20090520Reply Comments.pdf

1SIDA~POR~
An IDACORP Company
DONOVAN E. WALKER
Corporate Counsel
May 20,2009
VIA HAND DELIVERY
Jean D. Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
P.O. Box 83720
Boise, Idaho 83720-0074
Re: Case No. IPC-E-09-11
POWER COST ADJUSTMENT ("PCA') RATES FOR ELECTRIC SERVICE
FROM JUNE 1,2009, THROUGH MAY 31,2010
Dear Ms. Jewell:
Enclosed for filing please find an original and seven (7) copies of Idaho Power
Company's Reply Comments in the above matter.
Iy yours,eptV~
Donovan E. Walker
DEW:csb
Enclosures
P.O. Box 70 (83707)
1221 W. Idaho St.
Boise, 10 83702
DONOVAN E. WALKER (ISH No. 5921)
BARTON L. KLINE (ISB No. 1526)
Idaho Power Company
1221 West Idaho Street
P.O. Box 70
Boise, Idaho 83707
Tel: [phone]
Fax: [phone]
dwalker(tidahopower .com
bkline~idahopower.com
(~;r~~. \l
iO: 51
Attorneys for Idaho Power Company
Street Address for Express Mail:
1221 West Idaho Street
Boise, Idaho 83702
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MAnER OF THE APPLICATION )
OF IDAHO POWER COMPANY FOR ) CASE NO. IPC-E-09-11
AUTHORITY TO IMPLEMENT POWER )
COST ADJUSTMENT ("PCA") RATES FOR ) IDAHO POWER COMPANY'S
ELECTRIC SERVICE FROM JUNE 1, 2009, ) REPLY COMMENTS
THROUGH MAY 31,2010. )
)
Idaho Power Company ("Idaho Power" or "Company") respectfully submits the
following Reply Comments in response to the Comments filed by the Commission Staff
("Staff), the Industrial Customers of Idaho Power ("ICIP"), and the Idaho Irrigation
Pumpers Association ("IIPA") on May 14, 2009.
With these Reply Comments, the Company urges the Commission to: (1) pass
through the entire amount of the 2009-2010 PCA in one year, but mitigate the impact by
using the Company's April Operating Plan forecast, resulting in a 10.2 percent increase
IDAHO POWER COMPANY'S REPLY COMMENTS - 1
rather than the requested 11.4 percent; (2) alternatively, if the Commission decides to
extend the recovery period of this year's PCA beyond the traditional one-year time
period, that the Commission only reduce the present year's recovery to a level equal to
or greater than a 7 percent increase over current revenue, with the remainder of this
year's recovery moved into next year's deferral balance, and (3) should the Commission
decide to carry over any amount to a subsequent year for recovery, a carrying charge
that allows the Company to earn its authorized, after tax, rate of return of 8.18 percent
should be applied to the deferred. balance.
i. INTRODUCTION
Since 1993, Idaho Power's PCA mechanism has operated to mitigate the impact,
both positive and negative, of the extreme volatility and large dollar amounts inherent in
the variability of actual power supply expenses from historically "normal" power supply
expenses. "Normal" power supply expenses are less volatile over time and are
recovered through base rates established by the Commission in general rate cases.
Actual power supply expenses can vary substantially from one year to the next, and the
majority of this variable difference is either refunded or paid through the annual PCA.
Because of the inverse relationship between stream flows, which provide hydro
generation, and power supply expenses, the PCA amount is dependent, to a large
extent, upon the weather. Extended periods of drought, such as that which Idaho has
been experiencing since 2001, along with an extended period of growth in the demand
for electricity, which the Company has also experienced during this same time period,
has resulted in continued strong upward pressure on power supply expenses the
Company incurs to meet its obligation to serve. The annual PCA rate change has
IDAHO POWER COMPANY'S REPLY COMMENTS - 2
become one of the regulatory cornerstones relied upon by the Company to maintain its
financial health when it must front a tremendous amount of cash for power supply
expenses above "normal" levels.
The PCA is designed to implement both rate decreases when net expenses are
low and rate increases when net expenses are high. The PCA is filed with the
Commission on an annual basis for implementation on June 1 of each year. Since the
energy crisis of 2001, the dollar amount and the volatility of power supply expenses has
increased dramatically. Historically the PCA has resulted in rate refunds ranging from
$16 to $46 millon and rate recovery ranging from $4.9 to $240 millon (approximate).
