20101022Application.pdf

LISA D. NORDSTROM
Lead Counsel
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An IDACORP Company
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October 22, 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-10-27
IN THE MA ITER OF IDAHO POWER COMPANY'S REQUEST TO MODIFY
RECOVERY OF INCENTIVES PAID TO SECURE DEMAND-SIDE
RESOURCES
Dear Ms. Jewell:
Enclosed for filng please find an original and seven (7) copies of Idaho Power
Company's Application in the above matter.
In addition, enclosed are nine (9) copies each of Ric Gale's and Darlene Nemnich's
testimonies filed in support of the Application. One copy each of Mr. Gale's and Ms.
Nemnich's testimonies have been designated as the "Reportets Copy." In addition, a disk
containing a Word version ofthe aforementioned testimonies is enclosed for the Reporter.
Very truly yours,
r/tØ/J'71 ~
Lisa D. Nordstrom
LDN:csb
Enclosures
1221 W. Idaho St. (83702)
P.O. Box 70
Boise. ID 83707
LISA D. NORDSTROM (ISB No. 5733)
DONOVAN E. WALKER (ISB No. 5921)
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
Telephone: [phone]
Facsimile: [phone]
Inordstrom(âidahopower.com
dwalker(âidahopower.com
RECEIV !J
iOIOOCT 22 PH 3= 48
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 IDAHO POWER
COMPANY'S REQUEST TO MODIFY
RECOVERY OF INCENTIVES PAID TO
SECURE DEMAND-SIDE RESOURCES.
)
) CASE NO. IPC-E-10-27
)
) APPLICATION
)
COMES NOW, Idaho Power Company ("Idaho Powet' or "Company"), and in
accordance with Idaho Code §§ 61-502, 61-503, and 61-524 and RP 052, hereby
requests that the Idaho Public Utilties Commission ("IPUC" or "Commission") issue its
order on or before March 15, 2011, accepting the Company's demand-side resources
business modeL. To this end, Idaho Power also requests authorization to: (1) move
demand response incentive payments into the Power Cost Adjustment on a prospective
basis beginning June 1, 2011, (2) establish a regulatory asset for Custom Effciency
program incentive costs beginning January 1, 2011, and (3) change the carring charge
on the Energy Efficiency Rider from the customer deposit rate to the Company's
APPLICATION - 1
authorized rate of retum. The Company does not request a change in customer rates at
this time. In support of this request, Idaho Power states as follows:
I. BACKGROUND
1. In the early 1990s, Idaho Power first adopted a focused, substantial and
increasingly active approach to the development of demand-side resources with its
customers. During the ten years from 1990 to 2000, Idaho Power operated
approximately twelve programs in all customer sectors (plus several pilots) and initiated
participation in Northwest Energy Effciency Association ("NEEA") in 1997. The
Company spent just over $41 milion during those ten years and saved a cumulative 26
average megawatts. At that time, Idaho Power was in an energy deficit position.
Therefore, the program focus was on purchasing energy effciency resources; demand
response programs were not implemented at that time.
2. As described more fully in the testimony of Mr. John R. Gale, energy
efficiency measures implemented during that time period were treated for ratemaking
purposes the same as supply-side resources. While the concept had merit, the model
as then applied had a negative financial impact on the Company. The results of Case
No. IPC-E-97-12 dealing with the cost recovery of these energy efficiency expenditures
combined with the emerging electric industry restructuring phenomenon led to eventual
dismantling of the Company's energy efficiency effort. Under the restructuring
paradigm, the market would be the provider of all needed resources, both demand and
supply side. The dramatic impacts of the 2000-2001 Western Energy Crisis ultimately
exposed the flaws in "the market wil provide it" concept and set the Company on course
APPLICATION - 2
to reinvigorate its Integrated Resource Plan ("IRP") and rebuild its energy effciency
capabilty.
3. Following the Western Energy Crisis, both the Idaho Commission and the
Company moved to restore and enhance the energy efficiency effort at Idaho Power.
From a complete cold start, Idaho Powets energy efficiency and demand response
programs (referred to herein as "demand-side resources" or "DSRs") have progressed
to the point where the Company now has a robust suite of energy efficiency and
demand response programs and is spending nearly 5 percent of its revenues on these
activities. Among the successes are the institution of the Energy Effciency Advisory
Group, the Energy Effciency Rider funding mechanism, the Fixed Cost Adjustment
decoupling mechanism, the prudency Memorandum of Understanding, the energy
efficiency incentive workshops, the build-out of a complete suite of programs for all
customer classes, along with the growth in annual energy efficiency savings from
19,000 MWh in 2004 to 148,000 MWh in 2009, and the installation of demand response
capacity of 290 MW in 2010.
