20110602Cavanagh Di, Exhibits.pdf

RECEIVED
201 l JON - i PH 2=42
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC SERVICE
TO ITS CUSTOMERS IN THE STATE OF
IDAHO.
CASE NO. IPC-E-II-08
IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
RALPH CAVANAGH
1 Q.Please state your name, address, and
2 employment.
3 A.My name is Ralph Cavanagh. I am the Energy
4 Program Director for the Natural Resources Defense Council
5 ("NRDC"), 111 Sutter Street, 20th Floor, San Francisco, CA
6 94104.
7 Q.Please outline your educational background and
8 professional experience.
9 A.I am a graduate of Yale College and Yale Law
10 School, and I joined NRDC in 1979. I am a member of the
11 facul ty of .the University of Idaho's Utili ty Executive
12 Course, and I have been a Visiting Professor of Law at
13 Stanford and the University of California. From 1993-2003,
14 I served as a member of the U. S. Secretary of Energy's
15 Advisory Board, and I am now a member of the DOE
16 Electricity Advisory Board. My current board memberships
17 include the Bonneville Environmental Foundation, the Center
18 for Energy Efficiency and Renewable Technologies, the
19 Bipartisan Policy Center, the Renewable Northwest Project,
20 and the Northwest Energy Coalition. I have received the
21 Heinz Award for Public Policy (1996) and the Bonneville
22 Power Administration's Award for Exceptional Public Service
23 (1986). I first appeared before the Idaho Public Utilities
24 Commission ("Commission") in 1987 as a Commission Staff-
25 sponsored witness on energy conservation issues in Case No.
CAVANAGH, DI 1
Idaho Power Company
1 U-1500-165. In 2004, I was a witness for the Northwest
2 Energy Coalition in Case No. IPC-E-03- 13, and I appeared
3 subsequently as a witness for the Idaho Power Company
4 (hereafter either "Idaho Power" or "the Company") in Case
5 No. IPC-E-04-15. A Biographical Summary is attached as
6 Exhibit 40.
7 Q.On whose behalf are you testifying?
8 A.I am testifying for Idaho Power.
9 Q.Are you being compensated for this testimony
10 by the Company, or have you or NRDC ever received any
11 compensation or financial contributions from the Company?
12 A.No.
13 Q.What is the purpose of your testimony in this
14 proceeding?
15 A.My testimony supports the Company's proposal
16 to convert the Fixed Cost Adjustment ("FCA") mechanism that
17 the Commission established on a pilot basis in 2007 and
18 extended for two years in 2010 to an ongoing, permanent
19 tariff schedule.
20 Q.Summarize your conclusions and
21 recommendations.
22 A.In 2007, the Idaho Commission adopted a Fixed
23 Cost Adjustment Mechanism on a pilot basis for Idaho Power
24 (IPC-E-04-15, Order No. 30267), which subsequently was
25 extended for two years in 2010 (IPC-E-09-28, Order No.
CAVANAGH, DI 2
Idaho Power Company
1 31063). My testimony supports the Company's proposal to
2 end the FCA's "pilot" status, based on its obvious success
3 in supporting the Company's improved energy efficiency
4 performance, and make it permanent.
5 I agree strongly with Idaho Power that the FCA
6 should remain simple in design, and not be burdened with
7 unnecessary and inevitably contentious determinations of
8 what precisely accounts for increases and reductions in
9 electricity sales between rate cases. The principal
10 rationale for the FCA is not somehow to compensate the
11 Company for particular kinds of reductions in electricity
12 use, but rather to break the linkage between its financial
13 health and its retail commodity sales. FCA adj ustments
14 were never intended to reward or penalize the Company for
15 particular actions, but rather to remove a potent
16 disincentive to the Company's engagement with all forms of
17 energy efficiency progress, by ensuring that the Company
18 recovers no more and no less than the fixed costs
19 previously authorized by the Commission, notwithstanding
20 any short-term fluctuations in electricity use. My
21 testimony shows that efforts to link FCA adjustments to
22 energy efficiency program impacts would have perverse
23 consequences and impede statewide progress in achieving
24 cost-effective savings.