The largest refund of record occurred in 2006, which was a decrease of approximately
$46.8 millon. The largest PCA occurred in 2002, recovering approximately $244
milion. The PCA amount requested in the Company's filing this year is approximately
$203 millon above base, the third largest deviation since the establishment of the PCA.
II. ONE-YEAR PCA PASS THROUGH
Both Staff and the ICIP recommend a partial recovery of the PCA cost in the
2009-2010 PCA year. Staff recommends including the unrecovered balance in the
following year's PCA. ICIP recommends spreading the $203 millon cost over a three-
year amortization. Deferring the amounts recommended by Staff and the ICIP until next
year, or subsequent years, is not in the public interest, and is harmful to the Company.
A. Staff and ICIP Proposals Deviate from the CommisSion's Stated
Desire for Single Year Recovery of PCA Costs.
The Company firmly believes that the acknowledged integrity of the PCA is due
in large part to the Commission's decisions in the past to allow recovery over a one-year
timeframe and not burden future PCA rates with carried over, unrecovered amounts.
IDAHO POWER COMPANY'S REPLY COMMENTS - 3
The Company urges the Commission in this PCA year to continue its historical
reluctance to place customers in a situation where they are required to continue paying
costs from this year, when unknown water, market, and economic conditions may
require additional increases in future years.
The Commission has twice passed through, in one year, a higher PCA amount
than the one presented in this case; recovery of $220 milion in 2001 was immediately
followed by recovery of $244 milion in 2002. In the case for the 2002-2003 PCA year,
(consolidated Case Nos. IPC-E-02-03 and IPC-E-02-02), the Commission rejected both
the Company's securitization proposal (Bonding) and the Staffs proposal, which was
similar to Staffs recommendation in this year's case, to reduce the current yeats
recovery and carry over the balance to the following year. The Commission instead
ordered that the entire amount1 ($255 milion) be "approved for recovery within the
normal one-year timeframe." Order No. 29026 at p. 16. In rejecting the Company's
Bond Application the Commission stated:
The Commission finds that the public interest is better
served in this instance by recovering the vast majority of the
$255.9 millon authorized in this Order over a single year as
originally contemplated by the peA mechanism rather
than spreading large amounts of recovery over multiple
years. We reach this conclusion largely out of our concern
for uncertainties the future may hold.
Order No. 29026 at p. 14 (emphasis added). In concluding the issues with regard to the
Bonding Application, the Commission went on to say:
We certainly hope that this is the last year Idaho Power
ratepayers wil be faced with such extraordinarily high
deferred PCA costs. However, as we have learned over the
1 $11 million for the Irrigation Class (Schedule 24) and $600,000 for the Small General Service
Class (Schedule 7) was carried over for recovery into the following 2003-2004 PCA year leaving
approximately $244 milion for recovery in the 2002-2003 PCA year. Order No. 29026 at p. 17.
IDAHO POWER COMPANY'S REPLY COMMENTS - 4
past two years, there are no guarantees about future
streamflows or market prices. In short, the Commission
does not want to spread large amounts for recovery out over
multiple years, and it is not cost-effective to securitize
smaller amounts. Tr. at 433. Because mortgaging our
future through the issuance of Bonds is not in the public
interest at this time, we turn our discussion to other recovery
options.
Id. at p. 15 (emphasis added). The Commission extended this same logic into its
consideration of recovering the PCA cost over two years, as proposed by the Staff, and
ultimately found that, even though very large and with the possibly of imposing
hardships upon customers, a one-year recovery was better for customers and the
Company:
While the Commission understands the reasons why cost
recovery or some portion thereof might be amortized over
time, the Commission largely declines to adopt this
recommendation. As with any requested rate increase, the
Commission must balance the needs of the Company to
maintain its financial viability and recover its reasonable
expenses with customer concerns of fair rates and rate
stabilty. During the last two years, extraordinary conditions
have resulted in large purchase power costs and a low water
forecast. Given the amount of purchases the Company has
already made, it is reasonable and appropriate for the
Company to recover the majority of the $255.9 millon
approved for recovery within the normal one-year
timeframe.
