20081203Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
RECEIVED
2808 DEC -3 AM ll: 52
IOAHOP~B~H~(, ,"\i,'
UTiLITIES CO¡~i.,k)..I'""¡,,
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER )
COMPANY'S PETITION FOR APPROVAL OF )
CHANGES TO ITS POWER COST )
ADJUSTMENT (PCA) MECHANISM )
)
)
)
CASE NO. IPC-E-08-19
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilties Commission, by and through its Attorney of
Record, Weldon B. Stutzman, Deputy Attorney General, submits the following comments in
response to Order No. 30677 issued on November 13,2008.
BACKGROUND
On May 30, 2008, the Idaho Public Utilties Commission issued Order No. 30563 in Case
No. IPC-E-08-07, Idaho Power Company's anual Power Cost Adjustment (PCA) for
2008/2009. In that Order the Commission stated:
With respect to further evaluation of the PCA mechanism, Staff, Idaho Power,
and the Irrigators all proposed workshops to address issues such as sharing
methodology, forecasting methodology, the distribution of power cost
deferrals, and load growth adjustment rates. We support these proposals and
direct Idaho Power to schedule such workshops as soon as practicable.
STAFF COMMENTS 1 DECEMBER 3, 2008
The first PCA workshop was held on July 30, 2008, with Idaho Power Company,
Commission Staff, and representatives from Micron Technology, the Industrial Customers of
Idaho Power and the U.S. Deparment of Energy all paricipating. The workshop paricipants
agreed to discuss the following six PCA issues:
1) Customer/Company power cost sharing in the PCA. The PCA curently requires that cost
be shared on a 90%/10% basis, respectively.
2) The PCA load growth adjustment rate (LGAR). The LGAR is curently $62.48/Mwh but
is applied to only 50% of the load growth as specified in the Commission approved
settlement in Case No. IPC-E-07-13.
3) Third pary transmission expense. This expense is not curently tracked through the
PCA.
4) The methodology used to forecast power supply costs in the PCA. The PCA currently
uses anticipated inflows to Brownlee reservoir to forecast power supply costs.
5) The distribution of expected power supply costs over the PCA year. The curent
distribution is based on monthly modeled power supply costs.
6) The distribution of PCA cost among customer classes. PCA costs are currently assessed
on an equal ~ per kWh basis to all customer classes.
After the first workshop, it became clear that resolution of the issues would require
extensive negotiations of all the paries in an attempt to reach an acceptable consensus.
Consequently, two additional settlement workshops were held on August 13 and September 3,
2008 with the additional paricipation of Irrigation class representatives. On October 14, 2008,
Idaho Power Company fied a PCA Settlement Stipulation, developed as a result of the
workshops and signed by all paricipating paries.
The Stipulation
The Stipulation, fied as Exhibit NO.1 to Mr. Said's testimony lays out each of the six
issues identified in the workshops, describes the existing situation, the proposed solution and the
rationale for the recommended change. The first issue addressed is the Sharng Methodology.
Since the inception of the PCA, anual deviations in normalized power supply costs have been
shared 90%/1 0% by customers and Company shareholders, respectively. If costs were below
normal, customers received 90% of the windfall. If costs were above normal customers paid
90% of the excess costs while the Company paid 10%. The Stipulation changes the sharing
STAFF COMMENTS 2 DECEMBER 3, 2008
percentage to 95%/5% in recognition that while the Company should continue to have incentive
to make wise resource acquisition decisions, increases in power supply cost volatilty and
development of the Company's Risk Management Policy justifies the change.
The second issue addressed is the Load Growth Adjustment Rate (LGAR). The LGAR is
par of the PCA mechanism intended to remove the power supply expense effects of load
deviations due to weather, growing customer totals or changing customer usage patterns. The
curent LGAR is calculated by multiplying the marginal cost of serving new load by one half of
the difference between curent load and that established in the last rate case. The current rate is
effectively $31.39 per Mwh. The new methodology recognizes that the Company actually incurs
additional power supply costs to serve new load between rate cases and has no opportunity to
collect those costs. It also recognizes the generation related revenue that is collected from new
load through rates. The proposed new rate is $28.14 per Mwh.