4. Cost-effective demand-side resources are highly desirable in a carbon-
constrained world. Idaho Power is uniquely positioned to optimize the communication
and delivery of DSR programs. While most agree that the pursuit of DSR is a worthy
endeavor, Idaho Powets current DSR business model is inferior to investments on the
supply side. As set forth below and in the testimony accompanying this Application,
Idaho Power recommends specific actions that can bring the DSR to an equal footing.
A robust and healthy business model for energy efficiency wil provide for the optimal
APPLICATION - 3
procurement of cost-effective demand-side resources and is a matter of good public
policy.
II. DEMAND-SIDE RESOURCE BUSINESS MODEL
5. Cost-effective DSR is Idaho Powets resource of choice - both from a cost
standpoint and from an environmental perspective. The cleanest, most effcient
resource portolio is the one a utilty does not have to build. The Company believes that
demand-side resources should be pursued dilgently and that funding should not unduly
impede its acquisition. Otherwise, customers are left with the ultimately higher cost
"pay me latet' position when the Company is later forced to acquire higher cost
resources to match customer loads.
6. Even though cost-effective energy effciency is the resource of choice by
virtually all stakeholders, demand-side resources are faced with the most challenging
regulatory scrutiny for cost recovery. The challenges include elevated prudency
evaluation standards, protracted proceedings, overcoming the fixed cost recovery
disincentive, asymmetric risk and reward propositions, and no earnings opportunity thus
far.
7. From a regulatory standpoint, successful DSR business activities require
clear and achievable guidelines for prudency. There must be a timely recovery of out-
of-pocket expenditures that appropriately recognizes the time value of money and does
not negatively impact cash flow in a significant way. Economic disincentives to reduce
load must be removed via better pricing, decoupling, or some other mechanism that
does not strand fixed cost recovery. And finally, the Company must have the abilty to
APPLICATION - 4
earn on the energy effciency investments just like any other business activity in which
the Company is engaged.
8. As enumerated in Mr. Gale's testimony, several important regulatory
issues should be resolved in order to further the pursuit of cost-effective DSR. These
include: (1) a more straightforward approach to prudency determination, (2) solidifying
the Fixed Cost Adjustment mechanism, (3) optimizing Idaho Powets participation in
third-party initiatives such as the NEEA, the Northwest Regional Technical Forum, the
Integrated Design Lab in Idaho and other state and regional efforts to advance energy
efficiency research and market transformation, (4) addressing the growing Energy
Effciency Rider negative balance (and its subset of issues), and (5) implementing a
realistic earnings opportunity for Idaho Power for its investments in DSR.
9. To address these issues, Idaho Power wil continue to advocate for its
view of the proper regulatory/business model in existing forums and in new filngs. New
actions include proposals to address the growing Energy Efficiency Rider ("Ridet')
negative balance, including the proposals requested in this filng. A Rider with an
extended negative balance breaks the symmetry of the mechanism and negatively
impacts the Company's cash flow. The Rider balance is presently negative by more
than $16 milion and has been negative since April 2008. The large growing balance
reflects success associated with increasing programs, expenditures, and savings in
DSR. However, continuing to increase the amount is problematic. The Company
believes there is a more appropriate path that would allocate some of the expenses to
more suitable alternatives for recovery. As discussed below and in the Direct
Testimony of Darlene Nemnich, Idaho Power recommends: (1) moving demand
APPLICATION - 5
response incentive payments into the Power Cost Adjustment ("PCA") on a prospective
basis beginning June 1, 2011, and (2) establishing a regulatory asset for Custom
Efficiency program incentive payments through Commission order beginning January 1,
2011.
II. RECOVERING DEMAND RESPONSE INCENTIVES IN THE PCA
10. Demand response programs have become a significant and mature
resource for reducing the varying summer peaking needs on the Idaho Power system.
