20230601Direct Buckham.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS RATES AND CHARGES FOR ELECTRIC SERVICE IN THE STATE OF IDAHO AND FOR
ASSOCIATED REGULATORY ACCOUNTING TREATMENT.
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CASE NO. IPC-E-23-11

IDAHO POWER COMPANY
DIRECT TESTIMONY
OF
BRIAN R. BUCKHAM
BUCKHAM, DI 1
Idaho Power Company
Q. Please state your name, business address, and 1
present position with Idaho Power Company (“Idaho Power” or 2
“Company”). 3
A. My name is Brian Buckham. My business address 4
is 1221 West Idaho Street, Boise, Idaho 83702. I am 5
employed by Idaho Power as Senior Vice President and Chief 6
Financial Officer (“CFO”). 7
Q. Please describe your educational background. 8
A. I received a Bachelor of Science in Mining 9
Engineering from the University of Idaho, a Master of 10
Business Administration from Gonzaga University, and a 11
Juris Doctor from the University of Idaho College of Law. 12
Q. Please describe your work experience with 13
Idaho Power. 14
A. I was hired in 2010 as an attorney in Idaho 15
Power’s Legal Department, where I focused predominately on 16
securities compliance and external reporting, capital 17
markets transactions, corporate governance, and commercial 18
transactions, among other areas. In 2016, I was appointed 19
as IDACORP’s and Idaho Power’s Vice President & General 20
Counsel, and in 2017 as Senior Vice President & General 21
Counsel, where in both roles I was responsible for 22
leadership of the legal, corporate governance, compliance, 23
risk management, and physical and cyber security functions 24
at IDACORP and Idaho Power. In 2022, I was appointed as 25
BUCKHAM, DI 2
Idaho Power Company
IDACORP’s Senior Vice President and Chief Financial 1
Officer, where I oversee the companies’ finance, 2
accounting, investor relations, treasury, tax, Sarbanes-3
Oxley compliance, internal audit, compliance, risk 4
management, and physical and cyber security functions. 5
Q. What are your duties as Senior Vice President 6
and Chief Financial Officer of Idaho Power as they relate 7
to this proceeding? 8
A. I oversee the direct financial planning, 9
procurement, and investment of funds for Idaho Power, as 10
well as supervise corporate liquidity management. I also 11
have oversight and responsibility for our financial 12
reporting, both internal and external, and our investor 13
relations function, and for our capital markets 14
transactions and associated relationships with stakeholders 15
in that forum. 16
My duties and responsibilities include various 17
aspects of all the Company’s capital markets transactions, 18
treasury management, and other financial matters. With 19
respect to long-term financings, sale of bonds, and sale of 20
equity, my duties include development of financial plans 21
with senior officers, meeting with representatives of 22
current and prospective investment banking firms that 23
underwrite Idaho Power securities, discussions with credit 24
rating agencies, assisting in preparation of financial 25
BUCKHAM, DI 3
Idaho Power Company
material (including registration statements and 1
prospectuses filed with the U.S. Securities and Exchange 2
Commission), representing the Company in meetings with 3
investment banking firms, reviewing information relative to 4
the Company’s financings, meeting with current and 5
prospective debt and equity investors, meeting with 6
investment analysts, and recommending disposition of net 7
proceeds. With respect to short-term financing, these 8
duties and responsibilities include negotiation of credit 9
facilities and term loans with commercial banks and 10
overseeing the purchase and sale of commercial paper, and 11
establishing and maintaining the relationships that help 12
facilitate those transactions. 13
Q. Do your responsibilities include communicating 14
with members of the financial community? 15
A. Yes. I am in regular contact with individuals 16
representing investment and commercial banking firms, 17
credit rating agencies, insurance companies, institutional 18
investment firms, pension funds, infrastructure funds, and 19
other organizations interested in publicly traded 20
securities, who follow IDACORP and Idaho Power. Along with 21
the Company’s Vice President, Chief Accounting Officer and 22