The third issue addresses the PCA forecast. The curent power supply forecast is based
on estimated stream flow into Brownlee Reservoir. Load and natual gas prices used to estimate
power supply costs are established in the last rate case. The paries all agree that the curent
forecast methodology results in uneasonably large true ups after the fact. The paries also agree
that forecasting power supply costs based on the Company's existing Operating Plan wil
improve the forecast and reduce future true ups.
The fourh issue addressed is third par transmission expense. These expenses have not
historically been tracked through the PCA as are other variable power supply expenses. Because
these expenses vary in relation to power purchase and sales, the parties agreed that they should
reasonably be reflected in the PCA calculation.
The fifth issue addressed is Power Supply Expense Distribution. Power supply expenses
have historically been reported monthly based on a computer modeled distribution. The paries
agreed that the power cost distribution should be reported based on monthly revenue shape to
improve the information provided to the financial community regarding the relationship between
interim and anual reporting periods to better match cost allocation with revenues.
The fied Stipulation resolves all but one of the issues identified in the first workshop.
The sixth issue of whether the PCA rate should continue to be spread to all customer classes on
an equal ~ per kWh basis wil be reevaluated after completion of the Company's current general
rate case. Settlement on the remaining issues identified in the first workshop was arived at
STAFF COMMENTS 3 DECEMBER 3, 2008
through frank and comprehensive discussions and Staff believes represents a fair and reasonable
compromise.
STAFF ANALYSIS
For analysis puroses, Staff divided the six issues identified above and addressed in the
Settlement into two separate categories, those that affect the amount of power supply costs
recovered by the Company and those that do not. The proposed PCA modification to sharing
percentages, the LGAR and transmission cost recovery will all impact power supply costs the
Company will recover and the PCA rates that customers ultimately pay. The other categories
impact timing and cash flow.
It should be reiterated that the PCA is designed to be symmetrical in that in good water
years, power supply costs are below normal and customers receive a credit. In poor water years
power supply costs are above normal and customers pay a surcharge. None of the changes
agreed to in the Stipulation wil change the theoretical symmetry of the PCA. However, over the
past seven years poor water conditions have resulted in an overall customer PCA surcharge every
year. To the extent poor water conditions continue, the proposed changes will increase customer
PCA cost responsibility over what it would be with the curent sharing ratio. Conversely, if
water conditions are above normal, customers will receive a larger benefit than they otherwse
would have received.
PCA Sharing
The proposed change that impacts customer rates most significantly is the modification in
the sharing percentages. The Company provided information at the workshops showing the
magnitude of power supply costs borne by Company shareholders each year from 2001 through
2007 and the affect those costs had on the Company's overall equity retu. The Company's
share of above normal Idaho jurisdictional power supply costs during the period totaled
approximately $100 milion or 95 basis points of equity retu per year.
The Company maintains and Staff does not dispute that modeled power supply scenarios
in 1992, when the PCA was first established, showed anual power supply cost volatilty of
approximately $100 milion dollars. Applying the 10% Company sharing to power supply costs
resulted in an impact of approximately 50 basis points of Company earnings. With power supply
cost volatility modeled today in the $330 milion range, the impact on Company earnings is
STAFF COMMENTS 4 DECEMBER 3, 2008
approximately 100 basis points. Staff recognizes that greater power supply cost volatilty could
have a significantly greater impact on Company earings.
In evaluating justification for reducing the sharing percentage, Staff looked at various
sharng alternatives to determine potential customer impact. Applying the 95%/5% ratio to the
period 2001 to 2007 would have increased customer costs by approximately $47 milion. Staff
maintained at the workshops that any reduction in the Company sharing percentage and a
potential increase in customer costs must be accompanied by quantifiable benefits to customers
or other compellng rationale.
The Company's underlying rationale for changing the sharing percentage is the
detrimental effect curent sharing has had on Company earnings and credit quality as measured
by national credit rating agencies. The Company asserts that the existing PCA sharing
percentage has resulted in a lower credit rating and higher borrowing costs to the detriment of
customers. By lowering the sharng percentage, the Company maintains that credit ratings could
increase and interest costs on debt could decline to the benefit of customers. Staff does not
necessarily believe this to be the quantifiable benefit needed to justify lowering the Company
sharng percentage. Staff believes there are many other factors that contribute to a Company's
credit rating. There is no guarantee that credit rating would improve to any particular level based
on a reduced sharing percentage or that lower interest rates on debt would generate suffcient
quantifiable savings for customers.
