20081203Smith Rebuttal.pdf

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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
LORI SMITH
DIRECT REBUTTAL TESTIMONY OF LORI SMITH
TABLE OF CONTENTS
I . INTRODUCTION ....................................... 1
I I . TEST YEA METHODOLOGY .............................. 2
III. O&M ADJUSTMNTS ................................... 10
IV. PLAT ANALIZATION ADJUSTMNTS ................... 22
V. DEPRECIATION ADJUSTMNT ........................... 24
VI. PURCHASING CAS .................................. 25
A. Restaurant Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
B . Cell Phone Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
C. Gifts/Awards................................... 41
D. Bottled Water, Coffee, and Newspapers . . . . . . . . . . 43
E. Chari table Donations . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
F. Political Acti vi ty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
G . Keyword Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
VII. INVNTORIES ADJUSTMNTS ........................... 47
VIII. EXECUTIVE DEFERRD COMPENSATION ADJUSTMNT ........ 48
IX. INTEREST ON DIRECTOR'S FEES ADJUSTMNT ............ 52
X. OUT OF PERIOD ACCRUALS ADJUSTMNT ................. 53
XI. CONTRIBUTIONS, AL CLOCK AN CAY .......... ~ . . . 54
XII. FERC SETTLENT CREDIT ADJUSTMNT ................. 56
XIII. ARCHITECTS' SERVICES ADJUSTMT ................... 58
XIV. LEGA FEES ADJUSTMNT ............................. 59
1 I . INTRODUCTION
2 Q.Please state your name.
3 A.My name is Lori Smith.
4 Q.Are you the same Lori Smith that presented
5 direct testimony in this proceeding?
6 A.Yes.
7 Q.What issues will you be addressing in your
8 rebuttal testimony?
9 A.My testimony explains why the Company's test
10 year in this case better reflects the operating conditions
11 the Company expects to experience during the time rates
12 will be in effect than does Staff's proposed test year. I
13 will also provide information on the Company's 2008 actual
14 third quarter results that show that the methodology the
15 Company used to prepare its 2008 Test Year produces
16 reasonably accurate results. i will explain why Staff's
17 adjustments to the 2008 Test Year are arbitrary, rely on
18 speculation, and are inconsistent with the framework Staff
19 and Intervenors supported in the Forecast Test Year
20 Workshop that was held prior to the Company filing this
21 case. Finally, I will respond to several adj ustments
22 proposed by Commission Staff Witnesses Cecily Vaughn, Joe
23 Leckie, John Nobbs, and Micron Witness Dr. Dennis E.
24 Peseau.
SMITH, DI REB 1
Idaho Power Company
1 Q.Your rebuttal testimony responds to Staff's
2 proposed adj ustments in considerable detail. Why have you
3 taken this approach rather than focus on just the larger
4 revenue requirement issues?
5 A.Over the course of several recent rate
6 cases, Idaho Power believes it is making progress on
7 developing a test year methodology that addresses the
8 concerns of the Company, Staff, and other parties. Because
9 new test year methodology is developing, Idaho Power wants
10 to clearly address the new issues that arise from the
11 proposed methodology as identified by Staff auditors. This
12 necessarily requires delving into some of the intricacies
13 of the revenue requirement issues present in this case.
14 II. TEST YEA METHODOLOGY
15 Q.Idaho Power has proposed a test year that
16 trends 2007 actual results to 2008 levels to set rates in
17 2009 ("2008 Test Year"). Why is it important that the test
18 period and the rate-effective period closely match each
19 other?
20 A.In order to provide the Company a reasonable
21 opportunity to earn its allowed rate of return, the new
22 rates from a test year would ideally take effect with the
23 commencement of the actual year. With this underlying
24 premise in mind, the Company filed the proposed 2008 Test
SMITH, DI REB 2
Idaho Power Company
1 Year based on its intimate knowledge of the contributing
2 factors that hinder the Company's ability to earn its
3 allowed rate of return. These factors include the costs of
4 serving both new and existing customers. These costs
5 continue to out pace the revenues generated by rates set
6 based on an historical test year or a hybrid test year
7 adjusted for actuals. As a result of load growth, the
8 Company must acquire new generating resources, build new
9 transmission lines and stations for reliability purposes,
10 and maintain its existing base fleet of resources in an
11 environment of significant cost escalations.
12 Q.Haven't current economic conditions slowed
13 load growth?
14 A.To some extent, yes. However, even with the
15 lower than expected additions of new customers experienced
16 so far in 2008, the need for timely rate recovery of
17 operating expenses and capital expenditures is still
18 present.
19 Q.Do you believe the Company's proposed test
20 year revenue requirement is reasonable?
21 A.Yes. The Company's test year values are:.
22 (1) based on a compound average growth rate ("CAGR")
23 developed from historical spending patterns; (2) reflective
24 of realistic and systematic cost and revenue proj ections
SMITH, DI REB 3.
Idaho Power Company
1 that fairly represent the 2008 Test Year; (3) validated by
2 actual expenditures incurred thru September 2008; (4)
3 closely scrutinized by business unit management, Idaho
4 Power Company management, and the Idaho Power Company Board
5 of Directors; and (5) determined using a period of time
6 (2008) that precedes the rate implementation period (2009).
7 Q.By adopting a test year approach as proposed
8 by the Company in this proceeding, would the Commission be
9 required to accept all of the amounts reflected in the
10 Company's filing?
11 A.No. There may be differences of methodology
12 used to prepare a test year. Such differences are
13 unavoidable in a general rate case where the parties have
14 different perspectives. Idaho Power is not asking the
15 Commission for a blanket validation of this specific test
16 year. However, the Company is asking the Commission to
17 accept the widely used regulatory model of future test year
18 as being the most appropriate way to provide the level of
19 rates to produce timely recovery for the increased level of
20 expenditures that are required to serve Idaho Power's
21 growing load and to keep Idaho Power a financially viable
22 company, especially in light of current economic conditions
23 locally, nationally, and internationally. Mr. Gale's
SMITH, DI REB 4
Idaho Power Company
1 direct and rebuttal testimony explains the Company's
2 approach in greater detail.
3 Q.Have you reviewed the Company's September
4 2008 year-to-date expenditures?
5 A.Yes. Based on that review, I have included
6 a chart which summarizes the major components included in
7 the Company's filing with the amounts updated to reflect
8 September 2008 actual year-to-date values.
9 Q.What does that chart show?
10 A.It shows that the Company has done a very
11 good job of quantifying its 2008 Test Year expenses.
12 Q.Please explain how you came to that
13 conclusion.
14 A.First, I selected significant components of
15 the 2008 Test Year to compare them to actual September 2008
16 year-to-date values. These components are key variables in
17 the determination of the Company's revenue requirement.
18 The primary components I have included are Electric Plant
19 in Service (excluding Asset Retirement Obligations ("ARO"))
20 ("EPIS"), Accumulated Provision for Depreciation and
21 Amortization, Net Electric Plant in Service, Other
22 Operating Revenues, Operation and Maintenance Expenses
23 ("O&M"), Depreciation and Amortization, and IERCO operating
24 net income. I then compared the actual September 2008
SMITH, DI REB 5
Idaho Power Company
1 year-to-date to the test year totals. The results of that
2 comparison are as follows:
3
Year-To-Date 2008 Proposed
Septemer 2008 Test Year Total
EPIS (ex ARO)$3,953,058,903 $3,883,565,221
Accumulated Provision
for Depreciation &
Amortization 1,654,111,059 1,640,626,080
Net EPIS 2,298,947,844 2,242,939,141
Other
Operating Revenues 30,258,709 38,855,834
O&M Expenses 221,779,540 295,910,705
(excluding Net Power
Supply Expenses and
Energy Efficiency
Depreciation
& Amortization 78,112,259 105,290,342
IERCO Net Income 1,925,252 6,828,651
4 Q.Do the 2008 year-to-date actual values
5 validate the escalated values contained in the 2008 Test
6 Year used by the Company?
7 A.Yes.Year-to-date EPIS is already greater
8 than the test year level and will only grow.O&M expenses
9 excluding net power supply expenses and Energy Efficiency
10 expenses ("O&M") through September are approximately three-
11 fourths of test year values just as should be expected.
SMITH, DI REB 6
Idaho Power Company
1 Q.Please provide more detail on why O&M
2 expenses are three-fourths of the Company's test year
3 values.
4 A.For the period January 2008 through
5 September 2008, actual O&M equaled $215,197,715 with the
6 incentive accrual expenses normalized to reflect only the
7 operational targets. This amount can be compared to what
8 Idaho Power filed for its 2008 Test Year with a few
9 adjustments. Please refer, to Exhibit No. 83.
10 Idaho Power's 2008 Test Year O&M equaled
11 $295,910,705, which includes annualizing adjustments for
12 operating payroll of $2,593,733 and a 2009 Salary Structure
13 Adjustment of $3,019,804 as detailed on Exhibit No. 31 to
14 my direct testimony. As these annualizing adjustments
15 reflect 2009, they must be removed to properly compare what
16 Idaho Power is actually experiencing through September 2008
17 to what was included in its 2008 Test Year.
18 To further improve the accuracy of the comparison,
19 Account 565-Transmission of Electricity by Others is also
20 removed from both the 2008 Test Year O&M ($10,469,726) and
21 the year-to-date September 2008 actuals ($6,137,531).