The Commission does not make this decision lightly. We
understand the hardships that continuation of last year's
large rate increase will impose on customers. However, as
we stated in our Energy Bonds findings, the eommission is
very concerned about the unknown water and market
conditions that lie ahead. We are also reluctant to
create a situation where customers are required to
continue paying costs from this year on top of whatever
increases may be required in future years. Passing
through the majority of the PCA costs in one year wil be
unpleasant and create a hardship for some customers, but it
wil clear the way for significant rate decreases in the future
IDAHO POWER COMPANY'S REPLY COMMENTS - 5
barring any unforeseen circumstances. The peA was
designed for a single-year recovery of peA costs and
we continue to honor its original design.
Order No. 29026 at pp. 16-17 (emphasis added).
In a similar fashion, the Commission, in the previous year's (2000-2001) PCA
filing, which was the second largest on record, rejected the Staffs proposal to defer the
forecasted amount until the following year's PCA stating that although it understood the
purpose in recommending deferral of recovery of a PCA component to mitigate an
anticipated large rate increase, "deferring this amount would only increase next yeats
PCA rate." Order No. 28722 at p. 6. The Commission went on to order:
The Commission finds it reasonable and in the public
interest to allow recovery of the forecasted power supply
costs in the current 2000-2001 PCA. The peA was
designed to allow consistent recovery of anticipated
power supply costs. The Commission chooses not to
deviate from the established formula in this case. Given the
volatility and high wholesale prices in regional power
markets, the Commission finds immediate recovery of the
forecast amount is reasonable. This recovery also
assures the financial community that the eompany wil
be allowed to recover its reasonably incurred power
supply costs. Moreover, immediate recovery of this
forecasted amount wil minimize the interest costs that would
otherwise be included in next year's PCA.
Order No. 28722 at p. 6.
Staff bases its recommendation to defer a large portion of the current PCA
forecast into next year's PCA in large part on the risky assumption that the next PCA
year wil be better. In fact, Staffs assumptions go to the core of the same risks the
Commission cited when it decided in past years not to mitigate past PCA amounts: the
unknown future rate impacts associated with stream flows, markets, and the economy.
Staff attempts to dismiss the risk by saying that it is only because of the change in the
IDAHO POWER COMPANY'S REPLY COMMENTS - 6
PCA methodology. Staff acknowledges that their recommendation essentially shifts a
large amount into the true-up balance for the following year, ruining the effect of the
better forecast methodology so recently agreed upon by all parties in a collaborative
process and approved by the Commission. Staff Comments at p. 5. What is left unsaid
is the fact that variations in hydro generation and other concerns that impact power
supply expense reflected in the PCA represent only a portion of the risk that places
upward pressure on rates.
As everyone is well aware, the Company is in the midst of several large capital-
intensive projects. These include, but are not limited to: Hells Canyon Relicensing,
Advanced Metering Infrastructure ("AMI" Implementation, the Langley Gulch Power
Plant, as well as substantial transmission projects such as Gateway West, Boardman to
Hemingway, and the Hemingway Substation. All of these large projects require capital,
require cash flow, and represent certain "risks" of upward rate pressure in much the
same way that power supply costs do. The Company believes these "risks" should also
be considered when the Commission is deciding whether to defer large portions of
power supply expenses into the future, when in the past it has declined to do so stating,
"the Commission is very concerned about the unknown water and market conditions
that lie ahead. We are also reluctant to create a situation where customers are required
to continue paying costs from this year on top of whatever increases may be required in
future years." This statement is true not only in reference to PCA costs and increases
but also in reference to costs and increases from these other sources.
IDAHO POWER COMPANY'S REPLY COMMENTS - 7
B. Staff and ICIP Proposals Immediately Reject the PCA Methodology
Established Through a Collaborative Workshop Process.
The PCA methodology was recently revised through a collaborative workshop
process to use the Company's Operation Plan for the basis of the forecast. This was
done to improve the accuracy of the forecast or the forward looking aspect of the PCA.
See, Order No. 30715, Case No. IPC-E-09-19. Because of the true-up component of
the PCA, the better the forecast, the less there is in the true-up balance to recover the
following year. By splitting the recovery and pushing partial recovery into a future time
period, the gains made by a better forecast are eviscerated. The next PCA wil
automatically start off in the hole by whatever amount from this year is deferred into that
period, plus the carrying costs of that deferraL. Granting recovery in one year, as has
been the historical practice of the Commission, removes this problem and gives the
newly approved PCA methodology a chance to work as intended.