However, Staff does recognize that changing power supply cost volatilty has increased
the exposure of the Company over time. Lowering the Company's exposure in low water years
undoubtedly wil enhance its abilty to ear its authorized rate of retur. Staff also recognizes
that the Company has taken significant steps to collaboratively approach resources acquisition
and mitigate over all power supply cost risks. The unecovered power supply costs over the last
seven years equates to a larger average reduction in earings than was originally contemplated.
At the same time, the Company has developed a risk mitigation program with customer advisory
oversight (RMC) and developed resource acquisition customer advisory groups for Integrated
Resource Planing (IRP AC) and demand side management (the EEAG). These programs with
customer and Commission paricipation have helped direct the resource acquisition decisions of
the Company and to a greater extent than before helped to determine power supply costs that
flow through the PCA.
STAFF COMMENTS 5 DECEMBER 3, 2008
Staff continues to believe that the interest of Company customers and shareholders
should stil be aligned by giving the Company incentive to make cost effective resource
decisions through sharing of PCA power supply costs. Given the potential for lower interest
costs, the increased volatilty in power supply cost and improved collaborative resource
acquisition programs of the Company, Staff believes that a 95%/5% sharing for
customers/company is fair, just and reasonable.
The Load Growth Adjustment Rate (LGAR)
The treatment of growth related power supply costs in the PCA have been an issue since
the PCA was originally established in 1992. Staff has maintained that the PCA was designed to
track changes in power supply costs due to changing water conditions and energy prices. It was
not established to automatically track increased power supply costs associated with growing load
between rate cases.
Because actual booked power supply costs, including growth related costs, are compared
to normalized power supply costs without load growth, growth related costs are automatically
included in the PCA without an LGAR. The Commission recognized this fact and originally
established an LGAR of $ 16.84/Mwh. Staff believed this rate generally reflected the cost to
serve new load on the margin at the time. Then in 2007, the Commission confirmed Staff s
belief and increased the LGAR to $29.41/Mwh to reflect a more curent marginal cost to serve
new load.
The Company has maintained that the cost of serving new load between rate cases should
be recovered through the PCA. It believes that failure to recover the growth related power
supply costs at the margin between rate cases places an undue burden on Company shareholders
and that only the variable power supply revenue embedded in rates of approximately $7/Mwh
should be subtracted from PCA deferral balances.
In Case No. IPC-E-07-13 the Commission approved a comprehensive settlement that
established the LGAR at its curent level of $32. 14/Mwh. The rate is based on a marginal cost to
serve new load of$64.28/Mwh but is applied to only 50% of the load growth.
TheLGAR of$28.l4/Mwh proposed in this case recognizes the magnitude and financial
impact of serving new load at today's marginal cost, the obligation of the Company to incur new
load related variable power supply cost between rate cases and the inabilty of the Company to
recoup these expenditures after the fact through general rates. The proposed LGAR also
STAFF COMMENTS 6 DECEMBER 3, 2008
recognizes that revenue embedded in new customer rates wil offset a significant portion of the
growth related power supply costs.
Staff believes that the methodology using marginal power supply costs and power supply
revenue embedded in rates as established in a general rate case provides a sound basis to
calculate an appropriate LGAR. The agreement on an LGAR methodology represents a
reasonable compromise and finally resolves the issue in a fair and equitable maner for the
Company and its customers. The specific methodology is shown in Company Exhibit No.1, the
Settlement Agreement, Exhibit A.
Third Part Transmission Expense
Including third pary transmission expenses in the PCA seems to be a straight forward
treatment of power supply costs that fluctuate with PCA power purchases and sales. These
expenses are incurred by the Company when transmission is purchased from third paries outside
the Company's transmission network. These costs have not historically been tracked through the
PCA even though they are directly associated with the level of off system sales and purchases.