25
CAVANAGH, DI 3
Idaho Power Company
1 My testimony also anticipates and rebuts claims that
2 extending the FCA should be linked to reductions in Idaho
3 Power's return on equity. I am aware of no evidence that
4 decoupling mechanisms have reduced Idaho Power's or any
5 other utility's cost of capital, and Idaho Power's
6 sacrifice of the upside from increased electricity sales
7 constitutes an offset, in terms of shareholder welfare, for
8 increased certainty about recovery of authorized costs.
9 Customer benefits from the FCA are being abundantly
10 delivered in the form of cost-effective savings (up more
11 than ninefold from 2004 - 2010). Reducing the Company's
12 authorized return on equity ("ROE") would send the perverse
13 signal to management that no good deed goes unpunished,
14 even as it undercut the principal rationale for the FCA,
15 which was to remove a financial barrier to the Company's
16 energy efficiency progress.
17 Q.What is the basis for your conclusion that the
18 FCA is achieving the Commission's obj ecti ves?
19 A.It rests both on personal engagement and a
20 review of results achieved by the Company's programs and
21 other efforts. Since the Commission's initial order, I
22 have addressed meetings of the Company's entire energy
23 efficiency team, and had the opportunity to experience
24 first-hand its enthusiasm and commitment. I have also
25
CAVANAGH, DI 4
Idaho Power Company
1 worked with the Company's leadership directly on
2 enhancement of Idaho's energy efficiency infrastructure.
3 When the Commission adopted the FCA, it noted that
4 "Promotion of cost-effective energy efficiency and demand-
5 side management (DSM), we find, is an integral part of
6 least-cost electric service . . . Making the Company
7 indifferent to reduced energy consumption and demand is but
8 one half of the quid pro quo agreed to by the stipulating
9 parties. In return for the FCA, the Company is expected to
10 demonstrate an enhanced commitment to energy efficiency and
11 DSM. Evidence of enhanced commitment will include, but not
12 be limited to,. efforts to improve and enforce state
13 building codes and appliance efficiency standards, as well
14 as expansions and improvements to its load efficiency, load
15 management and DSM programs."(Order No. 30267, pp. 13-
16 14. J On all these counts, I believe that the Company has
17 met and surpassed the Commission's expectations.
18 Q.Summarize the "evidence of enhanced
19 commitment" that has emerged since the Commission
20 established these goals.
21 A.As a powerful indication of the Company's
22 "enhanced commitment" to energy efficiency, one need look
23 no further than the front page of the Business Section from
24 the New York Times of January 24, 2010, where Idaho Power
25 was highlighted as "in the vanguard" of utilities that help
CAVANAGH, DI 5
Idaho Power Company
1 their customers save energy, and Tom Eckman of the
2 Northwest Power and Conservation Council was quoted as
3 concluding that the Company "is clearly iconic in terms of
4 a utility that's turned the corner."(K. Galbraith, Why Is
5 A Utili ty Paying Customers?, New York Times, Sunday
6 Business, January 24, p. 1. Eckman's conclusion is
7 abundantly supported in the Company's Demand-Side
8 Management 2010 Annual Report (March 15, 2011), which
9 chronicles the evolution of a modest program that was
10 saving less than 20,000 megawatt-hours ("MWh") in 2004 to a
11 robust portfolio that was reaching toward 200,000 MWh by
12 the close of 2010 (id., p. 4), with an increase of more
13 than 30% in just the past year (id., p. 3). Today Idaho
14 Power's energy efficiency programs address all major
15 economic sectors and represent, by any measure, an
16 aggressive and innovative effort to capture all available
17 cost-effective energy efficiency. For load management, the
18 Company's progress is equally impressive; a 43 megawatts
19 ("MW") demand reduction capability for 2005 had grown to
20 336 MW by 2010. Id., p. 4.
21 Q.What energy efficiency progress has the
22 Company contributed to outside the specific context of its
23 programs?
24 A.Idaho Power was an early and effective
25 supporter of the U. S. Department of Energy's new efficiency
CAVANAGH, DI 6
Idaho Power Company
1 standards for gas and electric water heaters, and Idaho
2 Power provided crucial leadership in the process that
3 convinced the Regional Council to raise its five-year
4 regional efficiency targets by more than 70 percent in
5 2010. I was a member of the advisory group that provided
6 technical assistance on the targets, which were raised from
7 700 average megawatts to a minimum goal of 1,200 average
8 megawatts over the next five years.
