching the
23 application of forward test years in the West, it is my
24 understanding that the staff resource load is not
GALE, DI REB 8
Idaho Power Company
1 increased, but rather the focus of the staff investigation
2 changes.
3 For example, in the last two Rocky Mountain Power
4 general rate requests in Wyoming, there were five members
5 of the Public Service Commission Staff assigned to the
6 dockets. In Oregon, the Public Utility Commission assigns
7 approximately the same number of Staff to Idaho Power rate
8 cases (which utilized a historic test year) as it does to
9 the 2005 PacifiCorp rate case (which utilizes a future test
10 year).
11 Q.Previously you spoke of the use of the
12 forecast test year as a tool to remove the detrimental
13 effects of regulatory lag. While the Iowa Utilities Board
14 in its report to the Iowa General Assembly (Exhibit No.
15 702) recognized the eroding effects of regulatory lag on a
16 utility's revenue stream, the Board chose not to recommend
17 a future test year option. Please explain why.
18 A.In its investigation, the Iowa Utilities
19 Board found that most concerns regarding the negative
20 effects of regulatory lag had been addressed by other Iowa
21 statutes. In fact, Iowa has. numerous statutes or "tools"
22 in place that exist to reduce the effect of regulatory lag.
23 For example, Iowa allows for updates of infrastructure
24 investment nine months beyond a test year and allows
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Idaho Power Company
1 utilities to place temporary rates into effect without
2 Board approval within ten days of a filing for a general
3 rate increase. The Iowa Utilities Board has authority to
4 allow for the automatic adjustment of rates and charges for
5 sudden and volatile costs, and the Board has approved 100
6 percent recovery of fuel and transportation costs for
7 electricity generation.
8 In addition, the implementation of two relatively
9 new Iowa laws allowing regulatory assurances for capital
10 investment decisions and for environmental improvements and
11 the ability to consider cost of capital changes after the
12 test year period go a long way to alleviate concerns
13 related to regulatory lag in Iowa and therefore are useful
14 regulatory "tools." These regulatory tools would be very
15 helpful to have in Idaho given the current and forecasted
16 energy and economic situation.
17 Q.Dr. Peseau obj ects to the use of future test
18 years because he believes that utilities will be tempted to
19 abuse the system. He calls this "systemic bias." This
20 Commission has often approved the use of a historical test
21 year adjusted for known and measurable changes. Does a
22 historical test year always produce a totally objective and
23 unbiased revenue requirement?
GALE, DI REB 10
Idaho Power Company
1 A.No. Every type of test year is subject to
2 criticism and objection if a rate increase is proposed.
3 When an historical test year is proposed, the arguments
4 simply shift from issues surrounding forecasting technique
5 to the choice of known and measurable adj ustments .
6 Utilities are often criticized in their choice of an
7 historic test year; opponents argue that the utility has an
8 incenti ve to exaggerate its costs in the period under
9 review. Every type of test year has its advantages and
10 challenges.
11 Idaho Power is not asking for a blanket acceptance
12 of its calculations but rather acceptance of the concept of
13 a forward test year as being an appropriate tool to provide
14 timely recovery for the increased level of expenditures
15 that are required to serve the growing Idaho load.
16 Q.Let us now move on to Industrial Customers
17 of Idaho Power Witness Don Reading's forecast test year
18 concerns. Beginning on page 17 of his testimony, Dr.
19 Reading notes that in the current case, the Company has
20 filed a full twelve-month forecast test year and is
21 sympathetic as to the underlying reason for filing in this
22 manner. He is also complimentary (page 19) of the Company
23 for"... its efforts and communication with the Staff and
24 Interveners in the development of the forecasted test year
GALE, DI REB 11
Idaho Power Company
1 in this case." Yet he is not supportive of the Company's
2 filing. Why?
3 A.My. understanding of his testimony is that a
4 forecasted test year is based upon a proj ection that
5 ultimately may not be the case; thus, customers are paying
6 rates on unrealized projections. My difficulty with his
7 position is that rates based upon actual historical costs
8 are not reflective of future costs either.
9 Q.Dr. Reading proposes that Idaho Power file
10 actual results for the first nine months of 2008 and
11 compare these to the test year to provide a better
12 "squaring" with reality. Does the Company agree with this
13 proposal?