22 After making these adjustments, the 2008 Test Year O&M
23 equals $279,827,442 ($295,910,705 minus $2,593,733 minus
24 $3,019,804 minus $10,469,726). Year-to-date September 2008
SMITH, DI REB 7
Idaho Power Company
1 actual O&M equals $209,060,184 ($215,197,715 minus
2 $6,137, 53l) after adjustments.
3 One would expect that 75 percent (three-quarters of
4 the entire year) of the Company's 2008 Test Year O&M as
5 adjusted above would be reflected in actual O&M through the
6 nine months ended September 2008. This is in fact the
7 case. Through September 2008, the Company has experienced
8 75 percent ($209,060,184 divided by $279,827,442) of its
9 comparable 2008 Test Year O&M.
10 Another way to view the analysis is to annualize the
11 year-to-date September 2008 actuals which yields
12 $278,746,912 ($209,060,184 divided by 9 months and
13 multiplied by 12 months) and comparing the result to the
14 Company's comparable 2008 Test Year O&M. As shown on
15 Exhibit No. 84, Idaho Power's comparable test year O&M is
16 just $1,080,530 or 0.4 percent higher than an annualized
17 amount based on year-to-date September 2008 actuals.
18 Q.How does Staff's methodology for calculating
19 O&M compare with what the Company is currently experiencing
20 in 2008?
21 A.Staff's methodology severely understates the
22 level of 2008 O&M expenses the Company is likely to incur.
23 Please refer to Exhibit No. 83 for detailed calculations.
24 Staff's test year 2008 O&M equals $271,553,813. For valid
SMITH, DI REB 8
Idaho Power Company
1 comparison purposes, Staff's annualizing adjustment for
2 operating payroll of $1,157,432 must be removed from its
3 test year 2008 O&M along with Account 565-Transmission of
4 Electricity by Others of $10,469,726. After making these
5 adjustments, Staff's comparable test year 2008 O&M equals
6 $259,926,655 ($271,553,813 minus $1,157,432 minus
7 $10,469,726). When compared to year-to-date September 2008
8 actuals, as defined in the previous question, the Company
9 has already experienced 80 percent of what Staff has
10 proposed for its comparable 2008 test year.
11 As presented on Exhibit No. 84, when compared to the
12 annualized year-to-date September 2008 O&M, Staff's
13 comparable test year 2008 O&M is $18,820,257 or 6.8 percent
14 below the expenses the Company is currently experiencing.
15 Q.What conclusion do you draw from this
16 analysis?
17 A.The methodology Idaho Power used to forecast
18 test year O&M is a very good representation of the expenses
19 that the Company is currently experiencing and is much more
20 accurate than Staff's proposed methodology. Idaho Power's
21 methodology provides the Company the opportunity to earn
22 its allowed rate of return established by the Commission
23 while recovering operating expenses in a more timely
24 fashion. Staff's methodology and resulting position
SMITH, DI REB 9
Idaho Power Company
1 exacerbates the mismatch between the timing of when
2 expenses are incurred versus their recovery in rates and
3 denies the Company an opportunity to earn its allowed rate
4 of return.
5 Q.What other conclusions do you draw from the
6 data in your table and in Exhibits Nos. 83 and 84?
7 A.This information supports the Company's
8 position that a historical test year inadequately reflects
9 the operating costs and capital expenditures that Idaho
10 Power Company is currently experiencing to operate
11 effectively. By the end of 2008, the Company will have
12 made significantly more capital investments in property
13 plant and equipment and will have spent significantly more
14 money operating its system to provide reliable service to
15 its customers than a historic test year would reflect. The
16 Company proposed 2008 Test Year is a more reasonable
17 representation from which to set rates for the coming year
18 and will provide the Company the opportunity to earn its
19 allowed rate of return established by the Commission.
20 III. O&M ADJUSTMNTS
21 Q.Do you agree with Staff's adjustments to the
22 Company's 2008 Test Year O&M expenses?
23 A.No. I believe that the adjustments by Staff
24 Witnesses Vaughn, Leckie, and Nobps that reduce the revenue
SMITH, DI REB 10
Idaho Power Company
1 requirement by $24,314,269 are flawed. I will specifically
2 discuss why I disagree with reductions in Other Operations
3 and Maintenance, payroll-related items including reductions
4 to target employee incentive, the elimination of the 2009
5 salary structure adjustment, the revision to the
6 annualizing methodology, and the reduction of Plant
7 Materials and Supplies revenue later in my testimony.
8 Q.How did the Company determine the O&M
9 escalation methodology it applied in this case?
10 A.For the O&M escalation methodology, the
11 Company accepted a "trending" approach agreed to in the
12 Forecast Test Year Workshop (held on March 12, 2008, and
13 described in my and Mr. Gale's direct testimony), which
14 emphasized identification of the expected operating
15 conditions in 2008 and the ease of auditability of 2007 as
16 a base year to be trended forward to 2008. As stated in
17 Ms. Vaughn's testimony and consistent with the trending
18 approach, the Company developed a CAGR that was applied to
19 major Federal Energy Regulatory Commission ("FERC") account
20 groupings. Idaho Power Company's proposed maj or groupings
21 and CAGRs were as follows:(1) Steam Power Production,
22 CAGR 7.14 percent; (2) Hydro Production, CAGR 8.03 percent;
23 (3) Other Production, CAGR 11.76 percent; (4) Transmission,
24 CAGR 3.98 percent; (5) Distribution, CAGR 0.70 percent; (6)
SMITH, DI REB 11
Idaho Power Company
1 Customer Accounting, Service and Selling, CAGR 0.06
2 percent; (7) Administration and General, CAGR 9.41 percent;
3 and (8) for the total Company, an overall CAGR of 5.82
4 percent before considering the known and measureable cost
5 containment adjustment of $3.8 million and the traditional
6 ratemaking adjustments for annualizing and known and
7 measureable adj ustments . This compares to the Staf f' s
8 overall percentage increase in O&M expense of 0.64 percent
9 or $1,750,020.
10 Q.Please quantify the overall increase in O&M
11 expense based on the Company's use of this trending
12 methodology.
13 A.The overall increase in O&M expense as a
14 result of this trending methodology is $15,985,407.
15 Q.Do you agree wi th Ms. Vaughn's
16 recommendation that the Commission reduce the Company's O&M
17 expense by $14,235, 387?
18 A.No. Ms. Vaughn made two maj or adj ustments .
19 First, Ms. Vaughn reduced the O&M revenue requirement by
20 adjusting the 2007 base amount by $1,537,989 for P-card
21 expenditures and a 2003 FERC billing settlement. Both of
22 these adjustments are faulty and I will explain why later
23 in my testimony.
SMITH, DI REB 12
Idaho Power Company
1 Secondly, Ms. Vaughn created a methodology used for
2 escalation purposes that excluded all escalation on
3 Administration and General ("A&G") expenses including
4 labor, materials, purchased services, and other expenses,
5 and all escalation for labor, materials, and purchased
6 services from the other six areas of FERC O&M Account
7 expense categories (Steam Production, Hydro Production,
8 Other Production, Transmission, and Customer Accounting,
9 Selling and Service) .
10 Q.On page 7, lines 8-18 of her testimony,
11 Staff Witness Vaughn characterizes labor escalation as
12 being duplicated in two different areas of the Company's
13 case. Do you agree?
14 A.No. The Company's adjustments to labor for
15 annualization and structured salary adjustment ("SSA")
16 match rates to the costs that will be incurred in the 2009
17 time period when these rates will be in effect. The
18 Company's 2008 Test Year assumption for labor costs, as
19 Ms. Vaughn correctly states, was based on 2007 values
20 escalated to 2008 by the FERC account grouping escalation
21 rate. The effect of this escalation is to produce an
22 initial 2008 Test Year for the O&M expense component. The
23 December known and measurable adjustment that annualizes
24 the 2008 Test Year labor is then made to reflect the
SMITH, DI REB 13
Idaho Power Company
1 expected cost at the end of 2008 for labor expenses. This
2 adjustment provides a December 2008 test year estimate of
3 prospective employee count levels versus an average of
4 employment levels for the previous year that would be in
5 effect beginning January 1, 2009. These are two separate
6 and distinct adjustments, both of which are appropriate for
7 the test year.
8 The SSA adjustment is consistent with methodologies
9 accepted in past filings and is used to reflect salary
10 adjustments necessary to represent the 2009 expense level
11 of labor when new rates take effect. The SSA is a market-
12 based adjustment reviewed and approved by Idaho Power
13 Company's Board of Directors to provide market-based pay to
14 employees in order to at tract and retain the employee
15 talents necessary for the Company to operate effectively.
16 Company Witness Ric Gale discusses the appropriateness of
17 the adjustments in greater detail in his rebuttal
18 testimony. Despite the criticism of these adjustments,
19 Staff provides no evidence that these labor expenses are
20 not increasing.
21 Q.Do you agree with Ms. Vaughn's decision to
22 exclude any escalation or trending on the FERC O&M Accounts
23 listed above?
SMITH, DI REB 14
Idaho Power Company
1 A.No. Ms. Vaughn provides no empirical data
2 or verifiable evidence suggesting that the escalation rate
3 on the A&G category is incorrect or inappropriate. She
4 bases her disallowance recommendation solely on the fact
5 that the trending increase occurs coincidently with the
6 unrelated IDACORP divestiture of multiple subsidiaries.
