20091222Lobb Direct Supporting Stipulation.pdf

BEFORE THE REef:
2009 DEC 22 PH 2: 01
IDAHO PUBLIC UTILITIES COMMISSION UTld~1M1fJ
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER TO AMORTIZE
ADDITIONAL ACCUMULATED
DEFERRAL INCOME TAX CREDIT AND
APPROVING A RATE CASE
MORATORIUM.
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) CASE NO. IPC-E-09-30
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DIRECT TESTIMONY OF RANDY LOBB
IN SUPPORT OF STIPULATION
IDAHO PUBLIC UTILITIES COMMISSION
DECEMBER 22, 2009
1 Q.Please state your name and business address for
2 the record.
3 A.My name is Randy Lobb and my business address is
4 472 West Washington Street, Boise, Idaho.
5 Q.By who are you employed?
6 A.I am employed by the Idaho Public Utilities
7 Commission as Utili ties Division Administrator.
8 Q.What is your educational and professional
9 background?
10 A.I received a Bachelor of Science Degree in
11 Agricultural Engineering from the University of Idaho in
12 1980 and worked for the Idaho Department of Water Resources
13 from June of 1980 to November of 1987. I received my Idaho
14 license as a registered professional Civil Engineer in 1985
15 and began work at the Idaho Public Utilities Commission in
16 December of 1987. My duties at the Commission currently
17 include case management and oversight of all technical staff
18 assigned to Commission filings. I have conducted analysis
19 of utility rate applications, rate design, tariff analysis
20 and customer petitions. I have testified in numerous
21 proceedings before the Commission including cases dealing
22 with rate structure, cost of service, power supply, line
23 extensions, regulatory policy and facility acquisitions.
24 Q.What is the purpose of your testimony in this
25 case?
CASE NO. IPC-E-09-3012/22/09 LOBB , R . ( S tip) 1
STAFF
1 A.The purpose of my testimony is to describe the
2 process leading to the filed Stipulation (proposed rate
3 settlement), to present the terms of the Stipulation and to
4 explain the rationale for Staff's support.
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Q.Will you please summarize your testimony?
A.Yes. Staff believes that the comprehensive rate
7 Stipulation, developed through a series of workshops with
8 the participation of the Company, Staff, various customer
9 groups and other interested parties is in the public
10 interest and should be approved by the Commission. Staff
11 further believes that the proposed rate Settlement
12 incorporating a general rate case moratorium, use of
13 Accumulated Deferred Investment Tax Credits (ADITC), a
14 three-year settlement on return on equity (ROE), potential
15 revenue sharing and a formula to share anticipated
16 reductions in the 2010 Power Cost Adjustment (PCA) provides
17 benefits to both the Company and its customers. Finally,
18 Staff believes that proposed base rate relief provided to
19 the Company under the Stipulation represents a better deal
20 for customers than what might be achieved through a general
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21 rate case (rate case) .
Q.Would you please describe the terms of the
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23 proposed Stipulation?
A.Yes. The terms of the Stipulation specify the
25 potential rate changes that are allowed through
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 2
STAFF
1 December 31, 2011 and how an anticipated reduction in the
2 2009/2010 PCA will be allocated to customers and the
3 Company. The Stipulation also specifies that Idaho Power
4 Company can use up to $45 million in investment tax credits
5 over a three-year period (2009 to 2011) to improve its
6 opportuni ty to earn a reasonable return. In exchange, the
7 Stipulation specifies that Idaho Power will share with its
8 customers, on a 50/50 basis, any earnings during the three-
9 year period that exceed its authorized return.
10 Q.What does the Stipulation allow in terms of
11 potential rate changes through 2011?
12 A.The Stipulation specifies that base rates cannot
13 increase as a result of a general rate case until January 1,
14 2012. There are however, several exceptions that can result
15 in rate increases during that period. Increases can result
16 from existing annual adjustment mechanisms including the
17 power cost adjustment (PCA) and the fixed cost adjustment
18 (FCA). Potential increases can also occur through cost
19 recovery of advanced metering infrastructure, pension
20 expenses, changes in the energy efficiency rider adjustment,
21 governmentally imposed fees and increases in low income
22 weatherization funding. There is also a potential for rate
23 reduction if revenue above the Company's authorized return
24 is available for sharing.
