20100521Reply Comments.pdf

LISA D. NORDSTROM
Lead CQunsel
Inordstrom~idahopower.com
1SIDA~POR(8
An IDACORP Company
May 21,2010
VIA HAND DELIVERY
Jean D. Jewell, Secretary
Idaho Public Utilties Commission
472 West Washington Street
P.O. Box 83720
Boise, Idaho 83720-0074
Re: Case No. IPC-E-10-12
IN THE MA ITER OF THE APPLICA TION OF IDAHO POWER COMPANY
FOR AUTHORITY TO IMPLEMENT POWER COST ADJUSTMENT tPCA'j
RATES FOR ELECTRIC SERVICE FROM JUNE 1,2010, THROUGH MA Y
31,2011
Dear Ms. Jewell:
Enclosed for filng please find an original and seven (7) copies of the Reply
Comments of Idaho Power Company in the above matter.
Very truly yours,
X~j).'-~
Lisa D. Nordstrom
LDN:csb
Enclosures
P.O. Box 70 (83707)
1221 W. Idaho St.
Boise. ID 83702
LISA D. NORDSTROM (ISB No. 5733)
DONOVAN WALKER (ISB No. 5921)
Idaho Power Company
1221 West Idaho Street
P.O. Box 70
Boise, Idaho 83707
Telephone: [phone]
Facsimile: [phone]
Inordstrom ~ idahopower.com
dwalker~ idahopower.com
riE('r-lvr:n¡"i vC' l '-~.'
2010 HAY 2 l PM 12: 38
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 MATTER OF THE APPLICATION )
OF IDAHO POWER COMPANY FOR ) CASE NO. IPC-E-10-12
AUTHORITY TO IMPLEMENT POWER )
COST ADJUSTMENT (PCA) RATES ) REPLY COMMENTS OF IDAHO
FOR ELECTRIC SERVICE FROM JUNE ) POWER COMPANY
1,2010 THROUGH MAY 31,2011. )
)
COMES NOW, Idaho Power Company ("Idaho Power" or the "Company") and
hereby responds to the Comments of the Commission Staff, Industrial Customers of
Idaho Power ("ICIP"), and the Idaho Irrigation Pumpers Association ("IIPA") filed on May
18,2010.
I. BRIDGER COAL COSTS
A. Idaho Power Is Revenue Neutral to the Use of Third Part Coal Suppliers.
On pages 5-6 of its comments, the ICIP argues that because the sales price of
Bridger Coal includes an operating margin equal to Idaho Power's authorized rate of
REPLY COMMENTS OF IDAHO POWER
return, the Company has a financial disincentive to purchase coal for the .Bridger Plant
from a third-party. The ICIP's conclusion that Idaho Power has a financial disincentive
to purchase coal for the Bridger Plant from a third-party like Black Butte Coal Company
("BBC") is wrong. In fact, the ICIP identifies the very reason why its conclusion is wrong
on pages 4 and 5 of its comments: "Idaho Power treats the mining costs at BCC like any
other regulated expense for which it earns a rate of return." This statement is true.
Idaho Energy Resources Company's ("IERCO") fixed investment in plant and equipment
at Bridger Coal Company ("BCC") is treated in the same manner as Idaho Power's other
rate base for rate making purposes. The ICIP then states that the "sales price for BCC
coal used in the NPSE includes an operating margin, equal to the overall rate of return
authorized in general rate cases where IERCO/BCC operations are treated as part of
the regulated activities of the Company," and that "Idaho Power adjusts the sales price
periodically as updated BCC mining expense data becomes available." What the ICIP
fails to recognize is that the sales price for BCC coal is adjusted based upon changes in
mine operating costs rather than changes in IERCO rate base.
The "profit" or allowed return, although expressed by the ICIP as a per ton value,
is not variable with output. It is rather a set return on fixed investment which is divided
by the tons of coal to be sold to the Bridger Plant during the test period. The sales price
per ton for coal sold by BCC to the Bridger Plant is periodically set at a level designed to
achieve, as closely as possible, the targeted return on investment. This targeted return
on investment ("Margin") is established in general rate cases by multiplying the IERCO
rate base by the weighted average cost of capitaL. The Margin is added to the expected
mine operating costs to arrive at the revenue needed from cocll sales. Optimizing the
REPLY COMMENTS OF IDAHO POWER
surface and underground production levels from BCC along with purchasing BBC to
achieve a long-term fuel supply strategy is the justification for purchasing BCC coal --
not an embedded profit incentive as asserted by the ICIP.
Idaho Power and PacifiCorp have a significant investment in the BCC mining
operation which has benefited customers with a long-term, reliable and fairly priced
source of fueL. The fixed investment costs of BCC (including return dollars) should
continue to be recovered in rates, as these investments were made for the benefit of
Idaho Power's customers. The Company's long-term fuel supply strategy balances the
desire to minimize cost while ensuring a reliable supply over the lie of the plant. The
long-term investment in BCC helps accomplish this balance due its close proximity to
the Bridger Plant and its many years of recoverable reserves.
B. Idaho Power Has Properly Calculated the Decremental Cost of BCC
Surface CoaL.