Treasurer and the Company’s Investor Relations and Treasury 23
Director, my responsibilities include keeping these 24
representatives of the financial community informed of the 25
BUCKHAM, DI 4
Idaho Power Company
Company’s financial condition, arranging and participating 1
in meetings with these individuals and IDACORP’s and Idaho 2
Power’s other senior executive management, and visiting 3
with financial representatives in their respective offices 4
or virtually. Some of these members of the investment 5
community have followed the electric utility industry for 6
an extended period of time and have a great deal of 7
expertise in the specific financial risks and prospects of 8
utilities. 9
Through my contact with the financial community and 10
review of investment banking analytical reports and 11
publications issued by these firms and the rating agencies, 12
I keep informed on trends, interest rates, financing costs, 13
security ratings, and other financial developments in the 14
public utility industry. 15
Q. Are you a member of any professional societies 16
or associations? 17
A. Yes. I am a current member of the Idaho State 18
Bar, the Oregon State Bar, the Arizona State Bar 19
(inactive), and the Governing Council of the Business & 20
Corporate Law Section of the Idaho State Bar, in addition 21
to serving on various non-profit boards. Further, I was 22
previously an adjunct professor of law at the University of 23
Idaho College of Law, where I taught the securities 24
regulation course. 25
BUCKHAM, DI 5
Idaho Power Company
I also attend numerous conferences and seminars of 1
these and other utility business, law, and finance 2
professional groups, such as the Edison Electric Institute 3
and Western Energy Institute, and an investor-owned utility 4
CFO forum, on a regular basis. Through participation in 5
these groups and events, I gain additional information and 6
insights into the financial developments affecting IDACORP 7
and Idaho Power, as well as the electric utility industry. 8
Q. What is the purpose of your testimony in this 9
proceeding? 10
A. I am sponsoring testimony discussing financial 11
risk factors generally and risk factors unique to Idaho 12
Power that justify a return on equity (“ROE”) figure 13
supported in the Direct Testimony of Company Witness Mr. 14
Adrien McKenzie as the minimum acceptable ROE for Idaho 15
Power, the use of a forecasted year end 2023 capital 16
structure, the embedded cost of long-term debt, and the 17
resultant overall cost of capital used to compute the 18
Company’s revenue requirement. 19
Q. What Exhibits are you sponsoring? 20
A. I am sponsoring Exhibit Nos. 19-21. 21
I. COST OF EQUITY POINT ESTIMATE 22
Q. What ROE is the Company requesting in this 23
proceeding? 24
A. The Company requests 10.4 percent as the point 25
BUCKHAM, DI 6
Idaho Power Company
estimate to be used for the cost of equity. 1
Q. Does that point estimate align with the 2
recommendations made by the Company’s outside expert 3
regarding the Company’s cost of capital? 4
A. No, it is lower. As the Company evaluated its 5
request and the broader economic conditions, the Company 6
decided to apply an ROE that is lower than the 10.6 percent 7
point estimate provided by our outside expert. My 8
recommendation is on the lower end of the range suggested 9
by Mr. McKenzie. The Company believes this recommendation 10
is the minimum required ROE necessary to not weaken the 11
Company’s ability to attract capital at favorable and 12
customer-beneficial rates in the currently uncertain and 13
volatile financial markets. 14
Q. How did you arrive at your recommendation? 15
A. While I believe the discussion of risk factors 16
later in my testimony justifies an ROE in excess of 10.4 17
percent, as supported by Mr. McKenzie, I have taken into 18
account the economic impact of historically high inflation 19
on our customers and selected a rate below the midpoint of 20
the recommended range, while at the same time recognizing 21
that high inflation also biases toward a higher ROE. As 22
discussed in the Direct Testimony of Company Witness Ms. 23
Lisa Grow, Idaho Power has adopted a conservative approach 24
in this rate filing, utilizing several factors to mitigate 25
BUCKHAM, DI 7
Idaho Power Company
the overall rate impact on customers of its request. In 1
