20110321Gale Reply Supporting Stipulation.pdf

JASON B. WILLIAMS
Corporate Counsel
iwilliamsØìidahopower.com
eslDA~POR~
An IDACORP Company
March 18, 2011
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 AN INVESTIGATION OF APPROPRIATE COST
RECOVERY MECHANISMS FOR IDAHO POWER'S ENERGY EFFICIENCY
PROGRAMS
Dear Ms. Jewell:
Enclosed for filing in the above matter are nine (9) copies of the Reply Testimony of
John R. Gale in Support of Stipulation. One copy of Mr. Gale's Reply Testimony has been
designated as the "Reportets Copy." In addition, a disk containing a Word version of Mr.
Gale's Reply Testimony is enclosed for the Reporter.
Very truly yours,
a B. Wiliams
JBW:csb
Enclosures
1221 W. Idaho St. (83702)
P.O. Box 70
Boise, ID 83707
REGEl D
lOll MAR' B PH 4: 3'
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF AN INVESTIGATION
OF APPROPRIATE COST RECOVERY
MECHANISMS FOR IDAHO POWER'S
ENERGY EFFICIENCY PROGRAMS.
CASE NO. IPC-E-IO-27
IDAHO POWER COMPANY
REPLY TESTIMONY
OF
JOHN R. GALE
IN SUPPORT OF STIPULATION
1 Q.Please state your name and business address.
2 A.My name is John R. Gale and my business
3 address is 1221 West Idaho Street, Boise, Idaho.
4 Q.By whom are you employed and in what capacity?
5 A.I am employed by Idaho Power Company (~Idaho
6 Power" or ~Company") as the Senior Vice President of
7 Corporate Responsibility.
8 Q.Are you the same Mr. Gale that previously
9 submitted direct testimony in this case, Case No. IPC-E-10-
10 27 (~Case 10-27"), as well as direct testimony in support
11 of the settlement stipulation to this case that has been
12 previously submitted with supporting testimony
13 (~Stipulation")?
14 A.Yes, I am.
15 Q.What is the purpose of your testimony in this
16 matter?
17 A.My purpose is to reply to and rebut the
18 testimony of the Industrial Customers of Idaho Power's
19 (~ICIP") expert, Dr. Don Reading.
20 Q.To frame your rebuttal, please restate Idaho
21 Power's objectives in filing Case 10-27.
22 A.There were two broad obj ecti ves: (1) advance
23 the business and regulatory model for Company investments
24 in demand-side resources (~DSR") and (2) address the
GALE, REPLY SUPP 1
Idaho Power Company
1 growing negative balance in the Company's Energy Efficiency
2 Rider (~Rider") account.
3 Q.Also, please restate the Company's original
4 request.
5 A.The Company made several proposals to advance
6 both the DSR regulatory model for Idaho Power and to
7 address the growing negative balance in the Rider. These
8 actions included: (1) moving demand response incentive
9 payments for the A/C Cool Credit program, the Irrigation
10 Peak Rewards program, and the FlexPeak Management program
11 into the Power Cost Adjustment (~PCA") ona prospective
12 basis beginning on June 1, 2011, and (2) establishing a
13 regulatory asset for the Custom Efficiency program
14 incentives through Idaho Public Utilities Commission
15 (~Commission") order.
16 In the event the Commission failed to authorize the
17 PCA and regulatory asset requests previously discussed,
18 Idaho Power also requested that the Commission authorize
19 the carrying charge on the remaining balance to move to the
20 Company's authorized rate of return (currently 8.18 overall
21 rate of return with a 10.5 return on equity component)
22 instead of the interest rate on customer deposits
23 (currently 1.0 percent).
GALE, REPLY SUPP 2
Idaho Power Company
1 Q.As a final foundational question, please
2 describe the key provisions of the Stipulation.
3 A.The Stipulation agrees to the transfer of the
4 demand response incentive payments to the PCA beginning on
5 June 1, 2011, as requested by the Company. Additionally,
6 the Stipulation allows the impact of this change to be
7 revenue neutral for the customer classes for the interim
8 period until the next Idaho Power general rate case.