14 A.Yes. Ms. Smith's rebuttal testimony
15 includes precisely this type of information. Idaho Power
16 is comfortable with validating its test year and would even
17 entertain the idea of a future true-up if that type of
18 mechanism would advance the cause of more timely rate
19 relief.
20 Q.Are you proposing a true-up?
21 A.I do not think that a true-up of forecast
22 information is needed to set rates that are reflective of
23 the costs expected to be incurred during the time that the
24 rates are in place. Knowing how often the Company will be
GALE, DI REB 12
Idaho Power Company
1 before this Commission over the next five years, the
2 Company has concluded that unreasonably inaccurate
3 forecasting would become readily apparent to all the
4 parties. With the challenge Idaho Power has to earn
5 authorized returns, any incentive to "game" the forecast
6 would be short-term gain and long-term folly. However, as
7 a practical matter, if true-ups provide a comfort level to
8 the Commission and customers that would allow the
9 Commission to accept a full forecast test year, then Idaho
10 Power stands quite ready to accept the symmetrical
11 application of a true-up to a forecast test year.
12 Q.What do you mean by a symmetrical
13 application of a true-up?
14 A.If the Company estimate is higher than
15 actual values, rates would be reduced. If the Company
16 estimate is lower than actual, then rates would increase.
1 7 LAOR EXPENSE DISALLOWANCE
18 Q.Staff Witness Joe Leckie proposes to make
19 several labor expense disallowances to the Company's test
20 year. They include annualizing labor expense at August and
21 September levels instead of year-end, removing the Salary
22 Structure Adjustment ("SSA"), and removing most of the
23 normalized target incentives for employees. Do you agree
24 with Mr. Leckie's disallowances?
GAE, DI REB 13
Idaho Power Company
1 A.From a ratemaking perspective, I disagree
2 with all of Mr. Leckie's labor expense adjustments because
3 they are arbitrary and because their impact ignores costs
4 the Company will likely incur to serve its customers at the
5 time the ordered rates resulting from this proceeding are
6 effective.
7 Q.What is your concern with annualizing
8 employment levels partway through the year instead of at
9 year-end?
10 A.Annualizing adjustments are not new to
11 developing revenue requirements and, to my knowledge, they
12 are performed consistently at year-end. The purpose of an
13 annualizing adjustment is to reflect an amount that would
14 have existed had year-end circumstances been in effect for
15 the entire test period. Labor expense is a classic
16 annualizing adjustment because typically year-end is a
17 better reflection of labor expense going forward than
18 earlier in the year.
19 Q.What specifically is done in an annualizing
20 adjustment?
21 A.Year-end expense levels are treated as if
22 they had been in place throughout the year. Otherwise the
23 Company's labor expense for ratemaking purposes is
24 represented by essentially the average for the test year,
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Idaho Power Company
1 which is not reasonably reflective of the costs going
2 forward. Annualizing is particularly important to apply to
3 account classifications that are typically growing or
4 declining in a predictable trend year over year.
5 Q.What is your understanding of why Mr. Leckie
6 proposed changing the method for annualizing labor expense?
7 A.Mr. Leckie noted that there was a greater
8 opportunity to overstate annualized payroll expense through
9 a forecast method than by using actual numbers. He does
10 not present any evidence that this has occurred or will
11 occur. He only posits that it might occur. Presumably, he
12 believes his method is more reflective of what the future
13 costs will be.
14 Q.How do you answer Mr. Leckie's hypothetical
15 charge?
16 A.Admittedly, there is an opportunity to
17 manipulate a forecast. In my mind it would be a short-
18 sighted path for a utility that is attempting to bring
19 rates more current with costs to purposefully pursue this
20 strategy. In our case, just closing the time gap is
21 sufficient ratemaking progress. However, on the flip side,
22 when an expense category has proven to be appropriate for
23 annualization - as labor expense has - annualizing it by an
GALE, DI REB 15
Idaho Power Company
1 earlier time period than year-end will typically understate
2 the expense level.
3 Q.With 2008 drawing to a close, what has
4 happened to employment levels at Idaho Power?
5 A.At the end of November, Full Time Equivalent
6 ("FTE") employment is 2079 positions. In August, FTEs were
7 2085 and in September, they were 2084. While I disagree
8 with Mr. Leckie's adj ustment from a ratemaking logic
9 perspective, the actual plateaued employment levels in 2008
10 support his adjustment.
11 Q.Why have employment levels plateaued in the
12 second half of 2008?