light of this conservative approach, the Company is 2
requesting a minimum level of ROE at 10.4 percent. 3
Q. Did you consider other recent decisions in 4
Idaho-jurisdiction electric utility general rate cases 5
(“GRC”)? 6
A. Yes. However, I note that most of the recent 7
electric utility GRC have been settled through negotiated 8
settlement agreements, which may not fully reflect the 9
breadth of issues that a regulator might consider when 10
making an ROE determination. The two most recent electric 11
utility cases that were reviewed in regard to this filing 12
were Avista Corporation’s (“Avista”) GRC, which was settled 13
in August 2021, and the PacifiCorp (dba Rocky Mountain 14
Power) GRC, which was settled in December 2021. In both 15
cases settlement agreements were reached. More recently, 16
Intermountain Gas Company, a subsidiary of MDU Resources, 17
entered into a settlement in its natural gas retail rate 18
case in Idaho, but the proceedings in that case have not 19
concluded. 20
In the Avista case, the Commission’s final order 21
approved a 9.4 percent ROE, as proposed in the settlement 22
agreement. Notably, the Commission’s order cites testimony 23
stating, “the parties reached a compromise among differing 24
points of view, with concessions made by all Parties.” To 25
BUCKHAM, DI 8
Idaho Power Company
that end, the Company believes the stated ROE is not 1
indicative of the result from a fully contested case. Order 2
No. 35156, Case No. AVU–E-21-01. 3
In the PacifiCorp case, the settlement agreement and 4
the Commission’s final order approving the settlement were 5
silent as to PacifiCorp’s authorized ROE. Order No. 35277, 6
Case No. PAC-E-21-07. Regardless, PacifiCorp is a much 7
larger, multi-jurisdictional utility with a higher credit 8
rating and ownership by a substantial utility holding 9
company, which would justify an authorized ROE lower for 10
PacifiCorp than for Idaho Power. Intermountain Gas Company 11
is similarly situated structurally to PacifiCorp, and a 12
distributor of natural gas rather than electric service. 13
Q. Have financial market conditions changed since 14
these rate cases were filed? 15
A. Yes. Interest rates have gone up in the last 16
21 months, since the date Avista’s case referenced above 17
was filed, with the 10-year United States (“US”) Treasury 18
rate increasing over 200 percent over that period, from 19
less than 1.2 percent to around 3.7 percent as of May 22, 20
2023 (source: Yahoo Finance). As interest rates increase, 21
investors expect a higher ROE given the higher risk 22
compared to their alternative investment in debt 23
instruments. When the interest rate was at 1.2 percent, a 24
9.4 percent to 9.6 percent ROE may have been reasonable, 25
BUCKHAM, DI 9
Idaho Power Company
but in today’s market the ROE needs to be higher to 1
appropriately reflect the increase in debt cost and 2
prevailing interest rates, given investors’ available 3
options and expectations. The number of basis points should 4
increase even further in light of volatile market 5
conditions, and other factors I discuss in this testimony. 6
Indeed, typical money market deposit account rates 7
currently exceed even the 10-year Treasury rate from 21 8
months ago, meaning investors have existing nearly risk-9
free options with relatively high interest rates, thus 10
driving up required ROEs to attract investment. 11
Moreover, in my conversations with current and 12
prospective investors and with equity analysts, the topic 13
of authorized ROEs is frequently raised. Based on those 14
conversations, it is my impression that an ROE of the level 15
the Company has requested in this case, assuming it also 16
includes recovery of prudent expenditures and a return on 17
and of investment, would be sufficient to meet the 18
expectations of those investors and thus maintain IDACORP’s 19
reasonable access to equity capital. The authorized ROE is 20
one of the primary factors participants in the equity 21
capital markets will review when assessing the adequacy of 22
the outcome of a general rate case for purposes of making 23
an investment decision, and an authorized ROE lower than 24
Idaho Power’s request could increase the Company’s cost of 25
BUCKHAM, DI 10
Idaho Power Company
equity issuances. With IDACORP anticipating an equity 1
