20090911R A Slaughter Testimony on Reconsideration.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF IDAHO POWER
COMPANY FOR AUTHORI TO
MODIFY ITS RULE H LINE EXTENSION
TARIFF RELATED TO NEW SERVICE
ATTACHMENTS AND DISTRIUTION
LINE INSTALLATIONS.
CASE NO. IPC-E-08-22
BUILDING CONTRACTORS ASSOCIATION OF SOUTHWESTERN IDAHO
TESTIMONY ON RECONSIDERATION
OF
DR. RICHARD SLAUGHTER
1 Q.Please state your name and business address for the record.
2 A.My name is Richard Slaughter. My business address is 907 Harson Blvd, Boise,
3 Idaho 83702.
4 Q.Are you the same Richard Slaughter who has testified previously in this case?
5 A.lam.
6 Q.What is the purse of your testimony?
7 A.In Interlocutory Order No. 30883 the Commission granted the Building
8 Contractors' request for reconsideration "on the limited issue of the amount of
9 appropriate allowances." Order 30883 at 4. The Commission stated that
10 "Allowances are intended to reflect an appropriate amount of contrbution
11 provided by new customers requesting s~ices in an effort to relieve one area of
12 upward pressure on rates. BCA may address what allowance amount is reasonable
13 based on the cost of new distrbution facilities." My testimony addresses the
i 4 allowance issue in that context and with the framework of the existing
15 Commission standard enunciated in Order 26780 in 1995 concering an
16 appropriate amount of Company investment in distrbution facilities (and the
17 concurrent amount of contrbution provided by new customers).
Page 2
Richard A. Slaughter
Building Contrctors Association of Southwest Idaho
Case No. IPC-E-08-22
1 Q.
2
3
4 A.
5
6
7
8
9
10
11
12
13
14 Q.
15
16
17 A.
What is your understanding of the Order 26780 standard regarding distrbution
cost recovery as it applies to the contrbution provided by new Company
customers?
In Order 26780 (1995) the Commssion concluded that new customers are entitled
to the same company investment in distrbution enjoyed by existing customer in
the same class, and costs required to extend serce to new customers in excess of
the embedded cost of distrbution are to be recovered from the developer or new
customer:
We find that new customers are entited to have the Company provide a
level of investment equal to that made to sere existing customer in the
same class. Recover of those costs in excess of embedded costs must
also be provided for and the impact on the rates of existing customers is an
important par of our consideration. (Order 26780 at 17).
What is the significance of focusing on the Company's embedded costs for
distrbution when establishing an appropriate allowance for extending serice to
new customers?
The Company's per customer embedded cost for distrbution is equal to the
18 Company's investment in existing distrbution plant less depreciation. Embedded
19 cost represents the Company's curent "level of investment made to sere existing
20 customers," and depending on how much additional distrbution plant has been
21 added since the Company's last rate case, embedded cost approximates the
22 Company's per customer level of investment in distrbution plant that it can
23 recover through existing rates. To the extent that the Commission desires to
Page 3
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 relieve upward pressure on rates, then limiting the Company's investment in
2 distrbution to sere new customers to its cuent per customer embedded costs for
3 distrbution facilities providing the same serce to existing customers
4 accomplishes ths.
5 Q.Is there a reasonable estimate of what the Company's per customer embedded
6 cost for distrbution facilities is?
7 A.Both I, in my earlier pre-filed testimony, and Staff in its Comments, have
8 calculated the Company's embedded distrbution costs. In the residential
9 customer class, Staff calcuated this to be $1,232 per residential customer. That
10 calculation has not been challenged by any pary to this case. For puroses of my
11 testimony I have accepted Staffs estimate of the Company's per customer
12 embedded cost.
13 Q.How, then, does all of this relate to "what allowance amount is reasonable based
14 on the cost of new distrbution facilities?"