9 The Stipulation provides for the establishment of a
10 regulatory asset for incentive payments made for the Custom
11 Efficiency program beginning January 1, 2011. The asset
12 balance will earn the authorized rate of return until
13 placed in rates at the next Idaho Power general rate case
14 and will be amortized over a seven-year period as opposed
15 to the four-year amortization originally proposed by Idaho
16 Power.
17 Finally, the parties agree to leave the carrying
18 charge on the Rider balance at the customer deposit rate,
19 instead of the change proposed by the Company, because of
20 the diminished concern regarding Idaho Power carrying a
21 material negative Rider balance into the future.
22 Q.Does ICIP support the Company's initial
23 demand-side resource proposals or the subsequent
24 Stipulation filed with the Commission?
GALE, REPLY SUPP 3
Idaho Power Company
1 A.Surprisingly, no.
2 Q.Why do you say surprisingly?
3 A.The acquisition of cost-effective energy
4 efficiency provides substantial benefits for the industrial
5 customer class in the form of a less expensive and less
6 risky resource portfolio and also in the form of direct
7 incentives from the demand response and energy efficiency
8 programs. As shown on page 12 of Idaho Power's recently
9 filed Demand-Side Management 2010 Annual Report (Case No.
10 IPC-E-11-05), commercial/industrial customers received over
11 40 percent of the incentives paid for energy efficiency and
12 demand response in 2010. It is my testimony that the
13 regulatory model described by Idaho Power in the
14 Application and in the filing in support of the Stipulation
15 optimizes the acquisition of cost-effective energy
16 efficiency and, accordingly, subsequent benefits to ICIP
17 members.
18 Q.What reasons are given for opposing the
19 Stipulation?
20 A.On page 5 of Dr. Reading's testimony, lines 14
21 through 19, he states there is no compelling reason to do
22 anything, the filing is equivalent to a Rider change to 6.6
23 percent, and the requests represent a dramatic policy
24 shift. Additionally, Dr. Reading suggests that the demand-
GALE, REPLY SUPP 4
Idaho Power Company
1 side effort could be scaled back and implies that the
2 negati ve deferral balance represents an overspending of an
3 authorized amount with the insinuation that the Company has
4 mismanaged the Rider account by acquiring more cost-
5 effective demand-side management (~DSM") than can be timely
6 funded by the Rider. He also suggests that the new
7 proposals do not put the demand-side resources on an equal
8 footing with the supply-side resources and therefore should
9 be rejected. I see these transparent arguments for the
10 status quo to be detrimental to the general public's
11 interest and to the interest of the very customers that
12 ICIP represents.
13 Q.Where do you specifically disagree with Dr.
14 Reading's testimony?
15 A.I disagree with his contention that there is
16 no compelling reason to act. The compelling reason is to
17 advance the cause of DSR from its second-class citizen
18 status to that of an equal partner with the supply-side
19 al ternati ves. The state of Idaho and this Commission have
20 exhibited leadership in knocking down barriers and
21 exploring incentives to the acquisition of cost-effective
22 DSR. Through the proposed Stipulation, Idaho Power and the
23 other signatories desire to make another significant step
24 in this process. A second compelling reason is that a
GALE, REPLY SUPP 5
Idaho Power Company
1 growing multimillion dollar balance in what is a ~de facto"
2 regulatory asset earning a one percent rate on the balance
3 is not the type of business model that encourages optimum
4 efficiency.
5 The statement that the Company's filing is
6 equivalent to increasing the Rider to 6.6 percent is
7 mathematically accurate only from an interim rate impact
8 perspecti ve. Through its direct testimony, Idaho Power has
9 brought forth a purposeful rationale on why the DSR costs
10 should be recovered differently and more appropriately than
11 the current rate methods. Additionally, the Company has
12 noted that the Rider percentage rate can be reassessed and
13 lowered once the balance has been actually worked down.
14 The proposals contained in the Stipulation are
15 purposeful and a moderate step, not a dramatic policy
16 change. Putting power supply-related costs in the PCA is
17 not a new concept to this Commission or other commissions
18 and neither is the idea of capitalizing and amortizing
19 demand-side investments. In fact, the capitalization
20 proposal, which only includes the incentives for one energy
21 efficiency program, is quite modest compared to the
22 regulatory asset models of the past.
23 Q.Please comment on Dr. Reading's suggestion on
24 page 10 of his testimony that Idaho Power's demand-side
GALE, REPLY SUPP 6
Idaho Power Company
1 efforts could be scaled back and therefore potentially
2 eliminate the need for the changes agreed to in the
3 proposed Stipulation.
