20150903Redacted Reply Comments.pdf

SEffi*.
An IoACORP Company
LISA D. NORDSTROM
Lead Counsel
[e-mail]
September 3,2015
LDN:csb
Enclosures
VIA HAND DELIVERY
Jean D. Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
Boise, Idaho 83702
Re: Case No. IPC-E-15-17
Long Term Program Contract with Siemens Energy, lnc. - ldaho Power
Company's Reply Comments
Dear Ms. Jewell:
Enclosed for filing in the above matter please find an original and seven (7) copies
of ldaho Power Company's Redacted Reply Comments. ln addition, an original and seven
(7) copies of the confidential pages of the Reply Comments are provided separately.
Please handle the confidential information in accordance with the Protective
Agreement executed in this matter.
Very truly yours,
t)- 7/*/a/v**--t
Lisa D. NordstromL
1221W. lrlaho St. (83702)
PO. Box 7()
lloise, lD 83707
LISA D. NORDSTROM (lSB No. 5733)
ldaho Power Company
1221 West ldaho Street (83702)
P.O. Box 70
Boise, ldaho 83707
Telephone: [phone]
Facsimile: [phone]
I nord strom@ idahopower. com
Attorney for ldaho Power Company
IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR
APPROVAL OF LONG.TERM
MAINTENANCE PROGRAM CONTRACT
WITH SIEMENS ENERGY, SALE OF
SPARE PARTS INVENTORY TO SIEMENS
ENERGY, AND DEFERRAL OF
ASSOCIATED COSTS
,.'i - -r
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. IPC-E-15-17
IDAHO POWER COMPANY'S
REDACTED REPLY COMMENTS
ldaho Power Company ("ldaho Powe/' or "Company") respectfully submits the
following Reply Comments in response to comments filed by the ldaho Public Utilities
Commission ("Commission") Staff ("Staff') and the lndustrial Customers of ldaho Power
("lClP"). ln these Reply Comments, ldaho Power wishes to clarify or respond to issues
regarding the Company's proposed accounting treatment raised in Staffs and lClP's
comments.
I. BACKGROUND
On June 5,2015, ldaho Power applied to the Commission for an order: (1)
approving a Long Term Program (.LTP") Contract with Siemens Energy, lnc.
IDAHO POWER COMPANY'S REDACTEO REPLY COMMENTS - 1
("Siemens"), (2) approving the transfer and sale of certain assets to Siemens pursuant
to ldaho Code S 61-328, and (3) approving the Company's proposed accounting
treatment of costs associated with the LTP Contract. The Company did not request to
change customer rates in the context of this docket.
On August27,2015, Staff and lClP filed comments in this docket. On pages 8-9
of its Comments, Staff recommends that the Commission approve the LTP Contract
with Siemens, approve the sale and transfer to Siemens of $21.9 million in spare parts
for the Company's gas plants, and approve the following accounting treatment:
o Defer the initialization/initiation fees to a regulatory asset to be
amortized over the remaining Iife of each asset.
o Transfer of the initial spare parts net book value (approximately $21 .9
million, subject to true-up) and associated tax expense (approximately $1.8 million,
subject to true-up) to a regulatory asset to be amortized over the life of the plant to
which the initia! spare parts are associated.
o No carrying charge on any of the regulatory assets.
lClP supports the Company's Application but requests the Commission reject the
carrying charge on the regulatory assets proposed by the Company at its overall rate of
return. lClP Comments at 7. lf, however, the Commission insists on a carrying charge,
lClP states it should be at the Company's current cost of debt. /d.
!!. IDAHO POWER'S REPLY
ldaho Power acknowledges Staffs and lClP's review and agrees with the
conclusion of both parties that a LTP Contract with Siemens will provide a lower cost
maintenance option for the Company's gas plants over the life of the agreement by
IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS.2
Ieveraging Siemens' pool of inventory, outage resources, and technical expertise when
compared to the Company's cunent case-by-case maintenance approach with
Siemens. Likewise, both parties support the transfer and sale of the initial spare parts
to Siemens with Staff concuning "that the transaction satisfies the three-part test in
ldaho Code S 61-328." Staff Comments at 5. ln the discussion that follows, ldaho
Power responds to specific recommendations of Staff and lClP regarding the
Company's proposed accounting treatment of the transaction.
A. ldaho Power Should Be Authorized to Defer to a Requlatorv Asset the
Entiretv of the lnitiation Fees.