The ICIP argues that the decremental cost analysis prepared as part of Oregon
Annual Power Cost Update, Case No. UE-214, "miscalculates the amount that
ratepayers would save if Idaho Power stopped mining BCC surface coaL." ICIP
Comments at 10. The ICIP suggests that the decremental cost quantified in the
analysis should have included mining costs plus the Margin. The ICIP's conclusion in
this instance again demonstrates its lack of understanding of the manner in which BCC
coal is priced. As described in the previous section, because BCC coal pricing reflects
an authorized return on investment and variable components (operating costs),
reducing surface coal production avoids only the variable cost component. The fixed
investment in plant and equipment does not go away with reduced production.
Therefore, the most accurate method of computing a decremental cost for BCC surface
REPLY COMMENTS OF IDAHO POWER
coal production would be the method used by Idaho Power in Case No. UE-214 which
does not include the Margin.
C. Revising Net Power Supply Expense ("NPSE") to. Reflect the Updated
Mine Plan Amounts to Forecast Shopping.
The ICIP suggests that Idaho Power should revise its base NPSE determined by
Order No. 31402 in Case No. IPC-E-10-1 to reflect BCC coal prices from an updated
mine plan. The Company's standard practice when calculating base level or forecasted
NPSE is to include the most currently available information at the time each filing is
prepared. The Company believes this approach is fair, just and reasonable and results
in an accurate reflection of the Company's costs.
In Case No. i PC-E-1 0-01, filed on January 1, 2010, the Company determined the
2010 base level NPSE using the most current mine plan (created in July 2009) available
at the time the filng was prepared. The 2010 PCA forecast, which was filed almost
three months later on April 15, 2010, included an updated mine plan that was prepared
in late 2009. Both filngs include reasonable forecasts of coal prices that wil most
certainly differ slightly from actual coal prices. Any deviations that do occur wil be
captured in the true-up of the PCA.
D. Conclusion
Idaho Power has provided testimony, a detailed white paper, and extensive
discovery to support the full recovery of its BCC coal costs. Submitted with the
Company's Base Level NPSE Reply Comments in Case No. IPC-E-10-1, the white
paper explains Idaho Power's coal supply strategy and why it is the least-cost fueling
plan. This discussion details the Company's diversified approach, current supply for the
Bridger Plant, surface mine issues, coal quality and coal blending. The white paper also
REPLY COMMENTS OF IDAHO POWER
discusses why Black Butte does not constitute a market and the policy considerations of
the "lower of cost or market" rule. Company witness Tom Harvey's testimony further
outlines the Company's coal procurement strategy, explains why there is not a less
expensive alternative coal supply, and discusses why the coal prices for the Bridger
Plant are prudent and reasonable expenses.
As Staff succinctly noted on page 11 of its Comments, Bridger Coal Company
profits flow to Idaho Power subsidiary IERCO and IERCO profits flow back to customers
in Idaho Power's general rate cases. Even the ICIP admits there is litle risk of cross-
subsidization with this affliate relationship. Because the Company's long-term fuel
supply strategy results in a reasonable, reliable and fair-priced coal supply for the
Bridger Plant, the $63.7 millon of Bridger coal costs should be recovered in normalized
base power supply costs as proposed.
II. LOAD GROWTH ADJUSTMENT RATE (LGAR)
The current LGAR was derived under the stipulated methodology approved by
the Commission in its Order No. 30715 issued in Case No. IPC-E-08-19. The LGAR
represents the amount of base level power supply expense and specific generation-
related cost recovery that is included in the Company's base rates. In periods of load
growth, the LGAR eliminates the double recovery of power supply expenses and the
potential for double recovery of other specific generation-related costs that mayor may
not be increasing. In periods of load decline, the LGAR is consistently applied to ensure
that the Commission-allowed base level power supply costs are appropriately
accounted for in the calculation of the PCA. That is, the LGAR recognizes that the
amount of power supply expenses and other specific generation-related costs
REPLY COMMENTS OF IDAHO POWER
recovered through the Company's base rates changes as loads increase or declin~.
Therefore, a "load growth adjustment" must be made in order to properly estimate
power supply expenses at normalized load levels.
A. The LGAR Adjusts Actual Costs to Reflect Normal Weather and/or Water
in Periods of Negative Load Growth, Neither of Which Are "Phantom"
Costs.
The IIPA argues that the LGAR should not be applied to declining loads and that
doing so results in the recovery of "phantom" costs. To ilustrate its point, the IIPA
provides an example that concludes that "the Company wants to be reimbursed $2.663
cents" for each kWh of load decline below the base leveL. The IIPA's conclusion is
incorrect. The PCA mechanism is used to calculate the deviations between actual
power supply expenses and normalized power supply expenses. The LGAR is a
necessary component of the PCA mechanism that adjusts actual power supply costs to
reflect normal load levels. The LGAR does not result in the recovery of "phantom" costs
in times of declining loads; rather, the LGAR simply provides consistency between the
numerator and denominator of the PCA rate determination. In periods of declining
growth, the adjustment reflects normalization of weather and water conditions to
properly estimate power supply expenses at normalized load levels.