Currently, the Company has three Demand Response programs: (1) the AlC Cool
Credit Program, which provides summer peak reduction benefits by cycling participating
residential customers' air-conditioning units, (2) the Agricultural Irrigation Peak Rewards
Program, which switches off participating customers' irrigation pumps during times
when additional system peak resources are needed, and (3) the FlexPeak Management
Program, which reduces commercial and industrial load when called upon during
system peak times.
11. In 2009, Idaho Powets three programs provided 218 MW of resources
available to meet system peak needs. In 2010, preliminary estimates indicate that
these programs reduced peak by approximately 290 MW. Demand response resources
are selected similar to other generating resources in the IRP and are dispatched by
system operators just like any other peaking resource used by the Company. Starting
with the 2009 IRP, demand response resources were included in the Power Supply
Planning model, AURORAxmp.
12. All costs for the demand response programs are presently recovered
through the Rider. Currently, the Idaho Rider charge is 4..75 percent of base rates
APPLICATION - 6
applied to all customer groups. Idaho Power tracks the costs of its demand response
programs by program and expense type. These cost categories include incentives,
administrative costs, materials and equipment, marketing costs, labor, and evaluation.
13. Idaho Power requests authority to remove recovery of customer and
demand-aggregator contractor incentive payments for all Company demand response
programs from the Rider balancing account (Idaho rate schedule 91) and transfer these
costs to the PCA for 100 percent recovery on a prospective basis. While the impact of
this change wil not be seen until next summer, the magnitude of the funds not collected
through the Rider over the 2011 air-conditioning and irrigation season wil significantly
reduce the negative Rider balance. Table 2 of Ms. Nemnich's Exhibit NO.1 indicates
demand response incentive payments are expected to be nearly $13.7 milion in 2011
and a similar amount in 2012.
14. Idaho Power recommends that all 2010 actual demand response program
costs, even the incentive costs for reduced load for the summer peak season, continue
to be recovered through the Rider. However, Idaho Power proposes to begin shifting
the recovery of the demand response incentive costs to the PCA beginning with the
Company's forecast of April 2011 through March 2012 power supply costs, currently
expected to be approximately $13.7 milion. Idaho Power proposes to include these
costs in the PCA in a manner that is consistent with the current PCA methodology. The
Company would forecast Idaho demand response incentive payments just as it does for
its forecast of fuel, purchased power, and surplus sales. This forecasted amount of
demand response incentive costs would be included in PCA rates, effective June 1,
2011.
APPLICATION - 7
15. As part of a future filing, the Company intends to request that a normal or
base level of expenses related to demand response incentives be placed into base
rates. Then annually as part of the PCA case, the forecasted level of Idaho incentive
payment expenses wil be compared to the normal level included in base rates to
determine the level of demand response cost recovery to be included in the PCA
forecast. Any deviations between actual demand response incentive costs and
forecasted costs wil be included in the following yeats PCA true-up.
iv. CAPITALIZING ENERGY EFFICIENCY INCENTIVE PAYMENTS
16. In addition to moving demand response incentive costs to the PCA, Idaho
Power is proposing to change the method of recovering a portion of the energy
efficiency program incentive costs. Currently, all energy efficiency incentive costs are
recovered through the Rider balancing account. As explained in the testimonies of Mr.
Gale and Ms. Nemnich, the Company is proposing to capitalize the direct incentive
payments associated with the Custom Efficiency program to enable the Company to
earn a return on a portion of its demand-side resource activities. The Company
proposes to start booking incentive payments to a regulatory asset account beginning
January 1, 2011. The balance in the account would be included in the Company's
revenue requirement at the time of a future rate case and would be amortized over four
years. The then-current Commission authorized rate of return would be applied as a
carrying charge during the deferral period and the amortization period. This treatment
wil keep the selected demand-side resource assets on par with supply-side assets.
17. The Custom Efficiency program is a mature program that started in 2003
and has grown into the largest program in terms of megawatt-hour ("MWh") savings in
APPLICATION - 8
the Idaho Power portolio. In 2008 and 2009, the Custom Efficiency program saved
41,059 and 51,836 MWhs, respectively. In 2009, this represented almost 40 percent of
the total MWh savings on a system-wide basis for programs implemented by Idaho
Power. Additionally, this program historically is one of the most cost-effective programs
in the Idaho Power portolio. Over the life of the program, Customer Effciency has a
high Utilty Benefit/Cost Ratio of 5.37 and Total Resource Benefit/Cost Ratio of 2.05. In
2009 alone, the Customer Efficiency Total Resource Benefit/Cost Ratio was 3.56.