13 A.The Company is adjusting to the economic
14 slowdown and has instituted a selective hiring freeze to
15 help manage labor costs during difficult times.
16 Q.As a result of the economic slowdown,does
17 the Company accept Mr.Leckie's annualizing adjustment?
18 A.Yes. Again from a logic perspective, I
19 would disagree, but from a review of employment data after
20 the Company filing, Mr. Leckie's annualizing proposal is
21 reasonable.
22 Q.Turning to Mr. Leckie's proposed
23 disallowance of the SSA, what is the purpose of the SSA at
24 Idaho Power?
GALE, DI REB 16
Idaho Power Company
1 A.The purpose of an SSA is to realign base
2 compensation with prevailing market conditions.
3 Q.What is the process for determining the SSA?
4 A.Idaho Power gathers data from multiple
5 sources and evaluates factors when determining the
6 appropriate SSA. These include: the average percentage
7 increase among northwest utilities; industry and region-
8 specific salary increase surveys; budget increases of other
9 large local corporations; the local and national economy;
10 and the national Consumer Price Index.
11 Q.Who approves the SSA?
12 A.The Company's Board of Directors approve any
13 annual SSA at their November meeting.
14 Q.What reasons did Mr. Leckie give for
15 disallowing this labor expense?
16 A.He made two arguments. First, the SSA
17 proposed by the Company was neither known nor measurable
18 and, second, the Staff is .concerned about Company "raises"
19 during difficult economic times.
20 Q.Addressing the difficult economy first, why
21 is Idaho Power raising its employees' wages at this time?
22 A.There are two reasons: (1) to attract,
23 retain, and motivate a quality work force and (2) to offer
24 a competitive compensation package to our trade employees.
GALE, DI REB 17
Idaho Power Company
1 While the current job market does offer a deep, qualified
2 applicant pool, there are frequently exceptions in
3 specialized fields that remain in high demand.
4 Additionally, there are also many companies continuing to
5 provide salary adjustments to their employees. Even in a
6 softened economy, it is prudent to attract and retain a
7 quali ty workforce. For Idaho Power, there is the
8 additional need to offer a competitive compensation package
9 to the Company's trade employees. It is imperative that
10 the Company provide wages and benefits to this employment
11 group that they perceive as an equal or higher value than
12 other utili ties with union representation.
13 Q.Is Idaho Power opposed to unions?
14 A.Idaho Power values the flexibility and the
15 direct communication with employees that a non-union
16 environment provides to us and our customers. The Company
17 believes strongly that it is incumbent upon our management
18 team to provide a sustaining work environment that negates
19 the necessity for labor to organize. This is not an anti-
20 union position; it is a proactively pro-employee position.
21 Q.Regarding Mr. Leckie's concern that the SSA
22 is not known and measureable, what was the SSA amount
23 included in the Company' s2008 revenue requirement?
GALE, DI REB 18
Idaho Power Company
1 A.The SSA included in Idaho Power's rate
2 request was three percent.
3 Q.Did Idaho Power's Board of Directors take
4 any action at its November 2008 meeting regarding a year-
5 end SSA?
6 A.After much discussion, the Board of
7 Directors approved a three percent SSA. Idaho Power
8 believes it is important to provide employees with
9 competitive total compensation and reward the value they
10 bring to the Company. The need to maintain the
11 competitiveness of our base compensation structure comes at
12 a difficult time. The recent upheaval in the capital
13 markets, downsizing announcements by local businesses,
14 including our largest customer, and the significant
15 downturn in the housing market have and will affect us. In
16 order to narrow the gap between the higher pay of other
17 northwest utilities, the Company's original SSA
18 recommendation to the Board was 3.5 percent. However,
19 considering the current state of the economy, all of our
20 stakeholders and the long-term health of the Company, the
21 Board of Directors approved a 3 percent SSA that becomes
22 effective on December 27, 2008. This action makes the SSA
23 revenue requirement known and measurable and within the
24 test year. More importantly, the SSA is a real labor
GALE, DI REB 19
Idaho Power Company
1 expense the Company will incur at the time the new rates
2 are in place.
3 Q.The last component of labor expense
4 disallowance proposed by Mr. Leckie has to do with the
5 appropriate target employee incentive level for ratemaking
6 purposes. Do you agree with Mr. Leckie's contention that
7 some of the incentive components included by Idaho Power in
8 its test year are of primary benefit to the shareholders?
