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HomeMy WebLinkAbout20120217Lobb Direct.pdfBEFORE THE Ri:CEI\/i:O''\1_ ....1 ~~' ~..~.. 1012 FEB 17 PH 4: 06 IDAHO PUBLIC UTILITIES COMNl~,~~t:L¡Ç . . UTILITiES Coi,,¡MISSION IN THE MATTER OF THE PETITION OF ) HOKU MATERIALS, INC. FOR ) CASE NO. IPC-E-12-02 REPARATIONS AND REFORMATION OF ) ITS AMENDED SPECIAL CONTRACT WITH ) IDAHO POWER COMPANY. ) ) ) ) ) DIRECT TESTIMONY OF RANDY LOBB IN SUPPORT OF THE STIPULATION AND SETTLEMENT IDAHO PUBLIC UTILITIES COMMISSION FEBRUARY 17, 2012 1 Q.Please state your name and business address for 3 2 the record. A.My name is Randy Lobb and my business address is 4 472 West Washington Street, Boise, Idaho. 5 Q.By who are you employed? 6 A.I am employed by the Idaho Public Utilities 7 Commission as Utilities Division Administrator. 10 8 Q.What is your educational and professional 9 background? A.I received a Bachelor of Science Degree in 11 Agricultural Engineering from the University of Idaho in 12 1980 and worked for the Idaho Department of Water Resources 13 from June of 1980 to November of 1987. I received my Idaho 14 license as a registered professional Civil Engineer in 1985 15 and began work at the Idaho Public Utilities Commission in 16 December of 1987. I have conducted analysis of utility rate 17 applications, rate design, tariff analysis and customer 18 petitions. I have testified in numerous proceedings before 19 the Commission including cases dealing with rate structure, 20 cost of service, power supply, line extensions, regulatory 21 policy and facility acquisitions. My duties at the 22 Commission currently include case management and oversight 23 of all technical Staff assigned to Commission filings. 24 25 case? Q.What is the purpose of your testimony in this CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 1 STAFF 1 A.The purpose of my testimony is to describe the 2 settlement reach by Idaho Power Company (Idaho Power), Hoku 3 Materials Inc. (Hoku) and the Commission Staff (Staff) to 4 reform the existing Amended Electric Service Agreement 5 (AESA) between Idaho Power and Hoku and explain Staff's 6 support. 7 Q.Please summarize your testimony. 8 A.The existing AESA between Idaho Power and Hoku, 9 requires a minimum monthly payment that Hoku has had 10 difficulty making due to poor market conditions and cash 11 flow problems. Consequently, the Commission issued Order 12 No. 32437 in Case No. IPC-E-11-28, directing the parties to 13 undertake contract reform negotiations. The proposed 14 Settlement Stipulation is a result of those negotiations. 15 Staff believes that the terms of the Settlement 16 Stipulation reduce minimum monthly payment requirements and 17 adequately address Hoku's cash flow problems and provide 18 more time for market conditions to improve. At the same 19 time, recovering the deferred minimum payments with interest 20 at the end of the deferral period will assure that other 21 Idaho Power customers are no worse off than they otherwise 22 would have been had the agreement not been modified. Staff 23 maintains that the Settlement Stipulation is in the public 24 interest and should be approved by the Commission. 25 Q.Could you please describe the existing AESA CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 2 STAFF 2 1 between Idaho Power and Hoku? A.Yes. The AESA in effect today was originally 3 executed on June 19, 2009. The agreement specifies Hoku 4 contract demand schedules, Idaho Power service obligations, 5 first and second block energy and demand rates, minimum Hoku 6 payment obligations and various other provisions through 7 December 1, 2013. Under the AESA, commencing in April of 8 2011, Hoku is obligated to pay first block demand and energy 9 charges regardless of whether it actually demands or 10 consumes energy. This is commonly referred to as a "take- 11 or-pay" provision. The maximum contract demand under the . 13 12 agreement is 82 megawatts (MW) Q.What are the minimum monthly first block demand 15 14 and energy payments required from Hoku under the agreement? A.Annual first block demand payments in 2012 are 16 scheduled to be $1,388,850 and minimum annual first block 17 energy payments are scheduled to be $17,807,582 for a total 18 annual minimum first block payment in 2012 of $19,196,432. 