Custom Efficiency incentive payments are estimated to be approximately $5.2 milion in
2011 and $5.6 millon in 2012 (Exhibit NO.1, Table 2). The investments made under
Custom Efficiency tend to be in tangible assets (i.e., lighting upgrades and motor
rewinds) and similar to physical plant except it is not owned by the Company, it is
owned by the customer. The program's maturity, high benefit/cost ratio, and detailed
verification process were major factors in the selection of this program for cost deferral
and capitalization.
v. RIDER CARRYING CHARGE
18. Because of the large negative balance existing in the Rider and because it
wil take almost two years to work this balance down given the prospective nature of the
Company's previously stated requests, Idaho Power requests that the Commission
authorize the carrying charge on the remaining balance to reflect the Company's
authorized rate of return (currently 8.18 overall rate of return with a 10.5 return on equity
component) instead of the interest rate on customer deposits (currently 1.0 percent).
Changing the current carrying charge is particularly important should the Commission
decide against part or all of the Company's requests.
APPLICATION - 9
Vi. IMPACT ON THE ENERGY EFFICIENCY RIDER
19. Exhibit No.1, Table 1, to Ms. Nemnich's testimony shows a three-year
forecast of the Rider balance with current expected revenues and current forecast of
demand-side resource expenditures. If neither of the Company's proposals is approved
by the Commission, the estimated 2010 year-end negative balance of $17,009,140
grows to a negative $29,677,151 in 2012. Absent Commission approval of the two
Company proposals, clearing the balance in one year would require a 7.5 percent Rider.
The Rider percentage would have to increase from 4.75 percent to 6.6 percent in
January 2011 for the balance to be zero by the end of 2012.
20. If the Commission implements the Company's two proposals, the 2010
negative Rider balance of $17,009,140 is projected to shrink to a negative $3,356,306 in
2011. In the middle of 2012, it is expected that this account wil approach zero. Table 2
of Exhibit NO.1 reflects the impact of the two proposals.
VII. MODIFIED PROCEDURE
21. Idaho Power requests this Application being processed under Modified
Procedure, i.e., by written submissions rather than by hearing. RP 201, et seq. If,
however, the Commission determines that a technical hearing is required, the Company
stands ready to present testimony and support the Application in such hearing.
22. In support of this Application, Idaho Power has submitted the pre-filed
direct testimony of Mr. John R. Gale and Ms. Darlene Nemnich. Mr. John R. Gale,
Idaho Power's Senior Vice President of Corporate Responsibilty, describes: DSRs'
importance to the resource portolio, why utilties are good delivery vehicles for DSR
programs, the regulatory conundrum of approving DSR expenditures, the necessary
APPLICATION - 10
regulatory/business model for DSR, where the points of contention are among the
Company and the various parties, and Idaho Powets plan to address these issues. Ms.
Darlene Nemnich, Idaho Powets Senior Regulatory Affairs Analyst, sets forth the
Company's proposals for changes in how demand response incentive costs are
recovered and for changes in how some of the energy effciency incentive costs are
recovered.
23. The Company respectfully requests that the Commission issue its order
on or before March 15, 2011, to allow sufficient time to prepare and process a power
cost adjustment docket prior to June 1,2011.
VII. COMMUNICATIONS AND SERVICE OF PLEADINGS
24. Communications and service of pleadings with reference to this
Application should be sent to the following:
Lisa D. Nordstrom
Donovan E. Walker
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
Inordstrom(âidahopower.com
dwalker(âidahopower.com
John R. Gale
Darlene Nemnich
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
rgale(âidahopower.com
dnemnich~idahopower.com
IX. CONCLUSION
25. For the reasons set forth above and in the testimony that accompanies
this Application, Idaho Power respectfully requests that the Commission issue its Order
on or before March 15, 2011, accepting the Company's demand-side resources
business modeL. To that end, the Company specifically requests authority to: (1) move
demand response incentive payments into the PCA on a prospective basis beginning
June 1, 2011, (2) establish a regulatory asset for Custom Efficiency program incentive
APPLICATION - 11
costs beginning January 1, 2011, and (3) change the Rider Carring Charge from the
customer deposition rate to the Company's authorized rate of return.
DATED at Boise, Idaho, this 22nd day of October 2010.
~¡¿~SAORDST M
Attorney for Idaho Power Company
APPLICATION - 12