9 A.No. These components are customer-based
10 incentives. I am in agreement with Mr. Leckie that
11 incentives based solely on benefits accruing to
12 shareholders should be removed from revenue requirement.
13 Idaho Power routinely removes any incentives that are
14 driven by profits or earnings from its test year. The
15 Company also removes from its revenue requirement any
16 short-term incentives paid to or targeted for its senior
1 7 executives, whether those incentives are based on
18 shareholder benefits or customer benefits. Consistent with
19 Case No. IPC-E- 05-28 settlement, only mid-level or "target"
20 levels of customer-based incentives are requested to be
21 included in rates. As stated previously, these customer-
22 based incentives are keyed to customer satisfaction, budget
23 management, and reliability.
GALE, DI REB 20
Idaho Power Company
1 Q.Which customer-based incentive does Mr.
2 Leckie propose to remove?
3 A.Mr. Leckie proposes to remove from the test
4 year the two percent target incentive related to O&M budget
5 management because he believes the incentive should be
6 "self-funding." He also proposes to remove another 0.5
7 percent of the other incentive payments because no
8 incentives are paid unless the Company has sufficient
9 earnings to pay its $1.20 per share dividend.
10 Q.Is Mr. Leckie's argument that any incentive
11 for O&M budget management should be "self-funding" a valid
12 reason to remove target incentive payments?
13 A.No. Budget discipline is an important
14 management activity and an appropriate area to incent
15 employees. The balance and tension struck between
16 providing excellent customer service and improving
17 reliability from an aging distribution system is
18 accomplished by including the O&M budget management as part
19 of the customer-related target incentive. In the current
20 environment, in which the Company is in the position of
21 managing rising costs to the best of its ability and filing
22 rate cases everyone to two years, the benefits of budget
23 management are reflected in rates on an ongoing basis, thus
24 providing customers the direct benefit of cost management.
GALE, DI REB 21
Idaho Power Company
1 Q.Do you agree wi th Mr. Leckie's proposal to
2 remove from the test year the 0.5 percent incentive payment
3 because of the $ 1 . 20 dividend threshold?
4 A.No. This is an arbitrary and unnecessary
5 disallowance. The Company has already removed from its
6 rate request all short-term executive incentives and all
7 employee incentives that are directly based on earnings.
8 One could logically argue that positive earnings do provide
9 the customers with an indirect benefit through future lower
10 financing costs. The Company has not made this argument
11 because we believe the four percent normalized target
12 strikes a fair balance between customers, shareholders, and
13 employees. The $1.20 threshold recognizes that if the
14 Company's finances are such that it does not earn enough to
15 make i ts dividend payments, then employee incentives should
16 not be paid. History has shown again and again that when
17 utilities cannot pay their dividend, ultimately their
18 financing costs increase.
19 CONSTRUCTION WORK IN PROGRESS
20 Q.Staff Witness Cecily Vaughn, Dr. Reading,
21 and Dr. Peseau all criticize Idaho Power's proposal,
22 described in detail in Company Witness Catherine Miller's
23 testimony, to include some of its CWIP related to Hells
GALE, DI REB 22
Idaho Power Company
1 Canyon relicensing expense in its revenue requirement in
2 this case. What are their criticisms?
3 A. Ms. Vaughn finds the Company's application
4 of CWIP in this case to be appropriate, but takes issue
5 with the appropriate AFUOC rate used to compute the amount
6 of CWIP to be included. As previously stated, Ms. Miller
7 provides a technical rebuttal to Ms. Vaughn's
8 recommendation. Dr. Reading and Dr. Peseau are opposed to
9 the Company's inclusion of CWIP in rate base under any
10 circumstances as a general principle.
11 Q.Why has the CWIP issue surfaced at this
12 time?
13 A.For a number of years the Commission was
14 unable to allow utilities to include CWIP in its revenue
15 requirement due to a specific prohibition in Idaho law.
16 Interestingly, that section of code also contained a
17 prohibition on including plant held for future use in
18 ratemaking. As Idaho Power started into its current period
19 of increasing capital investments, it became apparent to
20 the Company and to others that it would be advantageous to
21 at least have these regulatory tools available to use at
22 the discretion of the Commission. Accordingly, in 2006,
23 Idaho Power supported legislation to strike the
24 prohibition. This legislation was successfully enacted.