7 Q.Staff Witness Vaughn attributes the 9.41
8 percent increase in A&G Accounts 920-935 to the one-time
9 di vesti ture of corporate subsidiaries. Please describe the
10 type of expenses that are included in this category of
11 expenses.
12 A.The type of expenses included in this group
13 of accounts are varied and include: regulatory commission
14 fees paid to regulatory agencies such as the state public
15 utilities commissions, the Federal Energy Regulatory
16 Commission, as well as property and casualty and excess
17 liability insurance premiums. This expense category also
18 includes the expenses required to meet the significantly
19 expanding compliance requirements for reliability mandated
20 activities required by FERC Order 888 for Critical
21 Infrastructure Protection, plus expenses related to the
22 large increase in reliability standards to be managed from
23 a compliance perspective. SEC mandated Sarbanes-Oxley
24 ("SOX") expenses, legal expenses to implement these new
SMITH, DI REB 15
Idaho Power Company
1 standards and compliance-related activities, and the
2 maintenance of general plant expenses are part of this
3 expense category as well.
4 The requirements listed above have also increased
5 the labor associated with this account group in order to
6 meet the compliance requirements, all of which are
7 incorporated in the A&G portion of the 5.82 percent overall
8 increase in O&M expenses. The divestiture of IDACORP's
9 subsidiaries has changed the expense allocation between
10 Idaho Power and IDACORP but to a significantly smaller
11 degree than Staff Witness Vaughn has inferred in her
12 testimony.
13 Q.Do you agree with Staff Witness Vaughn's
14 conclusion that the growth in A&G expense is attributable
15 to the divestiture of IDACORP subsidiaries?
16 A.No.I disagree with Ms. Vaughn's
17 conclusion for three reasons. First, Ms. Vaughn draws this
18 conclusion from incomplete and inadequate analysis. On
19 page 8 of her testimony, Ms. Vaughn states that 2007 A&G
20 expense has increased $17,597,452 over the average of 2004
21 through 2006. She then states that it is "coincident with
22 the divestiture of multiple IDACORP subsidiaries" and
23 concludes that "it is apparent that the growth in G&A is
24 the result of one-time corporate divestitures."
SMITH, DI REB 16
Idaho Power Company
1 In response to Production Request No. 30, Ms. Vaughn
2 indicates that her only rationale for drawing this
3 conclusion is her review of a handout for the November 16,
4 2006, presentation to the Idaho Power Board of Directors
5 where four factors, listed simply as discussion points,
6 were given for expected 2007 O&M expense increases. Then,
7 for additional support, she cites Audit Question and
8 Response No. 106 from Case No. IPC-E-07-08 where she asked
9 the Company "to provide copies of any additional materials
10 made available to the Board, before, during, or after the
11 meeting that provide additional information related to
12 these four factors." The Company responded that no
13 additional materials were made available to the Board.
14 In fact, in Audit Question and Response No. 140,
15 Case No. IPC-E-07-08, the Company estimated the impact on
16 the 2007 O&M budget to be approximately $560,000 in
17 additional labor costs resulting from IDACORP selling two
18 non-regulated subsidiaries and refocusing its efforts on
19 Idaho Power. Without adequate analysis and supporting
20 data, Ms. Vaughn incorrectly concluded that the $17.6
21 million increase was due to the divestiture of the IDACORP
22 subsidiaries.
23 Second, actual costs transferred from Idaho Power to
24 IDACORP and its non-regulated subsidiaries are very small
SMITH, DI REB 17
Idaho Power Company
1 in comparison to the $17.6 million Ms. Vaughn attributes to
2 the one-time cost of divesture. Since the mid-1990s, Idaho
3 Power has had in place Service Level Agreements which
4 transfer direct and indirect costs (fully loaded labor,
5 materials, purchased services, etc.) incurred by Idaho
6 Power for the benefit of IDACORP's subsidiaries. The
7 results of these Service Level Agreements have been
8 included in general rates cases beginning with the 2003
9 Rate Case. From 2003 through 2007, the average annual
10 expenses transferred to IDACORP from Idaho Power equaled
11 $3.1 million. From 2003 to 2007 (used in determining the
12 Company's 5-year CAGR), transferred costs have decreased
13 $1.6 million ($2.8 million less $1.2 million). This $1.6
14 million is significantly less than the $17.6 million Ms.
15 Vaughn suggests is the result of IDACORP's divesture of
16 subsidiaries.
17 And finally, any expenses due to divesture of
18 IDACORP subsidiaries were properly recorded to either the
19 di vested subsidiary or to the IDACORP holding company in
20 accordance with generally accepted accounting principles
21 ( "GAAP") and not to Idaho Power.
22 Q.Did Ms. Vaughn trend any O&M expenses?
23 A.Yes. Ms. Vaughn did escalate the Other
24 Expense cost category in her summarized Power Generation
SMITH, DI REB 18
Idaho Power Company
1 category and Distribution category by 5 percent, resulting
2 in an increase of $2,876,561. This amount was then offset
3 by her methodology applied to the Accounting Entries cost
4 element resulting in a $1,126,541 reduction to the
5 $2,876,561, or a net escalation of $1,750,020.
6 "Q.Do you agree wi th Ms. Vaughn's approach to
7 escalation or trending methodologies?
8 A.No. Actual experience in 2008 demonstrates
9 the flaw in these methodologies. Ms. Vaughn's escalation
10 results in a 0.64 percent increase in O&M expenses for the
11 2008 Test Year. The Company's year-to-date actualssupport
12 an overall increase of 5.82 percent as proposed by the
13 Company. The Company's actual expenditure levels to date
14 in September 2008, including cost containment efforts since
15 the spring of 2008, have resulted in a 75 percent
16 realization of the Company's 2008 Test Year O&M
17 expenditures. By ignoring the 75 percent of the test year
18 completed, the Staff adjustments to the Company's test year
19 O&M will not allow rates to match expenses and diminishes
20 Idaho Power Company's ability to remain financially viable
21 so as to meet customer loads during these financially
22 difficult times. To add insult to injury, Staff Witnesses
23 Mr. Leckie's and Mr. Nobbs's adjustments continue to erode
24 the requested O&M increase to a level that is below the
SMITH, DI REB 19
Idaho Power Company
1 actual 2007 expenses used as the base for the 2008 Test
2 Year presented in this case.
3 Q.Why do you disagree with Staff's
4 methodology?
5 A.The Company prepared a 2008 Test Year to
6 reduce the timing differences between its costs and
7 effective rates necessary to recover them. While the Staff
8 has aligned partially with the Company's approach of test
9 year determination for rate base adjustments, the Staff
10 adjustments to reduce the O&M expenses exacerbate the
11 timing differences between the Company's costs and the
12 rates necessary to recover them that the proposed test year
13 methodology sought to address. I believe the Company's
14 test year continues to closely match the expenditures
15 required to provide safe and reliable service to our
16 customers.
17 Q.Do you agree with Dr. Peseau's suggestion to
18 introduce an objective standard like the Producer Price
19 Index, the rate of system load growth, or employee load
20 growth in establishing an inflator for test year purposes?
21 A.I agree with the recommendation to use an
22 objective standard for establishing an inflation indicator
23 in a test year process. I do not agree with Dr. Peseau's
24 proposal to use a single factor inflator because I believe
SMITH, DI REB 20
Idaho Power Company
1 the combination of both inflation and customer growth
2 impact the Company's expense level. For the time period
3 2003 to 2007, the rate of combined growth for inflation and
4 customer growth has been 6.3 percent.
5 Q.How does this two-factor indicator compare
6 to the Company's filed test year in this case?
7 A.For the O&M FERC account groups that were
8 grown by an inflator as indentified in my Exhibit No. 33,
9 lines 33-46, the average for all accounts is 5.82 percent.
10 This is a smaller inflator than the 6.3 percent two-factor
11 inflator composed of the Consumer Price Index combined with
12 the additions of new customers to Idaho Power's system
13 between 2003 and 2007. The combination of these two
14 factors more reasonably represents the expense impact
15 versus a single- factor inflator suggested by Dr. Peseau.
16 Q.Are there other comparisons that would
17 support your O&M methodology of escalating the 2007 Base
18 Year on average by 5.82 percent?
19 A.Yes. A review of the rates of growth other
20 regional Northwest utilities have experienced also
21 reinforces the Company's use of as-Year CAGR of 5.82
22 percent in this filing. Using FERC Form 1 data, Idaho
23 Power's reported customer growth from 2003 to 2007 of 3.21
24 percent is 1.6 times greater than the peer group of
SMITH, DI REB 21
Idaho Power Company
1 utilities at 1.96 percent. By comparison the expense
2 growth rate for Idaho Power of 6.39 percent is only 1.1
3 times that of the other companies' expense growth rate of
4 5.74 percent. The result of reviewing a combination of the
5 actual O&M growth and the actual customer growth from 2003
6 to 2007 indicates that Idaho Power Company has had a slower
7 rate of O&M expense growth compared to this peer group on
8 average given the larger growth rate in new customer
9 additions during this time frame. This is depicted in
10 Exhibit Nos. 85 and 86, column 6, rows 1, 2, and 10.
11 Q.What is your conclusion on applying the
12 Company's CAGR of 5.82 percent as the rate of escalation of
13 O&M expenses, where appropriate?
14 A.When reviewing the actual adjusted expenses
15 through September 2008 and reviewing the Northwest utility
16 peer group included in Exhibit Nos. 85 and 86, the
17 Company's request for an increase in O&M expense of $16
18 million through this test year methodology is a reasonable
19 approach to set sufficient rates, not excessive rates, as
20 some witnesses have indicated, to provide the Company with
21 the opportunity to earn a reasonable return.
