20130122Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
P0 BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
7813 JAN 22 P11 3: 14
)PFCi
Street Address for Express Mail:
472 W WASHINGTON
BOISE ID 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
IDAHO POWER COMPANY FOR AUTHORITY) CASE NO. IPC-E-12-24
TO IMPLEMENT RATES TO INCLUDE )
CAPITALIZED CUSTOM EFFICIENCY ) COMMENTS OF THE
INCENTIVE PAYMENTS. ) COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through
its Attorney of record, Weldon B. Stutzman, Deputy Attorney General, and in response to the
Notice of Application and Notice of Modified Procedure issued in Order No. 32682 on
November 20, 2012, submits the following comments.
BACKGROUND
On October 31, 2012, Idaho Power Company filed an Application requesting
Commission authorization to place in rates a portion of a regulatory asset account created for
capitalized custom efficiency incentive payments. Idaho Power's custom efficiency program
provides financial incentives to commercial and industrial customers to implement energy
efficiency measures, including motor rewinds, variable frequency drives, energy efficient
refrigeration, and others. In an earlier case, Idaho Power proposed to capitalize direct incentive
payments associated with its custom efficiency program. Case No. IPC-E- 10-27. The
Commission did not approve the Company's request to allow capitalization of incentive
STAFF COMMENTS 1 JANUARY 22, 2013
payments, but did authorize the Company to account for custom efficiency incentive payments as
a regulatory asset beginning January 1, 2011. Order No. 32245, p. 6.
In Order No. 32667 recently issued in Case No. IPC-E-12-15, the Commission stated that
the interest rate to be applied to the incentive payment balance, which ultimately would be
included in rates, should be thoroughly reviewed and determined in a rate case. Order No.
32667, p. 11. The Company in that case argued that its current rate of return should apply. Id.
The Commission deferred a decision on the interest rate to be applied to the regulatory asset
account until the Company seeks to recover the deferral balance in a general rate proceeding. Id.
Idaho Power now proposes that the Commission allow recovery of custom efficiency incentive
payments outside of a general rate case proceeding.
The Company proposes in this case to recover in its base rates the custom efficiency
regulatory asset associated with incentive payments made in 2011 plus accumulated carrying
charges. Incentive payments made in 2011 totaled $7,018,385, and the Company calculated a
carrying charge using its authorized rate of return. Accordingly, Idaho Power proposes to
recover a balance as of May 31, 2013 of $8,126,504. The Company proposes to apply its current
authorized rate of return to the unamortized balance of the regulatory asset and to recover the
investment through a four-year amortization schedule. This results in an annual revenue
requirement of $2,949,340. The Company proposes to collect this additional revenue
requirement through a uniform cents-per-kilowatt-hour charge, identified in a new tariff
Schedule No. 56. Idaho Power also proposes to update Schedule 56 on an annual basis with an
effective date of June 1 each year.
STAFF REVIEW
Staff has reviewed the Company's Application and accompanying testimony and exhibits
of Matthew Larkin. Staff believes that Idaho Power has not provided any justification to change
the Commission's three prior orders stating that recovery of the regulatory asset associated with
the Company's Custom Efficiency DSM program and the carrying charge accrued to that
regulatory asset should be determined in a general rate proceeding. Staff recommends that the
Commission reject the Company's Application. Staff's comments in this case provide the
Commission with additional background information, discuss concerns with the Company's
proposal, and identify issues that need to be further vetted during a general rate proceeding.
STAFF COMMENTS 2 JANUARY 22, 2013
This case is the culmination of several cases in which the Company has attempted to
create a more profitable business model for its Demand-Side Management programs. These
Comments address the relevant issues in each of those cases.
IPC-E-10-27 -- Investigation of Cost Recovery Mechanisms for Energy Efficiency
Programs
On October 22, 2010, Idaho Power filed an Application with the Commission requesting
the Commission to accept the Company's proposed business model for acquiring demand-side
resources (DSR). The parties signed a stipulated settlement that allowed Idaho Power to recover
incentive payments for the Company's three demand response programs through the annual
Power Cost Adjustment (PCA) mechanism and capitalize the incentive payments for the
Company's Custom Efficiency program. The Custom Efficiency program regulatory asset
would have been amortized over seven years and includes a carrying charge equal to the
Company's approved rate of return. The Stipulation represented a compromise by all parties,
however, the Industrial Customers of Idaho Power (ICIP) refused to sign the Stipulation based,
in part, on disagreements over the amortization period and cost allocation issues. The
Commission rejected the Stipulation.