15 A.If the Commission's standard for Company investment in distrbution contiues to
16 be an amount "equal to that made to serve existing customers in the same class,"
17 and the Company is entitled to recover from the new customer the costs of new
18 distrbution facilities in excess of embedded costs, then the appropriate Company
19 per customer allowance for new distrbution should be an amount equal to the
Page 4
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 Company's per customer embedded costs to serve existing customers, or $1,232
2 per new customer.
3 Q.Are you aware that the Company's new tariff treats an "allowance" as an amount
4 equal to the Company's contribution toward the cost of terinal facilties, which
5 the Company, Staff and the Commission each have determned should be $1,780
6 per transformer as a "maximum allowance" for residential and non-residential
7 sigle phase serice?
8 A.Yes.
9 Q.The $1,780 allowance approved in Order 30853 is over $600 more than the
10 $1,001 embedded cost per customer that you calculated in your Direct Testiony,
11 and over $500 more than the $1,232 embedded cost per customer that Staff
12 calculated from the cost of serce studies used in the Company's most recent rate
13 case. Hasn't the Commission actully increased the allowance it now would
14 perit for these new residential class customers?
15 A.I state emphatically that it has not. The $1,001 to $1,232 embedded cost amounts
16 I have testified to above are per customer embedded costs. The $1,780 terinal
17 facilities allowance for new servce bears no relationship whatsoever to the
i 8 Company's curent per customer investment to sere existing customers in the
19 same class. A $1,780 allowance could be appropriate and reasonable ifit did, but
20 it simply does not.
Page 5
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 Q.Please explain.
2 A.As the Building Contractors have emphasized in their comments, and I have in
3 my testimony, in a residential subdivision terminal facilities can and do sere up
4 to ten customers per installation. Consequently, a single allowance, in whatever
5 amount, that is based solely on the cost of terinal facilties must be apportioned
6 among the tota number of new customers who share those terinal facilties. By
7 authorizing only a per trsformer allowance of $1,780, the Company investment
8 per new customer can drop to as low as $149 per customer, or nearly $1100 less
9 than the Company's current distrbution investment for each of its existing
10 customers.
11 Q.What does this mean in ters of the Company's abilty to recover its investment
12 though existing rates?
13 A.For the 60 lot subdivision example in Exhibit 204 of my Direct Testimony, ths
14 results in the Company recoverng through rates up to $1,084 more per new
15 customer than it invested in the distrbution facilties serng that customer.
16 Q.So what does that mean for ths proceeding?
17 A.In the context of residential customers, in all but the smallest subdivisions, the
18 allowance approved by the Commission in Order 30833 allows the Company to
19 receive a contribution for distrbution facilities from each new customer that
Page 6
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 exceeds embedded costs. In a large subdivision the new customer contrbution
2 exceeds the Company's embedded cost by approximately $1 ,OSO per customer.
3 Q.How does this compare with the Company's investment versus its recover
4 though rates using the curent allowances in the Order 26780 tarff
S A.Again using the residential customer class, the Company's current tarff approved
6 by Order 26780 provides a total per customer allowance that is made up of two
7 components: 1) an up-front allowance for terinal facilties; and 2) a per-
8 lot/customer refund allowance as new customer come on line.
9 Interestingly, as ilustrated in Exhbit 202 to my Direct Testimony, which is
10 appended to this testimony as Exhibit 20S, the total of these two allowances on a
11 per customer basis under the Order 26780 Rule H tarff are quite close to the
12 approximate $1,100 to $1,200 curent per customer embedded cost of distrbution.
13 Under the tariff approved in Order 308S3, however, even after accounting for a
14 $1,780 terinal facilties allowance, the Company's net per customer investment
is actually becomes negative.
16 Q.Please elaborate.
17 A.Table 1 below shows how developments of different sizes compare with regard to
18 the Company's capital investment for Rule Hcosts, including I.S%overhead.