issuance in 2024, or possibly sooner, an authorized ROE 2
that meets investor expectations will benefit customers 3
through greater value in issued equity financing. Mr. 4
McKenzie addresses this important intersection of utility 5
regulation and the investment markets in his testimony. 6
Q. Why is Idaho Power’s requested 10.4 percent 7
ROE justified in this case? 8
A. Notable changes in the economy, particularly 9
inflation levels not seen since the 1980s, market 10
volatility and uncertainty, and the interest rate increases 11
noted above, have taken place in the past few years, and 12
exacerbated recently. In his testimony, Mr. McKenzie also 13
discusses these changes and their implications on capital 14
costs and ROE. 15
Q. What other risks impact your selection of a 16
10.4 percent ROE? 17
A. Over the last few years, the utility risk 18
landscape has been shifting dramatically, increasing 19
several risks that the Company must address. I highlight in 20
the next section of my testimony several of these 21
heightened risks, including power supply costs, liquidity 22
challenges, wildfires, cybersecurity, and physical 23
security. I will also discuss other specific risks Idaho 24
Power continues to face. 25
BUCKHAM, DI 11
Idaho Power Company
Idaho Power must remain prepared to respond to 1
unforeseen events that may materialize in the future, some 2
of which are outlined in my discussion below. Recent 3
economic challenges and financial market disruption and 4
uncertainty highlight the importance of maintaining Idaho 5
Power’s financial strength in attracting the capital needed 6
to ensure reliable service to customers at a lower cost, 7
and to weather continued volatile and uncertain economic 8
conditions and circumstances. 9
Q. You mentioned the impact of interest rate 10
increases. How do interest rates affect the required ROE? 11
A. As Idaho Power competes with other investments 12
(both stocks and bonds) in the capital markets, to attract 13
capital at reasonable costs the Company must provide a 14
return that adequately compensates its investors relative 15
to the risk of other investments. With rising interest 16
rates, investors can obtain relatively higher returns on 17
debt instruments while retaining a much lower risk profile 18
relative to stocks. To compete as an investment, utilities 19
must then provide the opportunity for a higher return 20
commensurate with their higher relative risk level. 21
Q. Can you quantify the recent increases in 22
interest rates? 23
A. Certainly. As seen in the chart below (based 24
on data from Yahoo Finance as of May 22, 2023), 30-year US 25
BUCKHAM, DI 12
Idaho Power Company
Treasury bond yields have risen from around 1.8 percent 1
near the start of 2022 to as high as 4.36 percent in late 2
2022, and have recently been between 3.6 to 4.0 percent, a 3
100 percent increase over that period. 4
FIGURE 1 5 30-Year Treasury Bond 6
7
Q. How do higher levels of inflation impact ROE? 8
A. As noted in Mr. McKenzie’s testimony, an 9
investor’s required return is intended to compensate the 10
investor for the loss of purchasing power due to rising 11
prices. An investor adds an inflation premium to the real 12
rate of return (pure risk-free rate plus risk premium) to 13
determine the investor’s nominal required return. As a 14
result, higher inflation expectations lead to an increase 15
in the cost of equity capital. The expectations for the 16
1.00%
2.00%
3.00%
4.00%
5.00%
October-21 April-22 October-22 April-23
BUCKHAM, DI 13
Idaho Power Company
required return, and thus the cost of equity capital, 1
increase during inflationary periods when there is 2
regulatory lag in the recovery of those increasing costs, 3
which occurs where a historic test year is applied in the 4
ratemaking process. 5
II. RISK FACTORS 6
Q. Could you briefly outline the risks 7
confronting the Company that form the basis for your 8
recommendation of a 10.4 percent ROE as the minimum 9
acceptable authorized return? 10
A. Yes. I will summarize them here and discuss 11
each in greater detail later in my testimony. I believe 12
that, at a minimum, a 10.4 percent ROE is required to 13
properly account for the risks confronting Idaho Power for 14
the following reasons: 15
(1) The general decline in the Company’s credit 16
