20121221Supplemental Reply.pdf

Benjamin J. Otto (ISB No. 8292)
710 N 6th Street
Boise, ID 83701
Ph: [phone] x 12
Fax: [phone]
[e-mail]
Attorney for the Idaho Conservation League
RECEIVE !
2D1? DEC 2I PH 3:51
A IJ-. tU-iç Tfl ILl
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF IDAHO POWER CASE NO. IPC-E-11-19 COMPANY FOR AUTHORITY TO )
CONVERT SCHEDULE 54-FIXED SUPPLEMENTAL REPLY OF THE COST ADJUSTMENT-FROM A PILOT IDAHO CONSERVATION LEAGUE SCHEDULE TO AN ONGOING, )
PERMANENT SCHEDULE
This critical issue in this case is not whether the Staff proposal or the Company proposal
best isolates "cost recovery solely associated with the Company's energy efficiency programs."
Rather, the critical issue is whether this isolation is the best means to serve the pubic interest.
The Idaho Conservation League maintains that the current Fixed Cost Adjustment (FCA)
achieves a broad set of policy goals that ultimately benefit ratepayers. These goals include: (1)
removing an inherent disincentive for Idaho Power to promote energy efficiency; (2) reducing
Idaho Power's cost of capital by mitigating the risk imposed by revenue volatility; and (3) using
economic incentives to focus Idaho Power on controlling costs. Ratepayers benefit from all
three of these goals by aligning the utility's financial incentives with customers' interest in
controlling energy bills and keeping rates low. This alignment serves the public interest.
1 Staff Comments at 1 (filed December 7, 2012)(hereinafter Staff Supplemental Comments).
ICL Supplemental Reply
IPC-E-1 1-19 1 December 21, 2012
I. The Record Shows the FCA Mitigates Risk; Future General Rate Cases Can Quantify
This.
The Staffs most recent comments in this case continue to misinterpret the risk mitigation
function of the FCA. According to Staff, "the existing FCA simply assigns the risk of under
recovery of fixed costs to customers irrespective of the underlying cause."2 But the FCA does
not just assign risk; it mitigates risk by stabilizing cost recovery. In our opening comments ICL
referred to the National Association of Regulatory Utility Commissioners who state: "As noted
before, decoupling can reduce risk for the utility by ensuring that its revenues and return on
investment remain stable. A lower risk-profile should make the cost of capital lower for the
utility."3 We also pointed to the Regulatory Assistance Project's recent treatise on decoupling,
which states: "Economic theory supports the notion that risk mitigation is valuable to investors
and that that value will (eventually) be revealed in some way in the market - through a lower
cost of equity, a lower cost of debt, or a lower required equity capitalization ratio. Any of these
will eventually produce lower rates for consumers, in return for the risk mitigation measure."'
There is no evidence or argument in the record refuting the notion the FCA mitigates risk. And
mitigating risk serves ratepayers by reducing utility costs.
These benefits exist in practice too. The Commission recognized the risk mitigation
feature of the FCA when originally approving the pilot, stating: "The annual FCA true-up
mechanism assures a more stable utility recovery of fixed costs that are now recovered in the
energy rate component[.]"' Idaho Power agrees the FCA stabilizes the fixed cost revenue portion
of the revenue requirement.' As stated in ICL's Supplemental Comments, Standard and Poor's
2 Staff Supplemental Comments at 3
NARUC Decoupling for Electric and Gas Utilities: Frequently Asked Questions at 4, 9 (2007)
(Available at: http://bit.ly/NARUCDecoup1eFAQ)..
Regulatory Assistance Project, Revenue Regulation and Decoupling: A Guide to Theory and
Application at 39(June 2011) (Available at: http://bit.ly/RAPdecôuple); NARUC at 9.
Order No. 30267 at 13.
6 ldaho Power Reply at 17.
ICL Supplemental Reply
IPC-E-1 1-19 2 December 21, 2012
and Moody's both specifically call out the FCA as an important means to mitigate fixed cost
recovery risk, which supports a stronger credit profile for Idaho Power! The leading regulatory
advisors in America, NARUC and RAP, along with Idaho Power, the investment community, and
the Commission all recognize the risk mitigation value of the FCA. Again, the record is devoid of
any evidence or argument refuting this benefit.