C. Staff and ICIP Proposals Adversely Impact the Company's Cash
Flow.
The proposals presented by Staff and by ICIP wil reduce cash flow from
operations for at least one year and up to two years for the ICIP's proposal. Under
Staffs proposal, Idaho Power would not fully recover until May 2011, and under the
ICIP proposal, the Company would not fully recover until May 2012. The adoption of
either deferral approach wil negatively impact the financing of planned capital projects,
including the Commission-supported AMI project which is scheduled for implementation
over the next three years. The reduction in available cash wil cause the Company to
become further leveraged and wil continue to erode the Company's credit metrics for
cash flow coverage ratios. The deferral proposals by Staff and ICIP wil significantly
IDAHO POWER COMPANY'S REPLY COMMENTS - 8
increase perceived regulatory risk by undermining the financial community's current
expectations related to predictability, consistency, and stability of recovery of costs
through the PCA Mechanism.
Net Power Supply Cost is the Company's most significant expense and the most
variable. From a cash flow perspective, the proposals suggested by Staff and the ICIP
introduce cash flow risks of recovery associated with this significant expense. The
acceptance of the Staff and ICIP proposals has the potential to increase the regulatory
risk assessment of the Company's creditworthiness because the PCA mechanism is
generally perceived as a beneficial arrangement that allows for significant cost recovery
outside of a fully litigated rate proceeding. Such cost recovery mechanisms are
extremely beneficial to the Company's creditworthiness and financial security, and are
enhanced by a PCA that passes through those costs in the current year, as has been
the historical practice in Idaho.
D. Mitigation Based Upon an Updated Operating Plan Would Allow for
Single Year Recovery of PCA Costs. Would be Consistent With the
Newly Approved PCA Methodology. and Would Provide Reasonable
Cash Flow.
The Company filed a PCA rate increase of 11.4 percent above current revenue
based upon the March Operating Plan. The Company has since updated the PCA
amount based upon the April Operating Plan and provided this information to Staff. The
updated PCA amount reflects a higher stream flow forecast resulting from additional
late-season precipitation, and thus a reduced amount for recovery in the forecast
component of the PCA than the amount which was filed with the Application. This
change in the stream flow forecast results in a reduction of the Company's requested
rate increase to 10.2 percent or $84.3 millon, and provides a reasonable level of
IDAHO POWER COMPANY'S REPLY COMMENTS - 9
mitigation to the requested rate relief amount justified on the basis of the changed
conditions.
The Company proposes that this 10.2 percent PCA rate increase be passed
through in the current PCA year. Granting a recovery of this magnitude wil not only
maintain the historical integrity of the PCA and validate the Commission's previous
diffcult decisions to grant recovery in the current PCA year, but wil also better align
costs and revenue; provide much needed cash flow at a time when adequate cash flow
is of extreme importance to the financial health of the Company; and in the current
economic climate of shaky financial institutions where capital is much harder to come
by, will send the appropriate message to both sectors of the financial community, those
who set the Company's credit rating and those who actually provide the capitaL.
II. OTHER RECOVERY AL TENATIVES
As stated above, the Company strongly urges the Commission to maintain its
position that the PCA was designed for a single-year recovery of peA costs and to pass
through the mitigated rate increase of 10.2 percent. However, if the Commission
determines otherwise, the Company proposes, as an alternative, that the 7 percent cap
established by the Commission and referenced by the ICiP in its Comments should be
considered as the minimum level of recovery for the 2009-2010 PCA year. Additionally,
if the Commission finds it in the public interest to defer recovery of any amounts into
future years, the Company agrees with ICIP's assertion that an appropriate carrying
charge on the difference should be included.