Staff's support for the Stipulation was predicated on the large and growing balance in the
Company's DSM rider account. At the time, the rider account had an approximate negative
balance of $17 million. Without any action, the deficit balance was projected to grow to a
negative $30 million in 2012. Staff was cognizant of the Company's need for timely recovery of
DSM expenditures and was willing to negotiate a compromise position that would reduce the
rider balance.
On April 1, 2011, the Commission issued Order No. 32217 rejecting the Stipulation. The
Commission stated that "the specific proposals, however, raise issues and concerns that are more
properly vetted in a rate case. Expenditures that are expected to be included in rate base, or that
are included in the PCA after determining a normalized cost for customer base rates, present
issues of concern for all customers." The Commission further expressed its anticipation of
reviewing proposals to adjust DSM cost recovery in Idaho Power's next rate case. Order at 5.
On April 22, 2011, Idaho Power filed a Petition for Clarification because the
Commission's Order was silent with regard to the Stipulation's proposed treatment of the
Custom Efficiency program incentives as a regulatory asset with a seven-year amortization
STAFF COMMENTS 3 JANUARY 22, 2013
period. The Company stated, incorrectly, that "the sole point of disagreement between the
parties was with regard to the length of the amortization period." Petition at 5. This statement
was contested by ICIP in its Answer to the Petition. ICIP further argued that to grant the
Company's request without addressing the cost-of-service issues "would be a failure to address
all of the relevant issues regarding whether the Company's proposal can be workable." ICIP
Answer at 8.
The Commission allowed Idaho Power to establish the regulatory asset account as of
January 1, 2011. Establishing a regulatory asset account for the incentives paid through the
Custom Efficiency program did not change current customer rates. The Commission noted that
its Order did not presume recovery of any amount without appropriate program cost reviews, and
that the amortization period would be determined after those reviews.
IPC-E-12-15 - Determination of 2011 DSM Expenditures
On March 15, 2012, Idaho Power filed an Application to determine that the 2011 DSM
expenditures were prudently incurred, including $7,018,385 of Custom Efficiency incentive
payments. Staff reviewed the payments and concurred with the Company that the payments
were prudent. However, Staff and the Company disagreed on a carrying charge for the
regulatory asset. In Order No. 32667, the Commission stated it "believe[s] the interest rate to be
applied to the balance - and ultimately included in rates - concerns all customers and should be
thoroughly reviewed and determined in a rate case." Order at 11. The Commission found it
"reasonable to defer deciding the interest rate to be applied to the Custom Efficiency Program
regulatory asset account, and the resulting interest amount, until the Company seeks to recover
the deferral balance in a general rate proceeding."
Nothing has changed since Order No. 32667 was issued on October 22, 2012. The
Commission has consistently expressed its intent to determine these issues in the context of a
general rate proceeding. Nevertheless, the Company filed this Application to seek recovery
outside of a general rate case just nine days later. Staff recommends the Commission reject the
Company's Application and issue another Order reiterating that the various issues of concern to
all parties are best vetted during a general rate proceeding.
STAFF COMMENTS 4 JANUARY 22, 2013
Amortization Period
In addition to Staff's support for previous Commission directives to resolve issues
surrounding capitalization of regulatory assets in a general rate case, Staff has concerns about the
Company's specific proposals regarding the carrying charge and amortization period. The
Company prudently incurred $7,018,385 in Custom Efficiency incentive payments during 2011
and booked that amount as a regulatory asset. The Company's Application requests that it earn
the full authorized rate of return (currently 7.86%) on the regulatory asset and begin amortization
over four years beginning on June 1, 2013.
Staff believes the well-known Matching Principle applies in this case. The Matching
Principle is a fundamental concept of accounting where expenses for an accounting period
should be matched with the revenue generated in that same period. When the Matching Principle
is applied to fixed assets, depreciation expense applied to the asset is determined and matched
with the projected life of the asset. The same would hold true for the Custom Efficiency
program and its amortization expense in order to have treatment similar to supply-side resources.