There remains a valid question of how to quantify this risk mitigation value and the most
appropriate way to translate this value to customers. As stated in ICL's Supplemental
Comments, the FCA is one part of a broader package of risk mitigation tools.8 Due to this
complexity and recognizing the capital cost reduction benefits may take time to materialize, ICL
agrees with Idaho Power that a general rate case is the appropriate forum to quantify this
benefit.9 But one thing is sure, if the FCA is changed to exclude factors that cause revenue
volatility, the benefit of reducing capital costs may never materialize and ratepayers will never
benefit. The better course of action is to maintain the current FCA and address the risk
mitigation value in the next general rate case. This can be accomplished by requiring Idaho
Power, in the next general rate case, to justify whether factoring the FCA into the cost capital is
warranted or not based on: (1) the investment community's statements on the value of the FCA;
(2) any change in the need for working capital due to decreased revenue volatility; (3) a
comparison of the cost of capital for utilities with decoupling mechanisms in place. This course
of action, maintaining the current FCA and directly addressing the risk mitigation value in the
next rate case, is the best method to align Idaho Power's financial incentives with ratepayers'
interests in controlling energy bills and keeping rates low.
7 See ICL Supplemental Comments at 4-5, Exhibits 3 and 4.
8 ICL Supplemental Comments at 5.
9 Idaho Power Reply at 19.
ICL Supplemental Reply
IPC-E-1 1-19 3 December 21, 2012
II. The Record Does Not Support the Staff Proposal.
Staff continues to propose a 50/50 sharing mechanism, despite this number being
arbitrary. Staff does quantify Idaho Power's programmatic savings as constituting 24-43% of
reduced consumption. 10 Then, Staff attempts to capture non-programmatic savings from energy
education, market transformation, building codes and appliance standards, and rate design. But
the Staff does not attempt to justify why all of these activities would account for, at times, only
7% of reduced consumption. ICL agrees these efforts may be difficult to quantify, but submits
that some evidence is required to establish a reasonable amount. Unfortunately, instead of
responding to the Commission's statement that the record is not sufficient to support the
proposal, Staff does not offer any additional evidence. Instead, they merely clarify the source of
the previous data and add nothing further than "Staff believes the five years of experience with
the FCA has provided ample evidence to support its position."" These five years of experience
existed when Staff first proposed the 50/50 sharing scheme. This experience remains insufficient
to support Staff's arbitrary quantification of non-programmatic energy efficiency savings.
Staff's proposal also injects unnecessary complexity and contention into the FCA. Staff
states they "did not presume that the sharing ratio would remain fixed," but they provide no
guidelines or criteria for making this adjustment. 12 Staff complains that Idaho Power's proposal
"introduces another contested element that further complicates the methodology," but their
arbitrary method of rounding up from programmatic savings suffers from the same flaw.13
Instead of basing this decision on a slim record and adding complexity to the FCA, ICL urges the
Commission to maintain the current structure. The current FCA best serves ratepayers by virtue
'° Staff Comments at 8, Staff Supplemental Comments at 6.
' Staff Supplemental Comments at 6.
12 Staff Supplemental Comments at 6.
13 Staff Supplemental Comments at 5.
ICL Supplemental Reply
IPC-E-1 1-19 4 December 21, 2012
of the relative simplicity and by delivering additional benefits to customers - risk mitigation and
cost control.
III. Maintaining the Current FCA Benefits Ratepayers.
Modifying the Fixed Cost Adjustment to "isolate cost recovery solely associated with the
Company's energy efficiency programs" is not in the ratepayers' interest. 14 Instead, ratepayers
benefit by aligning Idaho Power's financial interests and incentives with customers interest in
controlling energy bills and keeping rates low. The current FCA is an important component of
aligning these interests. Ratepayers are better off when a utility aggressively pursues energy
efficiency because this helps individuals control their bills and defers or avoids the need for
additional energy infrastructure. Ratepayers benefit when a utility's cost of capital is low
because this reduces the overall revenue requirement. 15 Ratepayers benefit when a utility
controls cost, which becomes the best way for the utility to meet revenue targets when energy
sales are decoupled.16 Changing the FCA to isolate the effects of Company sponsored efficiency
programs will deprive ratepayers of these benefits.
