20090702Smith Rebuttal.pdf

RECEIVED
2099 JU -2 PM 4: 10
IOAHO PUaUQ" ..'1,)
UTILITIES COMi\11i::i,I(,.ii
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR A
CERTIFICATE OF PUBLIC CONVENIENCE
AND NECESSITY FOR THE LANGLEY
GULCH POWER PLANT.
CASE NO. IPC-E-09-03
I DAHO POWER COMPANY
DIRECT REBUTTAL TESTIMONY
OF
LORI SMITH
1 Q.Would you please state your name, business
2 address, and present occupation?
3 A.My name is Lori Smith and my business
4 address is 1221 West Idaho Street, Boise, Idaho. I am
5 employed by Idaho Power Company (" Idaho Power" or
6 "Company") as Vice President of Corporate Planning and
7 Chief Risk Officer.
8 Q.Are you the same Lori Smith that submitted
9 direct testimony in this proceeding?
10 A.Yes, I am.
11 Q.What is the purpose of your direct rebuttal
12 testimony in this proceeding?
13 A.My testimony responds to testimony by
14 Industrial Customers of Idaho Power ("ICIP") witness
15 Cynthia Mitchell and the Idaho Public Utilities Commission
16 ("IPUC") Staff witnesses Patricia Harms and Rick Sterling.
1 7 Q.Ms. Mitchell asserts on pages 34 and 35 of
18 her testimony that CWIP is inappropriate for investments in
19 new generation.
20 CWIP in rate base is a beneficial financing tool for
21 constructing new generation or any multi-year large project
22 that is available to the Commission to support the cash
23 flow health of the utility. CWIP augments the recovery of
24 financing costs and/or all costs associated with multi-year
SMITH, DI REB 1
Idaho Power Company
1 construction proj ects with current recovery of some or all
2 of the investments as the plant is constructed . Although
3 use of CWIP has been historically limited, the current
4 financing environment, the Company's current below-book
5 value stock price, and the uncertainty of the market of
6 providing financing for a large proj ect warrant the
7 consideration of extraordinary Commission support. CWIP is
8 precisely the sort of ratemaking support Idaho Power needs
9 in the current credit market because it reduces financing
10 risk, regulatory risk, and capital market risk associated
1 1 with long-lead time, large construction proj ects.
12 Q.Ms. Mitchell refers to a ratio that measures
13 the stress on financial ratios related to construction
14 programs in her testimony on pages 36 and 37. Do you agree
15 with her assumptions that Idaho Power's ratio has been in
16 the 8-10 percent range over the last several years and that
17 a 20 percent ratio is acceptable for avoiding financial
18 difficulty?
19 A.Partly. Idaho Power's CWIP to
20 Capitalization ratio is a financial ratio defined as
21 Construction Work in Progress, a line item on its asset
22 side of the balance sheet divided by Total Capitalization
23 (the sum of Long Term Debt and Common Stock - line items on
SMITH, DI REB 2
Idaho Power Company
1 the liability side of the balance sheet). Included below
2 is the 5 year history for this ratio for Idaho Power.
2008 2007 2006 2005 2004
CWIP 207,662 257,590 210,094 149,804 151,652
Total
Capi talization 2,368,569 2,255,190 2,255,190 1,927,761 1,842,616
CWIP to Total
Cap Ratio 8.9%11.4%9.3%7.8%8.2%
3 While Ms. Mitchell indicates Idaho Power's
4 capitalization ratio has been in the range of 8-10 percent
5 over the last several years, the ratio has actually been as
6 high as 11.4 percent. Additionally, she indicates that
7 adding one large generation project could take this ratio
8 as high as 20 percent for only a brief time. I am unaware
9 of what Ms. Mitchell bases her estimate of a 20 percent
10 CWIP capitalization ratio on, but I do know that Idaho
11 Power has more than one large generation project to be
12 funded in the near term horizon, including the Boardman to
13 Hemingway 500 kV transmission line, the Hemingway
14 Substation, plus the normal care and feeding of an aging
15 thermal fleet and distribution system. Ms. Mitchell's
16 conclusion that this ratio could linger as high as 20
17 percent without consequences is risky because the ratio
18 would be an indication of the deteriorating operating cash
19 flow health of the Company. Rating agencies may view
SMITH, DI REB 3
Idaho Power Company
1 IDACORP and Idaho Power as a greater credit risk and
2 downgrade the Company's ratings.
