20091023Decision Memo.pdf

DECISION MEMORANDUM 1
DECISION MEMORANDUM

TO: COMMISSIONER KEMPTON
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF

FROM: DON HOWELL
DEPUTY ATTORNEY GENERAL

DATE: OCTOBER 21, 2009

SUBJECT: IDAHO POWER COMPANY’S APPLICATION FOR AN ACCOUNTING
ORDER TO RECORD A POSSIBLE REVENUE DEFICIENCY FROM ITS
TRANSMISSION OPERATIONS, CASE NO. IPC-E-09-21

On July 20, 2009, Idaho Power Company filed an Application requesting that the
Commission issue an accounting order authorizing the deferral of costs associated with the
Company’s transmission services. The Company is requesting authority to record and possibly
recover in Idaho rates its unrecovered transmission costs that were denied in a recent
transmission rate case before the Federal Energy Regulatory Commission (FERC), Docket No.
ER06-787. The Company requested and Staff concurred that the Application for an accounting
order be processed under Modified Procedure.
On September 1, 2009, the Commission issued a Notice of Modified Procedure
requesting that interested persons file comments regarding the Application no later than
September 29, 2009. The only comments received were submitted by Commission Staff. The
Company did not file reply comments.
BACKGROUND
In March 2006, Idaho Power filed an Application with FERC requesting an increase
in its transmission rates subject to FERC’s jurisdiction. In its filing, the Company proposed to
revise its Open Access Transmission Tariffs (OATT) from “stated” rates to “formula” based
rates. Formula rates would be updated annually based upon Idaho Power’s total cost to own,
operate and maintain its transmission facilities for its transmission customers. Order on Initial
DECISION MEMORANDUM 2
Decision, 126 FERC ¶ 61,044 (Jan. 15, 2009). The “formula” rate methodology would be
calculated using data reported annually in the Company’s FERC Form 1.
In its FERC Application, Idaho Power noted that it had not adjusted transmission
rates since 1996. Nevertheless, several of the Company’s transmission customers opposed the
FERC rate application. Although the parties settled most of the issues, they were unable to
resolve the proper ratemaking treatment of the “Legacy Agreements.” Id. at ¶ 11.
Starting in the 1960s, Idaho Power entered into three long-term transmission service
contracts (commonly referred to as the “Legacy Agreements”) with PacifiCorp to provide
transmission service from the Jim Bridger power plant in western Wyoming. Idaho Power and
PacifiCorp jointly own the Bridger facility. Both companies built and now operate transmission
power lines from Jim Bridger to their respective service territories. Under the terms of the
Legacy Agreements, Idaho Power charges PacifiCorp “use of facility fees” to use Idaho Power’s
transmission facilities until 2025. Id. at ¶¶ 3-9.
The federal administrative law judge (ALJ) initially determined and FERC
subsequently affirmed that Idaho Power’s charges to PacifiCorp under the Legacy Agreement are
significantly lower than the OATT rates Idaho Power proposed to charge other customers for
similar transmission services. This rate “disparity” between the old Legacy Agreements and the
OATT rates has grown over time. Id. at ¶ 127. The ALJ further found that under the Legacy
Agreements, PacifiCorp’s load accounted for 40% of the transmission lines’ capacity, Idaho
Power’s load accounted for 45% of the capacity, and third-party transmission customers
accounted for only 15% of the total firm capacity of the subject Idaho Power facilities. Id. at ¶
128. Based upon the principles of cost causation and allocation, the Judge found that it was
unreasonable for Idaho Power to over-allocate its cost recovery to its third-party transmission
customers. Because of the longstanding Legacy Agreements, Idaho Power is contractually
bound to provide transmission service to PacifiCorp at rates that are now considered below cost.
In affirming the ALJ, FERC found that Idaho Power cannot require its third-party
OATT transmission customers to pay more than their prorate load share of Idaho Power’s total
transmission revenue requirement. Id. at ¶ 133. Because its revenue recovery is “locked in” by
the long-term Legacy Agreements, FERC found that Idaho Power must bear the under-recovery
of transmission costs on its own. Id. at ¶ 129.
DECISION MEMORANDUM 3
The intervenors in the FERC docket also argued that Idaho Power has other options to
make up for the revenue shortfall. The Company could avail itself of provisions in the Legacy
Agreements that allow some transmission charges to be adjusted. Id. at ¶ 163. In addition, the
ALJ observed that Idaho Power could seek to recover its revenue shortfall from its retail
customers. Id. at ¶ 158. He concluded that Idaho Power “has other ways to lessen any financial
blow . . . through appropriate rate changes at the retail level or through re-negotiations of its
legacy agreements with PacifiCorp.” Id. at ¶ 218.
THE APPLICATION
In response to FERC’s Initial Decision, Idaho Power has taken three actions. First,
on February 27, 2009, Idaho Power filed a Petition for Rehearing with FERC. On March 18,
2009, FERC granted rehearing so it could consider that matter in greater detail. Docket No.
ER06-787-006. Second, Idaho Power has initiated actions to amend portions of the Legacy
Agreements which are subject to change or re-negotiation. See FERC Docket No. ER09-1335-
000. Third, Idaho Power has filed the present Application with this Commission for an
accounting order to defer and account for unrecovered transmission costs associated with the
above FERC Order. The Company estimates its unrecovered costs are $8,084,251 for the period
March 2008 through May 31, 2010. Application at ¶ 9. If Idaho Power is able to reduce its
revenue shortfall through the first two alternatives, then the Company “will reduce the deferral”
request that is the subject of this Application. Id.
The Company seeks an accounting order authorizing the deferral of the unrecovered
transmission-related costs associated with the outcome of FERC’s Initial Decision. The
Company proposes to amortize the unrecovered transmission revenues on a straight-line basis
over a 36-month period beginning June 1, 2010, once these costs are included in rates. Id. at ¶
10. Idaho Power proposes to account for the unrecovered transmission revenues by charging
them to Account 182.3 (Other Regulatory Assets) and amortizing these amounts to Account
407.3 (Regulatory Debits) upon their inclusion in rates. Until such time as the Company begins
to recover its deferred costs, it requests that the Commission authorize a carrying charge on the
deferral balance based upon its latest authorized rate of return on rate base (i.e., 8.18% per Order
No. 30722). Id. at ¶ 11.