22 iv. PLAT ANALlZATION ADJUSTMNTS
23 Q. Why has the Company included $91.3 million
24 in annualizing adjustments to rate base?
SMITH, DI REB 22
Idaho Power Company
1 A.Annualizing adjustments are intended to
2 reflect projects at a year-end level so that rates in place
3 beginning in 2009 will reflect the end-of-year investment
4 in these proj ects versus an average year investment in
5 these proj ects, therefore reducing timing differences
6 related to recovery of rate base investments in 2009.
7 Q.Do Idaho Power and Staff generally agree on
8 how best to adjust rate base for investments in plant?
9 A.Yes. Proj ects greater than $2 million are
10 typically included as a known and measurable adjustment to
11 rate base. Although Staff did not recommend an adjustment
12 to the Company's proposed escalation of capital
13 expenditures less than $2 million, the Company is open to
14 discussing other ways it can capture growth in investments
15 less than $2 million given the large volume of proj ects
16 (approximately $110.4 million) that are included in this
17 category .
18 Q.Micron Witness Dr. Peseau criticizes the
19 Company's proposed plant annualizing adjustment, alleging
20 that it does not match costs and revenues. Do you agree
21 with Dr. Peseau's recommendation to remove $91.3 million in
22 annualizing adjustment to the 2008 rate base?
23 A.No. The Company proposed an annualizing
24 adjustment to 2008 rate base in Company Witness Greg Said's
SMITH, DI REB 23
Idaho Power Company
1 Exhibit No. 52. This exhibit identifies large construction
2 projects greater than $2 million that were classified as
3 Reliability/Compliance, Load Growth, or Other. The Company
4 removed $1,489,324, or 11.6 percent, of the requested
5 ratebase-related revenue requirement to reflect offsetting
6 revenues from those proj ects in the Load Growth category
7 that could be revenue producing.
8 More than 50 percent of the $91.3 million in
9 annualized plant, or $45.8 million, has an offsetting
10 imputed revenue included in the revenue requirement per the
11 Commission's direction in Order No. 29505.Over $37.6
12 million, or 41 percent, of the $91.3 million of annualizing
13 adjustments are included and categorized as Reliability or
14 Compliance-related proj ects that the Company is either
15 mandated to construct or has identified as a critical
16 project to reliably serve load. These projects do not have
17 revenue producing capability.
18 V. DEPRECIATION ADJUSTMNT
19 Q.Do you agree with Staff Witness Leckie's
20 $1,471,189 depreciation expense adjustment and the
21 adjustment to Accumulated Depreciation account or
22 depreciation reserve of $227, 440?
23 A.Yes. Mr. Leckie has correctly adjusted the
24 Company's filing to reflect the Commission Order No. 30630.
SMITH, DI REB 24
Idaho Power Company
1 VI . PURCHASING CAS
2 Q.As a preliminary matter, what are purchasing
3 cards and how are they utilized at Idaho Power?
4 A.Idaho Power has a One Card Solution
5 Purchasing Card ("P-Card") program implemented for Company
6 employees to use for purchases. This program was
7 implemented to replace a variety of processes including
8 petty cash, local check writing, cash advances by check,
9 expense accounts, open vendor accounts, and certain
10 purchase orders. The intent of the P-Card is to allow the
11 Company to better manage high volume, low-dollar
12 transactions and to improve cash flow management by
13 simplifying payments, reducing paperwork, reducing
14 processing expense, reducing multiple checks, and providing
15 a centralized listing of all expenses.
16 Q.How does the use of P-Cards add value to
17 Idaho Power's operations?
18 A.P-Cards are commonly used by many businesses
19 to effectively administer and manage the reimbursement of
20 business related expenses. P-Cards allow employees to make
21 emergency field purchases and fund business related travel
22 expenses. Also, the use of P-Cards for small dollar
23 purchases saves the Company money by eliminating the need
SMITH, DI REB 25
Idaho Power Company
1 to create purchase orders and process invoice payments for
2 small items.
3 Q.Staff Witness Vaughn claims that "the
4 widespread use of P-cards and the ability of an Idaho Power
5 employee to take cash withdrawals to self-reimburse for
6 expenditures prior to approval opens the door to the
7 possibility of employee abuse." Do you agree?
8 A.No. In fact, in Staff Witness Vaughn's
9 testimony, she specifically states that Staff did not find
10 any evidence of employee abuse. Company policy expressly
11 prohibits personal use of the P-Card and employees that
12 violate the policy are subject to discipline, including
13 termination.
14 Q.How do Idaho Power's internal controls and
15 the culture it promotes minimize the potential that exists
16 for employees to misuse Company assets?
17 A.Idaho Power has established a culture that
18 promotes honesty and integrity. This control environment
19 includes:
20 Tone at the Top - Officers and Senior Management
21 have established a culture with a strong value system
22 founded on integrity. This is evidenced through consistent
23 and frequent messaging, our mission statement, corporate
SMITH, DI REB 26
Idaho Power Company
1 leadership initiatives, and training programs, and through
2 the actions of management.
3 Code of Business Conduct and Ethics ("Code") - Each
4 Idaho Power employee is required to sign a statement of
5 acknowledgement that they will comply with the Code. The
6 Code not only outlines legal requirements and guiding
7 principles but also sets forth the Company's commitment to
8 an ethical way of doing business. The Manager of Corporate
9 Compliance oversees the Code and is a resource to
10 employees.
11 Ethics Line - Suspected violations may be reported
12 anonymously through a third-party hotline, a website, or
13 other internal resources. The third-party hotline allows
14 for a direct reporting conduit to the Board of Directors.
15 All reports are promptly investigated and acted upon.
16 Hiring and Promoting Appropriate Employees - Idaho
17 Power has established various proactive hiring and
18 promotion procedures to hire and promote qualified
19 employees. These procedures include the use of detailed
20 position descriptions, targeted selection interview
21 standards, background investigations, drug testing, and the
22 incorporation of regular performance reviews.
23 SOX Compliance Program - As part of the SOX
24 compliance program, fraud risk is considered in developing
SMITH, DI REB 27
Idaho Power Company
1 key controls. These controls are evaluated and tested as
2 part of the SOX compliance program.
3 Annual Business Planning - Management performs an
4 annual business planning process. In this process, fraud
5 risk factors to the Company are identified and catalogued
6 based on industry research, brainstorming/focus
7 group/interviews, existing event inventories, and process
8 flow analysis. Results are evaluated and presented to
9 Senior Management as part of the annual business planning
10 process.
11 Fraud Risk Assessment - The SOX Project Manager
12 compiles a fraud risk assessment as part of the SOX
13, compliance program, which is reviewed in detail with the
14 Vice President, Audit and Compliance and the Vice
15 President, Chief Risk Officer.
16 Q.How does Idaho Power's internal control
17 structure specifically limit the potential for employees to
18 misuse P-Cards?
19 A.Moni toring controls have been established to
20 deter or detect errors specific to the P-Card expense
21 process. P-Card charges must be approved for each
22 employee. Managers review their cost center charges, which
23 include P-Card expenses. Accounts Payable ('lAP") Team
24 Members review P-Card expenses to ensure that documentation
SMITH, DI REB 28
Idaho Power Company
1 provided is appropriate to support the expense. AP Team
2 Members are empowered to escalate any questionable expenses
3 to the AP Team Leader for further review. Finally, the AP
4 Team Leader, Vice President/Treasurer and Senior Vice
5 President, Administration/Chief Financial Officer review
6 and sign off on the monthly P-Card reconciliation.
7 Q.On page 33 of her testimony, Staff Witness
8 Vaughn states that because P-Cards can be used for cash
9 advances without pre-approval, an employee can use it for
10 personal expenses or a cash advance similar to a payday
11 loan. Is that an accurate assessment?
12 A.No. All expenses related to cash advances
13 must be properly supported and approved. If these
14 requirements are not met, the amount in question will be
15 deducted from the employee's next paycheck. In addition,
16 because Compa~y policy expressly prohibits personal use of
17 the P~Card, employees that violate the policy are subj ect
18 to disciplinary action including termination. This may
19 explain why Staff identified no instance of P-Cards being
20 used intentionally for employee personal expenses.
21 Q.On page 33 of her testimony, Staff Witness
22 Vaughn states that this practice gives an employee
23 "unfettered" access to $5,000. Is she accurately
24 describing Company policy?
SMITH, DI REB 29
Idaho Power Company
1 A.No. All employees with a P-Card do not have
2 cash advance access. The cash advance function can only be
3 granted to an employee based on a manager's approval. For
4 those employees granted cash advance access, limits range
5 from $150 to $ 3 , 000, depending on the employees' job
6 duties. The cash advance limit for most employees is $300.
7 Q.Do you have any concerns about the auditing
8 methodology used by Staff to come up with their critique of
9 the Company P - Card sys tem?