19 The monthly minimum first block energy payments are 50% of 20 total contact demand (at 90% capacity factor) and range from 21 $743,176 in July to $1,692,789 in January, May, October and 22 December. 23 Q.Is Hoku required to make any other minimum 25 24 payments under the Agreement? A.Yes, Hoku is also required to pay annual second CASE NO. IPC-E-12-2 02/17/12 LOBB, R. (Stip) 3 STAFF 1 block demand charges of $1,446,000. This payment is based 2 on full second block contract demand. Therefore, total 3 annual minimum payment in 2012 under the contract is 4 $20,642,432. 5 Q.Were these Hoku revenue streams included in retail 6 rates as part of the last Idaho Power general rate case? 7 A.Yes. In fact, rates from the last Idaho Power 8 rate case were designed assuming that Hoku would actually be 9 using first block demand and energy. Actual annual Hoku 10 revenue built into rates under full contract commitment was 11 $24,204,343 and $7,380,681 for the first and second service 12 blocks respectively for total annual expected revenue of 13 $31,585,024. Exhibit 3, p. 24 of 24 (Case No. IPC-E-11-08). 14 Annual Hoku energy assumed in the rate case totaled 15 approximately 370,000 MWh and 197,000 MWh in the first and 16 second blocks , respectively. Hoku' s actual energy 17 consumption is currently well below that level. Billed 18 consumption in November 2011 was only 46 MWh. 19 Q.What is the impact on Idaho Power and its 20 customers if Hoku does not use the energy or generate the 21 revenue assumed in the rate case? 22 A.There are several impacts. If Hoku uses no energy 23 in the first block, Hoku payments are limited to contract 24 minimums. The revenue loss of approximately $3.62 million 25 ($22.81 million in energy revenue less $19.2 million minimum CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 4 STAFF 1 revenue) flows through the Power Cost Adjustment (PCA) 2 mechanism as lost surplus sales revenue. Under the current 3 AESA, first block energy revenue is treated as surplus sales 4 revenue in the determination of net power supply costs. 5 Idaho customers pick up 95% of the jurisdictionally 6 allocated (95% ID) impact. Idaho Power picks up 5% of the 7 Idaho allocated impact due to PCA sharing. 8 It is also likely that actual power supply 9 expenses will decline over the amount included in rates if 10 Hoku does not use energy assumed in the calculation of base 11 power supply expenses. 12 Another impact is the loss of retail energy sales 13 and revenue associated with second block consumption that 14 Idaho Power anticipated in the rate case. The Company would 15 lose revenue from base rates needed to recover its fixed 16 costs. However, reduced Hoku retail energy sales would show 17 up as lost energy sales in the PCA for reimbursement to the 18 Company by customers through the Load Change Adjustment Rate 19 (LCAR) . 20 Q.Are these the impacts that occur as a result of 21 the stipulated changes to the existing AESA in this case? 22 A.No. These impacts are simply the difference 23 between what Hoku must pay at a minimum under the take-or- 24 pay provision of the existing agreement if it uses no energy 25 and the assumed Hoku energy consumption and revenue that was CASE NO. IPC-E-12-2 02/17/12 LOBB, R. (Stip) 5 STAFF 1 incorporated in Idaho Power's recently completed general 2 rate case. 3 Q.Why has Hoku been unable to ramp up to the 4 contract demand anticipated in the agreement or assumed as 5 part of Idaho Power's last general rate case? 6 A.Hoku maintains that through a series of events and 7 circumstances beyond its control, it has not yet begun 8 expected production ramp-up at the polysilicon plant. 9 Q.Why is it necessary for Hoku to modify the 10 existing AESA? 11 A.Hoku maintains that it is experiencing periodic 12 cash flow shortages because the manufacturing facility is 13 not yet operational and producing revenue. As a consequence 14 of its cash flow shortage, Hoku initially could not make its 15 November 2011 power payment and Idaho Power issued a notice 16 of termination. Although Hoku has since paid both its 17 November and December 2011 invoices, Hoku maintains that 18 without modification of the AESA to reduce the minimum 19 monthly first block energy payment, it will not be able 20 comply with the terms of the existing agreement. 