4 A.There is no evidence to support any scale back
5 of Idaho Power's DSR programs (and certainly not one of any
6 significance) without jeopardizing cost-effective savings.
7 Idaho Power's Commission-endorsed policy of acquiring cost-
8 effective DSR has been publicly articulated for a number of
9 years. The efficacy of these programs is properly vetted
10 in other forums, such as the Company's Energy Efficiency
11 Advisory Group and in the Company's annual prudency
12 determinations. As explained in significant detail in the
13 Demand-Side Management 2010 Annual Report previously
14 referenced, Idaho Power's cost-effectiveness findings for
15 2010 indicate that all DSR programs - both demand response
16 and energy efficiency - had benefit/cost ratios of greater
17 than 1.0 from both a total resource cost and a utility cost
18 perspecti ve. Programs should be monitored and either
19 modified or eliminated prospectively based upon a factual
20 basis, not speculation. The ICIP's position only
21 underscores the regulatory conundrum discussed in my direct
22 testimony in this docket.
23 Q.In support of Dr. Reading's DSR scale back
24 proposal, he states that more third-party evaluations would
GALE, REPLY SUPP 7
Idaho Power Company
1 identify programs which are not cost-effective. Do you
2 have a response?
3 A.This comment is also best addressed in other
4 forums; however, I will respond to the assertion. Idaho
5 Power already fully utilizes third-party independent
6 evaluations of DSM programs where appropriate. In 2010
7 alone, Idaho Power hired third-party independent evaluation
8 contractors for nine different program evaluations. In
9 2011, ten more third-party evaluations are scheduled.
10 Idaho Power worked diligently with the Commission
11 Staff in developing the Memorandum of Understanding for
12 Prudency Determination of DSM Expenditures (~MOU") that was
13 part of the stipulation in Order No. 31039, Case No. IPC-E-
14 09-09, which addresses matters such as adequate evaluations
15 and program prudency. The Company takes the MOU seriously
16 and expects to abide by its principles. The Company's
17 diligent stewardship of DSR programs is underscored by the
18 fact that the Commission has found all DSM expense from
19 2002 to 2009 as prudently incurred.
20 Q.Dr. Reading implies in several places in his
21 testimony that the Company should be adjusting its DSR
22 spending to the amount of revenue generated by the Rider.
23 Is this implication consistent with Idaho Power's practice?
GALE, REPLY SUPP 8
Idaho Power Company
1 A.That implication turns Idaho Power's whole
2 approach to pursuing and acquiring DSR on its head.
3 Instead of pursuing all cost-effective efficiency measures,
4 the Rider revenue becomes a ceiling or cap on demand-side
5 investments. The Company has consistently and publicly
6 maintained a policy of pursuing cost-effective DSR measures
7 first and, if circumstances merit, requesting rate
8 adj ustments to better align program funding and rate
9 revenue, but it has never been the Company's expectation to
10 perfectly match Rider revenues and expenses within each
11 year. I would represent that it is the expectation of its
12 Energy Efficiency Advisory Group to operate its programs as
13 I have indicated above and not view Rider revenues as a cap
14 on program spending, as doing so increases the likelihood
15 of missed opportunities for savings. In short, the
16 Company's perspective is to spend appropriately and seek
17 rate adjustments as necessary. To do otherwise is to view
18 the demand side as an inferior investment.
19 Q.On page 13 lines 17-19 of Dr. Reading's
20 testimony, he states, ~The ICIP submits that authorizing
21 additional recovery mechanisms through the PCA or rate base
22 to account for this over-spending, and to even incenti vize
23 the Company's demand side activities, may be putting the
24 cart before the horse." Please comment.
GALE, REPLY SUPP 9
Idaho Power Company
1 A.This testimony is useful in that it clearly
2 illustrates the differences between the ICIP and the
3 Company. Idaho Power would not use the pej orati ve term
4 ~over-spending" to refer to additional investments in
5 savings opportunities. Additionally, incenti vizing demand-
6 side acti vi ties is good public policy and precisely the
7 point that the Company is endeavoring to make . Incentives
8 help the horse pull the cart.
9 Q.Another reason given by Dr. Reading for
10 opposing the Stipulation is that the Company's proposal
11 does not truly put the demand side on equal footing with
12 the supply side. Please respond to this critique.