GALE, DI REB 23
Idaho Power Company
1 Q.Now that the legislation was revised, what
2 is Idaho Power's position regarding the potential inclusion
3 of CWIP in rate base in the future?
4 A.As described in my direct testimony, Idaho
5 Power views CWIP as a useful tool for itself, its
6 customers, and the Commission when used to smooth the
7 ratemaking and financing impacts of large multi-year
8 proj ects, which require capital outlays in the hundreds of
9 millions. Idaho Power believes it will benefit our
10 customers if the Commission allows the Company to include
11 CWIP in rate base for such items as major relicensing of
12 hydro proj ects, new base load production plants, and some
13 high voltage transmission construction.
14 Q.Why did Idaho Power introduce the concept as
15 it did in this case by proposing to include an AFUOC amount
16 related to relicensing?
17 A.Idaho Power wanted to test the concept in a
18 contested proceeding on a smaller amount at first. The
19 Company will likely have production and/or transmission
20 projects that may be considered for CWIP recovery in the
21 relatively near future.
22 Q.Dr. Peseau describes his opposition to
23 including CWIP in rate base as a "matter of principle." Do
24 you share his concern?
GALE, DI REB 24
Idaho Power Company
1 A.No, I do not. On page 22 of his testimony,
2 Dr. Peseau expresses his concern that including CWIP in
3 rate base breaks the regulatory compact in that it
4 "mitigates efficiency incentives and is fundamentally
5 unfair to ratepayers." Since the Company will be bringing
6 specific proj ect-by-proj ect CWIP proposals to the
7 Commission, the Commission will be in full control on how
8 much, if any, CWIP is allowed in rate base. In this
9 instance, it is limited to a portion of the carrying cost
10 on financing Hells Canyon relicensing. Future applications
11 will be based on well known and well vetted projects that
12 likely will have gone through a "Certificate of Public
13 Convenience and Necessity" process with the Commission.
14 These are unlikely candidates to fail a prudency test
15 particularly if amounts remain below approved commitment
16 estimates. Again, the Commission will be in full control
17 in the use of the CWIP tool. It can weigh valid "used and
18 useful" concerns against the customer benefits that CWIP
19 can provide.
20 Q.Dr. Reading is also opposed to the inclusion
21 of CWIP in rate base, citing a 1978 Commission order and
22 the Commission's long precedence in disallowing CWIP from
23 rates. What is your reaction to these points?
GALE, DI REB 25
Idaho Power Company
1 A.There is a long precedence in CWIP' s absence
2 from rate base because from 1984 to the 2006, the
3 Commission did not even have the ability to use CWIP even
4 if it might have benefited customers. The 1978 order
5 points to a shareholder risk shift and a generational
6 customer mismatch. As I stated above in response to
7 essentially the same argument made by Dr. Peseau, the
8 Commission will be in full control of the application and
9 the degree that CWIP will potentially be used. The Company
10 does not believe that the Commission will blindly approve
11 inclusion of CWIP in rate base in this case or in future
12 ones. The Company understands that in each instance it
13 will have the burden of showing why including CWIP in rate
14 base is in the public interest.
15 Q.Why would the Commission consider including
16 some amount of CWIP in the revenue requirement
17 determination?
18 A.Including CWIP in rate base is a tool that
19 allows the Commission to smooth the rate impact of large,
20 multi-year projects allowing more gradual rate changes
21 rather than the one-time impact of putting the project and
22 its financing costs in at one time. CWIP does provide
23 better cash flow to utilities, thus improving key financial
24 ratios and lowering interest costs.
GALE, DI REB 26
Idaho Power Company
1 ENERGY EFFICIENCY
2 Q.Staff Witness Lynn Anderson addresses Idaho
3 Power's energy efficiency efforts and recommends that the
4 Commission defer a prudency finding regarding these
5 efforts. What is the Company's reaction to this
6 recommendation?
7 A.This recommendation is frustrating to the
8 Company on several levels. Ms. Theresa Drake will address
9 its impact on energy efficiency operations, while I will
10 describe its potentially chilling effect on energy
11 efficiency investment.
12 Q.Please explain how Demand-side Management
13 ("DSM") and energy efficiency have risen to their current
14 prominence in Idaho Power's resource portfolio.