The Company calculates the cost-effectiveness of its Custom Efficiency program based
on a 12-year program life, which is intended to replicate as closely as possible the useful life of
the energy efficiency measures installed through the program. The Company proposes to
amortize the annual expenses of this program over just four years. Determining the amortization
period for this regulatory asset is understandably difficult because the Company does not retain
ownership of the physical assets installed through the Custom Efficiency program. Without
ownership in the tangible assets, the Company does not retain a marketable salvage value on its
books. The Company argues that it is appropriate to amortize the non-tangible book asset over a
shorter period to account for the increased risk of capitalizing intangible assets and chooses a
four-year amortization without providing any specific evidence of its appropriateness.
Carrying Charge
The Company believes it should be allowed to reduce its risk in its Demand-Side
Resource investment by amortizing annual expenses over a period much shorter than the useful
life of the program, but continues to argue for its full rate of return to earn a profit on its
investment. This Commission has reduced the amortization period associated with capitalized
DSM assets, but also reflected a corresponding decrease to the carrying charge on those assets.
In Case No. IPC-E-97-12, Idaho Power filed an Application requesting the amortization period
STAFF COMMENTS 5 JANUARY 22, 2013
of the then-capitalized DSM assets be shortened from 24 years (useful life) to 5 years. The
Commission stated in the Final Order in that case (Order No. 27660) that it found "it would be
consistent and reasonable for us to consider the reduction in risk attributable to a shorter DSM
recovery period in selecting a carrying charge. Because we have decided to allow the Company
to shorten the DSM recovery period to 12 years, we find that a carrying charge of 7.25% based
on utility bond rates would be appropriate." Order at 10. At the time, the Company's rate of
return was 9.199% with a Return on Common Equity of 11%, compared to its current rate of
return of 7.86%.
In that same case, the Company argued against singling out the interest on deferred DSM
balances without a full assessment of all factors impacting the Company's risk. By that same
principle, other parties argued that it is inappropriate to accelerate the recovery of DSM without
netting it against all of Idaho Power's resources. All parties seemed to agree that these issues
were best resolved during the course of a general rate case, which further supports Staff's
recommendation in this case, and the Commission's consistently stated position.
Demand-Side Resources vs. Supply-Side Resources
Company Witness Larkin states that "the primary objective of the Company's request is
to establish a ratemaking methodology that places investment in this demand-side resource
(DSR) on equal footing with investment in supply-side resources from a business evaluation
perspective." Direct Testimony at 2. While Staff recognizes the inherent differences between
demand-side and supply-side resources, Company witness Larkin believes that DSR is inferior to
supply-side resources, simply because it does not allow the Company profit without
capitalization. The Company has claimed that if the Commission were to allow it to earn profits
on DSR, it would be more willing to invest in DSR. This claim cannot be substantiated.
Providing the Company profit on its DSR investments will cause ratepayers to pay more for
those resources while not changing the Company's overriding incentive to invest in supply-side
resources. Further, Commission Orders directing the Company to pursue all cost-effective DSM
were not contingent on the Company being able to earn a return on those investments.
The Company argues that it is necessary to place DSR on equal footing with supply-side
resources, but then cherry picks the accounting treatment for supply-side resources that would
provide a financial benefit for its DSM program, and ignores the accounting treatments that do
not benefit it financially. For example, supply-side resources begin depreciating immediately
STAFF COMMENTS 6 JANUARY 22, 2013
upon being placed in service, but the Company proposes to begin amortization of the DSM
regulatory asset each year on June 1St Allowing the DSM investment to accumulate and earn a
carrying charge before beginning amortization provides the Company with undue profits and
does not align with supply-side resource depreciation practices. If the regulatory asset account
were to be treated the same as supply-side resources, the Company would begin amortizing
projects immediately upon completion, rather than booking those assets and allowing them to
earn a carrying charge for up to a year before amortization and recovery in rates.
Utilities regularly invest in supply-side resources between rate cases. The undepreciated
investment is not included in rate base until the conclusion of a general rate case, at which point
the Company earns a return. Of course, the Company decides when it will file a rate case.
