20170131final_order_no_33706.pdf

Office of the Secretary
Service Date
January 31, 2017
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF IDAHO POWER COMPANY FOR ) CASE NO. IPC-E-16-19
DEFERRAL AND RECOVERY OF COSTS )
ASSOCIATED WITH PARTICIPATION IN ) ORDER NO. 33706
AN ENERGY IMBALANCE MARKET )
On August 19, 2016, Idaho Power Company filed an Application requesting that the
Commission: (1) make a finding that Company participation in the proposed Energy Imbalance
Market (EIM) could net customers long-term benefits; (2) authorize a deferral account to track
incremental costs associated with participating in the EIM; and (3) allow the Company to recover
those costs from customers at a future rate proceeding. Application at 1.
The Commission issued an Order providing notice of the Application and setting a
deadline for interventions. The Commission granted interventions from the Industrial Customers
of Idaho Power ('ICIP), Idaho Conservation League (ICL), and Snake River Alliance (including
Staff and the Company, "the parties"). Order Nos. 33607, 33622, and 33615. The parties
conferred informally, agreed to process the Application via Modified Procedure, and agreed on a
schedule. The Commission issued an Order providing notice of Modified Procedure and
adopting the parties' agreed-upon schedule. Order No. 33627. The parties and one member of
the public timely submitted comments, and the Company timely submitted reply comments.
BACKGROUND
An EIM pools generation of interconnected electricity producers within a region, and
dispatches those resources with the goal of more accurately matching actual production with
actual demand. The EIM operates on a nearly real-time basis with multiple participants, as
opposed to more conventional long-term two-party contracts that deliver energy in hourly
blocks.
In November 2014, the California Independent System Operator (CAJSO) and
PacifiCorp formed the western EIM. The western EIM is a five-minute market administered by
CAISO. The market utilizes an automatic model to identify the least-cost energy resources to
serve real-time customer demand. According to the Company, the western EIM "focuses solely
on real-time imbalances and allows EIM entities to retain all balancing responsibilities and
transmission provider duties." Id. at 2. Participants in the EIM bid resources into the market,
ORDER NO. 33706 1
and the operator dispatches those resources based on marginal pnce for energy imbalances
factoring in load and available generation.
THE APPLICATION
With the Commission's permission, the Company plans to begin participating in the
western EIM in April 2018. The Company claimed that the western EIM will benefit customers
through "economic efficiency ... , savings due to diversity of loads and variability of resources
within the expanded [EIM] footprint, reduced operational risk ... , and ability to better support
the integration of renewable resources." Id. According to the Company, participation in the
EIM could result in net power supply expense savings of $4.1 to $5.1 million per year. Id. at 4.
The Company also reported that "in order to participate in the western EIM ... ,
Idaho Power must incur EIM-related costs, including upfront and ongoing incremental costs as
well as software and metering investments necessary for participation." Id. at 3. The Company
proposed deferral of the expenses into a regulatory asset until they can be amortized into rates
once the Company begins participating in the market. Id. The Company further sought
authorization to recover the costs of joining the western EIM in a future rate proceeding. Id.
The Company estimated that it will incur incremental costs of $15.77 million. Id. at 4. The
Company estimated that it would defer approximately $1. 73 million prior to the April 2018 go­
live date, as well as incremental annual ongoing labor, market, and hosted software expenses that
will be incurred upon commencement of participation. Tatum Direct at 11. The remainder of
the upfront startup costs reflect capital expenditures that will not be deferred, but booked to
appropriate capital accounts upon completion of the project in April 2018. Id. at 14.
The Company proposed applying a carrying charge to the deferred amounts at the
Commission-approved deposit rate until amortization of the deferred amounts begins, at which
time the unamortized balance would earn the Company's current Idaho authorized rate of return
(similar to the treatment of its other rate base items). Id. The Company proposed a IO-year
amortization schedule that would begin no earlier than April 2018. Application at 5.
The Company requested that the Commission issue a final Order in this matter by
January 31, 2017, in order to facilitate other regulatory requirements prior to the April 2018 go­
live date.
ORDER NO. 33706 2
THE COMMENTS
1. Commission Staff
Staff reviewed the analysis performed by the Company's consultant, Energy and
Environmental Economics, Inc. (E3 ), and reviewed the estimate of potential savings from Idaho
Power's participation in the EIM (E3 Study). Staff Comments at 3-6. Staff also reviewed the
Company's estimates of costs and other benefits. Id. at 7-11. Based on its review, Staff
concluded that "by employing conservative assumptions and modeling approaches, the study
produces quantified benefits that are modest yet sufficient to cover the proposed level of
investment." Id. at 6.