quality, in conjunction with the growing need for 17
access to debt and equity capital to fund the 18
Company’s growing capital expenditures in 19
response to recent and expected future economic 20
growth in its service territory. The Company 21
forecasts capital expenditures of approximately 22
$3.1 billion from 2023 to 2027 to reliably serve 23
customer needs. 24
BUCKHAM, DI 14
Idaho Power Company
(2) Energy market volatility and liquidity 1
challenges. 2
(3) Large and growing Public Utility Regulatory 3
Policies Act of 1978 (“PURPA”) project and Power 4
Purchase Agreement (“PPA”) expenditures, and more 5
recently, energy storage agreement expenditures. 6
(4) Risks related to wildfires from a financial, 7
reliability, insurability, and operational 8
standpoint. 9
(5) The renewal of federal licenses for the Company’s 10
hydroelectric projects, primarily the Hells 11
Canyon Complex, which provides 36 percent of the 12
Company’s total generating nameplate capacity, 13
and particularly the costs associated with the 14
relicensing of that project. 15
(6) Increased risks related to power reliability, as 16
well as execution risk associated with 17
infrastructure projects intended to maintain 18
reliability. 19
(7) Environmental risks and uncertainties related to 20
new or proposed legislation and requirements and 21
impacts on the Company’s operations. 22
(8) The increasing risks of cyber and physical 23
security attacks on Idaho Power’s and other 24
utilities’ infrastructure. 25
BUCKHAM, DI 15
Idaho Power Company
(9) The impacts of climate change on the Company, 1
including the perceived risk in the financial 2
community associated with the variability of the 3
Company’s hydroelectric generating base, 4
variances in sales, impacts on operations, 5
reputational concerns, application of investment 6
policies, and other factors associated with 7
changes in the climate. 8
(10) The Company’s small size in terms of market 9
capitalization and concentrated geographic and 10
associated regulatory risk (i.e., 95 percent of 11
the Company’s business is in Idaho). 12
(11) The financial impact of a lag in the recovery of 13
costs associated with higher capital 14
expenditures, including the higher costs of 15
financing those capital expenditures. 16
(12) Heightened scrutiny by equity investors and 17
analysts of authorized ROEs and regulatory 18
outcomes, and the disproportionate impact it has 19
on the success of equity financing, particularly 20
as the Company approaches the need for equity 21
issuances. 22
I address several of those risks below in my 23
testimony. 24
Q. Are there other risks, less specific to Idaho 25
BUCKHAM, DI 16
Idaho Power Company
Power, that also impact your recommendation? 1
A. Yes. There are general financial risks such as 2
increased volatility in the financial markets and what I 3
view as a heightened sensitivity to risk exposure. Other 4
risks are industry-wide, such as unknown costs relative to 5
carbon emissions, a need for infrastructure improvements, 6
and increased capital investment, as well as inflationary 7
pressures that increase costs of both operating expenses 8
and capital outlays. Interest rate uncertainty fuels the 9
fear that future borrowing costs could rise dramatically. 10
Recently, the Federal Reserve has been attempting to 11
control inflation by raising interest rates, which creates 12
expectations for continued rising debt costs in the near 13
future. These factors combine to make a challenging 14
environment in which the Company must compete with others 15
in the electric utility industry, as well as all other 16
industries, for both resources and capital, to serve the 17
needs of its customers. While I do not intend to elaborate 18
further on more general risks, they are factors worthy of 19
note that point to increased risks for the Company. 20
Many of the risks associated with the Company, and 21
that factor into its equity and debt valuations, are 22
included in the Annual Report on Form 10-K that the Company 23
files with the US Securities and Exchange Commission, under 24
the heading “Risk Factors.” For the Form 10-K filed in 25
BUCKHAM, DI 17
Idaho Power Company
February 2023, that section of the document was 1
approximately 13 pages in length.1 2
Credit Ratings and Capital Market Expectations 3
Q. What is the status of Idaho Power’s credit 4