25 Finally and most importantly, rate changes may
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 3
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1 occur based on a stipulated formula to share an anticipated
2 PCA rate reduction on June 1, 2010. The existing PCA rate
3 currently collects approximately $200 million per year. The
4 formula provides that the Company and its customers will
5 share equally in the first $40 million of PCA reduction.
6 Additional reduction will be used to address necessary
7 increases in base rate net power supply costs (power supply
8 costs), provide an additional $5 million in base rate
9 revenue relief for the Company and further decrease customer
10 rates. An example of the PCA rate reduction allocation
11 methodology is shown in Exhibit NO.3 of Company witness
12 Gale's direct testimony.
13 Q.Please explain the proposed use of Accumulated
14 Deferred Investment Tax Credits.
15 A.The ADITCs are tax benefits that Idaho Power has
16 already received based on the level of plant investment in
17 various years. Idaho Investment Tax Credits continue to
18 accumulate annually, but these particular Federal Investment
19 Tax Credits are no longer received. The ADITC is amortized
20 over the life of the associated plant investment. In each
21 general rate case this annual amortization is a reduction to
22 customer tax expense and the ADITC balance is a deduction to
23 rate base.
24 The Stipulation proposes to allow Idaho Power to
25 accelerate the amortization of up to $45 million of ADITC
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 4
STAFF
lover the three-year period of 2009 - 2011. This accelerated
2 amortization can be used to improve earned returns if Idaho
3 Power's actual Idaho jurisdictional earned return on year-
4 end equity falls below 9.5%. The stipulated return on
5 equity (ROE) is 10.5% but the ADITC can only be used to
6 improve ROE up to 9.5%. The maximum dollar amount of ADITC
7 that may be used in 2009 is $15 million. If the $15 million
8 is not accelerated in any year it may be rolled forward for
9 use in subsequent years of the proposal. The maximum
10 accelerated ADITC is $25 million in anyone year.
11 Q.How will the accelerated amortization of ADITC
12 impact the Company and its customers?
13 A.The accelerated amortization is intended to
14 improve the earnings of Idaho Power. These improved
15 earnings are important to maintain or improve the ability of
16 Idaho Power to finance its ongoing plant investments.
17 Improved earnings will improve financial ratios evaluated by
18 financial investors of the Company. It may help maintain
19 financial credit ratings and it could reduce interest costs
20 below the rate that Idaho Power would otherwise obtain. The
21 increased financial stability allows customers to benefit
22 now with the delayed rate case and potential lower interest
23 costs in exchange for the reduced ADITC in future rate cases
24 in later out years. Staff believes this is a benefit for
25 all under the current economic conditions.
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 5
STAFF
1 Q.Why does Staff believe this is a reasonable use of
2 ADITC?
3 A.Staff believes it is reasonable to accelerate the
4 amortization of ADITC due to current economic conditions.
5 The improved earnings stability benefits efforts to finance
6 ongoing required plant investments at the lowest cost.
7 Staff believes this benefits both customers and the Company
8 Q.Why does Staff believe a three-year agreement on a
9 10.5% ROE is reasonable?
10 A.The 10.5% ROE was authorized by this Commission on
11 January 30, 2009, Order No. 30722, Case No. IPC-E-08-10. In
12 that case the Commission specifically referenced
13 deteriorated economic and financial markets when approving
14 the increased ROE of 10.5% from the previously authorized
15 10.25%. The following ordering paragraph states it best and
16 Staff believes it remains accurate.
17 The Commission finds that a return on equity
of 10.5% for Idaho Power is fair, reasonable
and appropriate. This rate takes into account
the results of the analyses provided by the
wi tnesses, and also the deteriorated economic
and financial markets since the Company's last
contested rate case where we approved a return
of 10.25%. The determination of the appropriate
cost of common equity capital primarily attempts
to quantify a rate of return required by investors
for that specific investment, and the evidence
supports a finding that a slightly higher rate
of return is required to attract investors.
We are primarily concerned, however, with
establishing a rate that is "reasonably
sufficient to assure confidence in the financial
soundness of the utility," and that is "adequate,
under efficient and economical management, to
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CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 6
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maintain and support its credit and enable it
to raise the money necessary for the proper
discharge of its public duties." Tr. p. 2235
quoting Bluefield Water Works, supra. Idaho
Power is facing significant capital expenditures
in the next few years, and the current economic
climate will affect its ability to obtain credit
to build necessary facilities. The rate for
return on equity we approve is an increase over
its currently approved rate and should assure
continued confidence in the financial soundness
of the Company.
