20120511Reply Comments.pdf

IHO PlVER®
RE CE V E fl An IDACORP Company
?iJl2MAflI PM 4: 47
LISA D. NORDSTROM
Lead Counsel UTILiTIES €:MMiS•SION.:. Inordstrom(idahopower.com
May 11, 2012
VIA HAND DELIVERY
Jean D. Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
Boise, Idaho 83702
Re: Case No. IPC-E-12-13
Revenue Sharing With Customers - Idaho Power's Reply Comments
Dear Ms. Jewell:
Enclosed for filing please find an original and seven (7) copies of Idaho Power
Company's Reply Comments in the above matter.
Very truly yours,
,
Lisa D. Nordstrom
LDN :csb
Enclosures
1221 W. Idaho St. (83702)
P.O. Box 70
Boise, ID 83707
LISA D. NORDSTROM (ISB No. 5733)
JULIA A. HILTON (ISB No. 7740)
Idaho Power Company
1221 West Idaho Street (83702)
P.O. Box 70
Boise, Idaho 83707
Telephone: [phone]
Facsimile: [phone]
InordstromidahoDower.com
jhiltonidahopower.com
RECEIVED
2012 MAY T I PM t: 47
IDAHO PUBLIC UTILITIES COMMISSION
Attorneys for Idaho Power Company
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER )
COMPANY'S APPLICATION FOR ) CASE NO. IPC-E-12-13
AUTHORITY TO SHARE REVENUES )
WITH CUSTOMERS IN CONFORMANCE ) IDAHO POWER COMPANY'S
WITH ORDER NOS 30978 AND 32424 ) REPLY COMMENTS
I )
Idaho Power Company ("Idaho Power" or "Company") respectfully submits the
following Reply Comments in response to the Notice of Modified Procedure set forth in
Order No. 32492 and Comments filed on May 4, 2012. The Company concurs with the
Idaho Public Utilities Commission ("Commission") Staff's ("Staff') findings that the Idaho
2011 actual year-end return on equity ("ROE") determination was properly calculated
and that the proposed rates should be approved as filed. The Company disagrees with
the Idaho Irrigation Pumpers Association, Inc.'s ("IIPA") assertion that allocation factors
from the jurisdictional separation study ("JSS") used to determine the revenue
deficiency in the settlement stipulation approved in Case No. IPC-E-11-08 "2011
General Rate Case") should have been used in the 2011 actual year-end ROE
determination, and that the proposed revenue sharing amounts are consequently
IDAHO POWER COMPANY'S REPLY COMMENTS -1
understated. First, applying normalized, rate case-adjusted allocation factors to actual
results of operations is inappropriate and produces counterintuitive results. Second, the
use of full-year 2010 Federal Energy Regulatory Commission ("FERC") Form I
allocation factors applied to actual third quarter 2011 financial results is the most current
and accurate way to determine the Idaho-specific actual year-end ROE. Third, it is
inappropriate to use the revised JSS methodology filed by the Company in the 2011
General Rate Case to allocate actual year-end financial results in this proceeding
because the 2011 General Rate Case factors reflect various rate case adjustments that
would result in an improper allocation of actual financial results in the context of an
actual year-end ROE determination.
I. PROCEDURAL BACKGROUND
On March 2, 2012, Idaho Power applied for authority to share revenues with
customers based on year-end 2011 actual financial results. The Company's revenue
sharing proposal has two components: (1) Power Cost Adjustment ("PCA") sharing,
which reduces revenues recovered through PCA rates by $27,098,897, equating to a
3.25 percent rate reduction for all customer classes relative to current base revenues, or
a 3.21 percent reduction relative to total billed revenues, and (2) pension balancing
account sharing, which results in a $20,324,173 net reduction to the pension balancing
account. Idaho Power proposes that the rate change take effect on June 1, 2012, to
coincide with the effective date included in the 2012 PCA Application.
On May 4, 2012, Staff and IIPA filed Comments regarding Idaho Power's
Application. In the paragraphs that follow, Idaho Power indicates its support of the
findings and conclusions included in Staffs Comments and responds to proposed
modifications to the Company's request included in the IIPA's Comments.