9 In October of last year, in a huge coup for the
10 state of Idaho, Idaho Power helped launch the Northwest's
11 first Center on Energy Efficiency Research (see Exhibit 41,
12 a copy of the proclamation by Governor Otter, memorializing
13 an event in which I was proud to participate in also).
14 Boise's newly expanded Integrated Design Lab is an
15 important part of that ini tiati ve and another illustration
16 of the robustness of an energy efficiency infrastructure
17 that Idaho Power helped create. And in 2011 the Company
18 was a leader in the effort to redesign and upgrade the
19 Regional Technical Forum of the Northwest Power and
20 Conservation Council, which makes a crucial contribution to
21 low-cost validation and evaluation of energy efficiency
22 savings from both programs and standards in Idaho.
23 Those examples underscore a point that figures
24 clearly in the Commission's initial goals for the FCA:
25 Idaho Power' s capacity to influence efficiency progress
CAVANAGH, DI 7
Idaho Power Company
1 extends well beyond the incentive programs that the Company
2 administers (meritorious though they clearly are) .
3 Lifting the historic addiction to throughput has freed the
4 Company to be a much stronger efficiency educator and
5 advocate as well as investor.
6 Q.What do you say to those who are concerned
7 that the FCA significantly reduces incentives to save
8 energy, by raising rates in the aftermath of consumption
9 reductions?
10 A.Idaho's experience proves the opposite:the
11 FCA resulted in trivial rate adjustments that went both
12 ways, and did not materially affect rewards for saving
13 electrici ty. As the Oregon Public Utility Commission found
14 when it followed Idaho's good example by adopting a
15 decoupling mechanism for Portland General Electric in
16 January 2009, responding to analogous claims that
17 decoupling would rob customers of the rewards of
18 conservation: "We believe the opposite is true: an
19 individual customer's action to reduce usage will have no
20 perceptible effect on the decoupling adjustment, and the
21 prospect of a higher rate because of actions by others may
22 actually provide more incentive for an individual customer
23 to become more energy efficient." Oregon PUC Order No. 09-
24 020, p. 28 (Jan. 2009).
25
CAVANAGH, DI 8
Idaho Power Company
1 Q.Describe experience with revenue decoupling
2 elsewhere in the country.
3 A.In the West, Hawaii, California, and Oregon,
4 like Idaho, have adopted decoupling for at least one
5 electric utility. The Washington and Arizona Commissions
6 have adopted policy statements broadly supportive of the
7 policy and invited filings by their electric utilities (and
8 in Arizona's case, by natural gas utilities as well).
9 California, Utah, Oregon, and Washington have adopted gas
10 decoupling mechanisms. New Mexico's Public Service
11 Commission has left open "the determination of whether a
12 decoupling mechanism should be approved or required for any
13 utility," and the New Mexico Legislature has underscored
14 the urgent need to "identify regulatory disincentives or
15 barriers for public utility expenditures on energy
16 efficiency and load management measures and ensure that
17 they are removed in a manner that balances the public
18 interest, consumers' interests and investors' interests."
19 Nationally, the count of states with decoupling for at
20 least one utility stands at 14 for electricity and 22 for
21 natural gas.
22 Q.What about rate impacts of revenue decoupling?
23 A.Neither revenue decoupling in general nor the
24 FCA in particular add any additional costs to utility
25 bills; they simply ensure that previously approved fixed
CAVANAGH, DI 9
Idaho Power Company
1 costs are neither over- nor under-recovered. In terms of
2 rate adj ustments to achieve this obj ecti ve, Idaho's
3 experience is typical: effects are minimal in practice,
4 wi th adj ustments that go in both directions.(See Exhibit
5 42. ) A comprehensive industry-wide assessment found that,
6 of 88 gas and electric rate adjustments from 2000-2009
7 under decoupling mechanisms, less than one-seventh involved
8 increases exceeding 3 percent.(Refunds accounted for a
9 much larger fraction.) Typical adj ustments in utility
10 bills "amount (ed) to less than $1.50 per month in higher or
11 lower charges for residential gas customers and less than
12 $2.00 per month .for residential electric customers."