8 Staff believes the Company will continue to face
9 significant capital expenditures with current economic
10 conditions affecting its ability to obtain credit. Although
11 some economic indicators reflect a recovering economy, most
12 economists predict recovery will be slow. Staff believes
13 the three-year agreement on ROE provides continued
14 confidence to investors that the Company will remain sound
15 and that it can obtain credit at a reasonable cost to meet
16 its capital obligations. Perhaps more importantly to
17 customers is the base rate stability that will be provided
18 by the deferral of a general rate case increase through
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19 January 1. 2012.
Q.Please describe the process that led to the
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21 Stipulation.
A.In preparation for its anticipated rate case
23 filing in October of 2009, the Company informally approached
24 Staff in August of 2009 to discuss accelerated use of ADITC
25 and the possibility of an agreement on ROE. Staff was not
CASE NO. IPC-E-09-3012/22/09 LOBB, R . ( S tip) 7
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1 necessarily opposed to accelerated use of ADITC and an
2 agreement on ROE because a similar agreement on these issues
3 had been approved by the Commission in 1995. However, the
4 prior agreement had also included revenue sharing between
5 the Company and its customers when earnings exceeded the
6 Company's authorized return. The Company agreed that it
7 would consider revenue sharing and Staff suggested that
8 other interested parties be invited to participate in any
9 further discussions. On August 28, 2009, the Company
10 provided the Commission sixty-day notice of its intent to
11 file a general rate case.
12 Q.Wha t happened next?
13 A.On September 3, 2009, the Company, Staff and
14 parties participating in the last Idaho Power general rate
15 case met informally to discuss the Company's proposal to
16 provide revenue sharing in conj unction with accelerated use
17 of ADITC and an agreement on ROE. The Company indicated
18 that an agreement would simplify its rate case filing and
19 reduce its revenue request. The Company further stated that
20 it intended to have new base rates in effect by June 1, 2010
21 to coincide with a large anticipated reduction in the PCA.
22 The potential reduction in the PCA was estimated to be as
23 high as $160 million of the current $200 million annual
24 collection. Staff and the various parties asked the Company
25 to consider a general rate case moratorium as part of the
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 8
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1 ADITC/ROE agreement.
Q.Did the Company come back with a comprehensive
3 proposal?
4 A.Yes. At a meeting of the parties on October 13,
5 2009, the Company made a comprehensive proposal offering a
6 general rate case moratorium in exchange for base rate
7 relief using a portion of the anticipated reduction in the
8 PCA.
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Q.Was an agreement reached at that time?
A.No. The parties agreed to consider the Company's
11 offer, determine if a counter proposal was warranted and
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12 either meet again or discontinue discussions.
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Q.Did the parties meet again?
A.Yes. Staff and previous workshop participants met
15 on October 19, 2009 without the Company to discuss the
16 merits of the Company's proposal and determine whether a
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17 counter proposal could or should be developed.
Q.Did the parties develop a counter proposal and
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19 present it to the Company?
A.Yes. The parties presented a comprehensive rate
21 proposal to the Company on October 23, 2009. A settlement
22 in principal was reached at the meeting and the Company
23 agreed to drop its rate case filing. The Company filed a
24 Stipulated Settlement with the Commission on November 6,
25 2009. The Stipulation was signed by the Company, the
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 9
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1 Commission Staff, the Idaho Irrigation Pumpers Association,
2 the Industrial Customers of Idaho Power, Micron Technology
3 Inc., Kroger Co., the United States Department of Energy and
4 the Community Action Partnership of Idaho.
5 Q.Why does Staff believe rate treatment as proposed
6 in the Stipulation is reasonable?
7 A.Staff believes that the rates proposed in the
8 Stipulation strike a reasonable balance by providing modest
9 base rate relief for the Company and necessary rate relief
10 for customers during difficult economic conditions. Staff
11 further believes that the proposed base rate increase is
12 better for customers than might potentially occur as a
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13 result of a traditional rate case.
