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HomeMy WebLinkAbout20121031Larkin DI.pdfRE1.F 217QCy3I Pi4:3I IFS G, 0-M, BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO IMPLEMENT RATES FOR ELECTRIC SERVICE TO INCLUDE CAPITALIZED CUSTOM EFFICIENCY INCENTIVE PAYMENTS. CASE NO. IPC-E-12-24 IDAHO POWER COMPANY DIRECT TESTIMONY [.1 MATTHEW T. LARKIN 1 Q. Please state your name and business address. 2 A. My name is Matthew T. Larkin. 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 a Regulatory Analyst II in the 7 Regulatory Affairs Department. 8 Q. Please describe your educational background. 9 A. I received a Bachelor of Business 10 Administration degree in Finance from the University of 11 Oregon in 2007. In 2008, I earned a Master of Business 12 Administration degree from the University of Oregon. I 13 have also attended electric utility ratemaking courses 14 including The Basics: Practical Regulatory Training for the 15 Electric Industry, a course offered through New Mexico 16 State University's Center for Public Utilities, and 17 Introduction to Rate Design and Cost of Service Concepts 18 and Techniques, presented by Electric Utilities 19 Consultants, Inc. 20 Q. Please describe your work experience. 21 A. I began employment with Idaho Power as a 22 Regulatory Analyst I in January 2009. As a Regulatory 23 Analyst I, I provided support for the Company's regulatory 24 activities including compliance reporting, financial 25 LARKIN, DI 1 Idaho Power Company 1 analysis, and the development of revenue forecasts for 2 regulatory filings. 3 In January 2012, I was promoted to Regulatory 4 Analyst II. As a Regulatory Analyst II, my 5 responsibilities have expanded to include the development 6 of complex cost-related studies and the analysis of various 7 strategic regulatory issues. 8 Q. What is the Company requesting in this filing? 9 A. The Company is requesting authorization to 10 begin amortization of a portion of the regulatory asset 11 associated with the Custom Efficiency program. 12 Q. What is the primary objective of the Company's 13 request? 14 A. The primary objective of the Company's request 15 is to establish a ratemaking methodology that places 16 investment in this demand-side resource ("DSR") on equal 17 footing with investment in supply-side resources from a 18 business evaluation perspective. As described later in my 19 testimony, investment in DSR possesses inherently different 20 qualities than investment in supply-side resources that 21 must be recognized through unique ratemaking treatment in 22 order to truly level the playing field between these 23 varying resource types. The Company believes its proposal 24 accomplishes this objective, and allows all stakeholders to 25 LARKIN, DI 2 Idaho Power Company 1 fully realize the benefits of an efficient business model 2 that does not favor one type of resource over another. 3 Q. Please provide an outline of your testimony. 4 A. My testimony begins with a history of the 5 regulatory proceedings that led to the capitalization of 6 Custom Efficiency incentive payments, then proceeds to 7 describe the program itself and its success in achieving 8 cost-effective energy savings. My testimony continues to 9 detail the components of the Company's proposed ratemaking 10 treatment that appropriately account for the inherent 11 differences in DSR and supply-side resources, addressing 12 the proposed carrying charge rate, amortization period, 13 rate of return ("ROR"), and rate implementation. My 14 testimony concludes with the Company's proposed timeline 15 for future amortization requests and outlines the long-term 16 projected customer impact. 17 I. BACKGROUND 18 Q. Please describe the Company's 2010 filing in 19 Case No. IPC-E-10-27. 20 A. The Company's filing in Case No. IPC-E-10-27 21 described the Company's preferred DSR business model. The 22 Company did not request a rate change at the time of 23 filing, but rather sought to gain approval of a regulatory 24 framework that it believed would positively impact the 25 business rationale for acquiring cost-effective DSR. Among LARKIN, DI 3 Idaho Power Company 1 these requested changes was a proposal to begin 2 capitalizing incentive payments associated with the Custom 3 Efficiency program. 4 Q. Why did the Company request authorization to 5 capitalize a portion of its energy efficiency expenditures? 6 A. As stated on page 12 of the Direct Testimony 7 of Company witness John R. Gale in Case No. IPC-E-10-27, 8 two key components of a successful DSR business model are 9 (1) "timely recovery of out-of-pocket expenditures that 10 appropriately recognizes the time value of money and does 11 not negatively impact cash flow in a significant way," and 12 (2) "the ability to earn on the energy efficiency 13 investments just like any other business activity in which 14 the Company is engaged."' The recovery mechanism in place 15 at that time was insufficient in both of these areas, 16 creating the need for the Company to seek several changes 17 to the regulatory treatment of DSR. The proposed 18 capitalization of Custom Efficiency incentive payments was 19 requested as part of the Company's comprehensive solution. 20 At the time Case No. IPC-E-10-27 was filed, all 21 prudently incurred energy efficiency expenditures were 22 recovered through the Energy Efficiency Rider ("Rider") 23 balancing account. The Company collected revenues Case No. IPC-E-10-27, Direct Testimony of John R. Gale, p. 12, 11. 