For the past five years, the mechanism has worked as intended. Idaho Power has increased
the pursuit of energy efficiency and the investment community has recognized the FCA mitigates
the cost recovery risk associated with these pursuits. While the FCA goes beyond just capturing
company sponsored energy efficiency, this too benefits customers by reducing capital costs and
focusing the Company on controlling costs. The Commission should not abandon these benefits
by changing the FCA. Instead, ICL recommends the following:
14 Staff Supplemental Comments at 2.
' RAP at 39; NARUC at 4., 9; JCL Comments at 6- 8; ICL Reply at 2-3; ICL Supplemental
Comments at 3 - 5.
16 RAP at 45; NARUC at 9; ICL Comments at 5; ICL Reply at 3 —4; JCL Supplemental
Comments at 5.
ICL Supplemental Reply
IPC-E- 11-19 5 December 21, 2012
Maintain the current FCA as a permanent schedule with a 3% cap on annual adjustments.
Reaffirm the enhanced commitment to energy efficiency, 17 including:
o Publicly advocating for updating and adopting Idaho building codes on a regular
schedule, along with other legislative measures such as tax code changes, and
procurement policies;
o Demonstrating a consistent effort with Idaho's federal delegation to support
appliance codes, tax code changes, budget proposals, and other federal programs
that promote energy efficiency;
o Continuing to work with educational institutions at all levels to educate Idahoans
regarding energy efficiency and develop a knowledgeable and trained workforce;
o Continuing to implement and strengthen rate designs for all customer classes that
drive customers towards energy efficiency; and
o Establishing a long-term, comprehensive strategy to close the gap between the
achievable and economic energy efficiency potential identified in the most recent
DSM potential study.
Require Idaho Power to justify, the next general rate case, whether factoring the FCA into
the cost capital is warranted or not based on:
o The investment community's statements on the value of the FCA;
o Any change in the need for working capital due to increased revenue stability;
o A comparison of the cost of capital for utilities with decoupling mechanisms in
place.
Respectfully submitted this 21st day of December 2012,
Benjamin J. Otto
Idaho Conservation League
17 These efforts must be balanced with the goals of cost-effectiveness, prudency, and other
obligations. ICL envisions this to be a more qualitative than quantitative effort.
ICL Supplemental Reply
IPC-E-1 1-19 6 December 21, 2012
CERTIFICATE OF SERVICE
I hereby certify that on this 21st day of December 2012, I delivered true and correct
copies of the foregoing SUPPLEMENTAL REPLY COMMENTS OF THE IDAHO
CONSERVATION LEAGUE to the following via the method of service noted:
Hand delivery:
Jean Jewell
Commission Secretary (Original and seven copies provided)
Idaho Public Utilities Commission
427 W. Washington St.
Boise, ID 83702-5983
Electronic Mail:
Idaho Power
Lisa D. Nordstrom
Idaho Power Company
1221 West Idaho Street
Boise, Idaho 83707-0070
[e-mail]
[e-mail]
Michael J. Youngblood
Zachary L. Harris
Idaho Power Company
P.O. Box 70
Boise, Idaho 83707
[e-mail]
[e-mail]
Ralph Cavanagh
Energy Program Director
Natural Resources Defense Council
111 Sutter St., 201h Floor
San Francisco, CA 94104
[e-mail]
NWEC
Nancy Hirsh
NW Energy Coalition
811 1st Ave., Suite 305
Seattle, WA 98104
Ph: [phone]
[e-mail]
Micron
Richard E. Malmgren
Sr. Asst. General Counsel
Micron Technology, Inc.
800 South Federal Way
Boise, ID 83716
[e-mail]
Thorvald A. Nelson
Frederick J. Schmidt
Holland & Hart LLP
6800 South Fiddlers Green Circle, Ste. 500
Greenwood Village, CO 80111
[e-mail]
[e-mail]
Benjamin J. Otto
CERTIFICATE OF SERVICE
IPC-E-1 1-19 December 21, 2012