13 That represents about a dime a day for the average
14 household, which hardly seems like dangerous rate
15 volatility, particularly since it sometimes comes in the
16 form of a rebate - and serves only to ensure that the
17 utility recovers no more and no less than the fixed costs
18 of service that regulators have reviewed and approved.
19 Q.Explain your conclusion that extending the FCA
20 should not result in an adjustment in Idaho Power's
21 authorized return on equity.
22 A.The data that I just presented are part of the
23 basis for my recommendation here: rate impacts this modest
24 simply do not imply appreciable consequences for Company-
25 wide cost of capital. For example, I have seen no
CAVANAGH, DI 10
Idaho Power Company
1 empirical evidence that revenue decoupling has changed any
2 utility's cost of capital by "reducing risks. n Reducing
3 ROE in the aftermath of decoupling would overlook both what
4 shareholders give up when utili ties lose the capacity to
5 profit from electricity sales increases, and what customers
6 stand to gain from accelerated progress in energy
7 efficiency (and protection from higher utility bills linked
8 to extreme weather). Any gains to utilities in the form of
9 insurance against lower sales are offset by reduced
10 opportunities for financial gains when sales increase, and
11 it seems unreasonable to prejudge how that tradeoff might
12 affect the Company's overall risk profile and cost of
13 capital.
14 Appropriately, then, commissions typically have not
15 linked revenue decoupling to reductions in ROE. Aside from
16 Maryland and the District of Columbia, I am aware of only
17 one downward adj ustment specifically associated with
18 revenue decoupling for an electric utility, and that was
19 the 10 basis point (0.1 percent) adj ustment for Portland
20 General Electric that the Oregon Public Utility Commission
21 adopted in January 2009 as a severe recession deepened.
22 As to the District of Columbia, although a recent revenue
23 decoupling order reduced PEPCo's ROE by 50 basis points, it
24 also noted pointedly that the Company's decoupling
25
CAVANAGH, DIll
Idaho Power Company
1 application did not include any enhanced energy efficiency
2 efforts.
3 On the other hand, the Maryland Public Service
4 Commission recently ordered a 50 basis point ROE reduction
5 for BG&E, PEPCo and Delmarva, subsidiaries of PEPCO
6 Holdings, based on contentions that revenue decoupling
7 reduced financial risks for the utility. In these
8 decisions, the Maryland Commission is an outlier among its
9 peers.
10 Q.Why shouldn't the Commission amend the FCA so
11 that adjustments track only electricity savings
12 attributable to the Company's energy efficiency programs?
13 A.This would undercut the whole purpose of the
14 mechanism, while introducing a whole new set of perverse
15 incentives. It would reintroduce automatic penalties, in
16 the form of reduced fixed-cost recovery, for all cost-
1 7 effective electricity savings not directly associated with
18 Idaho Power's programs, even when the Company by action or
19 inaction could make a material difference in prospects for
20 those savings (see my earlier discussion of all Idaho
21 Power's contributions to energy efficiency outside the
22 context of specific programs). It would create a powerful
23 and perverse new incentive for the Company to promote
24 programs that looked good on paper but delivered little or
25 no savings in practice. And it would ensure adversarial
CAVANAGH, DI 12
Idaho Power Company
1 discord over every savings calculation, since significant
2 financial stakes would then hinge on the results.
3 Q.But doesn't your recommendation risk paying
4 Idaho Power for savings that it didn't help achieve?
5 A.No, because the FCA doesn't "pay" Idaho Power
6 any incremental amount for anything; it is simply a
7 mechanism that allows the Company to receive no more and no
8 less than the fixed-cost revenue requirement per customer
9 that the Commission has reviewed and approved.
10 Q.Does this conclude your testimony?
11 A.The most important thing for me to say in
12 conclusion is that I had high expectations when the FCA
13 pilot program began, and that Idaho Power has met them
14 fully. The Company has earned a long-term FCA as part of
15 its appropriately aggressive energy efficiency ini tiati ve,
16 and I strongly encourage the Commission to approve it.