8-11 and 14-16. LARKIN, DI 4 Idaho Power Company 1 associated with this account through the then-current 4.75 2 percent Rider applied against total base charges on 3 customer bills. In theory, this balancing account was 4 established to provide the Company with timely recovery of 5 expenditures associated with energy efficiency. In 2010, 6 however, the Rider balancing account had become 7 increasingly under-funded as expenditures in cost-effective 8 energy efficiency outpaced collection through the Rider, 9 indicating that the then-current 4.75 percent charge was 10 not able to provide timely recovery of all cost-effective 11 energy efficiency expenditures. The Company's proposal to 12 capitalize incentive payments associated with the Custom 13 Efficiency program served to relieve pressure on the Rider 14 balancing account by shifting recovery of these 15 expenditures from the Rider mechanism into base rates, 16 improving the ability of the mechanism to provide timely 17 recovery of prudently-incurred expenses while avoiding an 18 increase in the level of the corresponding Rider charge. 19 In addition to relieving pressure on the Rider 20 balancing account, the proposed capitalization of Custom 21 Efficiency incentive payments was intended to place 22 investment in DSR on par with investment in supply-side 23 resources by allowing the Company the opportunity to earn a 24 fair rate of return on a portion of its DSR investment. 25 While dollar-for-dollar recovery through the Rider LARKIN, DI 5 Idaho Power Company 1 mechanism provides for timely recovery of energy efficiency 2 expenditures, it does not provide for an earnings 3 opportunity for DSR, which relegates these investments to 4 an inferior status when compared to supply-side resources 5 from a business investment perspective. Through 6 capitalization, DSR and supply-side resources are 7 essentially equivalent from the Company's perspective, 8 resulting in a business model that promotes efficiency in 9 resource selection and does not unduly favor investment in 10 supply-side resources. 11 Q. Was an agreement of the parties reached in 12 Case No. IPC-E-10-27 regarding the Company's proposed 13 modifications to its DSR business model? 14 A. Yes. On March 3, 2011, the Company filed a 15 motion to approve a settlement stipulation ("Stipulation") 16 in Case No. IPC-E-10-27 addressing the issues raised in the 17 Company's initial application. Signatories to the 18 Stipulation included the Company, the Staff ("Staff") of 19 the Idaho Public Utilities Commission ("Commission"), the 20 Community Action Partnership Association of Idaho, the 21 Idaho Conservation League, the NW Energy Coalition, and the 22 Snake River Alliance, collectively referred to as the 23 "Parties". 24 25 LARKIN, DI 6 Idaho Power Company 1 Q. Please describe the terms of the Stipulation 2 related to the regulatory treatment of Custom Efficiency 3 incentive payments. 4 A. Page 3, section 3, paragraph 8, of the 5 Stipulation reads as follows: 6 The Parties agree that the direct 7 incentive payments of the Custom Efficiency 8 program should be capitalized as a 9 regulatory asset beginning January 1, 2011. 10 A carrying charge equal to the current 11 Commission authorized rate of return of 8.18 12 percent will be applied to the balance until 13 the Commission includes the regulatory asset 14 in Company rates as part of its next general 15 rate case. The regulatory asset once placed 16 in rates will earn the current Commission 17 approved authorized rate of return and will 18 be amortized over a seven-year period. 19 20 Q. Did the terms of the Stipulation reflect the 21 Company's initial proposal in Case No. TPC-E-10-27 with 22 respect to the capitalization of Custom Efficiency 23 incentive payments? 24 A. Not entirely. The Company initially proposed 25 a four-year amortization of the regulatory asset; however, 26 in the spirit of compromise, the Company agreed to a seven- 27 year amortization period. Although it agreed to the 28 extended amortization period in the context of the overall 29 settlement package, the Company noted that the risk profile LARKIN, DI 7 Idaho Power Company 1 of DSR coupled with an extended amortization period was 2 cause for concern.2 3 Q. Did the Commission approve the Stipulation 4 submitted by the Parties in Case No. IPC-E-10-27? 5 A. No. In Order No. 32217, the Commission 6 ultimately did not accept the Stipulation entered into by 7 the Parties. The Commission instead provided temporary 8 relief to the Rider balancing account through a one-time 9 Power Cost Adjustment ("PCA") mechanism surcharge while 10 leaving other issues raised by the Company to be addressed 11 at a later time. 12 Q. Was the capitalization of Custom Efficiency 13 incentive payments addressed in Order No. 32217? 14 A. No, not specifically. 15 Q. What was the Company's response to the 16 issuance of Order No. 32217? 17 A. On April 22, 2011, the Company filed a 18 Petition for Clarification ("Petition") regarding Order No. 19 32217 requesting further guidance on a number of issues, 20 including the Commission's intent with regard to the 21 treatment of Custom Efficiency incentive payments as a 22 regulatory asset. In its Petition, the Company described 23 the Parties' support for the concept of capitalizing energy 24 efficiency investments to earn the Company's authorized 2 Case No. IPC-E-10-27, Reply Testimony of John R. Gale, p. 15, 11. 5-6. LARKIN, DI 8 Idaho Power Company 1 ROR, and noted that the sole point of disagreement between 2 the Parties with regard to the capitalization of these 3 expenditures was the length of the amortization period. 4 The Company ultimately requested that the Commission "allow 5 Idaho Power to account for incentives paid through the 6 Custom Efficiency program as a regulatory asset beginning 7 January 1, 2011, with an amortization period to be 8 determined by the Commission. "3 9 Q. What was the Commission's ruling in response 10 to the Company's Petition for Clarification in Case No. 11 IPC-E-10-27? 12 A. On May 17, 2011, the Commission issued Order 13 No. 32245 in response to Idaho Power's Petition. With 14 respect to the capitalization of Custom Efficiency 15 incentive payments, the Commission ordered: 16 [T]he Commission will allow Idaho Power to 17 account for incentives paid through the 18 Custom Efficiency program as a regulatory 19 asset beginning January 1, 2011, with an 20 amortization period to be determined later 21 by the Commission.4 22 23 Q. Has the Company accounted for Custom 24 Efficiency incentive payments as a regulatory asset in 25 compliance with the Commission's directive in Order No. 26 32245? 