10 A.Yes. The Company has put in a great deal of
11 time and effort in reviewing Staff workpapers and discovery
12 responses to understand the basis for their conclusions and
13 findings related to P-Card expenditures. Our review was
14 guided by the standards issued by the American Institute of
15 Certified Public Accountants ("AICPA"), which state that:
16 The auditor must prepare audit
17 documentation in connection with each18 engagement in sufficient detail to19 provide a clear understanding of the20 work performed (including the nature,21 timing, extent, and results of audit22 procedures performed), the audit23 evidence obtained and its source, and24 the conclusions reached.
25 (AICPA, Professional Standards, VoL. 1, AU sec. 339)
26 It certainly does not appear that Staff complied with those
27 standards. In its review of Staff's workpapers, Idaho
28 Power was unable to gain a clear understanding of the work
SMITH, DI REB 30
Idaho Power Company
1 performed or the basis for the conclusions reached.
2 Specific concerns include:(1) The criteria for evaluating
3 audit evidence were not defined; (2) it does not appear
4 that Staff used the information obtained through the review
5 of the sample of 900 monthly reconciliations to develop
6 conclusions on the entire population; and (3) Staff's
7 conclusions on the disallowances regarding meals and cell
8 phone usage were subjective and not supported by the
9 testing documentation.
10 Q.What is your concern regarding Staff's
11 failure to not provide sufficient criteria for evaluating
12 audit evidence?
13 A.Through review of Staf f ' s workpapers, it
14 appears the criteria used by Staff were unreasonably
15 subj ecti ve . According to Government Auditing Standards
16 issued by the Government Accountability Office ("GAO"), the
17 criteria should ". . . provide a context for evaluating
18 evidence and understanding the findings." The GAO guidance
19 further represents that criteria includes " standards,
20 measures, expected performance, defined business practices,
21 and benchmarks against which performance is compared or
22 evaluated. "(Chapter 6.16) .
23 In Staff Witness Vaughn's response to Idaho Power
24 Company's Production Request No. 35, she states that
SMITH, DI REB 31
Idaho Power Company
1 \\. . expenditures must be considered necessary,
2 reasonable, and prudent in provision of this service" to
3 the customer. She further states that "Expenditures that
4 do not meet these criteria should be recorded below the
5 line."The criteria defined by Staff do not meet
6 the GAO standard because Staff does not cite anything other
7 than Ms. Vaughn's personal belief as the source to define
8 necessary, reasonable, and prudent expenses. For example,
9 there is no reference to an independent study, industry
10 benchmarks, or best practices to support her assertions.
11 Q.How did Staff use the sample of 900 monthly
12 reconciliations in performing their audit?
13 A.It appears that Staff examined a randomly
14 selected sample of approximately 900 reconciliation
15 envelopes. However, the information taken from the sample
16 was not used to evaluate the total population of P-Card
17 expenditures that occurred in 2007. Instead, Staff
18 requested a list of all 2007 calendar year P-Card
19 expenditures and subjectively chose percentages to exclude
20 for meal and cell phone expenditures. As a result, there
21 is not a clear logical link between Staff's selected sample
22 for review and the conclusions reached for the
23 disallowances.
SMITH, DI REB 32
Idaho Power Company
1 Q.How did you conclude that Staff did not use
2 the information obtained through the review of the sample
3 of 900 monthly reconciliations to develop conclusions on
4 the entire population?
5 A.In Ms. Vaughn's response to Production
6 Request No. 46, she stated "No" when asked if she pulled
7 and reviewed the individual P-Card envelopes
8 (reconciliations) that supported the charges included on
9 her Exhibit No. 125, pages 1 and 2 that formed the
10 foundation of Staff's conclusion that the expenses should
11 be excluded from recovery in rates.
12 Q.Regarding P-cards, please identify the
13 components that make up Staff Witness Vaughn's recommended
14 $884,747 adjustment for ratemaking purposes.
15 A.Staff Witness Vaughn's adjustment includes:
16 (1) $236,274 for restaurant expenditures; (2) $306,475 for
17 cell phone related expenditures; (3) $247,339 for
18 Gifts/Awards; (4) $61,729 for bottled water, coffee, and
19 newspapers; (5)$17,606 for charitable donations; (6)$7,999
20 for political activity; and (7) $7,366 related to the
21 Company's "keyword" search. I will address each of these
22 adjustments separately below.
SMITH, DI REB 33
Idaho Power Company
1 A. Restaurant Charges
2 Q.Do you agree with Staff Witness Vaughn's
3 recommendation to exclude $236,274 of restaurant expenses
4 from Idaho Power Company's revenue requirement?
5 A.No. Ms. Vaughn recommends removing
6 $236,274, or 50 percent, of all restaurant and food
7 expenses incurred within the Company's service territory
8 stating they were "excessive" and "neither reasonable or
9 necessary" while simultaneously stating that because of the
10 volume "it was clearly impossible for Staff to review all
11 supporting documentation." Although the implication in her
12 testimony is that she reviewed some supporting
13 documentation, Ms. Vaughn's response to Production Request
14 No. 46 was that she did not review the supporting
15 documentation for the P-Card expenditures included in the
16 amount she recommended for removal. To remove 50 percent
17 of all restaurant and food expenses incurred within the
18 Company's service territory is both subjective and
19 arbitrary.
20 Q.Why should these items not be removed?
21 A.Again, based on a limited description
22 provided in a data dump from the Company's general ledger
23 system and with no apparent detailed review, a 50 percent
24 adjustment removing these expenses is unreasonable. The
SMITH, DI REB 34
Idaho Power Company
1 Company has adequate oversight controls in place for these
2 types of purchases in order to ensure they have a
3 legitimate business purpose and are neither excessive nor
4 unreasonable.
5 Q.Why do you believe Staff's conclusions
6 regarding meals were arbitrary and not supported by the
7 testing documentation?
8 A.In Staff Witness Vaughn's response to Idaho
9 Power Company's Request No. 36 regarding the 50 percent
10 adjustment to restaurant expenditures, she states that "the
11 50% was not based on a specific calculation .. ."As
12 the rationale for this disallowance, she cites 50 percent
13 asa reasonable percentage "to eliminate expenditures that
14 are believed to be excessive."(Page 26 of Vaughn's direct
15 testimony). Further, she cites four "worrisome" examples
16 of meal expenditures that she believes are neither
17 reasonable nor necessary for a regulated utility based on
18 the limited description provided in a data dump from the
19 Company's ledger system. These four examples total less
20 than $150 and serve as her basis for excluding nearly
21 $236,000 in restaurant expenditures for ratemaking
22 purposes. Her workpapers do not provide an adequate basis
23 to conclude that the meal expenses were neither reasonable
24 nor necessary. There is no evidence that 50 percent of the
SMITH, DI REB 35
Idaho Power Company
1 meal expenses reviewed by Staff met her criteria as
2 "worrisome." Further, Staff did not include any objective
3 criteria to support her assertion that these expenses are
4 excessive.
5 B. Cell Phone Expenses
6 Q.Do you agree with Staff Witness Vaughn's
7 recommendation to exclude $306,475 of cell phone
8 expenditures from Idaho Power Company's revenue
9 requirement?
10 A.No. I have the same problems with Staff's
11 conclusions regarding cell phone usage that I did with
12 restaurant charges; Staff conclusions were arbitrary and
13 not supported by the testing documentation. The resulting
14 Staff adjustment is not valid and should not be allowed.
15 Q.Why do you believe Staff's conclusions
16 regarding cell phone usage were subjective and not
17 supported by the testing documentation?
18 A.On page 28 of Staff Witness Vaughn's direct
19 testimony, she states that she "removed 75% of the cell
20 phone expense charged to A&G and 50% of all remaining cell
21 phone expense." In her response to Idaho Power Production
22 Request No. 40, she further states that "the percentage was
23 not calculated, nor was it intended to be . . . ." As
24 rationale for this disallowance, she cites. a belief that
SMITH, DI REB 36
Idaho Power Company
1 the Company has too many employees with cell phones and
2 that cell phones are unnecessarily assigned to employees
3 located in central headquarters. Staff Witness Vaughn
4 further stated in response to Idaho Power Company
5 Production Request No. 39, that Staff believes it is
6 reasonable for certain key employees and many field
7 personnel to carry a Company-provided cell phone. In
8 reviewing the Company provided-workpapers, Staff had access
9 to employee job titles, yet there was no analysis performed
10 to determine which employees should or should not have cell
11 phones based on Staff's cell phone criteria. Rather, the
12 disallowance was based on assumptions unsupported in
13 Staff's workpapers or testimony.
14 Q.Why should cell phone related expenses be
15 included in the revenue requirement?
16 A.The Company agrees wi th Ms. Vaughn's
17 statement that cell phones are a necessary expense of doing
18 business and "due to the wide spread and often remote work
19 areas of Company employees, reasonable cell phone
20 communication expense should be included in rates."
21 However, I believe Ms. Vaughn reaches her conclusion that
22 the cell phone charges are excessive on the basis of an
23 inadequate auditing process. The Company takes very
SMITH, DI REB 37
Idaho Power Company
1 seriously the prudent use of cell phones and provides them
2 based on business necessity.
3 Q. You mentioned inadequate auditing process in
4 your answer. Would you elaborate on that statement?