IDAHO POWER COMPANY'S REPLY COMMENTS -10
iv. CARRYING CHARGE
In order to limit the financial uncertainty and perceived risk associated with the
collection of PCA-related expenses, the Company requests that the Commission grant
full recovery in the current PCA year, and give the new methodology approved by Order
No. 30715 a chance to operate. If this is not possible, the uncertainty created by
deferring recovery into future periods can be partially mitigated by providing an
appropriate return on any PCA balances explicitly deferred by the Commission by
increasing the allowed carrying charge from the current 2 percent deposit rate to a rate
allowing the Company to earn the rate of return granted in the Company's most recent
general rate case of 8.18 percent. See, Order No. 30722. The additional unanticipated
deferral wil have a negative impact on both cash flow and earnings for the Company. A
carrying charge of 8.18 percent, if it properly includes a gross up for the equity return
component, wil at least alleviate the earnings shortalL. While this wil not create the
needed cash flow, it may reduce the perceived regulatory risk associated with a deferral
of expenses that have historically been recovered in one year.
v. IIPA COMMENTS
The IIPA expresses concerns regarding the limited time available in a PCA
proceeding to review Idaho Power's system power purchase and sale transactions and
requests that a workshop or some other forum be convened to review the same. The
Company submits that workshops are unnecessary in this instance, and would merely
be a vehicle for delay or other mischief.
The IIPA did submit a substantial number of discovery questions in this case, 88
questions to be exact - many of which had multiple subparts and all of which came in to
IDAHO POWER COMPANY'S REPLY COMMENTS - 11
the Company less than two weeks before the comment deadline for the case, even
though the Company's case had been filed with the Commission and provided to the
IIPA since April 15, 2009.
Nearly all of IIPA's questions related directly to detailed information surrounding
particular purchases and sales of energy, and energy trading generally. To facilitate
understanding, Idaho Power personnel - including the trading floor supervisor - met
with IIPA and IPUC Staff to discuss various transactions that were the subject of IIPA's
discovery. During this meeting, the Company went line-by-line through a majority of the
written discovery questions submitted by the IIPA and provided solid rationale and
rational explanations for all questions asked.
By its own statement in its Comments, IIPA has not found incidence of
imprudence. This is confirmed by Staff in its review and Comments, as well as its active
participation in the meeting where IIPA's discovery questions were reviewed and
discussed. IIPA has an active member on the Company's Customer Advisory Group
("CAG") and was part of the development of the Risk Management Policies and
Procedures as well as Case No. IPC-E-01-16, which established the same. Idaho
Power is wiling to spend additional educational time with IIPA, and is wiling to give IIPA
time at the CAG meeting to discuss any concerns. However, the Company believes the
workshops, as proposed by the IIPA, are unnecessary and an opportunity for mischief.
Vi. CONCLUSION
The Company continues to urge that the traditional one-year recovery is
appropriate and in the public interest. However, in these Comments, the Company has
outlined some options that should be considered if the Commission determines to defer
IDAHO POWER COMPANY'S REPLY COMMENTS -12
recovery of a portion of this year's PCA expense beyond the traditional one-year time
period. This Commission has openly struggled with the extremely diffcult question of
PCA rate deferrals before, and has on two prior occasions concluded that it was in the
public interest to not defer costs into the future. In both of these instances, the
customer cost and the PCA amount was larger than it is in this case. The Company
respectfully urges the Commission in this case to reach the same conclusion and pass
through the mitigated 10.2 percent rate increase for the 2009-2010 PCA year.
Respectfully submitted this 20th day of May 2009.
ca~rf
DONOVAN E. WALKER
Attorney for Idaho Power Company
IDAHO POWER COMPANY'S REPLY COMMENTS - 13
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 20th day of May 2009 I served a true and correct
copy of IDAHO POWER COMPANY'S REPLY COMMENTS upon the following named
parties by the method indicated below, and addressed to the following:
Commission Staff
Weldon B. Stutzman
Deputy Attorney General
Idaho Public Utilities Commission
472 West Washington
P.O. Box 83720
Boise, Idaho 83720-0074
Industrial Customers of Idaho Power
Peter J. Richardson, Esq.
RICHARDSON & O'LEARY PLLC
515 North 27th Street
P.O. Box 7218
Boise, Idaho 83702
Idaho Irrigation Pumpers
Association, Inc.
Eric L. Olsen
RACINE, OLSON, NYE, BUDGE
& BAILEY, CHARTERED
P.O. Box 1391
201 East Center
Pocatello, Idaho 83204-1391
Snake River Allance
Ken Miler
Snake River Allance
P.O. Box 1731
Boise, Idaho 83701
Idaho Conservation League
Betsy Bridge
Idaho Conservation League
710 North Sixth Street
P.O. Box 844
Boise, Idaho 83701
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IDAHO POWER COMPANY'S REPLY COMMENTS - 14