27 Petition for Clarification, Case No. IPC-E-10-27, p. 5, 12. ' Clarification Order No. 32245, Case No. IPC-E--10-27, p. 6, 11. LARKIN, DI 9 Idaho Power Company 1 A. Yes. The Company has accounted for incentive 2 payments associated with the Custom Efficiency program as a 3 regulatory asset for all incentives paid on or after 4 January 1, 2011. 5 II. PROGRAM DESCRIPTION 6 Q. Please describe the Custom Efficiency program. 7 A. The Custom Efficiency program is designed to 8 provide financial incentives to commercial and industrial 9 customers for implementing customized energy efficiency 10 measures at their sites to reduce electrical usage. These 11 projects include motor rewinds, variable frequency drives, 12 and energy efficient refrigeration, among others. 13 Q. Has the Custom Efficiency program successfully 14 achieved cost-effective energy savings? 15 A. Yes. As detailed in the Demand-Side 16 Management ("DSM") 2011 Annual Report, filed with the 17 Commission on March 15, 2012, the Custom Efficiency program 18 is the Company's largest energy efficiency program in terms 19 of annual kilowatt-hour ("kWh") savings, with approximately 20 68 million kWh saved in 2011 alone. The program is also 21 very attractive from a cost-effectiveness perspective, with 22 a total Utility Cost Test ("UCT") ratio of 7.27 and a Total 23 Resource Cost ("TRC") ratio of 3.09 realized over the life 24 of the program .5 From a one-year perspective, in 2011 the Demand-Side Management 2011 Annual Report, p. 77. LARKIN, DI 10 Idaho Power Company 1 program had a UCT ratio of 4.42 and a TRC ratio of 2.37.6 2 The large amount of kWh savings coupled with favorable 3 cost-effectiveness measures indicates that the Custom 4 Efficiency program is one of the Company's most robust and 5 effective programs in its energy efficiency portfolio. 6 Third-party evaluations have recognized the success 7 of the Custom Efficiency program as well. In 2010, the 8 Company commissioned the services of The Cadmus Group, 9 Inc., to perform a process evaluation of the Custom 10 Efficiency program. In addition to providing invaluable 11 information for potential improvements to the program, page 12 2 of the final report noted, "In many ways, the Custom 13 Efficiency program exemplifies a quality efficiency program 14 compared to similar efforts across the country. "7 In 2011, 15 Idaho Power contracted with ADM Associates, Inc., to 16 conduct an impact evaluation and review of the Company's 17 reported energy savings from the Custom Efficiency program 18 for the 2010 calendar year. In conclusion, page 6-2 of the 19 final report noted, "Overall, the Custom Efficiency Program 20 received a high realization rate." Further, on page 1-1, 21 22 23 6 Demand-Side Manaqement 2011 Annual Report, Supplement 1: Cost- Effectiveness, p. 89. 7 Final Report: Custom Efficiency Process Evaluation Findings and Recommendations, The Cadmus Group, Inc., February 4, 2011. LARKIN, DI 11 Idaho Power Company 1 this report states a 94 percent overall energy savings 2 realization rate.8 3 Staff also acknowledged the success of the Custom 4 Efficiency program in its most current review of the 5 Company's 2011 energy efficiency expenditures in Case No. 6 IPC-E-12-15. On page 5, section 1, paragraph 3, of its 7 comments filed June 25, 2012, Staff recommended that the 8 Commission approve expenditures in the Custom Efficiency 9 program as prudently incurred. 10 III. REQUEST FOR RECOVERY 11 A. Amount To Be Amortized. 12 Q. What portion of the Custom Efficiency 13 regulatory asset is the Company requesting to include in 14 rates at this time? 15 A. The Company is proposing to include in rates 16 the portion of the Custom Efficiency regulatory asset 17 associated with incentive payments made during the 2011 18 calendar year plus associated carrying charges. As reported 19 on page 135 of the DSM 2011 Annual Report, incentive 20 payments made in 2011 totaled $7,018,385 prior to the 21 application of carrying charges, which I will discuss later 22 in my testimony. 23 24 Impact Evaluation of 2010 Custom Efficiency Program, ADM Associates, Inc., November 29, 2011. LARKIN, DI 12 Idaho Power Company 1 Q. What was the Commission's decision regarding 2 the prudence of 2011 expenditures in the Custom Efficiency 3 program? 4 A. On October 22, 2012, the Commission issued 5 Order No. 32667 in Case No. TPC-E-12-15, approving 2011 6 expenditures in the Custom Efficiency program as prudently 7 incurred. As stated on page 11 of Order No. 32667, "Based 8 on our review of the record and the agreement of Staff and 9 the Company, we find that the Company prudently incurred 10 $7,018,385 in Custom Efficiency Program incentive 11 expenses." 12 Q. Why is the Company proposing to include only 13 the portion of the regulatory asset associated with 14 incentive payments made in 2011? 15 A. In accordance with Order No. 32245 issued in 16 Case No. IPC-E--10-27, the Company has accounted for 17 incentive payments associated with the Custom Efficiency 18 program as a regulatory asset for all payments made to date 19 since January 1, 2011. Consequently, the total current 20 balance of this account reflects payments made in both 2011 21 and 2012. While incentive payments made in 2011 were 22 deemed prudent in Order No. 32667 in Case No. IPC-E-12-15, 23 prudence has not yet been determined for incentive payments 24 made in 2012. Therefore, a request for amortization of the 25 full regulatory asset balance would require the question of LARKIN, DI 13 Idaho Power Company 1 prudence of 2012 incentive payments to be answered in this 2 proceeding prior to the authorization of amortization. The 3 Company believes that introducing the question of prudence 4 to its request for amortization would add an additional 5 element of complexity and detract from the primary intent 6 of this filing. By requesting to only include in rates 7 incentive payments that have already been deemed prudent, 8 the scope of this filing is limited to the mechanics of 9 rate recovery, leaving the issue of prudence to be 10 addressed in the Company's currently-established DSM review 11 process. 