IDAHO POWER COMPANY'S REPLY COMMENTS -2
II. DISCUSSION
A.The Company's Proposed Jurisdictional Separation Percentages and
Corresponding Allocation Factors Are Reasonable.
The Company agrees with Staffs findings that its jurisdictional separation
percentages used to determine the 2011 Idaho jurisdictional ROE are consistent with
the 2009 and 2010 year-end ROE determinations and that the Company properly used
third quarter 2011 financial information and 2010 FERC Form I allocation factors. This
JSS methodology has been consistently applied and has facilitated the determination of
the Company's Idaho jurisdictional ROE based upon the most currently available actual
financial information and associated allocation factors.
B.IIPA's Assertion That the Company Should Have Used the Allocation
Factors in the JSS Resulting from the Settlement Stipulation in the 2011
General Rate Case to Calculate the 2011 Idaho ROE Is Inappropriate and
Produces Counter! ntuitive Results.
The stipulation agreement approved in Order No. 30978 is based upon the
premise that actual earnings can be bolstered by amortizing additional accumulated
deferred investment tax credits ("ADITC") to reach a minimum Idaho ROE of 9.5 percent
if the actual ROE falls below 9.5 percent on a year-end jurisdictional basis, while actual
earnings in excess of a 10.5 percent ROE are to be shared with customers. Because
actual earnings are the underlying driver of the mechanism allowed in the stipulation
agreement, actual results of operation should appropriately be the basis for allocation,
not hypothetical 2011 General Rate Case test year JSS allocations as suggested by
IIPA.
The application of allocation factors from a rate case JSS which uses normalized
and annualized inputs is not an appropriate method to allocate actual financial results in
the year-end Idaho ROE determination. Order Nos. 30978 and 32424 approved a
IDAHO POWER COMPANY'S REPLY COMMENTS -3
revenue sharing mechanism which relies upon the Company's actual year-end Idaho
jurisdictional ROE, not a normalized ROE. There are stark differences between a JSS
prepared for a rate case and one prepared based on actual financial results, such as
the JSS prepared for the annual FERC Form I filing. In a rate case, adjustments are
made to test year accounts and rate base to reflect known and measurable changes so
that test year totals accurately reflect anticipated amounts for the future period when
rates will be in effect. Adjustments to test year accounts generally fall into three
categories: (1) normalizing adjustments made for unusual occurrences, like one-time
events or abnormal weather conditions; (2) annualizing adjustments made for events
that occurred at some point in the test year to reflect a test year amount that would have
been realized had it been in existence during the entire year; and (3) known and
measurable adjustments made to include events that occur outside the test year but will
continue in the future to affect Company income and expenses.
Based on the adjustments made to reflect test year operating conditions, it is
inappropriate to use rate case-adjusted allocation factors to allocate actual historical
unadjusted results of operations. First, it is not appropriate to make an adjustment to
allocation factors to remove one-time events, as evidenced by the impact on actual
earnings of such an event that occurred in the 2011 fiscal year. During this time period,
actual earned ROE above 10.5 percent was the direct result of a one-time event, the
change in tax methodology related to Uniform Capitalization ("UNICAP"), which is not
recognized under IIPA's proposed allocation. Second, it is not appropriate to adjust
allocation factors to reflect annualized plant. Actual earnings result from actual plant in
service throughout the year, and to allocate actual year-end plant balances with
annualized and adjusted plant levels distorts actual year-end jurisdictional earnings.
Lastly, it is not appropriate to adjust allocation factors for known and measureable
IDAHO POWER COMPANY'S REPLY COMMENTS -4
events outside the year being evaluated. These events do not occur within the
applicable time period, and should therefore have no impact on the allocation of
financial results. Applying allocation factors prepared for a rate case test year to actual
unadjusted financial figures inappropriately impacts the jurisdictional separation of year-
end financial information and produces results that are counterintuitive.