15 A.Following the wholesale energy volatility
16 experienced in the 2000-2001 energy crisis, the Commission
17 directed Idaho Power in Order No. 28722 to develop and file
18 a comprehensive DSM program to provide customers with
19 opportunities to reduce electric consumption. The Company
20 did this in Case No. IPC-E-01-13 by identifying a number of
21 potential DSM programs that could be implemented to assist
22 customers in reducing their bills and proposed that the
23 expenditures for the analysis and implementation of energy
24 conservation programs be funded through a charge known as
GALE, DI REB 27
Idaho Power Company
1 the Energy Efficiency Rider ("Rider"). On November 21,
2 2001, the Commission issued Order No. 28894 directing the
3 Company to implement limited DSM programs for the 2001-2002
4 winter heating season and to organize the Energy Efficiency
5 Advisory Group ("EEAG") to advise the Company on the
6 implementation of long~term DSM programs. In April 2002,
7 the Energy Efficiency Advisory Group, comprised of members
8 from the Company's customer groups, technical experts,
9 special interest groups, Commission Staff, and Company
10 personnel, was formed and has met regularly since to advise
11 Idaho Power on its energy efficiency offerings.
12 On May 13, 2002, the Commission issued Order No.
13 29026 authorizing the implementation of the Energy
14 Efficiency Rider as a means to fund DSM programs. The
15 Rider amount for each customer class targeted a level
16 approximately equal to 0.5 percent of overall class
17 revenue. As more program offerings became available and
18 expenses increased, in Order No. 29784, the Commission
19 increased the Rider amount to 1.5 percent of base revenue
20 with a monthly funding cap of $1.75 for residential
21 customers and a cap of $50 per meter per month for
22 irrigation customers. Recognizing Idaho Power's robust
23 growth in both demand response and energy efficiency
24 programs as well as the importance of additional funding in
GALE, DI REB 28
Idaho Power Company
1 sustaining DSM programs that benefit customers individually
2 and collectively, the Commission, in Order No. 30560,
3 authorized removal of the funding caps and increased the
4 Rider to 2.5 percent of base revenues effective June 1,
5 2008.
6 Q.Has the Company's increased focus on energy
7 efficiency over the past six years impacted Idaho Power's
8 Integrated Resource Planning?
9 A.Yes. Idaho Power's 2004 Integrated Resource
10 Plan called for 124 MW of demand response and energy
11 efficiency programs, which demonstrated the Company's
12 renewed emphasis on demand-side resources. While the
13 Commission indicated in the April 2005 Order accepting the
14 2004 Integrated Resource Plan for filing that it was
15 pleased with the Company's efforts thus far, it found that
16 "Idaho Power could and should do more to implement
17 conservation. We encourage the Company to actively promote
18 and expand participation in its AC Cycling, Irrigation Peak
19 Clipping, and other cost-effective conservation programs."
20 (Order No. 29762 at 10.)
21 Following the issuance of Order No. 29784 increasing
22 the amount of the Rider in Case No. IPC-E-04-29, Idaho
23 Power successfully implemented four of the six energy
24 efficiency programs identified in the 2004 IRP and both of
GALE, DI REB 29
Idaho Power Company
1 the demand response programs. In addition, as part of the
2 2006 IRP process, Idaho Power implemented three new DSM
3 programs and a major expansion of a fourth program.
4 Following the suspension of the Bonneville Power
5 Administration's Conservation Rate Credit Program, two
6 programs developed by the Bonneville Power Administration
7 and implemented by the Company also began receiving Rider
8 funding in mid-2007. In the March 2007 order accepting the
9 2006 Integrated Resource Plan, the Commission again
10 indicated that it was "pleased that the Company is
11 expanding its DSM programs and increasing the amount of
12 energy sources in its portfolio."(Order No. 30281 at 12)
13 Recognizing that energy efficiency programs continue
14 to benefit its customers by reducing the need for
15 additional generation resources, Idaho Power will continue
16 pursuing all cost-effective energy efficiency programs as
17 part of its resource planning process going forward.
18 Q.To put the Company's DSM and energy
19 efficiency efforts in perspective, how has Idaho Power's
20 financial commitment and resulting energy savings grown
21 over the past several years?
22 A.As the Commission noted on page 6 of Order
23 No. 30560 issued in May 2008, "Idaho Power has
24 significantly increased its DSM programs during the past
GALE, DI REB 30
Idaho Power Company
1 six years, and many more customers are participating in and
2 seeing the benefits from the Company's DSM programs."