19 The examples are from Staff Comments, Attachment 9, page 2 of 4.
Page 7
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 Table 1
Order 30853 Rule H Rate Structure
Subdivision example 1 2 3 4 5
Design Number 61114 67186 60197 24482 27729
No. of Lots 3 10 32 60 101
No. of trformers 2 1 4 5 10
Average embedded cost per
customer (Staff comments at 5 )$1,232 $1,232 $1,22 $1,232 $1,232
Total Design Cost $10,572 $15,116 $50,432 $72,528 $144,771
Recovery though existing rates $3,697 $12,324 $39,438 $73,946 $124,476
Order 30853 developer payment
afer allowance $7,012 $13,336 $43,312 $63,628 $126,971
Net Company investment per
customer ($46)($1,054)($1,010)($1,084)($1,056)
Source: Staff Attachment 9, Page 2 of4; Staff comments at 5.
Company investment per customer is total design cost per lot less developer payment less rate recovery
2
3 Q.Please describe the table.
4 A.The table shows the number of lots and the number of transformers in each
5 development. It also shows the total designwork order cost, the amount
6 recovered though existing rates, and the amount that Order 30853 would require
7 be paid in up front capital by the developer. Finally, it shows the net Company
8 investment per customer in each case.
9 In example 5 of Table 1, total design cost is $144,771 of which the Company is
10 entitled to recover $124,476 from the new ratepayers through the existing rate
Page 8
Richard A. Slaughter
Building Contrctors Association of Southwest Idaho
Case No. IPC-E-08-22
1 strctue, leaving a shortfall of $20,395, presumably to be collected from the
2 developer. Order 30853, however, entitles the Company to collect almost
3 $127,000 from the developer, for a total recover of$251,447, having expended
4 only $144,771.
5 Q.How ca the Company's net investment be negative if the purose of Order
6 30853 is to "relieve upward pressure on rates," and if, as the Commission has
7 obsered in Order 30853 (see Testimony at page 11 below), "fees cannot be
8 charged for new plant that canot be attbuted specifically to sering new
9 customers?"
10 A.The conflict between the Order 26780 standards and the outcome of the new Rule
11 H design approved in Order 30853 canot be reconciled. As Table 1 clearly
12 shows, the new Rule H design does far more than affect "upward pressue on
13 rates" from new distrbution, it actually provides a profit on each installation
i 4 supplemental to the Company's authorized rate of retu on the investment.
15 Q.What is the case under Rule H from Order 26780?
16 A.From Staff Attachment 9, page 2 of 4, it is clear that under "Current Rule H"
17 approved by Order 26780, the developer's "Net Cost" plus the $800 per lot refud
18 almost exactly equal the "Work Order Cost per lot," which in tu are almost
19 exactly equal to the average embedded cost of$I,232 computed by Staff.
20 Whether as a result of simple coincidence or of thoughtfu consideration, under
Page 9
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 the existing Rule H tarff approved in Order 26780, cuent Company per
2 customer investment in new distrbution closely approximates its curent
3 embedded cost. It therefore is hard to see how, given today's costs for new
4 distrbution facilties, the authorized allowances under the Rule H taff approved
5 in Order 26780 produce "upward pressure on rates," let alone why any signficant
6 change in the tariff is waranted.
7 Q.So what rationale does exist for changig the taff and reducing the Company's
8 distrbution investment if the sum of its curent per customer allowance in the
9 form ofterinal facilties allowances and per lot refuds actually approximates
10 its embedded cost for distrbution?
11 A.None that lam aware of.
12 Q Do you have an opinion as to what the economic result to the Company would be
13 if only a $1,780 terinal facilities allowance is approved and there is no other
14 allowance provided for new distrbution?
15 A.In the residential subdivision examples I have been discusing, the Company wil
16 be in an excess earing situation with regard to its distribution plant. The
17 diffculty in accounting for this excess earng after the fact and providing
18 necessar refuds or credits to the appropriate new customers wil be significant.
19 Q.Absent such an after-the-fact accounting, what happens to ths "excess earings?"
Page 10
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 A.Absent a timely tre up that ultimately distrbutes these excess revenues back to
2 the new customers who paid them, the practical effect quite likely wil be that the
3 amount eared on new distrbution plant in excess of embedded costs wil be
4 applied to help pay the Company's other costs, including non-recoverable costs,
5 generation and/or transmission costs-new customers will be paying an unequal
6 proportion of these costs when compared with existing customers.