12 B. Carrying Charge. 13 Q. What does the Company believe the Commission 14 should authorize as the carrying charge for the Custom 15 Efficiency regulatory asset? 16 A. Consistent with the Company's proposal in Case 17 No. IPC-E-10-27 and the subsequent Stipulation of the 18 Parties in that case, the Company has calculated associated 19 carrying charges by applying its full authorized ROR to the 20 balance of the Custom Efficiency regulatory asset. The 21 calculated carrying charges reflect the change in the 22 Company's authorized ROR resulting from the Company's 2011 23 general rate case, Case No. IPC-E-11-08. 24 25 LARKIN, DI 14 Idaho Power Company 1 Q. Why does the Company believe the full 2 authorized ROR is the appropriate carrying charge for this 3 asset prior to the commencement of amortization? 4 A. The full authorized ROR is the appropriate 5 carrying charge for this asset because it allows the 6 Company to begin applying its full authorized ROR at the 7 time when investment in DSR becomes used and useful. From 8 an earnings perspective, this places investment in DSR on 9 equal footing with investment in supply-side resources. 10 Q. Please explain further. 11 A. While supply-side resources are being 12 constructed, the Company accrues carrying charges on its 13 investment in the form of the allowance for funds used 14 during construction ("AFUDC") rate. As construction nears 15 completion, the Company has the opportunity to file a 16 request to move the investment from AFUDC into rate base 17 and begin earning its full authorized ROR with an effective 18 date corresponding to the online date of the project. This 19 results in virtually no lag between the completion date of 20 a supply-side resource and the Company's ability to begin 21 earning its full authorized ROR on its investment. In the 22 case of the newly constructed Langley Gulch power plant, 23 for example, official commercial operation began on June 24 29, 2012, with a corresponding rate change effective July 25 1, 2012, reflecting a lag of two days between the used and LARKIN, DI 15 Idaho Power Company 1 useful date of the plant and the Company's ability to begin 2 earning its full authorized ROR. 3 With capitalized investment in DSR, however, an 4 inherent lag exists between project completion and rate 5 recovery, causing investment in completed projects to 6 remain on the Company's books for a much longer period of 7 time prior to the commencement of amortization. Using 2011 8 expenditures as an example, projects associated with the 9 Custom Efficiency program became used and useful in each 10 month of 2011, while the prudence of associated incentive 11 payments was not determined until the issuance of Order No. 12 32667 on October 22, 2012. This reflects a lag of ten 13 months (for projects completed in December 2011) to twenty- 14 one months (for projects completed in January 2011) between 15 the completion date of the projects and the determination 16 of prudence. Allowing for a full seven-month procedural 17 schedule for the Company's request for amortization, the 18 earliest effective date for an associated rate change is 19 June 1, 2013. This represents a lag between project 20 completion and the commencement of rate recovery that 21 varies between 1.5 and 2.5 years. Without the ability to 22 apply its full authorized ROR as a carrying charge 23 throughout the deferral period, investment in DSR would 24 experience an increased lag between project completion and 25 the ability to begin earning its full authorized ROR, thus LARKIN, DI 16 Idaho Power Company 1 making these investments inferior to supply-side resources 2 from the perspective of earnings potential. 3 Q. Why is it appropriate to use the full 4 authorized ROR as a carrying charge for the Custom 5 Efficiency regulatory asset while the Rider balancing 6 account that funds other energy efficiency programs accrues 7 interest at the customer deposit rate, currently one 8 percent?9 9 A. In theory, the Rider mechanism is designed to 10 offer real-time recovery of expenses associated with the 11 Company's energy efficiency programs. While it could be 12 argued that the full ROR is the appropriate carrying charge 13 for the Rider balance, the Commission has determined that 14 it is more appropriate to apply the customer deposit rate 15 of one percent. As described above, the capitalization of 16 Custom Efficiency incentive payments results in a lag 17 between project completion and recovery that is years 18 greater than that realized by both Rider-funded energy 19 efficiency programs and supply-side generation resources, 20 which should appropriately be reflected in a higher 21 carrying charge. 22 C. amortization Period. 23 Q. What is the Company's proposed amortization 24 period for the Custom Efficiency regulatory asset? Case No. GNR-tJ-11-01, Order No. 32109. LARKIN, DI 17 Idaho Power Company 1 A. The Company proposes an amortization period of 2 four years. 3 Q. Why does the Company believe a four-year 4 amortization period is appropriate? 