13 A.This is one of his more perplexing arguments.
14 Primarily, because the amortization period is not as long
15 as ICIP would like, the substantial movement toward ~equal
16 footing" provided in the Stipulation is dismissed by ICIP
17 as inconsequential. This is analogous to traveling on a
18 long journey and being wi thin reach of the final distant
19 destination and then saying no progress has been made.
20 Under the Company's proposal as modified by the
21 Stipulation, the regulatory treatment for both types of
22 resources would recognize prudent investments in assets and
23 provide rate-of-return ratemaking (annual expense plus the
24 authorized return on the unamortized rate base) to each.
GALE, REPLY SUPP 10
Idaho Power Company
1 Additionally, annual power supply-related expenses are
2 properly accounted for in the PCA. This is progress toward
3 equal footing. The small remaining differences between the
4 treatment of demand-side and supply-side resources are that
5 the customer, not the Company, owns the asset and the
6 amortization period is purposefully shorter than the
7 expected life of the asset. My direct testimony discusses
8 in detail the different risk attributes of the regulatory
9 asset and why the amortization needs to be shorter. Long-
10 lived regulatory assets have simply been unworkable in the
11 past. The Stipulation contains a negotiated increase to
12 the asset life from the four originally proposed by Idaho
13 Power to seven years. For the Company, this was a maj or
14 concession, which partially mitigates ICIP's expressed
15 concern.
16 The ultimate irony of ICIP's position on arguing for
17 a longer amortization than provided in the Stipulation is
18 that it represents an extreme departure from what Dr.
19 Reading really proposes - a one-year expensing of all DSR
20 investments. This position when coupled with ICIP's
21 continued support of using the customer deposit rate as the
22 carrying charge creates a ~de facto" regulatory asset with
23 a one percent return. As intelligent business people,
24 ICIP's members must understand that if this were their
GALE, REPLY SUPP 11
Idaho Power Company
1 business, the model described above would not be conducive
2 to sustained investment. It is worse than treating DSR as
3 an expense and worse than treating it as a prudently
4 invested asset.
5 Q.On page 15, lines 8-11, of Dr. Reading's
6 testimony, he discusses a utility's fiduciary
7 responsibili ty to its shareholders and, in his opinion, the
8 best way to build profits is to build plants and put them
9 into rate base. Additionally, he notes that effective DSR
10 will prevent the need for new plants. Do you agree with
11 his testimony in this respect?
12 A.I agree with elements of the testimony, but
13 not the conclusion that the testimony infers. A rate of
14 return on prudently built or acquired rate base is the
15 method in which utilities make their money. However, as
16 long as the Commission allows the asset in rate base and
17 the return is the same, a utility is indifferent from a
18 fiduciary standpoint on whether the asset is demand related
19 or supply related. That is precisely why adding a return
20 component is an improvement to the demand-side regulatory
21 model.
22 Q.Dr. Reading describes a reduction in Idaho
23 Power's demand response capability as articulated in an
24 Integrated Resource Plan as inconsistent with an earlier
GALE, REPLY SUPP 12
Idaho Power Company
1 DSR capacity potential. Is this a case of the Company
2 using information in a self-serving manner?
3 A.No. Idaho Power firmly believes in using
4 demand response programs to help manage peaks and, to my
5 knowledge, uses them as much as any utility. However, the
6 Company's demand response programs are relatively new. The
7 Company is still learning how to optimize these resources
8 over the long-term, which involves such things as customer
9 acceptance, program persistence, dispatching the programs,
10 and optimizing the hours from a system and customer
11 perspective. The reduction from the 376 megawatt to the
12 330 megawatt operational level reflected a more practical
13 and sustained use of the resources as opposed to more of a
14 maximum potential capability.
15 Q.In addition to the stated reasons to oppose
16 the Stipulation, Dr. Reading's testimony discusses issues
17 contained in the Stipulation and recommendations related to
18 it. Please discuss these Stipulation issues.
19 A.While opposing the Stipulation, ICIP wants to
20 modify it in several ways, including (1) increasing the
21 amortization period and (2) memorializing the cost of
22 service treatment for the demand response incentives. I
23 have previously discussed the amortization issue.