Q.What does Staff believe is the most important
15 provision in the Stipulation?
16 A.While the Stipulation contains many terms and
17 conditions, it is the limited impact on customer base rates
18 through 2011 that justifies the Settlement and makes it
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19 superior to the al ternati ve.
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Q.Would you please explain?
A.Yes, but in order to demonstrate why the limited
22 base rate change is the key to supporting the Stipulation,
23 it is necessary to discuss the other Settlement terms. As
24 explained earlier, Staff believes that accelerated use of
25 the ADITC will have little impact on long-term customer
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 10
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1 rates but will provide benefits to the Company and will
2 require reduced revenue from customers in the near term.
3 The 10.5% ROE was recently approved by the Commission for
4 Idaho Power and would likely have been recommended by Staff
5 in the Company's rate case. The revenue sharing provision,
6 while a necessary backstop to assure that the Company does
7 not over earn during the moratorium period, provides little
8 potential for customer rate relief in Staff's opinion.
9 The existing PCA at a current surcharge of $200
10 million per year provides the potential for significant rate
11 relief in June of 2010 regardless of the Stipulation. The
12 agreement simply allocates whatever reduction actually
13 occurs between the Company and its customers. Even the
14 proposed allocation of the PCA reduction to increase base
15 rate power supply costs will have little impact on overall
16 customer rates in the future as 95% of all power supply
17 costs flow through the PCA anyway.
18 The revenue requirement and rate adjustment
19 changes allowed during the period deal primarily with
20 existing annual mechanisms or cost recovery previously
21 approved by the Commission and would occur absent the
22 Stipulation. Other potential rate changes allowed during
23 the moratorium period address issues such as pension
24 expense, the DSM tariff rider, and low income
25 weatherization. Rate changes associated with these issues
CASE NO. IPC-E-09-3012/22/09 LOBB, R . ( S tip) 11
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1 while allowed, can only occur with specific Commission
2 approval.
3 That leaves the proposed base rate increase, which
4 is dependent upon the 2010 PCA reduction, as the most
5 significant provision of the Stipulation and the primary
6 tradeoff to the rate case moratorium.
7 Q.What is the proposed base rate increase?
8 A.The base rate increase proposed in the Stipulation
9 is dependent upon the ultimate reduction in the 2010 PCA.
10 The maximum proposed base rate increase is $25 million if
11 the PCA reduction is $145 million. No base rate increase
12 would result if there is no reduction in the PCA. The
13 Stipulation does allow the Company to further pursue base
14 rate relief up to the $25 million maximum in the 2011 PCA.
15 A $25 million annual increase in base revenue represents an
16 increase of approximately 3.5% in total annual base rate
17 revenue.
18 Q.What level of net PCA rate reduction would occur
19 if base rates increased by the maximum of $25 million?
20 A.Under the allocation formula, PCA rates would
21 decrease by $120 million less the increase in net power
22 supply cost, if any, ultimately approved by the Commission.
23 For example, if the Commission approves a power supply cost
24 base rate increase of $75 million, the PCA rate reduction
25 would be $45 million. Keep in mind that any base rate
CASE NO. IPC-E- 09-3012/22/09 LOBB, R. (Stip) 12
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1 increase in power supply cost will reduce all future PCA
2 surcharges or increase all future PCA credits over what they
3 otherwise would have been.
4 Q.How does the stipulated base rate impact compare
5 to what might have occurred as a result of a general rate
6 case?
7 A.Because the Company never filed its rate case, it
8 is not known what the base rate revenue request would have
.9 actually been. However, the Company has indicated that its
10 request would have been in excess of 10% or about $80
11 million even if all of the stipulated carve out issues like
12 net power supply expense, AMI investment and pension
13 expenses were excluded. The Company has also indicated that
14 the cost drivers for its rate request are near-term
15 declining revenues due to reduced sales, added rate base and
16 increased operation and maintenance expense. Staff
17 conducted a preliminary analysis and concluded that
18 potential test year results of operations could result in a
19 rate case filing as described by the Company.
20 Q.How did Staff evaluate the potential rate case
21 revenue request of the Company to determine if the base rate
22 increase proposed in the Stipulation is reasonable?