ratings? 5
A. Idaho Power’s credit ratings as of May 31, 6
2023, are as follows: 7
TABLE 1 8
Idaho Power Credit Ratings as of May 31, 2023 9
Standard and Poor’s Rating
Investors Service
Corporate Credit Rating BBB Baa 1 Senior Secured Debt A- A2
Senior Unsecured Debt BBB Baa 1
Commercial Paper A-2 P-2
Rating Outlook Stable Stable
10
Q. Have there been any recent changes in the 11
Company’s credit ratings? 12
A. Yes. In July 2022, Moody’s long-term issuer 13
rating for Idaho Power was downgraded from A3 to Baa1. In 14
addition, Moody’s ratings for First Mortgage Bonds and 15
Senior Secured Debt were downgraded to A2 from A1. Also, in 16
February 2023, S&P downgraded its liquidity assessment of 17
the Company from “strong” to “adequate.” The downgrades 18
occurred despite the expectation by the rating agencies 19

1 The Company’s 10-K is available at: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000049648/e858bcab-7dd5-4c28-b5ba-56d347339652.pdf
BUCKHAM, DI 18
Idaho Power Company
that the Company planned to file this rate case and that by 1
2024 the Company expected to have an increase in cash flow 2
from collections from customers. 3
Q. What is the Company’s assessment of the impact 4
of these downgrades? 5
A. Following the recent Moody’s credit ratings 6
changes, the Company’s credit ratings remained investment 7
grade. However, Moody’s new rates move the Company closer 8
to being below investment grade, referred to as “junk bond” 9
status. 10
The Company’s first opportunity to test the bond 11
market after the 2022 downgrade was in December 2022. While 12
Idaho Power was able to issue some long-term debt, buyer 13
interest in the transaction was less than we anticipated, 14
the buyers were limited, and we were not able to issue the 15
volume of debt that we had originally intended to issue. We 16
believe that fixed-income investors that had not been 17
actively following the Company previous to our marketing of 18
the debt instruments likely were concerned when they 19
noticed the recent downgrade. This softened demand likely 20
led to a higher cost of debt associated with these 21
instruments than would have occurred with a backdrop of a 22
more stable credit rating outcome. 23
Further ratings downgrades would cause additional 24
harm to the risk perception of the Company in the debt 25
BUCKHAM, DI 19
Idaho Power Company
markets. If, for example, Idaho Power’s credit ratings were 1
to fall below investment grade, which would be below Baa3 2
for Moody’s and below BBB- for S&P, Idaho Power’s cost of 3
borrowing would increase substantially. A change below 4
investment grade will also trigger significant increases in 5
collateral-related deposits as well as significant cost 6
increases for the Company’s credit facility, which will 7
increase costs to customers. That downgrade would also 8
negatively impact IDACORP’s stock price, decreasing the 9
value the Company would receive for issuances in the equity 10
markets. 11
A downgrade in the short-term debt rating could make 12
it difficult for the Company to issue commercial paper 13
under reasonable terms, if at all, which is the instrument 14
Idaho Power relied upon recently during volatile power and 15
fuel markets for its liquidity and to meet margin 16
requirements. Additionally in tight markets such as a 17
recession, liquidity for companies that are below 18
investment grade becomes extremely limited, resulting in 19
lack of cash on reasonable terms to finance the business, 20
which could result in the inability of the Company to fund 21
needed capital projects to reliably serve customers. 22
Q. How did Moody’s describe the reasons for its 23
downgrade? 24
BUCKHAM, DI 20
Idaho Power Company
A. In July 2022, Moody’s noted financial metrics 1
and need for more timely rate relief as reasons: 2
Idaho Power Company's (IPC) credit profile 3 reflects lower financial metrics over the 4 last several years that are no longer 5
supportive of an A3 rating, the major driver 6 for the utility's recent downgrade to Baa1. 7 These metrics include a ratio of cash flow 8 from operations before changes in working 9 capital (CFO pre-WC) to debt of between 12% 10
and 13% over the last two years. We expect 11 the ratio to be around 13% over the medium-12
term, which is weak for its new Baa1 rating. 13