3 Idaho Power currently has 13 programs and two pilot
4 programs serving all of its customer classes.Idaho
5 Power's DSM expenditures have grown rapidly from
6 approximately $1.8 million in 2002 to nearly $20 million in
7 2008. The Company estimates that this investment in energy
8 efficiency will save an estimated 118,000 MWh in 2008.
9 Idaho Power is proud of the positive results its
10 increased energy efficiency efforts have achieved for its
11 customers. In October 2008, the state of Idaho received
12 national recognition by the American Council for an Energy-
13 Efficient Economy ("ACEEE") when it named Idaho as the most
14 improved state for employing energy efficiency to grow its
15 economy while meeting electricity demand, combating global
16 warming, and contributing to U. S. energy security. The
17 commitment of more resources to energy efficiency programs
18 was a significant reason the state of Idaho jumped 12 spots
19 in ACEEE' s rankings. Idaho Power is pleased to have played
20 a role in this achievement.
21 Q.Why does Idaho Power want to be in the
22 business of energy efficiency?
23 A.For a number of reasons:(1) energy
24 efficiency is a good activity to build positive
GALE, DI REB 31
Idaho Power Company
1 relationships with our customers; (2) similarly, it is a
2 good activity to build positive relationships with our
3 regulators; (3) it is an integral and increasingly
4 important part of our resource planning; and (4) the
5 Company believes it can provide energy efficiency in a more
6 cost effective and efficient manner because of the inherent
7 discipline in place in the regulated environment.
8 Q.Why is a prudency review of energy
9 efficiency measures important to Idaho Power?
10 A.Under Idaho Power's current regulatory model
11 for energy efficiency, out-of-pocket costs are largely
12 recovered through Schedule 91, the Energy Efficiency Rider.
13 Essentially the Rider provides for the collection of funds
14 in relatively close proximity to their expenditures. The
15 Company collects and spends dollars on energy efficiency
16 measures in a balancing account that carries symmetrically
17 applied interest. However, there is no earnings
18 opportunity for the energy efficiency activities at this
19 time - other than one very small performance-based pilot
20 ~related to Energy Star homes.
21 The energy efficiency activity today is a close
22 regulatory parallel to the buying and selling of energy for
23 the system that is run through the Power Cost Adjustment
24 ("PCA") mechanism. Typically, the Company expects PCA
GALE, DI REB 32
Idaho Power Company
1 costs to be deemed prudent and recovered, unless there has
2 been mismanagement of system operations. In like manner,
3 Idaho Power would expect Rider costs to be deemed prudent
4 and recovered, except in circumstances of mismanagement.
5 Any disallowance would result in reduced earnings stemming
6 from other Company operations unrelated to DSM. Delayed
7 prudency review places future earnings at risk.
8 Q.Did the Company communicate this importance
9 to the Staff?
10 A.Yes. With the growing importance of energy
11 efficiency and demand-response programs in terms of
12 dollars, megawatts, and megawatt-hours and without a clear
13 understanding of when Rider expenditures can be considered
14 appropriately spent, the Company informally asked the Staff
15 to specifically include in its case audit a review of Rider
16 funds spent to date. As described in Ms. Drake's rebuttal
17 testimony, the Company has made great strides in the area
18 of energy efficiency and demand response programs. Idaho
19 Power has invested millions and intends to invest even
20 more. A timely prudency decision from the Commission
21 greatly assists our continued commitment to what we believe
22 is now our first resource.
23 Q.What is your reaction to Staff's suggestion
24 to defer review?
GALE, DI REB 33
Idaho Power Company
1 A.Idaho Power believes that energy efficiency
2 activities since 2002 need some finality as to the prudency
3 of their expenditures, particularly when even more dollars
4 are planned for the near future. The Company believes that
5 it has supplied appropriate and sufficient information for
6 the Staff and Commission to make a determination. Since
7 the inception of the Rider, Idaho Power has had multiple
8 general rate proceedings and Rider funding requests.
9 Certainly, Rider funding spent through either the last
10 general rate case or Rider filing should be determined as
11 spent in the public interest and not subj ect to continued
12 jeopardy.
13 AFRDABILITY ISSUES
14 Q.There have been concerns regarding energy
15 affordability - and specifically, electric service
16 affordability - raised in the testimony of the Staff and by
17 Community Action Partnership Association of Idaho
18 ("CAPAI"). Please summarize your understanding of these
19 issues.