5 A. It is apparent Ms. Vaughn failed to follow
6 good auditing practice and look at the data underlying the
7 numbers. There are numerous items Staff Witness Vaughn
8 identifies in her workpapers as cell phone charges which
9 are not cell phone charges. Among the largest of these
10 individual charges are satellite communication fees
11 incurred in the monitoring of water flows, monitoring of
12 snow levels, and communication service for dams. Most of
13 the noted monitoring equipment charges are included in
14 Account 921. In reviewing Account 921, Ms. Vaughn
15 concludes "145,921 (27%) of the total O&M cell phone
16 expense is charged" to P-cards and because "most A&G
17 employees are employed at the Company central
18 headquarters." She incorrectly concludes that these
19 charges are for only A&G employee use of cell phones. Also
20 included in Ms. Vaughn's analysis of cell phone expenses
21 are charges completely unrelated to cell phones use, such
22 as charges for ladders and tools for vehicles, an extension
23 cord, parking fees, employee training, trailer stock
24 materials, audit department reference materials,
SMITH, DI REB 38
Idaho Power Company
1 restaurant, lodging and training expenses. In addition,
2 there is a significant amount of charges related to after-
3 hour and on-call support for the call center. It is
4 apparent Ms. Vaughn based her findings on assumptions and
5 "not fact.
6 Q.Are there any other cell phone charges that
7 Ms. Vaughn has identified for removal that are in fact
8 reasonable and prudent expenses for ratemaking?
9 A.Yes. There are charges for cell phones that
10 are located in outlying areas that are used to transmit
11 data so that additional labor costs can be averted in the
12 collection of necessary business data. Among these are
13 cell phones located at large customer (Rate Schedule 9P and
14 19) meter locations and interchange points. These phones
15 are attached directly to the meter and are necessary due to
16 the large amount of daily transmitted data collected from
17 these customers. Additionally, there are charges for cell
18 phones used by meter readers to receive orders for
19 disconnects and connects, to call prior to disconnecting
20 customers for non-payment, and to call other meter readers
21 when they are done with their routes to see if help is
22 needed in other areas.
23 Q.What is your overall assessment of the cell
24 phone charges Ms. Vaughn has removed?
SMITH, DI REB 39
Idaho Power Company
1 A.I have discussed several flaws within Ms.
2 Vaughn's evaluation of data that she used for the basis of
3 her assumptions. While the Company takes Ms. Vaughn's
4 concerns seriously, the Company provides cell phones based
5 solely on business necessity and has adequate controls in
6 place. As part of the Company's ongoing cost containment
7 and prior to the filing of Mrs. Vaughn's testimony, the
8 Company commenced a complete review of all cell phone
9 policies and procedures, which should be completed by the
10 end of the year.
11 Contracts with carriers are continuously reviewed
12 and renegotiated resulting in more competitive pricing.
13 Corporate pooled accounts were established with two large
14 cell phone carriers in December 2007 and January 2008,
15 which have resulted in additional savings. The Company has
16 negotiated an umbrella contract that will cover all
17 employees, creating a larger group and thereby providing
18 economies of scale, which will provide significant savings
19 to customers. Ms. Vaughn's desire to make assumptions
20 based on a data dump of 14,327 lines, with limited
21 descriptions, without a detailed review is unreasonable.
22 Ms. Vaughn has not demonstrated any rational basis for her
23 50 percent and 75 percent removal percentages.
SMITH, DI REB 40
Idaho Power Company
1 Q.In her testimony, on page 32, Staff Witness
2 Vaughn states that P-Cards are used for cell phones and
3 office supplies "in lieu of standard business purchasing
4 practices." Has she correctly characterized the Company's
5 purchasing practices?
6 A.No. In 2007, each employee with a Company-
7 issued cell phone used Company-negotiated service contracts
8 with an individual pool of minutes. In addition, standard
9 purchasing practices are utilized to purchase office
10 supplies and paper. With the exception of emergency
11 purchases, all paper and office supplies are purchased
12 through negotiated contract pricing using an electronic
13 procurement system, which uses P-Cards instead of separate
14 purchase orders to improve the Company's efficiency and
15 reduce costs.
16 C. Gifts/Awards
17 Q.Do you agree with Staff Witness Vaughn's
18 $247,339 adjustment for Gifts/Awards?
19 A.No. Blanket removal of all these items
20 should not be allowed based on a data dump, with limited
21 descriptions of the charges, and no in-depth review. The
22 Company provides certain benefits to employees to foster a
23 positive working environment, good morale, and, although
24 indirect, assist in attracting and retaining quality
SMITH, DI REB 41
Idaho Power Company
1 employees - all of which benefit customers. Although Ms.
2 Vaughn states these expenditures, "though allowable as
3 traditional expenses, do not benefit the customer," she
4 does not articulate why they do not benefit customers. In
5 review of Ms. Vaughn's adjustments, a large majority of
6 these items are for Service Award Celebrations, including
7 Retirement Parties ($67,795), Excellence Awards ($50,314),
8 and Company-Sponsored Social Functions ($76,543), all of
9 which are conducted under specific guidelines and are
10 addressed in the Company's employee handbook. For example,
11 the purpose of the Service Award Celebration is for an
12 employee's co-workers to recognize the employee for his or
13 her time and contributions to the Company. The total
14 amount of expenditure is based on years of service, which
15 is $125 for 5 and 10 years, $200 for 15 and 20 years, and
16 $300 for 25 years of service and above.
17 Excellence Awards are tools that supervisors,
18 managers, and officers can utilize to recognize
19 "exceptional" employee contributions and motivate employees
20 to perform in a like manner. These awards can be given in
21 the form of cash or gifts for which there are specific
22 guidelines.
23 While in today's environment Company-sponsored
24 social events such as Christmas parties and picnics are
SMITH, DI REB 42
Idaho Power Company
1 kept to a minimum, these events promote employee morale as
2 well as develop positive working relationships and
3 environments.
4 Q.What other types of items were included in
5 Ms Vaughn's adjustment for gifts and awards?
6 A.There are over 2,500 rows of expenses listed
7 in Ms. Vaughn's exhibit so it is virtually impossible to
8 list each item; however, the list is included in her
9 workpapers for review. Examples of the types of items
10 included in this list are expenses related to team building
11 functions, sympathy cards and flowers for deaths, safety
12 appreciation lunches, employee appreciation breakfasts,
13 etc.
14 D. Bottled Water, Coffee, and Newspapers
15 Q. Do you agree with Staff Witness Vaughn's
16 $61,729 adjustment for bottled water, coffee, and
17 newspapers?
18 A.No. Idaho Power employees, particularly
19 those in the field, frequently work in inhospitable
20 conditions to maintain or restore power in remote areas.
21 In some instances, the Company provides water or coffee for
22 the health and/or safety of employees working in extreme
23 temperatures. Idaho Power utilizes local newspaper
24 subscriptions to stay abreast of new businesses, legal
SMITH, DI REB 43
Idaho Power Company
1 notices, and legal publications of local ordinances and
2 laws that may impact the utility business or Idaho Power
3 customers. Staff's proposed adjustment would disallow
4 appropriate business expenses such as these that enable the
5 Company to provide quality service to its customers.
6 E. Chari table Donations
7 Q.Please address Staff Witness Vaughn's
8 $17,606 adjustment for charitable donations. Is this
9 adjustment reasonable?
10 A.No. Ms. Vaughn removed $17,606 in expenses
11 classifying them as donations. In the Company's 2003 Idaho
12 Rate Case (IPC-E-03-l3), Staff identified and the
13 Commission ordered the removal of 100 percent of all
14 charitable contributions and 1/3 to 100 percent of
15 memberships. In this current rate case, the Company
16 removed $195,563 for those items identified in Exhibit No.
17 30, pages 2 and 3 of 9, and an additional $3,445 on Exhibit
18 No. 30, pages 4 and 5 of 9.
19 While the Company reviewed thousands of entries in
20 an attempt to remove all charitable donations, it is
21 inevitable that a few small dollar items might be missed.
22 However, unlike donations made to specific entities, the
23 vast majority of the expenses was incurred in support of
24 employee community involvement, which enhances employee
SMITH, DI REB 44
Idaho Power Company
1 morale and benefits the local communities that comprise
2 Idaho Power's service territory. A review of these items
3 also indicates that some of these items (less than $2,000)
4 were already removed in my Exhibit No. 30, pages 2 and 3 of
5 9. Ms. Vaughn's adjustment would remove those amounts
6 twice from Idaho Power's 2008 test year expenses.
7 F. Poli tical Acti vi ty
8 Q.Do you agree with Staff Witness Vaughn's
9 $7,999 adjustment for political activity?
10 A.Partially. While the Company makes every
11 effort to assure expenses relating to political activities
12 are removed, some of Ms. Vaughn's adjustments are valid.
13 However, the Company had already removed $4,733.70 of this
14 amount and thus Ms. Vaughn's adjustment results in double
15 counting. For example, one-third of the $3,752.50 Boise
16 Metro Chamber membership was removed in Exhibit No. 30,
17 page 2 of 9, line 41. The amount of $404.00 for Mr.
18 Panter's officer physical was removed in Exhibit No. 30,
19 page 8 of 9, line 126, and 17.4 percent of Mr. Keen's
20 travel expenses to the Governor's Cup Scholarship fund
21 raising event has been removed in Exhibit No. 30, page 6 of
22 9, line 56. These were removed in accordance with Order
23 No. 29505 (Case No. IPC-E-03-l3).
SMITH, DI REB 45
Idaho Power Company
1 G. Keyword Search
2 Q.Do you agree with Staff Witness Vaughn's
3 $7,366 adjustment related to the Company's keyword search?