23 A.Staff considered several factors in evaluating the
24 base rate increase proposed in the Stipulation. The first
25 is the recent history of Idaho Power general rate cases. In
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 13
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1 the last decade, the Company has filed four general rate
2 cases. The average request has been for an increase in
3 rates of 11.44%. The average increase awarded by the
4 Commission was 5.13% or approximately 45% of the original
5 request. The Stipulated increase in this case is a maximum
6 of 3.5% or less than 35% of what Staff expected the Company
7 to request.
8 Staff also recognized that all of the requests
9 made by the Company in past rate cases included a ROE
10 significantly above what the Commission ultimately
11 authorized. The lower Commission-approved ROE represented a
12 significant portion of the difference between the Company's
13 requested increase and that ultimately approved by the
14 Commission. The requested increase in excess of 10% that
15 the Company expected to make in its planned 2009 rate case
16 was at a ROE of 10.5%, the same ROE approved by the
17 Commission in the Company's last rate case. Consequently,
18 little reduction in the Company's request would likely have
19 been achieved by reduced ROE.
20 Finally, after four Idaho Power general rate cases
21 in eight years, the expense and rate base items subject to
22 adjustment in the past are no longer included in the
23 Company's filings. In other words, Company rate case
24 filings have become leaner, eliminating many of the items
25 adjusted by the Commission in recent cases.
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 14
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1 Therefore, Staff believed that a maximum 3.5%
2 increase until at least January 1, 2012 was a better outcome
3 than trying to achieve a smaller increase through an October
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4 2009 rate case.
Q.You state that the proposed increase in base rate
6 power supply costs will have little impact on overall
7 customer rates. How is that possible?
8 A.The limited impact on overall customer rates is
9 due to the method currently in place to recover power supply
10 costs. Actual net power supply costs that are incurred by
11 the Company each year are recovered to the extent possible
12 from base rates. If actual costs exceed the amount
13 authorized for recovery in base rates, 95% of the remaining
14 costs are recovered through the PCA via a customer rate
15 surcharge. If actual power supply costs are less than the
16 costs embedded in base rates then 95% of the over recovery
17 is returned to customers through the PCA via a rate credit.
18 Consequently, an increase in base rates to recover higher
19 power supply costs simply decreases future PCA surcharges or
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20 increases PCA credits.
Q.Company witness Gale's Exhibit No. 3 shows an
22 expected annual increase in base rate power supply costs of
23 $75 million. Has the future increase actually been
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24 determined?
A.No. The $ 7 5 mi i i ion increase used in the exhibi t
CASE NO. IPC-E-09-3012/22/09
LOBB, R. (Stip) 15
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1 is only an example of what the Company believes may be
2 justified. The Stipulation requires that prior to June 1,
3 2010 the Company file a case before the Commission to
4 determine if power supply costs included in base rates
5 should change and by how much.
6 Q.When would new rates resulting from the
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7 Stipulation become effective?
A.New PCA and base rates would become effective on
9 June 1, 2010 if the Stipulation is approved by the
10 Commission. The actual magnitude of the rate changes, if
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Q.Does this conclude your testimony?
A.Yes it does.
CASE NO. IPC-E-09-3012/22/09 LOBB, R. (Stip) 16
STAFF
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 22ND DAY OF DECEMBER 2009,
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB IN SUPPORT
OF STIPULATION, IN CASE NO. IPC-E-09-30, BY MAILING A COPY THEREOF,
POSTAGE PREPAID, TO THE FOLLOWING:
BARTON L KLINE
LISA D NORDSTROM
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: bklineriidahopower.com
Inordstromriidahopower .com
JOHN R GALE
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: rgaleriidahopower.com
BRAD M PURDY
ATTORNEY AT LAW
2019 N 17TH ST
BOISE ID 83702
E-MAIL: bmpurdyrihotmaiLcom
MICHAEL L KURTZ ESQ
KURT J BOEHM E~Q
BOEHM KURTZ & LOWRY
36 E 7TH ST, SUITE 1510
CINCINATI OH 45202
E-MAIL: mkurtzriBKLlawfrm.com
kboehmriBKLlawfirm.com
KEVIN HIGGINS
ENERGY STRATEGIES LLC
PARKS IDE TOWERS
215 S STATE ST, SUITE 200
SALT LAKE CITY UT 84111
E-MAIL: khigginsrienergystrat.com
CERTIFICATE OF SERVICE