17
18
19
20
21
22
23
24
25
CAVANAGH, DI 13
Idaho Power Company
BEFORE THE
RECEIVED
201l JUN -I PH 2=41
t ()i~~H()
IDAHO PUBLIC UTiliTIES COMMISslåN
CASE NO. IPC-E-11-08
IDAHO POWER COMPANY
CAVANAGH, 01
TESTIMONY
EXHIBIT NO. 40
BIOGRAHICAL SUMMARY FOR RAPH CAVANAGH
RALPH CAVANAGH is a senior attorney and co-director of NRDC' s energy program,
which he joined in 1979. Ralph has been a Visiting Professor of Law at Stanford and UC
Berkeley (Boalt Hall), and a Lectuer on Law at the Harard Law School; he has also
been a faculty member for the University ofIdaho's Public Utility Executives Course for
more than fifteen years. From 1993-2003 he served on the U.S. Secretar of Energy's
Advisory Board. His current board memberships include the Biparisan Policy Center,
the Bonnevile Environmental Foundation, the Californa Clean Energy Fund, the Center
for Energy Efficiency and Renewable Technologies, the Nortwest Energy Coalition, and
the Renewable Nortwest Project. Ralph has received the Heinz Award for Public
Policy, the National Association of Regulatory Utility Commissioners' Mary Kilmarx
Award, the Yale Law School's Preiskel-Silverman Fellowship, the Lifetime Achievement
in Energy Effciency Award from California's Flex Your Power Campaign, the
Nortwest Energy Coalition's Headwaters Award, and the Bonneville Power
Administration's Award for Exceptional Public Service. He is a graduate of Yale
College and the Yale Law SchooL. He is mared to Deborah Rhode, who is the
MacFarland Professor of Law at Staford Law SchooL.
CONTACT INFORMTION:
Natual Resources Defense Council, 111 Sutter Street, 20th Floor
San Francisco, CA tel. [phone] (rcavanagh~nrdc.org)
Exhibit No. 40
Case No. IPC-E-11-08
R. Cavanagh, IPC
Page 1 of 1
RECEIVED
BEFORE THE ioii JUN -I PH 2=41
IDP,HO Fi!)
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IDAHO PUBLIC UTILITIES COMMissiON.' ........ ~,
CASE NO. IPC-E-11-08
IDAHO POWER COMPANY
CAVANAGH, 01
TESTIMONY
EXHIBIT NO. 41
'£ecti Ðepit
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WHERES, the Sttfe oJ Ida lw demcnsttfed i~ commitm to provide a compeheniv
and clear 4pprO( to Idah (s energy .fure; an
WHERS. th Center for AdvfJd Energy Stues is a publicfprWte ptJtnel'ship comprised
of Boise Stat Universty, University of Idah an Idho Ste Univrsit, privnte intr. an the Idaho
National labørtfør; an
WHEREAS, the Center for Advanced Ene Sties tntegrates resources, cailties an
~pel'tise to crate ne l'esearh cabilities, expan reset:che-to-resecher collaboron. an
enhae en-reltfed eduatOll opprtites; 4fd
WHEREAS, the Center Jor Advced Energy 8tuies , newly farmd Enegy E.fiency Resarh
Inti will be a core elemet to accelerate eollribortfan, levee resources anmaximiz cifpabi1ities
acrøss the member instituions; and
WHRE the Energy Effcie Reseach Instite wil fo on sciene, implementtfon and
policy nt the ÙJtersection of energy geneation an uiliøaon, $taiabi1it, environmntal science.
design, measement and materials; and
WHER, the Energy Effcien Researh Intitue wil be a leadg a reognized inter
disciplin entity Iht wil enhace the Center/or Adanced Er Stuies' delivery oj m1iOltieN cost
efecive an relellant energy reseach leading to sustaible technologybased economic tkiielopment
an indutral cnmpetitteness;
NOW, THERFORE the pares below flo hereby proclaim supportfor the Center for
Advaced Energy Stuies' Energy Effciency ResetJch Institue in Boise, Ida.
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Exhibit No. 41
Case No. IPC-E-11-08
R. Cavanagh, IPC
Page 1 of 1
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-E-11-08
IDAHO POWER COMPANY
CAVANAGH, 01
TESTIMONY
EXHIBIT NO. 42