Staff analyzed the Company's estimated costs of joining the EIM and concluded that
they are "sound and a good approximation of actual costs for purposes of the cost/benefit
analysis." Id. at 7. However, Staff also concluded that the cost estimates were not rigorous
enough nor certain enough to be used for determining recovery through rates. Id. Staff
concluded that "almost all of the cost figures were based on projections and on scopes of work to
be determined later." Id. For the cost/benefit analysis, Staff noted that "a reasonable margin of
error in estimated cost will not drastically effect the outcome of the analysis." Id.
Staff reviewed the Company's net present value (NPV) revenue requirement impact
analysis, which "calculates the impact to the Company's revenue requirement based on proposed
implementation costs and benefits and costs quantified in the E3 baseline scenario." Id. at 8 (see
also id. at 3). Staff concluded that the analysis "was reasonably accurate showing positive net
benefits (negative revenue requirement impact) in approximately five years with a total net
benefit of $4.4 million over ten years." Id.
Staff also commented on what it described as possible intangible benefits of EIM
participation that were not included in the Company's and E3' s benefit analysis. Id. Staff
discussed two in particular: (i) reduced congestion and (ii) reduced need for reserves and
improved reliability. Id. at 8. Regarding reduced congestion, Staff concluded that while there
may be reductions of curtailments from congestion across the region possibly attributable to the
EIM, the incremental potential savings to the Company's balancing area at this time are very
small. Id. at 9. Regarding the need for reserves and reliability, Staff indicated that the
Company's participation in the EIM may hold significant benefits in the form of a reduced need
to carry reserves due to the ability to share balancing reserves across a wider footprint. Id. at 9.
ORDER NO. 33706 3
Staff acknowledged that apportioning this benefit among participating Balancing Authorities
would be difficult, but cautioned against underestimating the benefit of a potential reduced need
to carry reserves. Id. at 9.
Staff supported the Company's proposal to track the startup and incremental costs
associated with joining the EIM via a deferral account. Id. at 12. Staff explained that the long­
term benefits will likely outweigh the costs, and that because the customers will receive the
benefits, customers should also bear the costs. Id. According to Staff, "a deferral account is the
appropriate mechanism to capture the initial costs until such time as benefits begin to flow to
customers." Id. Staff also agreed with the Company's proposal for the Federal Energy
Regulatory Commission (FERC) Accounts to be used (Account 182.3, Other Regulatory Assets,
for the deferred amounts and Account 407.3, Regulatory Debits, for amortization). Id. at 13.
Staff agreed with the Company's proposal that the initial costs should be amortized
over a ten-year period because that will result in a reasonable matching of costs and benefits. Id.
at 13. Staff noted that the Company's NPV revenue requirement cost/benefit analysis reflects
positive net benefits over a ten-year period. Id. Staff further explained that ten years is a good
blend of the normal depreciation periods for the FERC accounts that the initial costs are booked
into (specifically referring to software integration capital costs and metering investment). Id.
Staff also believed that customers will not be harmed by a ten-year amortization period. Id.
Staff opposed the Company's proposal to apply a carrying charge to the deferral
balance at the customer deposit rate. Id. Staff asserted that the ability to defer the costs for
future recovery provides a sufficient benefit to the Company without a need for a carrying
charge. Id. Staff explained that the deferral account preserves all the initial costs for future
recovery, compared with the normal ratemaking treatment. Under normal ratemaking treatment,
operations and maintenance (O&M) costs would be expensed in the year incurred, and in the
next general rate case only prudently incurred ongoing O&M costs would be built into rates. Id.
at 13-14. Staff believes that not having a carrying charge during the deferral period could further
incent the Company to minimize costs. Id. at 13.
Staff recommended that the Company cease booking costs to the deferral account at
the earlier of when the Company requests recovery of EIM costs and the deferral balance, or the
end of 2018. Id. at 12. Staff explained that after the EIM participation go-live date, the costs are
similar to any other O&M costs that may be included for recovery in a rate proceeding, and that
ORDER NO. 33706 4
the existing rate case process will allow the Company the opportunity to recover these costs. Id.
Staff recognized that the timing of rate proceedings may differ from the go-live date of April
2018, and thus recommended December 2018 as the latest possible deferral month. Id. at 13.
Finally, Staff opposed the Company's request for an assurance that the estimated
upfront costs associated with participation in the EIM are eligible for recovery when requested.