5 A. The need for a four-year amortization period 6 is primarily driven by the lack of physical Company-owned 7 property backing the non-physical assets on the Company's 8 books. Investment in DSR is inherently different from 9 investment in supply-side resources in that the ownership 10 of physical assets is retained by the customer, not the 11 Company. In the case of supply-side resources, the Company 12 invests in physical assets and retains ownership once the 13 assets are placed in service. This property is tangible, 14 possessing a marketable value throughout its life as well 15 as a potential salvage value upon retirement. Ownership 16 provides the added benefit of tangible valuable assets 17 should the Company be subject to any event that impacts its 18 ability to recover the return of and return on its 19 investment through rates. With DSR, however, the Company 20 invests in customer-specific projects rather than physical 21 assets, and retains no ownership of tangible project- 22 related assets upon completion. While these projects 23 provide cost-effective energy savings, the Company is left 24 with no salvageable assets when the projects are retired, 25 nor does it possess any marketable assets throughout the LARKIN, DI 18 Idaho Power Company 1 useful life of the projects. This lack of ownership makes 2 investment in DSR inherently riskier than investment in 3 supply-side resources because the assets on the Company's 4 books are not backed by physical property. To account for 5 this risk, the Company is requesting an amortization period 6 of four years to limit the period of time over which these 7 non-physical assets remain on the Company's books. 8 Extending the amortization period beyond four years would 9 compound the risk of eventual recovery and fail to 10 appropriately recognize the unique characteristics of these 11 assets. 12 Q. Why is it inappropriate to amortize the Custom 13 Efficiency regulatory asset over the useful life of the 14 associated Custom Efficiency projects? 15 A. The regulatory asset on the Company's books is 16 not comparable from a ratemaking perspective to the 17 customer-owned physical assets associated with the various 18 Custom Efficiency projects. Through the Custom Efficiency 19 program, the Company is not procuring physical assets; 20 rather, it is purchasing a cost-effective, albeit non- 21 physical, demand-side resource. Its investment does not 22 result in the ownership of long-lived physical assets with 23 a marketable value that depreciate over time, but rather 24 the accrual of a non-physical regulatory asset with no 25 marketable value. If the Company is negatively impacted by LARKIN, DI 19 Idaho Power Company 1 an event that prevents it from placing the investment in 2 rates, it is left with no marketable asset or method to 3 recoup any of its investment. As described above, this 4 lack of ownership of a physical asset increases the risk of 5 recovery and distinguishes the risk profile of DSR 6 investment from that of the customer-owned physical assets 7 associated with the Custom Efficiency program. For this 8 reason, any parallels drawn between the appropriate 9 amortization period of a physical, customer-owned asset and 10 a non-physical, non-marketable regulatory asset are 11 invalid. 12 Q. Why is it appropriate to apply a shorter 13 amortization period to demand-side assets when the Company 14 believes that DSR and supply-side resources should be on 15 equal footing from a business investment perspective? 16 A. The Company's desire to level the playing 17 field between DSR and supply-side resources is precisely 18 why a shorter amortization period is appropriate for 19 investment in DSR. Supply-side resources offer the ability 20 to immediately modify rates upon project completion and 21 result in Company ownership of physical assets. 22 Alternatively, investment in DSR experiences a prolonged 23 delay between project completion and amortization and does 24 not result in Company ownership of valuable physical 25 assets. These inherent differences must be addressed LARKIN, DI 20 Idaho Power Company 1 through unique ratemaking treatment in order to put these 2 varying resource types on equal footing within the context 3 of the Company's investment decisions. 4 D. Rate of Return. 5 Q. What is the Company's proposed ROR to be 6 applied at the time of amortization? 7 A. The Company believes that once placed in rates 8 the unamortized balance of the regulatory asset should earn 9 the then-current authorized ROR. 10 Q. Why is the then-current authorized ROR 11 appropriate at the time of amortization? 12 A. The full authorized ROR results in equal 13 treatment between the Company's supply-side and demand-side 14 resources at the time of amortization. Applying an ROR 15 that is anything less than the Company's then-current ROR 16 would devalue investment in DSR relative to investment in 17 supply-side resources with respect to the Company's 18 earnings potential. Additionally, the use of the then- 19 current authorized ROR allows for rates to adjust over time 20 as modified by the Commission to reflect changing 21 circumstances. 22 E. Revenue Requirement Determination. 23 Q. After applying the Company's proposed 24 ratemaking treatment, what is the annual revenue 25 requirement associated with the amortization of this asset? LARKIN, DI 21 Idaho Power Company 1 A. After applying the Company's proposed carrying 2 charges, rate of return, and amortization period, the 3 resulting annual revenue requirement associated with the 4 amortization of this asset is $2,949,340. 5 Q. Have you prepared an exhibit detailing the 6 calculation of this amount? 7 A. Yes. Exhibit No. 1 details the determination 8 of the annual revenue requirement resulting from the 9 Company's request. 10 Q. Please describe Exhibit No. 1. 11 A. Exhibit No. 1 is comprised of two tables. 12 Table 1 details the accrual of carrying charges at the 13 Company's full authorized ROR between January 2012 and May 14 2013. As listed at the top of column A, the balance as of 15 January 2012 in this account totaled $7,230,724, 16 representing the $7,018,385 of incentive payments made 17 between January and December 2011 plus $212,339 of carrying 18 charges that would have been accrued throughout 2011. As 19 listed at the bottom of column B, 2011 expenditures with 20 associated carrying charges as of May 31, 2013, will total 21 $8,126,504. 22 Table 2 calculates the annual revenue requirement 23 associated with the $8,126,504 regulatory asset balance. 