3 Q.What is the operating cash flow result of
4 this ratio getting too high?
5 A.The increase in the AFUDC component of net
6 income, while construction is in progress, will be
7 detrimental to the cash flow coverage ratio because AFUDC
8 is a non-cash item (except for those instances where the
9 Commission allows for CWIP in rate base or the collection
10 of AFUDC currently in cash while construction is underway).
11 Without the cash flow associated with these expenditures in
12 the form of CWIP in rate base or AFUDC collection
13 currently, the credit metric that measures funds from
14 operations, a key rating agency metric for determining a
15 company's ability to pay its bondholders, will, all things
16 being equal, decline.
17 Q.Would the recommended regulatory assurances
18 Mr. Gale outlines in his direct testimony help support the
19 financial impact of financing a large project like Langley
20 Gulch?
21 A.Yes. The regulatory assurances Mr. Gale
22 outlines will serve to reduce the regulatory risk of how
23 the expenditures for the Langley Gulch Proj ect will be
24 handled in the future, specifically upon completion of the
SMITH, DI REB 4
Idaho Power Company
1 proj ect. These assurances will help Idaho Power to obtain
2 the lowest possible cost for the financing package of
3 Langley Gulch; the traditional balanced approach of issuing
4 both long-term debt and common equity for these
5 expendi tures is the Company's preference in this case.
6 Absent this support and more certain capital markets, the
7 Company may have to obtain less traditional types of
8 financing that are typically more expensive.
9 Q.Do these assurances satisfy credit rating
10 agency requirements to maintain Idaho Power's current
11 credit ratings?
12 A.As I stated in my direct testimony, there
13 are a number of factors that are involved in rating
14 recommendations like past operational and financial
15 performance (quantitative factors) as well as regulatory
16 environment and management capability (quali tati ve
17 factors). Of the al ternati ves outlined by Mr. Gale in his
18 supplemental testimony filed on April 28, 2009, pages 3
19 through 5, CWIP would provide the regulatory support of
20 current cash flow in the form of collection of construction
21 expenditures during the construction of the plant in the
22 form of AFUDC or CWIP. The other alternative, which Mr.
23 Gale requested given the current economic environment in
24 southern Idaho, is the regulatory assurance provisions
SMITH, DI REB 5
Idaho Power Company
1 available to the Commission under Senate Bill 1123. I
2 believe both al ternati ves provide for a reduction in
3 regulatory risk; however, I cannot predict the outcome of
4 credit rating agency decisions related to Idaho Power's
5 credit ratings.
6 Q.Do you agree with Staff witness Harms'
7 testimony on pages 19-20 that the decision to include CWIP
8 in rate base under the amended section of Idaho Code 61-
9 502A be based solely on the three unique circumstances
10 cited by the Commission in Order No. 30722?
11 A.No.
12 Q.Please describe the amended section of the
13 Code and the Company's request for extraordinary rate
14 assurances with this filing.
15 A.The amended section previously read:
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Except upon its finding of an extremeemergency, the (Public Utili ties J
Commission is hereby prohibited in any
order issued after the effective date
of this act, from setting rates for any
utility that grants a return on
construction work in progress . or
property held for future use and which
is not currently used and useful in
providing utility service.
26
SMITH, DI REB 6
Idaho Power Company
1 However, in 2006 this section was amended to read:
2 Except upon its explicit finding that3 the public interest will be served4 thereby, the Commission is hereby
5 prohibited in any order issued after6 the effective date of this act, from7 setting rates for any utility that
8 grants a return on construction work in9 progress or property held for10 future use and which is not currently11 used and useful in providing utility12 service.
13 The capital market meltdown in late 2008 coupled
14 with the RFP selection of the Benchmark Resource, which was
15 $ 95 million less expensive than the next closest bid,
16 creates a compelling argument for the Commission to use
17 CWIP in rate base to support all or some portion of the
18 successful baseload resource.
19 The financing of Langley Gulch will be a significant
20 challenge for many reasons, including the size of the
21 resource, the current uncertain market for long-term debt,
22 and the current trading level of IDACORP's common stock.