21 Failure of Hoku to make payments under the 22 existing AESA will result in service disconnection, default 23 by Hoku on the agreement, immediate loss of revenue 24 associated with Hoku service and litigation by Idaho Power 25 to collect amounts due under the AESA. Hoku also maintains CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 6 STAFF 1 that disconnection would result in damage to critical 2 equipment at the plant and jeopardize future operations. 3 5 4 termination of service or modification of the AESA? Q.Has the Commission issued any Orders dealing with A.Yes. As a result of Case No. IPC-E-11-28 (Hoku 6 Material, Inc.' s Complaint to stay termination of service), 7 the Commission issued Order No. 32437, directing Idaho Power 8 and Hoku, with facilitation by Staff, to negotiate contract 9 reform. The Commission stated: 10 11 12 13 14 We also direct Idaho Power and Hoku to immediately enter into negotiations regarding Hoku' s Petition to reform the amended special contract. Staff counsel shall facilitate the negotiation in an effort to determine whether the parties can settle the issue in Hoku' s reformation petition. Order No. 32437 at 11. 15 The proposed Settlement Stipulation is the result of five 17 16 negotiation sessions. Q.What does the Settlement propose in terms of 18 modifying the existing AESA? 19 A.The Settlement proposes several revisions to the 20 AESA including: 1) a reduction in minimum first block energy 21 payments for an 18-month period beginning January 1, 2012, 22 with subsequent repayment by extending the agreement by 23 twelve months through November of 2014 i 2) an initial 24 payment to Idaho Power of $3.8 million using $2 million of 25 the existing $4 million Hoku deposit with additional CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 7 STAFF 4 1 payments spread over the next 18 months i 3) usage triggers 2 requiring 30-days notice from Hoku when it plans to exceed 3 10 MW and 6-month notice when it plans to exceed 20 MW. Q.Would you please describe the proposed reduction 5 in the minimum first block energy payment? 6 A.Yes. The existing AESA requires that Hoku make 7 minimum first block energy payments based on 50% of total 8 contact demand each month (82 MW maximum). The proposed 9 minimum energy payment would be $800,000 each month less the 10 current first and second block minimum demand charges. For 11 example, Hoku would be required to make a minimum first 12 block energy payment of $1,692,789 (744*41*0.9*$61.66) in 13 January under the existing AESA and only $545,550 under the 14 revised agreement for a difference of $1,147,239. 15 This difference accrues each month in a balancing 16 account with a 6% carrying charge through June of 2013. The 17 deferred payments along wi th carrying charges would then be 18 amortized and paid by Hoku on a monthly basis over 12 months 19 starting in December of 2014. Staff Exhibit No. 101 shows 20 how the deferred minimum energy charges would accrue and be 21 repaid by Hoku through November of 2014. 22 Q.How does this modification impact Idaho retail 24 23 customers? A.Reduction in the Hoku minimum first block energy 25 payments will flow through the PCA as a loss of surplus CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 8 STAFF 1 sales revenue resulting in higher than normal net power 2 supply expenses embedded in rates as part of the last 3 general rate case. Hoku energy payments deferred in 2012 4 and 2013 will cause increased PCA rates for retail customers 6 5 in 2013, 2014 and 2015. Q.If Idaho Power and its customers are entitled to 7 Hoku revenue in 2012 under the agreement, how are they 9 8 reimbursed for allowing the Hoku payment deferral? A.The Idaho customer share of the deferred revenue 10 (that is covered by customers through the PCA) will be 11 tracked on a monthly basis with a 6% carrying charge. The 12 deferred balance will then be reimbursement to customers 13 over the twelve month period of December 2013 to November 14 2014 under the modified agreement. 