B. The LGAR Must Be Reciprocal to Prevent Double Counting.
On pages 15 and 16 its comments, the ICIP clarifies what it believes the purpose
of the LGAR to be with the following statement: "In other words, if the PCA were not
adjusted to take into account the revenues the Company receives from new customers
or increased load, the Company would again receive them automatically in the PCA as
higher power supply costs." The ICIP's logic can also be applied to explain the use of
REPLY COMMENTS OF IDAHO POWER
the LGAR in times of decreasing loads. That is, if the PCA were not adjusted to take
into account the reduced revenues from decreased load, the customer would receive
double benefits automatically in the PCA. First, customers would receive the benefit of
actual reduced costs. Second, customers would receive an additional benefit when the
PCA rate was computed based upon a load that was higher than actually occurred.
When load change is positive the LGAR is used to calculate the level of
additional cost recovery to be removed in the true-up calculation in order to reflect
comparable actual power supply costs at normal load levels. Likewise, when. load
change is negative the LGAR is used to calculate the level of additional cost recovery to
be added to the true-up calculation in order to reflect actual comparable power supply
costs at normal load levels.
C. The LGAR Is Not a Decoupling Mechanism.
The ICIP suggests that the use of the LGAR in periods of load decline works like
a second decoupling mechanism. The LGAR does not guarantee a certain level of
revenue recovery nor does it act as a decoupling mechanism; rather, it is used as part
of an adjustment to ensure the numerator and denominator in the annual PCA
calculation are consistent (at normalized load levels).
The LGAR adjusts actual power supply expenses to be comparable to actual
power supply expenses at a normal load leveL. The adjusted expense is then divided by
a normal sales level to determine the PCA true-up rate. The load growth adjustment is
not a decoupling mechanism, it is simply an adjustment required to establish
consistency between the numerator and denominator of the PCA rate determination.
REPLY COMMENTS OF IDAHO POWER
D. Conclusion
The purpose of the LGAR remains constant whether loads increase or decline -
that is, to prevent double counting by adjusting actual power supply expenses to reflect
actual comparable power supply costs at normal load levels. As verified by the
Commission Staff, Idaho Power has accurately calculated the LGAR per the Stipulation
approved by the Commission in Order No. 30715. Moreover, the application of the
LGAR to periods of load decline is consistent with the 2009 PCA, which included a load
growth adjustment that was based upon six months of load growth and six months of
load decline, resulting in net positive load growth of 119,299 megawatt-hours. This can
be seen on page one of Exhibit NO.1 in Case No. IPC-E-09-11.
II. INTEREST CALCULATION
In Staff comments, Staff recognized that deviation of actual and Base Net Power
Supply costs as demonstrated in Staff's attachments C, line 62, page 2 of 2 and
attachment D, line 62, page 2 of 2 are identical in total for the PCAyear. This is
consistent with the Stipulation Agreement which states that for "PCA deferral reporting,
the Base Net Power Supply Expenses wil be distributed to monthly values based upon
a monthly revenue shape" and "that this adjustment wil not affect the total PCA year
calculation of the deviation between actual and Base Net Power Supply Expenses but
wil improve comparabiliy between interim and annual financial reporting periods." Staff
also noted that the redistribution caused $215,027 of additional interest. On page 5 of
its Comments, Staff quoted Order No. 30715 stating "the remaining issues addressed in
the Stipulation do not affect the overall PCA cost responsibilty between customers and
shareholders" and as such, the Commission envisioned no cost difference as a result of
REPLY COMMENTS OF IDAHO POWER
the redistribution. Therefore, any additional interest should be removed.
However, "the remaining issues" referred to in the Order did not include the
impact of the resulting interest. Therefore, Idaho Power believes that removal of
$215,027 of interest based on Staff's interpretation of the Order is in error and is
contrary the accepted interest calculation methodology. Calculating the interest based
on Staff's methodology would also be contrary to the Company's actual cash inflows
and outflows and would require the Company to maintain two sets of books.
IV. CONCLUSION
Based on the evidence in the Commission's record and for the reasons
described above, Idaho Power Company respectfully requests the Commission issue its
Order: (1) implementing the Schedule 55 Power Cost Adjustment rates as shown in
Application Attachments Nos. 1 and 3 to be effective June 1, 2010, through May 31,
2011, and (2) authorizing increased base rates per the terms of the settlement
Stipulation approved by Order No. 30978.
Respectfully submitted this 21st day of May 2010.
~fJ~~
LSAD:NORDST OM
Attorney for Idaho Power Company
REPLY COMMENTS OF IDAHO POWER
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 21th day of May 2010 I served a true and correct
copy of REPLY COMMENTS OF IDAHO POWER COMPANY 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
Gregory M. Adams
RICHARDSON & O'LEARY
515 North 2ih Street
P.O. Box 7218
Boise, Idaho 83702
Idaho Irrigation Pumpers Association
Eric L. Olsen
RACINE, OLSON, NYE, BUDGE &
BAILEY, CHARTERED
P.O. Box 1391
Pocatello, Idaho 83204-6101
REPLY COMMENTS OF IDAHO POWER
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~i1'14~Lisa D. Nordstrom ~