24 Regarding memorializing a permanent cost of service
GALE, REPLY SUPP 13
Idaho Power Company
1 treatment, the Company simply feels that the immediate
2 issue has been addressed and that a longer term resolution
3 is properly vetted in the context of a general rate
4 proceeding where all parties can weigh in fully. ICIP's
5 arguments for specific cost of service treatment will hold
6 without any prej udice until such time. To act now is
7 premature. In the interim period, the Stipulation contains
8 no cost allocation shift among the customer classes.
9 Q.In addition to the specific disagreements with
10 Dr. Reading's testimony already discussed, do you have a
11 general comment regarding the Stipulation and ICIP's
12 unwillingness to support it?
13 A.Yes. The Stipulation actually addresses
14 several of ICIP's concerns expressed in Dr. Reading's
15 testimony. These items included the lengthening of the
16 amortization period for the regulatory asset from four
17 years to seven and the interim revenue neutral allocation
18 to the PCA, which is beneficial to the high-load factor
19 customers, such as the industrial class. In my personal
20 opinion, it would be a shame if by actively opposing the
21 Stipulation, the ICIP was rewarded by the Commission with
22 an extra bite of the apple.
23 Q.Has the ICIP testimony changed Idaho Power's
24 opinion regarding the value of the Stipulation?
GALE, REPLY SUPP 14
Idaho Power Company
1 A.No. The Company believes the Stipulation is a
2 reasonable compromise by the parties that advances the
3 treatment of the Company's investments in DSR to a position
4 essentially equivalent to its investments in supply-side
5 resources. The seven-year amortization period causes some
6 concern because of the different risk profile of DSR, but
7 strikes a reasonable balance when compared to the overall
8 lives of the demand-side measures. The Company determined
9 that it could drop its carrying charge request in light of
10 the substantial impact to the Rider's negative balance of
11 the other agreed upon actions.
12 Q.Are the terms of this Stipulation, in your
13 opinion, consistent with the Stipulation entered into by
14 Idaho Power and other parties and approved by this
15 Commission in Case No. IPC-E-09-30 on January 10, 2010?
16 A.Yes, as the Company's lead negotiator to that
17 agreement, it is my testimony that the Stipulation is fully
18 consistent with the prior stipulation approved by the
19 Commission in Case No. IPC-E-09-30. The Stipulation in
20 this current case does not seek a general rate change; it
21 only adjusts the PCA and changes the inputs to the Rider,
22 both of which are specified exceptions to the rate
23 moratorium as provided under Section 5.2 of the stipulation
24 in Case No. IPC-E-09-30.
GALE, REPLY SUPP 15
Idaho Power Company
1 Q.What are the benefits of the Commission
2 approving the Stipulation?
3 A.Approving the Stipulation relieves pressure to
4 increase the Rider percentage again and provides all
5 essential components to the DSR regulatory model, including
6 the opportunity to earn on DSR investments. This action
7 better aligns the risk/reward proposition for energy
8 efficiency acti vi ties. Finally, the Stipulation provides
9 the foundation for a continued robust DSR effort at Idaho
10 Power. For these reasons, I believe the Commission should
11 find the Stipulation in the public interest.
12 Q.Does this conclude your testimony?
13 A.Yes.
GALE, REPLY SUPP 16
Idaho Power Company
CERTIFICATE OF SERVICE
lOff /lu.oi HEREBY CERTIFY that on this 18th day of March 2011 I serVJ au'Hlfld
correct copy of the REPLY TESTIMONY OF JOHN R. GALE IN¡'&WRrPQRT 0(=32
STIPULATION upon t~e following named parties by the method i~ciifif*l9¡~~?"
addressed to the following: A d,;;,IUN
Commission Staff
Weldon B. Stutzman
Deputy Attorney General
Idaho Public Utilties 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, PLLC
515 North 27th Street
P.O. Box 7218
Boise, Idaho 83702
Dr. Don Reading
Ben Johnson Associates
6070 Hil Road
Boise, Idaho 83703
Idaho Conservation League
Benjamin J. Otto
Idaho Conservation League
710 North Sixth Street
P.O. Box 844
Boise, Idaho 83701
NW Energy Coalition
Nancy Hirsh
NW Energy Coalition
811 1st Avenue, Suite 305
Seattle, Washington 98104
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Idaho Irrigation Pumpers
Association, Inc.
Eric L. Olsen
RACINE, OLSON, NYE, BUDGE &
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201 East Center
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Pocatello, Idaho 83204-1391
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Yankel & Associates, Inc.
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