15 Q.Are there any other impacts to Idaho retail 17 16 customers as a result of Agreement modification? A.There are no other negative impacts identified as 19 18 a result of modifying the Agreement. Q.What happens if Hoku does not meet the terms of 21 20 the modified agreement? A.If Hoku fails to make required minimum payments, 22 then Idaho Power would terminate service and seek legal 23 recourse to recover Hoku revenue obligations under the 24 agreement. 25 Q.How did Staff determine that modification of the CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 9 STAFF 1 AESA was justified and that the terms of the Settlement were 2 reasonable? 3 A.Staff based its analysis of Hoku AESA modification 4 solely on its impact on other Idaho Power retail customers. 5 The starting point in evaluating modification impact was the 6 minimum Hoku payment required under the Agreement. 7 Although Idaho Power base rates and power supply 8 expenses assumed a level of usage and revenue generation 9 from Hoku above minimum levels, it is only the failure of 10 Hoku to pay existing AESA minimum payments or modification 11 of AESA minimum payments that have further impact on Idaho 12 Power customers. Clearly, the failure of Hoku to make any 13 payments under the agreement has the largest potential 14 negati ve impact on Idaho Power customers. 15 Based on the proposed ramp up schedule for Hoku' s 16 Pocatello plant, the future status of the plant given the 17 currently low polysilicon prices and Hoku' s recent Idaho 18 Power payment history, it appears likely that Hoku will have 19 difficulty making the minimum payments under the existing 20 AESA. 21 Consequently, Staff's approach was to reduce the 22 minimum payments required from Hoku under the existing AESA 23 and recover the difference by extending the term of the 24 agreement. The proposed Settlement Stipulation will still 25 provide some minimum level of revenue under the AESA, it CASE NO. IPC-E-12-2 02/17/12 LOBB , R . ( S tip) 10 STAFF 1 will allow Hoku more time to resolve its cash flow and plant 2 ramp up issues and it will still make customers no worse off 3 during the term of the agreement if Hoku were to be 5 4 disconnected. Q.Does Staff support the $3.8 million payment 6 required by Idaho Power as part of the Settlement 7 Stipulation? 8 A.Yes. Staff supports the Settlement Stipulation 9 and all of its terms. The $3.8 million dollar payment 10 required by Idaho Power as a condition to modify the AESA 11 does not actually impact Idaho Power's other retail 12 customers. This condition was proposed by the Company to 13 assure reimbursement of Idaho Power net power supply 14 expenses as included in base rates. 15 The Company generally derived the payment amount 16 by subtracting estimated power supply expense savings (Hoku 17 wi thout energy consumption) during the 18 month deferral 18 period from the expected Hoku revenue included in base rates 20 19 (Hoku with assumed energy consumption) . Q.Why does Staff support use of $2 million of the $4 21 million Hoku deposit as partial payment of the $3.8 million 22 fee? 23 A.Staff supports use of the deposit in recognition 24 that the remaining $2 million deposit will still exceed two 25 times the modified monthly Hoku payment required under CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 11 STAFF 1 Company rules. Use of the deposit in conjunction with 2 amortization of the remaining fee over 18 months addresses 3 Hoku's cash flow problems that resulted in AESA modification 4 in the first place. 5 Q.Did Staff's impact analysis identify power supply 6 expense reductions that might occur with AESA modification? 7 A.No. Staff's analysis assumes there would be no 8 significant change in power supply expense as a result of 9 reducing Hoku minimum energy payments under the AESA. The 10 existing minimum payment under the current AESA and the 11 minimum payment under the Settlement assume Hoku uses little 12 or no energy. Variable power supply costs would not change 13 significantly under these circumstances. 