20 A.Staff Witness Curtis Thaden and CAPAI
21 Witness Terri Ottens both address affordability concerns.
22 Mr. Thaden discusses the soft economy and its impact on
23 customers, including some customers who may be facing tough
24 financial circumstances for the first time. Mr. Thaden
GALE, DI REB 34
Idaho Power. Company
1 also discusses the stress on current energy assistance
2 programs such as Low Income Home Energy Assistance Program
3 and Proj ect Share and the status of the Weather Assistance
4 for Qualified Customers ("WAQC"). Ms. Ottens expresses
5 similar concerns and recommends future increases to WAQC
6 funding.
7 Q.Regarding the issue of energy affordability,
8 does the Commission currently have a docket open to address
9 aspects of this issue?
10 A.Yes. It is GNR-U-08-1, a generic Commission
11 inquiry into matters of energy affordability.
12 Q.Is Idaho Power an active participant in this
13 proceeding?
14 A.Yes. Idaho Power has attended and actively
15 participated in both the October 14 and October 22 public
16 workshops. The Company has presented comprehensive
17 information on its current programs and acti vi ties that
18 specifically address low income customers, as well as other
19 customers who might be financially challenged in today's
20 economy. Currently, the Company is reviewing draft Staff
21 comments on the matter that have been publicly available
22 since November 26, 2008, and will be commenting fully by
23 the December 19 due date.
GALE, DI REB 35
Idaho Power Company
1 Q.Realizing that comments are not due until
2 December 19, please indicate what Idaho Power's position
3 has been during the public workshops?
4 A.The Company has emphasized that new and
5 addi tional action should be purposeful and productive.
6 Idaho Power believes that the capabilities of existing
7 programs and activities should be fully understood and
8 utilized as an appropriate first step. Further the Company
9 is supportive of matching ongoing WAQC funding with the
10 needs of the service area communities, addressing energy
11 efficiency to the impacted customers, and supporting rate
12 design that promotes efficient use of energy.
13 Additionally, in recognition of the impact that the present
14 economy has on some of Idaho's citizens, Idaho Power is
15 increasing its shareholder commitment to Project Share from
16 present levels to $100,000 for the current heating season.
17 Q.Ms. Ottens proposes to increase funding for
18 WAQC progressively in 2010, 2011, and 2012. Do you agree
19 with her recommendation?
20 A.As stated previously, Idaho Power supports
21 adequate funding for the WAQC programs and these funds may
22 very well need to be increased in 2010 and in subsequent
23 years. Idaho Power believes this is the low hanging fruit
24 when it comes to addressing affordability. The Company has
GALE, DI REB 36
Idaho Power Company
1 calculated that a $100 investment in WAQC can return more
2 than $200 in present value customer benefits in future bill
3 savings and over $300 in system benefits because of the
4 selection of a lower cost resource option. Idaho Power
5 commits to work with Ms. Ottens and CAPAI to fund WAQC
6 appropriately. The Company also commits to bring to the
7 Commission the appropriate rate recovery request - general
8 rate case or other - for additional WAQC funding. However,
9 a 2010 issue does not need to be addressed now when the
10 generic energy affordability docket and future Rider
11 funding filings are looming.
12 CONCLUSION
13 Q.Please summarize Idaho Power's rebuttal
14 position to the collective recommendations of the Staff and
15 Intervenors.
16 A.This is Idaho Power's fourth general rate
17 case since 2003. The Company is evaluating a 2009 filing
18 at this writing and anticipates the need for additional
19 general rate cases in the next several years as we meet the
20 challenges of both our industry and our service territory.
21 As a resul t, our opera tions and financial resul ts will be
22 very transparent to both the Commission and our customers.
23 The Company is seeking a reasonable opportunity to earn its
24 authorized rate of return during this time period. It is
GALE, DI REB 37
Idaho Power Company
1 the Company's opinion that this opportunity can be best
2 achieved through use of the forecast test year proposed -
3 January 1, 2008, to December 31, 2008 - to decrease the
4 time period between cost incurrence and rate
5 implementation. This ratemaking model, along with the
6 establishment of the proposed PCA changes currently before
7 this Commission in Case No. IPC-E- 08 - 19, will give Idaho
8 Power a reasonable opportunity to earn its authorized
9 return for the first time in many years.
10 Q.Have you concluded your direct rebuttal
11 testimony?
12 A.Yes.
GALE, DI REB 38
Idaho Power Company