24 The Company is proposing to use the same mid-year rate base 25 convention utilized in rate case filings of calculating the LARKIN, DI 22 Idaho Power Company 1 return on rate base levels as of the mid-point of the test 2 period. As detailed in columns B through D, this is 3 accomplished by first calculating six months of accumulated 4 amortization according to a 48-month amortization period, 5 calculated at $1,015,813 as listed in column C. This 6 amount is then subtracted from the principal balance of 7 $8,126,504, to determine the mid-year unamortized rate base 8 balance of $7,110,691, listed in column D. The Company's 9 full authorized ROR is then applied to this mid-year amount 10 to calculate a total annual return of $917,714 after tax- 11 gross up, listed in column G. When combined with the 12 annual amortization expense based on a four-year 13 amortization period, the total annual revenue requirement 14 amount associated with the Company's proposal is 15 $2,949,340, listed in column I. 16 F. Allocation and Rate Implementation. 17 Q. What is the Company's proposed jurisdictional 18 allocation of this asset? 19 A. Because this asset reflects amounts paid to 20 Idaho-specific projects, the Company has allocated 100 21 percent of the associated revenue requirement to the Idaho 22 jurisdiction. 23 Q. How does the Company propose to collect the 24 requested amount from customer classes? 25 LARKIN, DI 23 Idaho Power Company 1 A. The Company proposes to collect the revenue 2 requirement associated with the amortization of this asset 3 through a uniform cents-per-kWh charge. This charge will 4 be included as part of the "Annual Adjustment Mechanism" 5 line item on customer bills, which currently contains 6 charges associated with the PCA and the Fixed Cost 7 Adjustment ("FCA") mechanism. 8 Q. what is the rationale for collecting these 9 expenditures through a uniform energy rate? 10 A. As previously stated, the Custom Efficiency 11 program is intended to provide cost-effective energy 12 savings. Because these savings are realized through 13 foregone net power supply expenses associated with a 14 reduction in energy, the appropriate recovery method for 15 investment in this program is through a cents-per-kWh 16 charge. In other words, because the program is energy- 17 related, it logically follows that associated costs should 18 be recovered through an energy rate. 19 Q. Have you prepared an exhibit detailing the 20 calculation of the proposed energy rate and the subsequent 21 customer impact of the Company's proposal? 22 A. Yes. Exhibit No. 2 contains the energy rate 23 and revenue impact by class of the Company's proposal. The 24 resulting rate is 0.0220 cents-per-kWh, representing an 25 overall average increase of 0.32 percent. LARKIN, DI 24 Idaho Power Company 1 Q. What is the requested effective date for the 2 Company's proposed rate change? 3 A. The Company is requesting an effective date of 4 December 1, 2012, with the expectation that the Commission 5 will suspend that date to provide for additional time to 6 review and implement rates on June 1, 2013. A final 7 effective date of June 1, 2013, will coincide with rate 8 changes associated with the PCA and the FCA. 9 Q. Is the sales and load forecast used to set 10 rates in this initial filing the same forecast that will be 11 used in the upcoming PCA and FCA filings? 12 A. The Company cannot say at this time if the 13 sales and load forecast used in this filing will be the 14 same as that used to prepare the 2013/2014 PCA and FCA 15 filings. The sales and load forecast utilized in the 16 current proposal reflects the most current forecast 17 available, prepared in August 2012 for use in the Company's 18 2013 Integrated Resource Plan. If this forecast changes 19 prior to the Company's PCA and FCA filings in the first 20 quarter of 2013, the Company may request to update Exhibit 21 No. 2 to reflect these changes in order to maintain 22 consistency between the forecasts utilized to set rates 23 effective June 1, 2013. 24 25 LARKIN, DI 25 Idaho Power Company 1 Q. Please describe the accounting entries that 2 will be utilized to record the amortization of the Custom 3 Efficiency regulatory asset. 4 A. The Custom Efficiency regulatory asset is 5 currently recorded in Account 182.317. Commencing June of 6 2013, the Company will credit $169,302 to this account on a 7 monthly basis, and debit Account 908, Energy Efficiency 8 Expenses, by the same amount, for a period of four years. 9 IV. FUTURE RATEMKING TREATMENT 10 Q. What is the Company's proposal for requesting 11 amortization of this regulatory asset in future years? 12 A. The Company proposes to request amortization 13 of prudently incurred Custom Efficiency incentive payments 14 on an annual basis in the same manner as requested in this 15 case. These filings will be made in the first quarter of 16 each year requesting amortization of Custom Efficiency 17 incentive payments deemed prudent by the Commission in the 18 previous year through the Company's separate DSM review 19 process. Additionally, future filings will be simplified 20 to request the inclusion of prudent investment in rates 21 according to the methodology established in this 22 proceeding, eliminating the need to address rate mechanics 23 in the future. This simplified process will allow the 24 Company to file amortization requests associated with 25 Custom Efficiency incentive payments in accordance with LARKIN, DI 26 Idaho Power Company 1 other annual adjustment mechanisms in early spring, 2 consolidating rate changes and customer communication to 3 correspond with a simultaneous effective date of June 1. 4 Q. What are the advantages of filing amortization 5 requests on an annual basis? 