Id. at 7, 14. Staff believed that the cost estimates fall short of the "known and measurable"
standard because the Company does not have prior experience operating in an EIM-like market
and because the cost estimates were developed without complete scopes of work and without a
rigorous bidding process. Id. at 7 ( citing Idaho Code § 61-502). Staff also explained that the
Commission reserves the right to review actual costs incurred to determine if they were
prudently incurred, unless the investment is under special circumstances. Id. at 7-8 (citing Idaho
Code § 61-503). Staff asserted that providing "cost pre-approval removes the incentive for the
Company to implement a project in a prudent least-cost manner by removing the possibility of
non-recovery of imprudently incurred actual cost." Id. at 8. Thus, Staff recommended deferral
of costs until actual costs can be determined and reviewed for prudency. Id.
2. ICIP
ICIP did not oppose the issuance of an Order '"acknowledging the expected benefits
resulting from [Idaho Power's] participation in the Western EIM'." ICIP Comments at 2 (no
citation provided for quotation). ICIP also did not oppose an Order authorizing a deferral
account for EIM-related costs. Id. ICIP
agrees that the Commission may enter a deferred account order to permit the
Company to begin to defer its [Idaho] jurisdictional share of EIM-related
operations and maintenance expenses and depreciation expenses related to
capital investments necessary to implement the EIM for potential recovery
from customers pursuant to a Commission order in a future rate case.
Id. at 2-3 (emphasis in original).
However, ICIP "strongly opposes any order from this Commission authorizing rate
recovery of any costs in a future proceeding that have yet to be proven to be prudently incurred."
Id. at 2. According to ICIP, the prudency of the deferred EIM costs can only be determined in a
future rate case, and "ICIP reserves the right to contest said costs to be recovered
notwithstanding its position relative to the deferred accounting treatment of those expenses[.]"
Id. at 3.
ORDER NO. 33706 5
3. !CL
ICL analyzed the E3 Study and concluded that it is a conservative estimate of the
benefits the Company's customers can expect to receive in at least three ways. ICL Comments
at 1. First, the E3 Study assumed RPS requirements that are lower than actual RPS standards
recently adopted by California and Oregon, and ICL concluded that expanding RPS requirements
in other states will increase Idaho Power's opportunities to sell resources into the market. Id at
1-2. Second, ICL suggested that the E3 Study considered only the net power supply cost impacts
from the Company's participation in the EIM, but failed to consider increased opportunities to
find least-cost resources across the EIM footprint to maintain system stability. Id at 2. Third,
the E3 Study discussed, but did not quantify, potential benefits from reducing the Company's
need for flexible reserves to maintain system reliability. Id. As a result of its review, ICL
considered the E3 Study' s assumptions to be conservative.
Further, ICL commented on the E3 Study's inclusion of scenarios for early coal plant
closure and possible reduced participation in the EIM. Both scenarios still showed net benefits.
Id. at 2-3. ICL noted that since the Company filed the Application, at least two other utilities
have committed to join the EIM (Sacramento Municipal Utility District and Seattle City Light),
further expanding the opportunity to realize benefits. Id. at 3. ICL asserted that as a result of
these developments and the conservative assumptions of the E3 Study, "the Commission should
feel confident Idaho Power customers will benefit from joining the growing EIM regardless of
the timing or fate of Valmy." Id. at 3.
ICL supported the Company's proposals to defer the costs of joining the EIM and
amortize these costs over ten years when collected from customers. Id. at 3. ICL indicated that
it "looks forward to further process to determine the appropriate way to incorporate [the EIM's]
costs and benefits into base rates." Id. ICL supported "deferring costs into a regulatory asset,
applying the deposit rate, and allowing the benefits to flow through the Power Cost Adjustment"
for the time being. Id.
4. Snake River Alliance
The Snake River Alliance (the Alliance) explained that participating in the EIM will
benefit the Company's customers by providing the Company with additional opportunities to
meet short-term needs and five-minute access to the market to meet real-time changes in
customer demand. Snake River Alliance Comments at 1. The Alliance agreed with the
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Company's claim that the EIM "will benefit customers through economic efficiency ... savings
due to diversity of loads and variability of resources within the expanded (EIM) footprint,
reduced operational risk ... and ability to better support the integration of renewable resources."
Id. at 2 (quoting Order No. 33627 at 2). The Alliance also stated that if the Company's demand
response and EIM efforts are properly synchronized, participation in the EIM could enhance the
value of the demand response programs. Id. The Alliance suggested that the EIM will
"encourage greater renewable energy investments, inter-utility cooperation and communications,
and transmission benefits that include reduced transmission constraints but also a reduced need
for certain new transmission investments." Id.