14 Q.What happens if Hoku' s Pocatello plant comes on 15 line and uses sufficient energy to exceed the minimum 16 revenue specified in the modified AESA? 17 A.Any consumption up to 20 MW that results in Hoku 18 revenue paid to Idaho Power that exceeds the minimum monthly 19 energy payment would be booked as surplus sales revenue and 20 flow though the PCA. A reduced amount of revenue would be 21 deferred in the balancing account up to monthly minimum 22 revenue specified in the original AESA when no revenue 23 deficiency would be deferred. 24 25 MW? Q.What happens if Hoku uses energy in excess of 20 CASE NO. IPC-E-12-2 02/17/12 LOBB, R. (Stip) 12 STAFF 1 A.According to the Settlement Stipulation, Hoku 2 would be required to pay the minimum first block energy 3 payments specified in the original AESA for the remainder of 4 the deferral period. 5 However, the Settlement Stipulation also requires 6 that Hoku notify Idaho Power six months in advance before 7 usage exceeds 20 MW. Staff believes the 20 MW threshold is 8 consistent with service provided to other Schedule 19 9 customers and the 6-month notification period allows Idaho 10 Power time to plan and acquire the necessary energy and 11 capacity. 12 Q.Could you please summarize Staff's support for the 13 Settlement Stipulation? 14 A.Yes. Given Hoku's payment history and the current 15 limi ted market for polysilicon from the Pocatello plant, 16 Staff believes that Hoku will be unable to make its minimum 17 first block energy payments under the agreement without 18 modification of the existing AESA. Because these payments 19 are treated as surplus sales in the calculation of base rate 20 net power supply expense, any revenue reduction results in 21 above normal power supply expenses in the PCA and increased 22 PCA rates for Idaho Power's other customers. 23 Staff believes that some near term revenue from 24 Hoku under the modified AESA is better than no near term 25 revenue, disconnection and litigation. Reducing the minimum CASE NO. IPC-E-12-202/17/12 LOBB, R. (Stip) 13 STAFF 1 payment under the AESA will improve Hoku's cash flow, 2 improve its ability to make its payments and provide 3 addi tional time for the Pocatello plant to come on line. 4 At the same time, customers can be held harmless 5 over the term of the contract by deferring, for subsequent 6 repayment, the difference between the minimum payment Hoku 7 would have made under the AESA and what it will make under 8 the modified AESA. Consequently Staff believes that the 9 Settlement Stipulation modifying the existing AESA is in the 10 public interest and should be approved by the Commission. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.Does this conclude your testimony in this case? A.Yes it does. CASE NO. IPC-E-12-2 02/17/12 LOBB, R. (Stip) 14 STAFF zo-l- e: :æ~o LL Wii I- a.o -- ~~ I- w Z UJO~o :J~oJ: NoiNori WIo ë ¡ ~ Q¡ ~:§ 5r;; ei .~ (I ûí.2: ro ~ro t: .æ "5 Jl c: § ~£(, .;: ûí ~.!E (I;. - ~ ê"5 JlE (I::O(, io ~ io O'c: 0) II ~ ii. gi :êc:0¡:is"' ..en c: c: en ißW c: en c: "C E~ (I :: c: E .§ ~ 0.5 :ê Q¡::._ ei0.9 c: èien Q¡W c: Ec: W :: al t o§ E ff ~.9 _(I f! ei u: èi .~ Q¡ Eu. c: :: c: W .§en t.~W o:: c: 1õ "C(I "CEco::0en..~ ;;c:0:: æ ~ ~ooto ~~ ~ ~ ~~ ~ ~~ ~ ~ ~ 0) ~. ~cò..~ MmM~~~moo~~~~ ~~NS~N~~m~M00 ~ 0) 00 ~ 0 0) 00 io .. ~ ~ M ~ .. 00 0) ~ N ~ N 00 MM M M 00 0) N ~ 0) 0 00 0) N 00 io M io 00 .. 00 ~ .. ~ ~ ~ ~~ ~ ~ ~g g~ ~R ~ ~ ~ ~ ~~ g ~ i~ ~ 8o 0) 0 0 0 io 00 .. 0) 0) 0) 0 0 0) 0) 0) 0 0 0 .. 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U. M..oN æ a.iU§3 §l5rõ ~ ir::c:::....c:enOzo c: .cco (I.. u.~..oN ~~l~~~~g~~ Exhibit No. IOI case No. IPC-E-12-2 R. Lobb, Staff 02/l7L12_ CERTIFICATE OF SERVICE I HEREBY CERTIFY THAT I HAVE THIS 17TH DAY OF FEBRUARY 2012, SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB IN SUPPORT OF THE STIPULATION AND SETTLEMENT, IN CASE NO. IPC-E-12-02, BY E- MAILING AND MAILING A COpy THEREOF , POSTAGE PREPAID, TO THE FOLLOWING: LISA D NORDSTROM JASON B WILLIAMS IDAHO POWER COMPANY PO BOX 70 BOISE ID 83707-0070 E-MAIL: Inordstrom(fidahopower.com j williams(fidahopower .com DEAN J MILLER CHAS F McDEVITT McDEVITT & MILLER LLP PO BOX 2564 BOISE ID 83701 E-MAIL: joe(fmcdevitt-miler.com ~~k~ SECRETARY CERTIFICATE OF SERVICE