6 A. There are several advantages of filing 7 amortization requests on an annual basis. First, the 8 Company's proposal does not compromise the currently- 9 established process for prudence review of energy 10 efficiency expenditures. Introducing the question of 11 prudence to the request for amortization would overly 12 complicate these proceedings and undermine the separate 13 prudence review process that is already in place. 14 Second, filing each year allows the Company to 15 update rate base amounts annually to reflect accumulated 16 amortization and incremental investment. Rate base will be 17 adjusted downward as unamortized balances decline year- 18 over-year, while corresponding increases to rate base will 19 occur to recognize incremental investment. Additionally, 20 the Company will be able to remove fully amortized assets 21 from rates immediately upon the completion of amortization. 22 This effectively keeps rates current and in-line with 23 fluctuating rate base balances on the Company's books. 24 Third, regular filings limit the lag between 25 expenditure and recovery as much as possible, allowing the LARKIN, DI 27 Idaho Power Company 1 request for recovery to occur on a consistent basis rather 2 than sporadically at the time of general rate case filings. 3 This will limit carrying charges and promote rate stability 4 by avoiding lumpy requests for recovery of this asset. 5 Q. Please describe the expected rate impact of 6 the Company's proposal over time. 7 A. Under the Company's proposal, the combination 8 of a four-year amortization period and annual filings will 9 result in the stabilization of rates within four years if 10 expenditures in the Custom Efficiency program remain level. 11 As described above, annual adjustments will take into 12 account reductions to rate base due to accumulated 13 amortization, as well as rate base increases associated 14 with incremental investment. After four years, the 15 amortization associated with the Company's initial filing 16 will be removed from rates and a new four-year amortization 17 period will begin for incremental investment made in 2015. 18 Beyond four years, each annual filing will reflect the 19 removal of the full amortization of one year's investment 20 while beginning amortization of a new year's investment, 21 thus stabilizing rates after the initial four-year ramp-up 22 period. 23 Q. Have you prepared an exhibit demonstrating the 24 customer impact of the Company's proposal over time? 25 LARKIN, DI 28 Idaho Power Company 1 A. Yes. Exhibit No. 3 details the long-term rate 2 impact of the Company's proposal assuming investment in the 3 Custom Efficiency program remains at 2011 levels. As shown 4 on the line labeled "Total Annual Revenue Requirement," in 5 2016 the revenue requirement included in rates associated 6 with this asset levels off at approximately $10.2 million. 7 Q. How will the Custom Efficiency regulatory 8 asset be treated in future general rate case proceedings? 9 A. To avoid double-counting, the Company will 10 exclude the Custom Efficiency regulatory asset from rate 11 base in future general rate case filings. 12 Q. How does the Company propose to collect future 13 revenue requirement associated with the amortization of 14 Custom Efficiency incentive payments? 15 A. The Company proposes to annually update the 16 cents-per-kWh charge to be applied to customer bills in the 17 same manner as described on pages 23 and 24 of my 18 testimony. 19 V. CONCLUSION 20 Q. Do you have any concluding thoughts regarding 21 the Company's proposal? 22 A. Yes. As stated by Mr. Gale in Case No. IPC-E- 23 10-27, "The cleanest, most efficient resource in the 24 25 LARKIN, DI 29 Idaho Power Company 1 Company's portfolio is the one it does not have to build."0 2 Through the Custom Efficiency program, the Company has been 3 able to attain verified cost-effective energy savings that 4 benefit the Company and customers through lower net power 5 supply expenses. Unfortunately, current ratemaking 6 standards actually discourage investment in energy 7 efficiency relative to supply-side resources by not taking 8 into account the financial circumstances unique to 9 investment in DSR. The Company believes its proposal 10 addresses this problem with a methodology that strikes a 11 balance between the interests of customers, intervenors, 12 and shareholders. This methodology allows for timely 13 recovery of expenditures and the opportunity to earn a fair 14 and reasonable return, while limiting the long-term impact 15 on customer rates and year-over-year rate fluctuations. 16 The Company believes that its proposal financially 17 encourages an efficient allocation of limited investment 18 dollars and promotes an optimal resource balance that will 19 benefit all of the Company's stakeholders. 20 Q. Does this conclude your testimony? 21 A. Yes. 22 23 24 U Case No. IPC-E-10-27, Direct Testimony of John R. Gale, p. 9, 11. 10-12. LARKIN, DI 30 Idaho Power Company BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. IPC-E-12-24 IDAHO POWER COMPANY LARKIN, DI TESTIMONY EXHIBIT NO. 1 IDAHO POWER COMPANY TABLE I ACCRUED CARRYING CHARGES: 2011 CUSTOM EFFICIENCY INCENTIVE PAYMENTS IDAHO JURISDICTION JANUARY 2012 THROUGH MAY 2013 Account 182.317 - Interest Accrual (A) (B) (C) (D) (E) (F) (A+B)12 Idaho Cumulative Beginning Ending Allowed Carrying Interest MONTH Balance Balance AVG BAL Rate of Return Charges Charges Jan, 2012* 7,230,724 7,275,420 7,253,072 7.86% 47,508 304,543 Feb 7,275,420 7,322,928 7,299,174 7.86% 47,810 352,353 Mar 7,322,928 7,370,738 7,346,833 7.86% 48,122 400,474 Apr 7,370,738 7,418,859 7,394.798 7.86% 48,436 448,910 May 7,418,859 7,467,295 7,443,077 7.86% 48,752 497,662 June 7,467,295 7,516,047 7,491,671 7.86% 49,070 546,733 July 7,516,047 7,565,118 7,540,583 7.86% 49,391 596,124 Aug 7,565,118 7,614,509 7,589,813 7.86% 49,713 645,837 Sep 7,614,509 7.664,222 7,639,365 7.86% 50,038 695,875 Oct 7,664,222 7,714,260 7,689,241 7.86% 50,365 746,239 Nov 7,714,260 7,764,624 7,739,442 7.86% 50,693 796,933 Dec 7,764,624 7,815,318 7,789,971 7.86% 51,024 847,957 Jan, 2013 7,815,318 7,866,342 7,840,830 7.86% 51,357 899,314 Feb 7,866,342 7,917,699 7,892,021 7.86% 51,693 951,007 Mar 7,917,699 7,969,392 7,943,546 7.86% 52,030 1.003,037 Apr 7,969,392 8,021,422 7,995,407 7.86% 52,370 1,055,407 May 8,021,422 8,073,792 8,047.607 7.86% 52,712 1,108,119 Balance with Interest through May 2013 88,126.504 I * Reflects prudently-incurred 2011 Custom Efficiency incentive payments of $7,018,385 plus accrued 2011 carrying charges of $212,339. Exhibit No. 1 Case No. IPC-E-12-24 M. Larkin, IPC Page 1 of 2 CO r CA 2: CD CD Cr o 0 Z -I'.. 