23 All considerations for regulatory assurances by the
24 Commission related to this lowest cost RFP resource will be
25 helpful to Idaho Power in the financing challenge it faces
26 in the current environment.
27 Q.In Mr. Sterling's direct testimony on pages
28 59 and 60 he states "by choosing the Benchmark Proposal,
29 Idaho Power will face some risks that it would have avoided
SMITH, DI REB 7
Idaho Power Company
1 with a tolling agreement." What risks would Idaho Power
2 assume if a tolling agreement was chosen?
3 A.Mr. Sterling is correct in summarizing the
4 construction and operational risk that the Company would
5 have in owning the Langley Gulch proj ect. These risks are
6 risks that the Company currently manages in its operation
7 and construction of many of its assets. The Langley Gulch
8 proj ect will simply be on a larger scale.
9 Q.Do you agree that a tolling agreement would
10 have been risk-free for the Company?
11 A.No. Mr. Sterling outlines the risks that
12 could have been avoided, but does not list the risks that
13 would be assumed if a tolling arrangement bid had been
14 selected. Plant ownership carries a range of operational
15 risks like Mr. Sterling describes, but a tolling agreement
16 carries a significant risk in the 20-year counterparty
17 credi t exposure. Credit risk manifests itself in the
18 ability for the counterparty to perform under the terms of
19 the contract. Both plant ownership and a tolling
20 arrangement will expose the Company to liquidity risk in
21 the management of fuel supply for the plant.
22 Q.Ms. Harms recommends in her direct testimony
23 on page 3, lines 8-15, that a new depreciation study be
24 conducted around the time that the Langley Gulch proj ect be
SMITH, DI REB 8
Idaho Power Company
1 completed and placed into service. Do you agree with Ms.
2 Harms?
3 A.Yes, I do.
4 Q.Ms. Harms recommends in her direct testimony
5 on page 11, lines 7-17 "that the Company create and retain
6 documentation associated with the Langley Gulch Proj ect
7 that would allow the Company to comply with component
8 depreciation when IFRS are adopted." Do you agree with Ms.
9 Harms?
10 A.I agree with Ms. Harms that the Securities
11 and Exchange Commission ("SEC") is evaluating the
12 convergence of U. S. Generally Accepted Accounting
13 Principles - ("U. S. GAAP") and the International Financial
14 Reporting Standards ("IFRS"). I also agree that this
15 migration from GAAP to IFRS will be a significant change in
16 accounting practice.
17 However, I do not agree that the SEC is eager to
18 impose such a significant change on business that will be
19 required with this conversion. Under the previous
20 administration, the roadmap that Ms. Harms refers to was
21 published in 2008 and established very aggressive
22 implementation deadlines by 2014. This was proposed before
23 the capital market crisis and the recession. Because of
24 the uncertainty related to the timing of the implementation
SMITH, DI REB 9
Idaho Power Company
1 of the migration of GAAP to I FRS, I would not recommend
2 that Idaho Power be required to create additional
3 documentation related to the Langley Gulch proj ect that is
4 different than currently required for established FERC and
5 state accounting requirements. IFRS accounting for
6 depreciation requires componentization of significant
7 pieces of large assets be separately capitalized and
8 depreciated. Utility depreciation identifies units of
9 property that are tracked, depreciated, and retired by
10 vintage year. The implementation of IFRS on IPC related to
11 depreciation expense is not expected to be large because of
12 the detailed depreciation requirements currently in place.
13 However the system changes required for this migration will
14 be large and would be an administrative burden to request
15 that this be implemented for the Langley Gulch proj ect.
16 Q.Is Idaho Power actively engaged in the
17 progress of the migration of U. S. GAAP to IFRS?
18 A.Yes. Idaho Power is closely monitoring
19 these activities by participating in industry task force
20 groups, attending external auditor training, evaluating the
21 impacts on our fixed asset accounting systems, and is
22 closely following all related acti vi ties and guidance on
23 this potential requirement.
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SMITH, DI REB 10
Idaho Power Company
1 Q.
2 A.
Does this conclude your testimony?
Yes, it does.
SMITH, 01 REB 11
Idaho Power Company