The Alliance recommended that the Commission direct Idaho Power to "more
thoroughly define the 'non-financial benefits associated with increased reliability or potential
financial benefits due to anticipated reductions in reserves."' Id. at 2 ( quoting Application at 4 ).
The Alliance asserted that there are "obvious non-financial benefits associated with EIM
participation" and it "would like to see those memorialized or acknowledged in the
Commission's final order." Id. at 2-3.
The Alliance believed recovery of the Company's EIM expenses, including the
projected $1. 73 million in startup costs and EIM market entry fee and software integration costs,
appear to be prudent and in the best interest of the Company and its customers. Id. at 3. The
Alliance supported "in principle" the Company's request for authorization to recover EIM­
related costs in a future proceeding, but recommended the Commission address cost recovery in
more detail in its final Order so that customers can have a better understanding of the timing and
magnitude of future rate impacts from this case. Id. The Alliance suggested that its
recommendation is supported by the uncertainty of the timing and nature of future Company rate
cases. Id. The Alliance recommended the testimony of the Company's witnesses regarding
possible rate and other impacts, including reductions to annual net power supply expense. Id.
While the Alliance supported the Company's Application, it disagreed with certain
statements of Idaho Power. Id. The Alliance differed with the Company's assertion that its
system has a finite capability to integrate intermittent sources of generation. Id. The Alliance
also stated that it does not agree with the Company's allegations regarding the balancing reserve
violations occurring during periods of over-generation when Company generation is operating at
safe levels, but Company generation plus intermittent generation exceeds customer load. Id. at
ORDER NO. 33706 7
3-4. The Alliance "reject[ed] the premise that non-hydro renewable energy is the sole culprit"
for over-generation, an "annual and now predictable phenomenon." Id. at 4. The Alliance
believed that a detailed discussion of the Company's over-generation challenges is best left for
another docket. Id.
5. Public Comment
One member of the public submitted a comment on the Application. The commenter
wished "to confirm that power produced in Idaho and sold to higher priced markets will not
inadvertently raise the cost of electricity in Idaho." Comment at 1. The commenter stated that it
would be "counterproductive to Idaho consumers to sell off electricity to higher priced markets,
potentially raising the prices of electricity here in Idaho." Id. The commenter supported Idaho
Power joining the EIM as long as doing so would not contribute to rising electricity costs in
Idaho. Id.
6. Company Reply
In its reply comments, the Company provided additional context regarding the study
performed by E3, and explained that once participation in the EIM begins, the quantification of
actual benefits derived will be based on a quarterly report released by CAISO-not on studies or
reports produced by E3. Company Reply Comments at 3-4. The CAISO report (Quantifying
EIM Benefits) "quantifies the estimated gross benefits achieved by western EIM participants for
the previous calendar quarter." Id. at 4. The Company explained that "CAISO determines the
total EIM benefit by calculating the cost savings of the EIM dispatch as compared to a
counterfactual without EIM dispatch and includes the estimated gross benefits by EIM
participant and quarter." Id. The Company further explained that given the cost of contracting
with E3 to perform the study, and because the benefit quantification function is already
performed by CAISO for EIM participants, the CAISO reports should be used as the basis for
benefit determinations. Id. The Company requested that if the Commission approves its
Application, it include language in the Order acknowledging that the CAISO quarterly reports
will be used as the basis for determination of benefits associated with EIM participation. Id.
The Company also requested the Commission make clear in its Order that "the
Company should only record O&M start-up expenses to the deferral account, not capitalized
incremental costs." Id. at 5. The Company explained that its proposal is to treat capitalized
investments required for EIM participation in the same manner as any other capital investment-
ORDER NO. 33706 8
use the methodology prescribed by FERC's Uniform System of Accounts. Id. Under this
methodology, capitalized investment amounts would first be recorded in construction work in
progress until EIM participation begins, then the costs would be closed to electric plant in
service. Id. The Company explained that if it were to record capital costs to a regulatory asset
account with no carrying charge, it would result in a negative financial impact to the Company
relative to the standard treatment of other capital investment. Id.
The Company also responded to Staffs proposal that the booking of costs to the
deferral account cease "' at the earlier of when the Company requests recovery of EIM costs and
the deferral balance, or the end of 2018."' Id. at 5-6. According to the Company, ceasing the
deferral of costs at the time the Company requests recovery through an Application with the
Commission (before the Company begins actually recovering those costs) would not provide a
reasonable opportunity to recover the prudently incurred costs due to the length of time
necessary for the regulatory review process prior to recovery through rates. Id. at 6. Thus, if the
Commission accepts Staffs proposal, the Company "requests that the Commission include
language in the order stating that the Company would cease recording costs to the deferral
account at the earlier of when the Company begins recovery of EIM costs and the deferral
balance or the end of 2018." Id. (emphasis in original).