This point is most simply illustrated by comparing the Idaho jurisdictional
earnings above a 10.5 percent ROE derived under IIPA's proposal to the Company's
actual "Total System" earnings above a 10.5 percent ROE. IIPA presents a summary of
its recommended study results in Attachment A to its Comments. Line 61 of this
attachment presents the Idaho jurisdictional earnings above a 10.5 percent ROE of
approximately $39.8 million that resulted from applying IIPA's proposed JSS
methodology. The IIPA-derived earnings amount is approximately $5.7 million greater
than the Company's actual "Total System" earnings above a 10.5 percent ROE of $34.1
million. For this relationship to be possible, the Company must have earned an actual
year-end 2011 ROE well below 10.5 percent in its Oregon jurisdiction. However, this is
not the case, as evidenced by the Company's 2011 Year-End Report to the Oregon
Public Utility Commission ("2011 Oregon Results of Operations Report"). As displayed
on page 31 of this report, provided as Attachment No. I to these Reply Comments, the
Company calculates that it achieved a 2011 ROE of over 10.5 percent in its Oregon
jurisdiction based on actual 2011 year-end financial information utilizing the
methodology prescribed by the state of Oregon.
The flaws in the methodology suggested by IIPA are exemplified in many
categories of the JSS, but nowhere are these flaws more prevalent than in the allocation
of federal tax expense. As stated above, the Company received approval in 2011 from
the Joint Committee on Taxation of its UNICAP method agreement with the Internal
IDAHO POWER COMPANY'S REPLY COMMENTS -5
Revenue Service, which allowed for recognition in the 2011 fiscal year of $56.9 million
of previously unrecognized tax benefits for tax years 2009 and prior. This one-time tax
benefit was recognized in the results of the third quarter 2011 JSS, which was the basis
for the allocation factors in the Idaho ROE calculation, but it was not included in the
2011 General Rate Case JSS as it is not indicative of "normal" ongoing operations. The
Idaho jurisdictional allocation of federal tax expense based on the third quarter 2011
JSS is 92.5 percent compared to an Idaho jurisdictional allocation factor for total federal
tax expense in the 2011 General Rate Case JSS of 105.5 percent. The UNICAP tax
benefit is a plant-based adjustment, properly allocated using the Company's plant
allocator in the third quarter 2011 JSS. Based on this allocation factor, the Idaho
jurisdiction received 92.86 percent of the system UNICAP benefit. However, IIPA
suggests that the Idaho federal tax expense ratio from the 2011 General Rate Case of
105.5 percent be used to allocate 105.5 percent of the actual 2011 federal tax benefit to
Idaho in the ROE determination. Because the primary driver of the actual tax benefit in
2011 was the plant-driven UNICAP benefit, the IIPA's proposed methodology assumes
that the Idaho jurisdictional plant in service is more than 100 percent of the system total.
Likewise, this proposed allocation suggests that Idaho customers receive an earnings
benefit greater than the UNICAP benefit received by the Company as a whole. This is
not logical or reasonable, and overstates year-end actual 2011 earnings for the Idaho
jurisdiction. Idaho jurisdictional customers are not entitled to greater benefits than
actually occurred.
There are a myriad of additional examples as to why the JSS prepared for a
general rate case differs from a JSS based on actual results, and why applying
normalized rate case-adjusted allocation factors unduly skews resulting jurisdictional
financial results. For example, in the 2011 General Rate Case, in Table 7 of the JSS,
IDAHO POWER COMPANY'S REPLY COMMENTS -6
"Taxes Other than Income Taxes," property taxes were forecast based on the test year
plant in service and hydro kilowatt-hour taxes were forecast based upon normalized
hydro conditions and normalized consumption. Once again, under the IIPA's proposal,
these actual expenses would not be allocated on the basis of the actual usage and
property levels that drove the expenses during the applicable earnings time frame, but
rather on the basis of 2011 General Rate Case-specific numbers reflecting normalized
forecast amounts. Such examples demonstrate that it is inappropriate to use
normalized, annualized, out-of-period known and measurable data to establish
allocation factors for actual data to allocate actual results of operation.
C. Applying Allocation Percentages Based Upon Actual Third Quarter 2011
Results Is the Most Current and Most Accurate Way to Calculate Actual
Year-End ROE.