4 A.No. Ms Vaughn states she included
5 "expenditures similar to those removed by the Company
6 subsequent to its \ keyword' search as described in Ms.
7 Smith's direct testimony." (Vaughn Dir. 22.) However, this
8 statement is incorrect. In Exhibit No. 30, page 9 of 9,
9 the Company removed charges that, although the Company
10 feels are appropriately incurred costs, the vendor name
11 might lead an uninformed individual to come to the wrong
12 conclusion. Included in the Company's initial keyword
13 search was the name "bar." However, the Company has found
14 that a significant number of restaurants include the name
15 "bar" in their names. There are instances when "bar" may
16 not even be stated in the logo on the building, but when
17 employees pay for their meals, they find it is printed on
18 their receipts. Therefore, after discussions with
19 management, it was determined to remove only charges to
20 establishments that included only the word "bar" in their
21 name. If the establishment's name included "bar" but also
22 grill, restaurant, café, or something similar, it was not
23 removed. Therefore, the Company feels it is unreasonable
24 to remove all of these charges.
SMITH, DI REB 46
Idaho Power Company
1 VII. INVNTORIES ADJUSTMNTS
2 Q.Staff Witness Vaughn recommends removal of
3 $6,617,514 from rate base based on her assessment that
4 there is "no accurate predictor" of Accounts 154 and 163 -
5 Plant Materials and Supplies and therefore "adequate
6 planning, ordering, and inventory management" by the
7 Company will allow inventory levels to be maintained at
8 2007 levels. Is her recommendation valid?
9 A.No. While I do agree that 100 percent
10 accuracy in estimating account balances is difficult, a
11 reasonable estimation is possible. 2008 actual data shows
12 that the Company has done a good job of managing and
13 estimating Accounts 154 and 163 levels. In its original
14 filing, the Company estimated that by the end of 2008 the
15 total of these two accounts to be $50,128,526. As of
16 October 2008, the combined balance is $50,407,997, or
17 $279,471 higher than the Company's entire 2008 estimate.
18 There were three primary drivers in arriving at the
19 Company's 2008 estimate:( 1 ) the Company in 2007 had been
20 applying sales taxes included in Account 163 to the
21 reissuance of Company remanufactured transformers; (2) the
22 Company has seen an increase in the cost of transformers by
23 an estimated 60 percent due to the increased cost of metal
SMITH, DI REB 47
Idaho Power Company
1 and oil; and (3) the need for higher inventories to serve a
2 larger customer base.
3 The over-application through the Stores Loading
4 process of sales taxes was discovered in February 2008 and
5 corrected through a reduction to Stores Loading rate from
6 February 2008 through October 2008, resulting in an
7 increase to 2008 inventory levels of approximately $2
8 million. The Company only incurs sales tax expense once
9 when a transformer is purchased and subsequently should
10 only be capitalized once when the transformer is originally
11 issued, not when remanufactured and reissued.
12 While the Company is constantly monitoring its
13 inventory levels to assure adequate but minimal inventory,
14 it must ensure that there are sufficient inventories to
15 serve the customers. It takes this responsibility very
16 seriously. Unlike unregulated companies, Idaho Power
17 cannot tell a customer he or she may have to wait while
18 inventory is ordered.
19 VIII. EXECUTIVE DEFERRD COMPENSATION ADJUSTMNT
20 Q. Do you agree with Staff Witness Nobbs that
21 the four entries in sub-account 920.350 identified as
22 Executive Deferred Compensation for 2007 totaling $459,524
23 should not have been included in the revenue requirement?
SMITH, DI REB 48
Idaho Power Company
1 A.Yes, but not for the reasons cited by Mr.
2 Nobbs. Idaho Power has approximately 1,250 active general
3 ledger accounts and many of those accounts have thousands
4 of lines of entries included within them in any given year.
5 While Idaho, Power makes every possible attempt to review
6 accounts and remove items that should not be borne by the
7 ratepayer, these costs were inadvertently overlooked in the
8 preparation of the rate case.
9 Q.Do you agree wi th Mr. Nobbs' s
10 characterization of the source of the funds included in the
11 $ 459 , 524 amount?
12 A.No, I do not. While Mr. Nobbs is correct
13 that these expenses are included in a "Rabbi Trust," he is
14 incorrect in his description of the source of the funds
15 included in the $459,524 amount. As part of Idaho Power
16 Company's Executive Compensation plans, the Company allows
17 executives to defer, at their discretion, some of their
18 compensation until he or she separates from the Company.
19 While the executive's compensation is correctly recorded as
20 a current expense to the Company at the time it is earned,
21 instead of paying the executive at that time, the Company
22 takes the cash the executive elects to defer and deposits
23 it in a participant-directed investment account. This
24 account is very much like a 401 (k) plan and the executive
SMITH, DI REB 49
Idaho Power Company
1 has the same investment options as are available to
2 participants in the Company's ordinary 401 (k) plan.
3 Generally Accepted Accounting Principles ("GAAP") require
4 the Company to set up an asset for the investment and
5 corresponding liability for the benefit of the executive.
6 Any earnings or losses on the trust assets that accrue to
7 the benef it of the employee are recorded as either gains or
8 losses, or interest and dividend income or expense, in the
9 Company's income statement as it is earned and a
10 corresponding entry is made to gross up the value of the
11 asset. At the same time, an identical amount is recorded
12 as an increase or decrease to compensation expense in the
13 income statement with an offsetting entry credited to the
14 liability account to recognize the increase or decrease in
15 the liability to the executive. Therefore, the income
16 generated is offset by a corresponding expense. In this
17 case, the income fell below the line while the expense was
18 recorded above the line. Mr. Nobbs is correct that the
19 $459,524 should not have been included in the revenue
20 requirement.
21 Q.Did any executive use this provision to
22 defer a portion of their compensation in 2007?
23 A.No. The $459,524 represents only earnings
24 on amounts executives had deferred prior to 2007.
SMITH, DI REB 50
Idaho Power Company
1 Q.Mr. Nobbs stated earlier in his testimony
2 that businesses often use this type of trust to provide
3 "Golden Parachutes" and later in his testimony that it is a
4 form of non-qualified deferred compensation similar to a
5 golden parachute. Do you agree with these statements?
6 A.No, I do not. It is not a form of severance
7 pay, bonus, stock option, or a combination thereof. There
8 is also no contract defining it as such. It is purely a
9 plan to permit deferral of base salary or incentive
10 compensation that the participant would otherwise receive
11 in cash. The deferred funds are kept in a participant-
12 directed investment account that is very similar to a
13 401 (k) account. The term "golden parachute" is certainly
14 an inflammatory term these days and it is unfortunate that
15 Mr. Nobbs chose to use it when it is not applicable to
16 Idaho Power's situation.
17 Q.Mr. Nobbs stated on pages 3 and 4 of his
18 direct testimony that "(because) creditors can exercise a
19 prior claim on trust corpus; the trust beneficiaries bear a
20 \ substantial risk of forfeiture.' Simply put,
21 contributions can be taken back until they are given to the
22 employee. "(Emphasis in original.) Has he correctly
23 described the operation of the deferred compensation plan
24 at issue here?
SMITH, DI REB 51
Idaho Power Company
1 A.Not entirely. Trust beneficiaries do bear a
2 risk of forfeiture of their deferral and earnings on their
3 deferral because the trust corpus can be reached by
4 credi tors. However, it is inaccurate for two reasons to
5 say that contributions can be taken back until they are
6 gi ven to the employee. First, the Company does not make
7 contributions to this plan. All amounts contributed to the
8 plan are elective deferrals made by the participants.
9 There is no Company match associated with these deferrals.
10 Second, the statement implies that Idaho Power may redirect
11 these funds to its own purpose, which is not true. Idaho
12 Power holds legal title to the funds until they are
13 distributed but has no access to the funds for its own use.
14 The funds could only be forfeited in a bankruptcy
15 proceeding, in which case the funds would go to satisfy
16 creditor claims.
17 ix. INTEREST ON DIRECTOR'S FEES ADJUSTMNT
18 Q. Do you agree wi th Mr. Leckie's removal of
19 $15,172 in interest paid to Company directors on their
20 deferred director's fees?
21 A.No. Interest on deferred director's fees is
22 recorded in FERC Account 431 and is a below-the-line
23 account. Because the interest was not included in the
SMITH, DI REB 52
Idaho Power Company
1 Company's requested revenue requirement, the $15,172 cannot
2 be removed.
3 x. OUT OF PERIOD ACCRUALS ADJUSTMNT
4 Q. Staff Witness Nobbs states that he found two
5 accruals in 2007 recorded in account 928.101 - FERC Order
6 No. 472 containing out-of -period charges totaling $193,901
7 and that each of these accruals covered a one-year period.
8 Do you agree with this statement?
9 A.No. Idaho Power accrues FERC administrative
10 fees monthly, based on an estimate using the previous
11 twelve-month actual billing. The monthly accrual amount is
12 established in August or September of each year and is for
13 the following twelve-month period from October 1 through
14 September 30. When the Company receives the FERC's
15 invoice, the Company adjusts its accruals and by the end of
16 the twelve-month period in September the amount accrued
17 agrees to the actual billing for the same time period.
18 Based on the FERC invoice, the Company would then estimate
19 the monthly accrual for the next twelve-month period.