While the LTP Contract provides significant benefits to customers over the life of
the contract, absent ldaho Poweds requested accounting treatment, the financia! impact
to the Company in the first few years is considerable, primarily attributable to the
initiation fees and net tax expense. The initiation fees serve as a prepayment toward
lower cost services that wi!! be performed by Siemens over the life of the LTP Contract;
the expense is paid up front by ldaho Power, a cost borne by shareowners, for work
performed throughout the duration of the contract, providing cost savings benefits to
customers in the future. Staff agrees and acknowledges "the initiation fees serve as a
prepayment toward future maintenance expenses" and further acknowledges that the
initiation fees will be used toward milestone payments and other maintenance that
contribute to the delivery of services to customers when scheduled maintenance
outages for the plants occur. Staff Comments at 7-8. Yet, Staff also states ldaho
Power should, using the historical 89 percent capital and 11 percent operations and
maintenance expense split for gas plant maintenance, capitalize approximately $I
I and expense approximately $f of the initiation fees. td. This would result
IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS - 3
in , $I expense today borne by shareholders for work performed and cost
savings benefits received by customers in the future, creating a mismatch of costs and
benefits and the inability of ldaho Power to earn a retum on its investment.
Nevertheless, in its fina! recommendation on page 8 of its Comments, Staff proposes
the Commission authorize the defenal of initiation fees to a regulatory asset. The
Commission should find that, in order to limit financial harm and better align expenses
with work performed, the Company is authorized to defer to a regulatory asset the entire
$-in initiationfees.
B. The Amortization Period of the Reoulatorv Asset Should Equal the Lensth
of the LTP Contract.
ldaho Power proposed to amortize the balance of the regulatory asset, the
initiation fees plus the sum of the net book value of the initial spare parts and net tax
expense, over the life of the contract to better align the expense recognition with the
work performed by Siemens. Application at 6. Staff, however, supports amortization
over the remaining life of each asset; "i.e., on the same schedule as the associated
plant." Staff Comments at 7-8. While Idaho Power believes it is appropriate to apply a
20-year amortization period to the requested regulatory asset to align with the estimated
duration of the LTP Contract, the Company can accept Staffs proposal to match the
amortization period with the remaining life of the associated plant.
C. Idaho Power Should Have the Opportunitv to Earn a Return on the Entire
Unamortized Balance of the Resulatorv Asset No Later Than the Next
Revenue Requirement Proceeding.
The Company requested, and Staff and ICIP agree, approval to defer to a
regulatory asset the sum of initiation fees and the net book value of the initial spare
parts plus the associated net tax expense. ln addition to the deferral, ldaho Power
IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS - 4
requested approval to accrue a carrying charge on the initiation fees and $2.9 million of
the initial spare parts because those amounts have not yet been included in the
Company's authorized rate base. The entire amount of the regulatory asset-i.e., the
sum of the net book value of the initial spare parts and net tax expense plus the
initiation fees-provide customers the benefit of lower contract costs over the life of the
LTP Contract.
Staff, however, states that it does "not support, under any scenario, interest or an
accrual of return on the $2.9 million of the initial spare parts that will be returned to
Siemens' possession when the contract takes effect." Staff supports its position with a
belief that "[t]hese assets would not be 'used and useful' because the Company would
no longer possess them." Staff Comments at 8. Staff clarifies that "[w]hen parts are
actually placed in service, they may be capitalized as a transfer from the regulatory
asset and included in rate base in the next general rate case at the then authorized rate
of return." Staff Comments at 8. The Company disagrees with the Staffs
understanding of the purpose and appropriate regulatory treatment of the initial spare
parts.
First, it is important to clarify that the initial spare parts at issue in this case are
parts that are in service today and are already "used and useful." These turbine
components are costly, proprietary, and have lead times up to 48 weeks. When parts
are removed from the combustion turbines, the parts are retired, inspected, and
repaired. Once refurbished, they are placed back in service to stand ready for use by
ldaho Power. The parts are kept on hand to maintain plan availability in anticipation of
maintenance outages and therefore considered used in the generation of electric
IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS - 5
energy. When the initial spare parts are transferred to Siemens under the LTP
Contract, Siemens will ensure that spare parts are available and stand ready for use by
the Company when the need arises. Consistent with treatment of other utility spare
parts inventory, initial spare parts receive rate base treatment while in inventory as
"spare" parts in addition to when the parts are installed for use in the generation units.
Consistent regulatory treatment should exist for the regulatory asset that is established
in place of the initial spare parts being transferred to Siemens.
Next, Staff appears to suggest that a return on deferred amounts should be tied
to the maintenance schedule of the plants by recommending amounts included in the
regulatory asset and associated with the net book value of the initial spare parts are
only eligible for rate base treatment once ldaho Power makes milestone payments to
Siemens. "lf the Company's proposal is accepted, Staff recommends that the
Commission not allow a carrying charge before 2016 when the first scheduled
maintenance outage for the plants occurs. This is when the initiation fees will be used
toward milestone payments and other maintenance that contributes to the delivery of
service to customers." Staff Comments at 8. While scheduled maintenance for the gas
plants and payments to Siemens occur periodically over the life of the LTP Contract,
Siemens is also responsible for performing unscheduled maintenance throughout the
duration of the contract. The initiation fees serve as a prepayment toward such
services. Simply put, maintenance activities at the gas plants and services provided by
Siemens are independent of payments made by ldaho Power and therefore should not
be tied to the current rate base treatment of the initial spare parts.
IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS - 6
Finally, on page 9 of Staffs Comments, Staff recommends the Commission
authorize "[n]o carrying charge on any of the regulatory assets." Likewise, lClP urged
"the Commission to reject the carrying charge on the regulatory asset proposed by the
Company . . . ." lClP Comments at 2. ldaho Power should have an opportunity to earn
a return on the entire regulatory asset, which includes the sum of initiation fees and the
net book value of the initial spare parts plus the associated net tax expense. Any other
treatment of the net book value of the initial spare parts would be contrary to treatment
received today. And, without the ability to rate base the entire amount of the regulatory
asset, shareowners bear upfront investments without corresponding benefits, resulting
in a financial disincentive to look for such opportunities to manage costs over the long
term.
D. ldaho Power Requests Assurance that the Entire Regulatorv Asset
Authorized in this Case Be Elisible For Rate Base Treatment in the
Companv's Next Revenue Requirement Proceedinq.
Should the Commission agree with Staff that a regulatory asset established in
this case should not immediately receive a carrying charge, ldaho Power requests that,
at a minimum, the Commission assure the Company that it will have the opportunity to
include the entire regulatory asset in rate base at the time of the next rate proceeding
and earn a return on the unamortized balance of that regulatory asset. Both Staff and
lClP reviewed the proposed LTP Contract with Siemens and the Company's revenue
requirement analysis presented in Exhibit No. 1 to Ms. Waites'testimony. Based on that
review, Staff and ICIP both concluded that the LTP Contract with Siemens will result in
cost savings benefits for customers as compared to a self-managed maintenance
scenario. ln order to achieve these cost savings benefits for customers, ldaho Power
IDAHO POWER COMPANY'S REDAGTED REPLY COMMENTS - 7
must pay Siemens an upfront initiation fee of $I and transfer ownership of the
initial spare parts with a net book value of $21.9 million. Because the Commission has
the ability to assess the prudence of these investments today, the Company requests
that the Commission assure the Company that the entire regulatory asset approved in
this case be eligible for rate base treatment in the Company's next revenue requirement
proceeding. Without such assurance, pursuant to the contract's PUC Approval
provision, Idaho Power will reevaluate the business case of entering into the LTP
Contract with Siemens under its current terms and reassess the associated financial
risk.
ilr. coNcLustoN
The LTP Contract with Siemens will provide a lower cost maintenance option for
the Company's gas plants over the life of the agreement by leveraging Siemens' pool of
inventory, outage resources, and technical expertise when compared to the Company's
cunent case-by-case maintenance approach with Siemens. Both Staff and lClP agree
the Commission should approve the LTP Contract and the transfer and sale of the initial
spare parts to Siemens pursuant to ldaho Code S 61-328. lf the Commission is
persuaded to accept any of the Staffs or lClP's recommendations regarding the
appropriate regulatory treatment for the LTP Contract costs, ldaho Power requests, at a
minimum, the Commission issue an order clarifying and explicitly authorizing the
following regulatory treatment:
o The deferral to a regulatory asset the sum of the entire initiation fee
and the net book value of the initial spare parts plus the associated net tax expense with
amortization to begin coincident with the Effective Date of the LTP Contract.
IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS. S
o An amortization period for the regulatory asset equal to the length of
the LTP Contract or a period consistent with the remaining life of the associated plant.
. The entire unamortized balance of the regulatory asset approved in
this case will be eligible for rate base treatment in the Company's next revenue
requirement proceeding.
For the reasons set forth in these Reply Comments, ldaho Power respectfully
requests that the Commission issue its order (1) approving the LTP Contract with
Siemens, (2) approving the transfer and sale of certain assets to Siemens pursuant to
ldaho Code S 61-328, and (3) approving the Company's proposed accounting and
regulatory treatment of costs associated with the LTP Gontract.
DATED at Boise, ldaho, this 3d day of September2OlS.
Attomey for ldaho Power Company
]DAHO POWER COMPANY'S REDACTED REPLY COMMENTS - 9
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 3d day of September 2015 I served a true and
conect copy of IDAHO POWER COMPANYS REDACTED REPLY COMMENTS upon
the following named parties by the method indicated below, and addressed to the
following:
Commission Staff
Karl T. Klein
Deputy Attomey General
ldaho Public Utilities Commission
47 2 W est Washington (83702)
P.O. Box 83720
Boise, ldaho 83720-001 4
lndustrial Customers of ldaho Power
Peter J. Richardson
Gregory M. Adams
RICHARDSON ADAMS, PLLC
515 North 27s Street (83702)
P.O. Box 7218
Boise, Idaho 83707
Dr. Don Reading
6070 Hill Road
Boise, Idaho 83703
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IDAHO POWER COMPANY'S REDACTED REPLY COMMENTS - 10