IIPA contends that allocation factors based upon actual results for nine months
are incomplete and proposes that the Commission use the allocation factors from the
2011 General Rate Case. With the understanding that applying a rate case JSS
methodology to actual year-end financial results would inappropriately impact the
jurisdictional separation of year-end financial information and produce counterintuitive
results, the Company developed a JSS methodology that appropriately applies the most
currently available actual financial information and associated allocation factors to
determine the Idaho jurisdictional ROE. The Commission-accepted methodology used
by Idaho Power to calculate the actual Idaho year-end ROE balances the need for
updated financial information with the timing of the year-end closing process. Idaho
Power calculates the Idaho ROE determination on the 8th working day following the end
of the fiscal year to enable any ADITC or revenue sharing entry to be recorded in the
appropriate fiscal year's financial statements. As detailed in the Company's response to
IIPA's Data Request No. 4, "FERC Form I allocation factors are not finalized until
IDAHO POWER COMPANY'S REPLY COMMENTS -7
approximately April 1 of the following year." Due to the unavailability of data and the
impact of the revenue sharing mechanism on financial reporting, the development of
Idaho-specific allocation percentages based on actual year-end financial information
from the current year is not feasible. Therefore, the use of full-year allocation factors
from the JSS prepared for the 2010 FERC Form I filing applied to third quarter 2011
actual financial results captures the most current allocation factors reflective of actual
operating results at the time of filing. The Company's methodology not only provides
transparency but also demonstrates a balance between the need for up-to-date financial
information and the Company's year-end closing process.
D. It Is Inappropriate to Use the JSS Methodology Applied In the 2011 General
Rate Case Reflecting Normalized, Rate Case-Adjusted Results to Determine
Actual Year-End Jurisdictional Earnings.
IIPA asserts that "The JSS as used previously has not been appropriate since
Case No. IPC-E-1 1-08." llPA Comments at 2. The Company believes that IIPA is
referencing the change requested in the 2011 General Rate Case methodology to
remove the FERC jurisdiction from the JSS. As described in its Comments, IIPA
contends that the JSS used to determine the settled Idaho jurisdictional revenue
deficiency in the 2011 General Rate Case should be used in the 2011 ROE
determination. While the Company prefers the methodology proposed in the 2011
General Rate Case which removes the FERC jurisdiction from the JSS, it would only be
appropriate in the context of an actual year-end ROE determination if it were applied
using actual financial results and associated allocation factors, not the 2011 General
Rate Case test year values suggested by IIPA. As previously stated, this type of study,
as was applied in the preparation of the 2011 FERC Form I JSS, was not completed
until April 1, 2012, and therefore would not have been available to calculate the 2011
Idaho jurisdictional ROE in January prior to the closing of the Company's 2011 books.
IDAHO POWER COMPANY'S REPLY COMMENTS -8
For this reason, the Company utilized third quarter 2011 actual financial information and
the prior year's FERC Form I JSS allocation factors to determine the 2011 Idaho
jurisdictional ROE in this proceeding, consistent with the Commission-accepted
methodology applied in the 2009 and 2010 ROE determinations. However, had the
2011 FERC Form I JSS allocation factors been available at the time of filing, it would
have resulted in less revenue sharing for Idaho customers than proposed by the
Company in this case.
III. CONCLUSION
The Company, with concurrence from the Commission Staff, concludes that the
Idaho ROE determination was calculated correctly and that its customers should receive
the benefits as filed. As set forward in its previously filed Application and testimony,
Idaho Power respectfully requests the Commission issue its Order approving the
Company's determination of 2011 revenue sharing, amounts, which results in an overall
3.21 percent decrease to current billed revenues to be effective June 1, 2012, and
resulted in a separate reduction to the Company's pension balancing account effective
as of December 31, 2011.
DATED at Boise, Idaho, this 11 th day of May 2012.