20 In Mr. Nobbs' s exhibi t, he reduces the Company's
21 2007 accrual of $480,505 by $163,901, stating that $98,239
22 of this amount relates to 2006 and $65,662 relates to 2008.
23 I am not certain how Mr. Nobbs came to his conclusion but
24 the full $480,505 is the accrual for 2008. A reduction of
SMITH, DI REB 53
Idaho Power Company
1 this amount would understate Idaho Power's 2007 expenses
2 and revenue requirement.
3 XI . CONTRIBUTIONS, AL CLOCK AN CAY
4 Q. Staff Witness Nobbs recommends the removal
5 of contributions, alarm clocks, and candy in the amount of
6 $7,150 from Account 930. 2-Miscellaneous Expenses because
7 these "appear to be personal, a contribution or frivolous."
8 Do you agree with his assertion?
9 A.No. None of these items are either personal
10 or frivolous in nature. These expenses had a definite
11 business purpose and benefit. The alarm clocks, which were
12 of small individual dollar value ($8.46 each and $457 in
13 total expense), were given out at the EEl Fall Financial
14 Conference to assist in reminding security analysts (both
15 fixed-income or debt, and equity) that Idaho Power is a
16 viable and prudent investment option. This either
17 reinforces Idaho Power (by a logo on the gifts) to those
18 who already know us or introduces the corporate logo to new
19 analysts and potential investors.
20 As Idaho Power and IDACORP compete for new capital
21 (an even more defining issue today in the credit-
22 constrained capital markets), it is important to
23 differentiate Idaho Power from others. And to that extent,
24 Idaho Power is not alone in giving out "trinkets" to those
SMITH, DI REB 54
Idaho Power Company
1 who either influence or directly purchase our debt and
2 equity securities. At this conference, Idaho Power also
3 met with members of the credit rating agencies (Moody's,
4 Standard & Poor's, and Fitch) and they often take these
5 items after having a thorough dialog with the management
6 team.
7 The $1,718 spent on butter toffee was provided to
8 city and county agencies for providing information, data
9 and assistance with easements, GIS data, and other
10 documentation to Idaho Power. Maintaining city and county
11 relationships and their cooperation is invaluable when
12 gathering easement information.
13 Q.Do you take issue with any other amounts
14 included in the $7,150 that Mr. Nobbs recommends removing?
15 A.Yes. Besides the gifts previously
16 mentioned, the Company had already removed from the
17 Company's revenue requirement the membership for $1,000 to
18 the Idaho Economic Council in Exhibit No. 30, page 2 of 9,
19 line 53. Therefore, this amount does not exist in the
20 revenue requirement such that it can be removed.
21 Q.Are there any amounts included within the
22 $7,150 Mr. Nobbs recommends removing that you do agree
23 should be removed?
SMITH, DI REB 55
Idaho Power Company
1 A.Yes. While the Company feels the remainder
2 of the $7,150 has an appropriate business purposes, in Case
3 No. IPC-E-03-l3 the Commission found that certain
4 memberships and contributions should be removed from test
5 year expenses. As a result, the Company reviewed thousands
6 of rows of charges to make every attempt to remove such
7 charges. However, our additional review shows that the
8 Company did in fact fail to remove the memberships for
9 $2,500 to the Caldwell Economic Council and $1,125 to the
10 Eastern Oregon Visitors Association.
11 XII. FERC SETTLEMNT CREDIT ADJUSTMNT
12 Q. Staff Witness Vaughn describes on page 19 of
13 her testimony an adjustment to the Staff's actual test year
14 for a credit received from the FERC involving FERC
15 administration and Other Federal Agency ("OFA") charges.
16 Do you agree that this adjustment is appropriate?
17 A.No.
18 Q.Please explain why the Company received
19 reimbursement of the FERC administration and other federal
20 agency charges.
21 A.The FERC and other federal agencies assess
22 utilities for costs related to their administrative and
23 regulatory duties. Numerous utilities sued over the
24 accuracy of the charge and the court agreed with Idaho
SMITH, DI REB 56
Idaho Power Company
1 Power's position on the charges. As a result, Idaho Power
2 received reimbursement for fees collected from 1999 through
3 2006.
4 Q.Ms. Vaughn recommends that the Company flow
5 through this reimbursement to its customers over a five
6 year period. Do you agree with this recommendation?
7 A.No. There are essentially two reasons for
8 my disagreement. First, Ms. Vaughn contends that the
9 Company over-collected its expenses in prior years. This
10 would only be true if the Company had over-earned since the
11 period of time she uses; i.e., from 2003 forward. As
12 Company Witnesses Steve Keen demonstrated on page 31 of his
13 direct testimony and LaMont Keen explained on pages 9 and
14 10 of his direct testimony, the Company actual return on
15 equity for those time periods was well below the allowed
16 return established in those two cases and accordingly there
17 was no overcharge. Second, Ms. Vaughn has simply selected
18 one expense item out of many to make a retroactive
19 adjustment for ratemaking purposes. She is artificially
20 increasing the Company's revenues for the next five years
21 when she creates the amortization of her credit. This
22 amortization has no relationship to the actual ongoing
23 costs of the Company. It will simply cause the Company to
24 under-earn through the device of creating a revenue stream
SMITH, DI REB 57
Idaho Power Company
1 from a prior period by assuming that the Company has over-
2 collected on an expense item for a prior period.
3 Q.What would be the financial impact on the
4 Company of Ms. Vaughn's recommendation?
5 A.The Company would be required to write off
6 approximately $3.3 million to 2008 net income.
7 XIII. ARCHITECTS' SERVICES ADJUSTMNT
8 Q.Do you agree with Staff Witness Nobbs's
9 characterization that the architects' services of ZGA
10 Architects and Planners totaling $36,375 should be
11 capitalized rather than expensed?
12 A.No. Mr. Nobbs appears to have assumed that
13 because these particular expenses were incurred to an
14 architectural and planning firm, that these costs represent
15 architectural costs for capitalized items. However, this
16 firm not only provides architectural services but also
17 consulting services. Idaho Power requested the firm's
18 consulting services be provided in the Corporate
19 Headquarters Master planning efforts to identify
20 alternative solutions to physically accommodating employee
21 growth. This effort has resulted in the decision to
22 relocate approximately 20 percent of the Company's
23 employees from the Corporate Office to the Boise Plaza
SMITH, DI REB 58
Idaho Power Company
1 building and thus defer a long-term decision on building
2 new facilities.
3 Q.Why have you concluded that these costs are
4 not capitalizable costs?
5 A.Capi tal expendi tures according to GAAP are
6 not normal, recurring expenses and are costs that benefit
7 the operations of more than one operating period. Also,
8 costs that improve efficiency or extend the life of an
9 asset would also qualify under GAAP to be capitalized.
10 However, unlike architectural drawings which may meet the
11 aforementioned requirements, consulting costs of this
12 nature are normal, recurring, and according to GAAP should
13 be expensed.
14 Q.Gi ven that Mr. Nobbs stated these should be
15 capitalized, did he add these costs to rate base and
16 include an appropriate amount in the cost of service for
17 depreciation?
18 A.No, he did not.
19 XiV. LEGA FEES ADJUSTMNT
20 Q.On page 13 of his testimony, Staff Witness
21 Leckie recommends that the Commission deny recovery of
22 legal fees in the amount of $192,364 paid to the Dewey &
23 LeBoeuf law firm. Is Mr. Leckie's adjustment reasonable?
SMITH, DI REB 59
Idaho Power Company
1 A.No. Mr. Leckie testifies that the billings
2 for these legal services were entitled "Stock Plans" and
3 separated from other Dewey & LeBoeuf billings. On this
4 basis, he mistakenly concludes that the legal services
5 covered by these billings only benefit shareholders and
6 therefore should be excluded from expenses to be included
7 in the Company's revenue requirement. I believe if
8 Mr. Leckie had examined the actual invoices from Dewey &
9 LeBoeuf, he would have recognized that the legal services
10 described in the invoices labeled "Stock Plans" cover legal
11 compliance issues associated with multiple employee" benefit
12 matters and are not for legal services directly related to
13 IDACORP stock. For example, the legal services cQvered in
14 the "Stock Plan" invoices include work on legal compliance
15 issues associated with the Company's 401 (k) and restricted
16 stock plans for its employees. Both restricted stock and
17 401 (k) plans are common employee benefits that help the
18 Company attract and retain qualified employees.
19 Q.Should any of the legal services billed
20 under the "Stock Plans" label be allocated to IDACORP?
21 A.Yes, and they already have been. The actual
22 invoiced amounts are greater than the amounts shown in
23 Mr. Leckie's Exhibi t No. 118. The Company has already
24 reduced the amount it is seeking to collect in its revenue
SMITH, DI REB 60
Idaho Power Company
1 requirement to reflect an allocated portion of these
2 billings going to IDACORP. The Company's General Counsel's
3 office reviewed the bills and concluded that a portion of
4 the total bill should be allocated to IDACORP. The amounts
5 shown in Mr. Leckie's Exhibit No. 118 reflect that
6 reduction.
7 Q.will the Company change the way it labels
8 these legal services invoices in the future?
9 A.Yes. Idaho Power has requested that Dewey &
10 LeBoeuf revise its invoice descriptions to avoid future
11 misunderstandings of this type.
12 Q.Does this conclude your rebuttal testimony?
13 A.Yes, it does.
SMITH, DI REB 61
Idaho Power Company
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