Company analysis showed that while transmission expense can fluctuate from year to
year it is difficult to directly correlate these costs with water conditions. Nevertheless, the
Company estimates that up to $12.5 milion in transmission power supply costs above and
beyond those included in base rates have been borne by Company shareholders over the past
seven years. The paries agreed that transmission cost approved by the Commission in the
Company's most recent rate case wil provide a reasonable basis for normal transmission
expenses in the PCA. For example, actual 2007 third pary transmission costs were in the $13
millon range. To the extent these costs are approved for base rate recovery, they wil also be
used as the basis for determining extraordinar transmission expense in the PCA going forward.
Staff agrees that these costs are incured in conjunction with market purchases/sales and should
be tracked through the PCA subject to sharing like other variable power supply costs.
Forecast and Expense Distribution
The remaining issues cidressed in the Settlement Stipulation do not affect the overall
PCA cost responsibilty between customers and shareholders. The first such issue identified by
all paries for needed change was the forecast of PCA power supply costs. All paries agreed that
the PCA forecast was badly flawed and sent inaccurate and improper power supply price signals.
STAFF COMMENTS 7 DECEMBER 3, 2008
The primar reason for forecast inaccuracy is the methodology used to make the power supply
cost estimate. The forecast is curently based on a forecast of river inflows based on snow pack
and then those river inflows are input into a regression formula derived from the base power
supply model to calculate Company power supply costs. Inaccuracies in the river flow forecast
and the power supply modeling create errors in the power supply forecast when compared to
expenditues that actually occur. More importtly, the system load and the gas price forecast
used in the power supply model are based on information established in the last general rate case.
The combination of internal modeling inaccuracies and outdated load/gas price data has resulted
in a significant underestimation of power supply costs and very large PCA tre-ups.
Staff, along with the other paries to the case, agrees that use of the Company's Operating
Plan (OP Plan) provides the best forecast available for use in the PCA. The Operating Plan is
continually updated based on gas prices, loads, resources, water conditions and other power
supply variables. It is the defacto forecast used by the Company to actually meet system load
throughout the year. It is also an integral par of the Company's Risk Management Program and
is subject to review by Staff and customers as par ofthe risk management customer advisory
group. Staff believes the Company OP Plan will more accurately forecast power supply costs
thereby sending a more accurate price signal to customers and thus reduce the magnitude of
subsequent true-ups.
The distribution of power supply expenses throughout the year used for comparson to
actual expenses has historically been based on the monthly power supply model output. This
distribution has created confusion in the financial community by inappropriately showing huge
swings between expected and actual earings on a quarerly basis and earings that eventually
result on an anual basis. Staff agrees that use of the monthly revenue shape to report Base Net
Monthly Power Supply Expenses will improve information dissemination to financial entities
without sacrificing appropriate accounting for PCA puroses. The paries agree that modeled
power supply costs on a monthly basis will be tracked with PCA expense deferrals and reported
to the Commission Staff.
Finally, Staff agrees that it is reasonable to investigate the rate spread/revenue allocation
that has historically been used in the PCA. Traditionally, PCA costs have been spread on an
equal ~/kWh basis to all customer classes because these costs have been allocated on an energy
only basis in Commission approved cost of service studies. Various paries to the case believe
that if variable power supply costs tracked through the PCA are allocated in a general rate case
STAFF COMMENTS 8 DECEMBER 3, 2008
based on demand and energy, then extraordinary PCA costs should also be allocated on demand
and energy. The need to pursue this issue fuer is dependent upon how the Commission
determines that PCA costs should be allocated through cost of service in the pending general rate
case.
Conclusions
For the reasons cited above, Staff believes that the Stipulated Settlement filed by the
Company in this case represents a fair and reasonable resolution of the issues originally
identified by the Commission and discussed in the workshops. Staff recommends that the
Settlement, signed by all paricipating paries, be approved by the Commission.
Respectfully submitted this '3., day of December 2008.
( ~.--,
Weldon B. Stutzman
Deputy Attorney General
c
Technical Staff: Randy Lobb
i :umisc/commentslipce08.19wsrl
STAFF COMMENTS 9 DECEMBER 3, 2008
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 3RD DAY OF DECEMBER 2008,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-E-08-19, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BARTON L KLINE
IDAHO POWER COMPANY
POBOX 70
BOISE ID 83707-0070
E-MAIL: bkline(iidahopower.com
DONOV AN E WALKER
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: dwalker(iidahopower.com
J:~
SECRETARY
CERTIFICATE OF SERVICE