Mr. Larkin quotes the testimony of Company witness Gale in Case No. IPC-E-10-27
stating that one component of a successful DSR business model would be "the ability to earn on
the energy efficiency investments just like any other business activity in which the Company is
engaged." Not all of the Company's business activities include the ability to earn a return. The
Company has invested in numerous Purchase Power Agreements (supply-side resources) without
earning a return. Demand-side resources, treated as an annual expense, are already on equal
footing with many supply-side resources from a cost-recovery standpoint.
Other Concerns
One of Staff's primary concerns with the Company's proposal is that it unduly places
shareholder profits above customers' best interests. The Company paid $7 million in Custom
Efficiency incentives, yet with carrying charges proposes to collect over $8 million beginning on
June 1, 2013. Grossed up for taxes, customers would pay over $2.9 million per year, which is
approximately $12 million over the proposed four-year amortization period. Staff believes it is
unreasonable for customers to pay $12 million for an annual expense of $7 million, as they
would under the Company's proposal. The primary reason Staff accepted the Stipulation filed in
Case No. IPC-E- 10-27, was because the Company was not receiving timely recovery of its
investments in DSM. Through actions taken by this Commission, the rider account balance has
gone from a negative $17 million at the end of 2010 to a surplus balance of $2.4 million on
September 30, 2012. The Company is currently receiving more revenue through the DSM rider
than it spends. At this point, the Company would actually receive more timely recovery of its
STAFF COMMENTS 7 JANUARY 22, 2013
investment in the Custom Efficiency program if it were paid through the rider and not
capitalized.
The Company stated that cost-effective demand-side resources are the Company's
resource of choice - both from a cost standpoint and from an environmental perspective. Given
its admission that DSR is the resource of choice for all stakeholders, and the directive of this
Commission to pursue all cost-effective DSM, Staff believes it is inappropriate to provide the
Company extraordinary customer-funded incentives for operating a program that it has already
been operating successfully for years without this incentive.
Single-Issue Ratemaking
Staff believes the Company's proposal constitutes single-issue ratemaking. The
Commission has approved single-issue rate cases in the past, but only for significant investments
such as a new power plant closely following a general rate case. When the Company makes
significant investments in generation, a single-issue rate case may be appropriate to allow
recovery of the new generation plant without the scrutiny of a general rate case. The Company's
investment in the Custom Efficiency program is not significant enough to qualify for that special
treatment by the Commission.
STAFF RECOMMENDATION
Staff recommends that the Commission reject the Company's Application to establish a
ratemaking methodology with annual adjustments to recover DSM incentive payments. Staff
supports the Commission's previous directives that the issue of recovery and carrying charge is
best suited for a general rate case.
Respectfully submitted this day of January 2013.
Weldon B. Stutzman
Deputy Attorney General
Technical Staff: Donn English
i:umisc:comments/ipce 1 2.24wssddenk comments.doc
STAFF COMMENTS 8 JANUARY 22, 2013
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 22" DAY OF JANUARY 2013,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-E-12-24, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
LISA D NORDSTROM MATT LARKIN
IDAHO POWER COMPANY GREG SAID
P0 BOX 70 IDAHO POWER COMPANY
BOISE ID 83707-0070 P0 BOX 70
BOISE ID 83707-0070
PETER J RICHARDSON DR DON READING
GREGORY M ADAMS 6070 HILL ROAD
RICHARDSON & O'LEARY BOISE ID 83703
515 N 27TH STREET
BOISE ID 83702
BENJAMIN J OTTO FREDERICK J SCHMIDT
ID CONSERVATION LEAGUE JACQUELINE B ROMBARDO
710 N 6TH ST BRIAN T HANSEN
BOISE ID 83702 PAMELA S HOWLAND
HOLLAND & HART LLP
777 E WILLIAMS ST STE 200
CARSON CITY NV 89701
RICHARD E MALMGREN
SR ASSIST GEN COUNSEL
MICRON TECHNOLOGY INC
8005 FEDERAL WAY
BOISE ID 83716
A~ Jill
SECRETARY
CERTIFICATE OF SERVICE