ZC 2L"Z~,_
USA D. NORDSTFOM
Attorney for Idaho power Company
IDAHO POWER COMPANY'S REPLY COMMENTS -9
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 1 1h day of May 2012 I served a true and correct
copy of IDAHO POWER COMPANY'S REPLY COMMENTS upon the following named
parties by the method indicated below, and addressed to the following:
Commission Staff
Donald L. Howell, II
Karl T. Klein
Deputy Attorneys General
Idaho Public Utilities Commission
472 West Washington (83702)
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 (83702)
P.O. Box 7218
Boise, Idaho 83707
Dr. Don Reading
Ben Johnson Associates, Inc.
6070 Hill Road
Boise, Idaho 83703
Micron Technology, Inc.
Thorvald A. Nelson
Frederick J. Schmidt
Sara K. Rundell
HOLLAND & HART, LLP
6380 South Fiddlers Green Circle, Suite 500
Greenwood Village, Colorado 80111
Richard E. Malmgren
Senior Assistant General Counsel
Micron Technology, Inc.
800 South Federal Way
Boise, Idaho 83716
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IDAHO POWER COMPANY'S REPLY COMMENTS -10
Idaho Irrigation Pumpers Association, Inc.
Eric L. Olsen
RACINE, OLSON, NYE, BUDGE &
BAILEY, CHARTERED
201 East Center
P.O. Box 1391
Pocatello, Idaho 83204-1391
Anthony Yankel
29814 Lake Road
Bay Village, Ohio 44140
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Christa Bearry, Legal ssisW (j
IDAHO POWER COMPANY'S REPLY COMMENTS -11
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-E-12-13
ii gm[.1 LOT ji I
ATTACHMENT NO. 1
IDAHO POWER COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31,2011
OPUC JURISDICTION
DESCRIPTION ACTUAL TYPE I ADJUSTED TYPE II ADJUSTED
ALLOCATION ADJUSTMENTS TOTAL - TYPE I ADJUSTMENTS TOTAL- TYPE I & II
OPERATING REVENUES
Retail Sales Revenues 42,466,390 0 42,466,390 (2,920,988) 39,545,402
Sales for Resale 86,586 0 86,586 (86,586) 0
Opportunity Sales 4,582,339 0 4,582,339 (2,235,665) 2,346,674
Other Operating Revenues 4,688,314 (2,515,131) 2,173,183 18,180 2,191,362
Total Operating Revenue 51,823,629 (2,515,131) 49,308,498 (5,225,059) 44,083439
OPERATING EXPENSES
Operation & Maintenance Expense 35,658,483 (4,120,710) 31,537,773 (1,553,683) 29,984,090
Depreciation Expense 4,689,777 0 4,689,777 125,052 4,814,829
Amortization Expense 273,660 17,165 290,825 22,518 313,343
Taxes Other Than Income Taxes 1,959,217 (0) 1,959,217 (66,904) 1,892,313
Regulatory Debits/Credits 28,099 0 28,099 0 28,099
Provision for Deferred Income Taxes 305,867 1,558,703 1864,570 (13,720) 1,850,850
Investment Tax Credit Adjustment (48,620) 0 (48,620) (411) (49031)
Federal Income Tax (3,448452) 3,514,916 - 66,463 (1,124,696) (1,058,233)
State Income Taxes (74,468) 229,312 154,844 (225,422) (70,578)
Total Operating Expenses 39343,562 1,199,385 40,542,947 (2,837,266) 37,705,681
OPERATING NET INCOME 12,480,067 (3,714,516) 8,765,551 (2,387,793) 6,377,758
Add: IERCO Operating Income 275,650 0 275,650 3,007 278,657
CONSOLIDATED OPERATING INCOME 12,755717 (3,714,516) 9,041,201 (2384,786) 6,656,415
RATE OF RETURN EARNED 11.892% 8.488% 6.2040/6
IMPLIED RETURN ON EQUITY 17.833% 11.157% 6.677%
COST OF CAPITAL - DEC 31, 2011 ACTUAL EMBEDDED WEIGHTED
STRUCTURE COST COST
Long Term Debt 49.017% 5.7120/6 2,800%
Preferred Stock 0.0000/0 0.000% 0.000%
Common Equity 50.9830/6 10.175% 5.187%
Total 100.000% 7.988%
() -