DISCUSSION AND FINDINGS
Idaho Power Company is an electric utility. The Commission has jurisdiction and
authority over Idaho Power Company and the issues raised in this case pursuant to Title 61 of the
Idaho Code and the Commission's Rules of Procedure, IDAPA 31.01.01.000, et seq. Based on
our review of the record, we find it fair, just and reasonable to allow the Company to establish a
deferral account in which to track the incremental O&M expenses associated with joining the
EIM, as described further below.
We find that the E3 Study employed reasonable assumptions m modeling the
potential benefits of the Company's participation in the EIM. We further find that the record and
the E3 Study demonstrate that the Company's participation in the EIM would provide an
opportunity for benefits greater than costs. Thus, the record shows there is a possibility of a net
benefit to the Company's customers. As a result, we conclude that the Company's joining the
EIM is reasonable and in the public interest.
ORDER NO. 33706 9
Once the Company's participation in the EIM has begun, we will require the
Company to provide evidence of any benefits it is receiving from participation and how those
benefits are being passed on to customers. The Company will be required to demonstrate
benefits based on any information available at the time, including but not limited to the quarterly
CAISO Quantifying EIM Benefits report. We direct the Company to file the CAISO Quantifying
EIM Benefits report with us when it is released (after the Company's participation in the EIM has
begun) and to work with Commission Staff to determine what other information may be
available to demonstrate benefits. In addition, we direct the Company to, after one year of
participation, provide a report to the Commission describing the costs and benefits of
participation. This report should be based on and include any relevant cost and benefit
information.
We further find that a deferral account is the appropriate mechanism to capture the
initial costs of joining the EIM until such time as benefits begin to flow to customers. We
therefore find it fair, just and reasonable to allow the Company to book the O&M expenses
associated with joining the EIM to a deferral account.1 We find that a ten-year amortization
period for the deferred costs is a reasonable approach that would result in an appropriate
matching of costs and potential benefits. We also find it fair, just and reasonable to allow the
Company to record expenses to the deferral account until the earlier of when the Company
begins recovery of EIM costs and the deferral balance, or the end of 2018. This time line
recognizes the regulatory review process that will occur before expenses are included in rates.
We decline to apply a carrying charge to the deferred amounts. We find that the
ability to defer O&M costs for future recovery, compared to the normal ratemaking treatment,
provides sufficient benefit to the Company. A carrying charge in addition to the ability to defer
costs would not be in the public interest.
We also decline to provide pre-approval for recovery of Idaho Power's estimated
incremental costs of joining the EIM. Our normal practice is to review actual costs to determine
whether they were prudently incurred and thus recoverable in rates. Providing pre-approval for
estimated costs would remove the incentive for the Company to implement the project in a
prudent, least-cost manner. Instead, we will determine the recoverability ofldaho Power's actual
1 We note that the deferral treatment applies to the O&M expenses of joining the EIM, and not to capital costs,
which should be treated as any other capital expenditure.
ORDER NO. 33706 10
incremental costs of joining the EIM in a future proceeding, once the actual costs have been
incurred.
ORDER
IT IS HEREBY ORDERED that after Idaho Power Company has participated in the
EIM for one year, it will file a report with the Commission describing the costs and benefits of
participation thus far and other relevant information. Idaho Power is directed to include in this
report any available benefit and cost information, including but not limited to the CAISO's
quarterly Quantifying EIM Benefits report. Idaho Power is further directed to work with
Commission Staff to determine what information may be relevant going forward.
IT IS FURTHER ORDERED that Idaho Power is authorized to track the incremental
O&M expenses of joining the EIM in a deferral account, with a ten-year amortization period and
no carrying charge, as described above. Idaho Power is directed to cease booking costs to the
deferral account at the earlier of when the Company begins recovery of EIM costs and the
deferral balance, or the end of 2018.
IT IS FURTHER ORDERED that the recoverability in rates of Idaho Power's actual
costs incurred to join the EIM will be determined in a future proceeding.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order with regard to any
matter decided in this Order. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61-
626.
ORDER NO. 33706 11
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of January 2017.
ATTEST:
Diane M. Hanian
Commission Secretary
O:IPC-E-16-19 cc
ORDER NO. 33706
ERIC ANDERSON, COMMISSIONER
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