7 Q.Is that result consistent with prior Commssion decisions?
8 A.No. It would not be consistent with Order 30853 or the two Idaho Supreme Cour
9 decisions on this subject referenced in that Order, which preclude
10 disproportionately recoverg the costs of new generation and transmission plant
11 from new customers:
12
13
14
15
16
17
18
19
20 Q.
21
Allowances. The capital cost of installng new generation and transmission
plant has always generally been recovered though rates paid by all
customers. Indeed, fees canot be charged for new plant that canot be
attbuted specifically to sering new customers. (Idaho State
Homebuilders v. Washigton Water Power, 107 Idaho 415,690 P.2d 350
(1984); Building Contractors Association v. ¡PUC and Boise Water Corp.,
128 Idaho 534, 916 P.2d 1259 (1996).) (Order 30853, at 9-10) Emphasis
added.
Aside from the issues you have just described, is the rate strctue in Order 30853
an economically effcient result as it applies to residential extensions?
22 A.No. An economically effcient result would align costs with recovery from
23 developers, so that the highest developer contrbutions would come from
24 developments that present the highest per customer cost. In the Table 1 example,
Page 11
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 the subdivision with three lots, which has two transformers for three customer,
2 receives the highest allowance, over $1,000 higher per lot (customer) than the
3 larger subdivisions with ten customers per transformer. In other words, the rule
4 approved in Order 30853 encourages high cost development. This canot be
5 desirable.
6 Q.Based on the foregoing testimony, do you have an opinon concerng how to
7 calculate a reasonable and appropriate allowance for line extensions to serve new
8 customer?
9 A.However the allowance is configued, to meet the Commission's stated standard
10 an appropriate per new customer allowance must be approximately equal to the
11 Company's per existing customer embedded costs, calculated in ths case by Staff
12 at $1232.44.
13 Q.Do you have a proposed rate strcture for residential subdivisions that satisfies
14 ths standard?
15 A.Yes. Much of the regulatory difficulty with Rule H, insofar as residential
16 customers are concered, stems from attempting to match allowances and refuds
17 with defined "standard serice," accounting for transfonners, underground vs.
18 overhead, serice drops, the size of the pole offset, etc. It would be much simpler
19 for all to understand and administer, if the tariff simply were to charge a
20 subdivision developer the full work order cost for the installation, and then credit
Page 12
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 that charge with the capital value embedded in rate base. In other words, the
2 appropriate allowance would achieve a Company investment for any new serice
3 extension request equal to its per customer embedded cost multiplied by the total
4 number of new customers to be served. The developer or new customer
5 contrbution towards the new distribution facilities then would be equal to total
6 design cost minus the Company's per customer embeded cost allowance (i.e.,
7 those facilties costs in excess of the amount the Company wil receive as a return
8 from the new customer through rates).
9 Q.
10 A.
11
12
13
14
15
16
17
18
19
20 Q.
Are there side effects to such a strctue?
Yes. Ths strctue would cause embedded rate base to decline slowly over time,
unless the allowance is somehow adjusted for inflation. While such an outcome
may be desirable from the Company's standpoint or from a political standpoint, it
would over time cause rates to be less trly reflective of energy costs than they
are now. To the extent that allowances fall fuer behind costs, the Rule would
shift generation and transmission cost to the new customer. To avoid this
outcome, the embedded cost allowance should be indexed to the lesser of a
general energy or constrction cost index or the increase in installation work order
costs. Either approach wil work and either cost method can easily be updated
annually by the Company and Staff.
Can you ilustrate your proposal?
Page 13
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 A.Yes. Table 2 shows the effect of a simplified Rule H rate strctue, wherein the
2 developer pays up front the entire work order or Total Design cost, less the
3 amount expected to be recovered from the new customers though existig rate
4 base. This latter amount can be calculated by Commission staff each year, in
5 conjunction with a filing by the Company of curent work order costs. Developer
6 payments would always be $0 or greater. In the examples in the table,
7 subdivision #4 is from 2002, so the costs shown may be understated in today's
8 dollar.