0 0 0 IDAHO POWER COMPANY TABLE 2 CUSTOM EFFICIENCY AMORTIZATION ANNUAL REVENUE REQUIREMENT IDAHO JURISDICTION AMORTIZATION BEGINNING JUNE 1, 2013 A B C D E I Account Balance as Monthly Six Months Accumulated Mid-Year Unamortized of May 31, 2013 Amortization Amortization Balance Idaho Authorized ROR Table 1, Column B A/48 B X 6 A - C Case No. IPC-E-1 1-08 I $8,126,504 $169,302 $1,015,813 $7,110,691 7.86% I F C H I I Pre-Tax Return on Return with Tax Annual Amortization Annual Revenue Rate Base Gross-Up Expense Requirement I DXE FXI.642 A/4 G+H I $558,900 $917,714 $2,031,626 $2,949,340 BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. IPC-E-12-24 IDAHO POWER COMPANY LARKIN, DI TESTIMONY EXHIBIT NO. 2 Idaho Power Company Calculation of Revenue Impact Class Allocated Custom Efficiency Amortization State of Idaho Filed October 31, 2012 (A) (B) (C) (D) (E) (F) (G) Rate Average Revenue Percent Line Sch. Number of Normalized Requirement Cents per Current Billed Proposed Revenue No Tariff Description No. Customers Energy (kWh) Allocation kWh Rate Revenue Billed Revenue Change Uniform Tariff Rates: CO r mwmcr 1 Residential Service 1 404,785 4,823,318,996 $1,059,335 0.0220 $417,352,464 $418,411,799 0.25% 2 Master Metered Mobile Home Park 3 23 4,889,668 $1,074 0.0220 $402,015 $403,089 0.27% 3 Residential Service Energy Watch 4 0 0 $0 0.0000 $0 $0 0.00% 4 Residential Service Time-of-Day 5 1,152 13,721,181 $3,014 0.0220 $1,216,033 $1,219,047 0.25% 5 Small General Service 7 27,998 148,988,687 $32,722 0.0220 $16,233,672 $16,266,394 0.20% 6 Large General Service - Secondary 9S 32,283 3,140,350,716 $689,709 0.0220 $195,058,611 $195,748,320 0.35% 7 Large General Service - Primary 91) 189 431,899,796 $94,857 0.0220 $23,086,186 $23,181,043 0.41% 8 Large General Service - Transmission 9T 2 2,712,595 $596 0.0220 $145,088 $145,683 0.41% 9 Dusk to Dawn Lighting 15 0 6,481,376 $1,423 0.0220 $1,231,311 $1,232,735 0.12% 10 Large Power Service - Secondary 19S 1 6,678,959 $1,467 0.0220 $354,845 $356,312 0.41% 11 Large Power Service - Primary 19P 105 2,050,443,491 $450,335 0.0220 $97,221,416 $97,671,750 0.46% 12 Large Power Service - Transmission 19T 3 44,485,107 $9,770 0.0220 $1,998,342 $2,008,112 0.49% 13 Agricultural Irrigation Service 24 17,013 1,695,350,452 $372,346 0.0220 $116,053,614 $116,425,961 0.32% 14 llnmetered General Service 40 1,288 15,807,753 $3,472 0.0220 $1,189,372 $1,192,844 0.29% 15 Street Lighting 41 1,197 23,165,568 $5,088 0.0220 $3,327,180 $3,332,268 0.15% 16 Traffic Control Lighting 42 412 2,981,282 $655 0.0220 $155,372 $156,027 0.42% 17 Total Uniform Tariffs 486,451 12,411,275,627 $2,725,862 $875,025,522 $877,751,384 0.31% 18 19 Special Contracts 20 Micron 26 1 587,867,669 $129,112 0.0220 $23,828,078 $23,957,190 0.54% 21 J R Simplot 29 1 192,687,586 $42,320 0.0220 $7,389,321 $7,431,641 0.57% 22 DOE 30 1 236,974,493 $52,046 0.0220 $9,390,916 $9,442,963 0.55% 23 Hoku 32 1 0 $0 0.0000 $0 $0 0.00% 24 Total Special Contracts 4 1,017,529,748 $223,478 $40,608,315 $40,831,793 0.55% 25 26 Total Idaho Retail Sales 486,455 13,428,805,375 $2,949,340 $915,633,837 $918,583,177 0.32% Note: June 1, 2013 - May 31, 2014, Forecast BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. IPC-E-12-24 IDAHO POWER COMPANY LARKIN, DI TESTIMONY EXHIBIT NO. 3 IDAHO POWER COMPANY LONG-TERM CUSTOMER IMPACT PROPOSED CUSTOM EFFICIENCY AMORTIZATION IDAHO JURISDICTION 2013-2018 June 1. 2013 June 1. 2014 June 1. 2015 June 1. 2016 June 1. 2017 June 1. 2018 2011 Exoenditures with Carrvine Charees $8,126,504 $8,126,504 $8,126,504 $8,126,504 $0 $0 Mid-Year Amortization Adjustment $1,015,813 $1,015,813 $1,015,813 $1,015,813 $0 $0 Accumulated Amortization $0 $2,031,626 $4,063,252 $6,094,878 $0 $0 Rate Base Amount $7,110,691 $5,079,065 $3,047,439 $1,015,813 $0 $0 Annual Revenue Requirement $2,949,340 $2,687,136 $2,424,932 $2,162,728 $0 $0 2012 Expenditures with Carrvins Charees $8,126,504 $8,126,504 $8,126,504 $8,126,504 $0 Mid-Year Amortization Adjustment $1,015,813 $1,015,813 $1,015,813 $1,015,813 $0 Accumulated Amortization $0 $2,031,626 $4,063,252 $6,094,878 $0 Rate Base Amount $7,110,691 $5,079,065 $3,047,439 $1,015,813 $0 Annual Revenue Requirement $2,949,340 $2,687,136 $2,424,932 $2,162,728 $0 2013 Expenditures with Carrvine Charees $8,126,504 $8,126,504 $8,126,504 $8,126,504 Mid-Year Amortization Adjustment $1,015,813 $1,015,813 $1,015,813 $1,015,813 Accumulated Amortization $0 $2,031,626 $4,063,252 $6,094,878 Rate Base Amount $7,110,691 $5,079,065 $3,047,439 $1,015,813 Annual Revenue Requirement $2,949,340 $2,687,136 $2,424,932 $2,162,728 2014 Exaendltises with Carrvins Charges $8,126,504 $8,126,504 $8,126,504 Mid-Year Amortization Adjustment $1,015,813 $1,015,813 $1,015,813 Accumulated Amortization $0 $2,031,626 $4,063,252 Rate Base Amount $7,110,691 $5,079,065 $3,047,439 Annual Revenue Requirement $2,949,340 $2,687,136 $2,424,932 2015 ExDendltures with Carrvins Charees $8,126,504 $8,126,504 Mid-Year Amortization Adjustment $1,015,813 $1,015,813 Accumulated Amortization $0 $2,031,626 Rate Base Amount $7,110,691 $5,079,065 Annual Revenue Requirement $2,949,340 $2,687,136 cD0)m o 5,9 Z -I" 3 2016 Expenditures with Carrvina Charees Mid-Year Amortization Adjustment Accumulated Amortization Rate Base Amount Annual Revenue Requirement $8,126,504 $1,015,813 $0 $7,110,691 $2,949,340 ITOTAL ANNUAL REVENUE REQUIREMENT $2,949,340 $5,636,477 $8,061,409 $10,224,137 $10,224,137 $10,224,137 I