DECISION MEMORANDUM 4
STAFF COMMENTS
In its review of the Application, Staff’s primary objective is to evaluate the
appropriateness of the requested accounting order for deferral of unrecovered transmission-
related costs. Staff does not object to the request for an accounting order. However, Staff
believes the determination of revenue recovery from native load customers is appropriately
determined in a future proceeding after the reconsideration issues at FERC have been finally
decided, and after Idaho Power’s efforts to re-negotiate provisions of its Legacy Agreements.
In Staff’s view, the unrecovered transmission-related revenues are generally costs
previously associated with and recovered from third-party transmission users until the recent
FERC case described above. The revenues from these transmission users covered a portion of
actual transmission costs and reduced the overall revenue requirement to Idaho customers
through a revenue credit in each rate case. The FERC decision has the effect of reducing the
revenue credit, thereby creating the unrecovered amount. With the FERC reconsideration and
Legacy Agreement actions incomplete, Staff believes deferral accounting for these unrecovered
transmission revenues is appropriate through May 2010 as requested by Idaho Power. The
question whether the deferred amount should be recovered from Idaho ratepayers, is a matter that
should be reserved for a future proceeding.
The estimated unrecovered transmission-related revenues through May 31, 2010 to be
deferred were estimated by Idaho Power to be $8,084,251. As the contested issues are decided
or resolved, the deferral will be reduced. Since this Application was filed, FERC increased the
OATT revenues Idaho Power is authorized to collect and Idaho Power filed its annual OATT
update to change rates effective October 1, 2009. These last actions reduce the estimated
deferral by approximately $3.4 million. Consequently, the current unrecovered estimate to be
deferred is approximately $4.675 million.
1. Deferral Period. Idaho Power is requesting to amortize the deferral over a three-
year period beginning June 1, 2010, upon the inclusion in retail rates. Staff believes a three-year
amortization period is reasonable. However, Staff does not believe the amortization should be
timed to coincide with recovery of the amortization in retail rates. Rate case filings are made
based on various considerations of the Company with amortizations being just one of many
factors. With a deferral period through May 31, 2010, Staff recommends the amortization begin
January 1, 2011, even if the Idaho ratemaking treatment is not fully decided. This provides time
DECISION MEMORANDUM 5
for Idaho Power to resolve the FERC-contested issues and the Legacy Agreement actions along
with its rate case reviews.
2. Deferral Accounts. Idaho Power proposes to account for the unrecovered
transmission revenues by charging them to Account 182.3 (Other Regulatory Assets) and
amortizing these amounts to Account 407.3 (Regulatory Debits). These accounts are appropriate
and Staff recommends that the proposed accounting treatment be approved.
3. Carrying Charge. Idaho Power also proposes to accrue a carrying charge on the
deferral at the most recent return on rate base (currently 8.18%). Staff believes deferral in itself
provides adequate benefit to the Company without it earning a return on the deferral. Absent an
accounting order authorizing deferral, Idaho Power would not recover any of the transmission-
related revenues or receive a return on them. Staff recommends no carrying charge on the
deferral be authorized.
The deferral as requested in the Application acknowledges the extraordinary nature of
these unrecovered transmission-related revenues. Deferred accounting treatment for regulatory
purposes is an appropriate, just and reasonable means of providing the Company the opportunity
to request and litigate future recovery of unrecovered revenues caused by the FERC decision.
Commission approval of this Application does not relieve Idaho Power of its obligation to
demonstrate the prudence of its actions, or lack of actions with respect to the FERC cases and
contracts. A deferral order in this case does not limit the right of Staff, other parties and the
Commission to examine the lawfulness, reasonableness and prudence of the actual deferral
amount for recovery in retail rates. This type of review is critical to protect customers before
including unrecovered third-party transmission revenues once the contested issues before FERC
are decided.
In summary, Staff recommends the following:
1. An accounting order authorizing deferral of the unrecovered transmission-
related revenues through May 31, 2010 should be approved.

2. The proposed accounts should be utilized with the unrecovered
transmission-related revenues charged to Account 182.3 (Other
Regulatory Assets) and the amortization charged to Account 407.3
(Regulatory Debits).

3. An amortization period of three years should be approved.

DECISION MEMORANDUM 6
4. The amortization period should begin on January 1, 2011.

5. No carrying charge should be authorized.

6. The ratemaking treatment and possible recovery should be addressed in a
future proceeding.

COMMISSION DECISION
1. Should Idaho Power’s Application for an accounting order to defer unrecovered
transmission revenues/costs be granted?
2. If so, does the Commission wish to condition the accounting order as
recommended by Staff?

bls/M:IPC-E-09-21_dh2