9 Table 2
Simplified Rule H Rate Structure
Subdivision example 1 2 3 4 5
Design Number 61114 67186 60197 24482 27729
No. of Lots 3 10 32 60 101
Average embedded çost per
customer (Staff comments at 5 )$1,232 $1,232 $1,232 $1,232 $1,232
Total Design Cost $10,572 $15,116 $50,432 $72,528 $144,771
Recovery though existing rates $3,697 $12,324 $39,438 $73,946 $124,476
Developer payment (::= $0)$6,875 $2,792 $10,994 $0 $20,295
Developer payment per lot $2,292 $279 $344 $0 $201
Net Company investment per
customer $0 $0 $0 ($24)$0
10
11 Q.Does this strctue have advantages?
12 A.Subject to the qualifications above, it achieves several objectives: 1) it does not
13 contrbute additional cost to rate base, which achieves the Company's and
Page 14
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
1 Commission's stated objectives. Residential growth serves only to maintain rates
2 at their curent levels insofar as Rule H costs are concerned; 2) it satisfies the
3 Supreme Court standard in Water Power and Boise Water by avoiding the need
4 for continual after-the-fact accounting for excess earings on distrbution plant
5 and/or the potential shift of generation and transmission costs to new customers
6 though the line extension tarff; 3) it greatly simplifies the presentation and
7 calculation of Rule H costs for residential development; and 4) it is economically
8 effcient, because it recover the highest development payment frm the highest
9 cost intallations.
10 Q.Does this conclude your testimony?
11 A.Yes.
Page 15
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-3-08-22
BUILDING CONTRACTORS ASSOCIATION OF
SOUTHWST IDAHO
EXHIBIT 205
Page 16
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
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CERTIFICATE OF SERVICE
I hereby certify that on the 1 I th day of September, 2009, a tre and correct copy of
the foregoing was sered upon the following individual(s) by the means indicated:
Origial + 9 Copies Filed:
Jean D. Jewell, Secretar
Idaho Public Utilties Commission
472 West Washington Street
P.O. Box 83720
Boise, Idaho 83720-0074
Lisa D. Nordstrom
Baron L. Kline
Idaho Power Company
POBox 70
Boise,ID 83707-0070
Inordstrom(fidahopower.com
bkline(fidahopower.com
cc: cbea.idahopower.com
Scott Sparks
Gregory W. Said
Idaho Power Company
POBox 70
Boise,ID 83707-0070
ssparks(fidahopower.com
gsaid(fidahopower.com
Krstine A. Sasser
Deputy Attorney General
Idaho Public Utilties Commission
472 W. Washington
POBox 83720
Boise,ID 83720-0074
krs.sasserlfuc.idaho. gov
Servce Copies:
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Page 18
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
659283JDO
Matthew A. Johnson
Davis F. VanderVelde
Whte, Peterson, Gigray, Rossman, Nye &
Nichols, P.A.
5700 E. Franin Rd., Ste. 200
Nampa, il 83687
mjohnsonCiwhitepeterson.com
dvandereldeCiwhitepeterson.com
Attorneysfor The City of Nampa and The
Association of Canyon County Highway
Districts
Michael Kur
Kur J. Boehm
Boehm, Kurz & Lowr
36 E. Seventh St., Ste. 1510
Cincinnati, OH 45202
mkzCiBKLlawfirm.com
KboehmCiBKLlawfirm.com
Attorneys for The Kroeger Co.
Kevin Higgins
Energy Strategies, LLC
Parkside Towers
215 S. State St., Ste. 200
Salt Lake City, UT 84111
khigginsCienergystrat.com
Representing The Kroeger Co.
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Page 19
Richard A. Slaughter
Building Contractors Association of Southwest Idaho
Case No. IPC-E-08-22
659283JDO