14 and 15
… without the benefit of more incremental 16 and timelier rate relief through riders or 17 cost tracking mechanisms, more frequent 18
base rate increases and lower imputed debt 19 from pension obligations, IPC's credit 20
metrics will not improve materially and the 21 utility will have limited financial cushion 22 at its current rating level to manage 23
unforeseen events. 24 25
Q. How did S&P characterize its February 2023 26
change? 27
A. S&P cited Idaho Power’s reliability and 28
economic growth-driven capital spending needs as reflecting 29
its liquidity downgrade, as it perceived “elevated capital 30
spending that will result in modest weakening of the 31
Company’s liquidity throughout the forecast period.” 32
Q. Do you believe that the current credit ratings 33
of Idaho Power are adequate? 34
BUCKHAM, DI 21
Idaho Power Company
A. Stronger credit ratings would be beneficial, 1
but Idaho Power is still able to raise capital in today’s 2
markets with its current ratings. However, new debt/bond 3
issues are at a higher cost than if Idaho Power’s credit 4
ratings were higher (i.e., the higher the credit rating, 5
the lower the debt financing cost). Stronger credit ratings 6
also result in more liquidity in all market conditions. 7
Q. How else can credit ratings impact the 8
Company? 9
A. Idaho Power maintains margin agreements 10
relating to its wholesale commodity contracts that allow 11
performance assurance collateral to be requested of and/or 12
posted with certain counterparties. If Idaho Power 13
experiences a reduction in its credit rating on its 14
unsecured debt to below investment grade, Idaho Power could 15
be subject to requests by its wholesale counterparties to 16
post additional performance assurance collateral. Likewise, 17
counterparties to derivative instruments and other forward 18
contracts could request immediate payment or demand 19
immediate ongoing full daily collateralization on 20
derivative instruments and contracts in net liability 21
positions. For example, on March 31, 2023, the amount of 22
collateral that could be requested by counterparties upon a 23
downgrade to below investment grade was $44.6 million. The 24
BUCKHAM, DI 22
Idaho Power Company
costs to finance the cash needed to meet these margin 1
requirements would increase costs to customers. 2
Q. What factors could lead to a credit rating 3
upgrade or downgrade? 4
A. Per Moody’s in July 2022, factors that could 5
lead to an upgrade include: 6
The rating of IPC could be upgraded if key 7
credit metrics improve such that the CFO 8 pre-WC to debt ratio increases to 16% or 9 above on a sustained basis. An upgrade could 10
also occur if the utility's regulatory 11 construct improves materially, including 12
authorization of trackers and rider 13 mechanisms that would result in faster cost 14 recovery, reducing regulatory lag. 15
16 Factors that could lead to a downgrade include: 17
IPC's rating could be downgraded if 18
financial metrics weaken further including 19 a CFO pre-WC to debt ratio of 13% or below 20
on a sustained basis. The rating could also 21 come under pressure if the utility were to 22 experience a decline in the credit 23
supportiveness of its regulator including 24 either higher cost recovery risks or lower 25
returns. 26
27 Per S&P in May 2022, factors that could lead to an upgrade 28
include: 29
We could raise ratings if the company’s 30 business risk profile strengthened through 31 a more robust management of regulatory 32 relationships and improved operating 33 efficiency, combined with stronger cash 34
flow measures, including FFO [funds from 35 operations] to debt consistently exceeding 36
20%. 37 38 Factors that could lead to a downgrade include: 39
BUCKHAM, DI 23
Idaho Power Company
We could lower ratings if business risk 1
increased because of unsupported recovery 2 of operating expenses, including higher-3 than-average reliance on purchased power or 4
unsupported capital investments through the 5 regulatory process or if the company 6
materially expanded its nonregulated 7 segments, which are currently negligible. 8 We could also lower ratings if financial 9
measures consistently underperformed our 10 base case forecast, leading to an FFO-to-11
debt measure that is consistently less than 12 14%. 13
14
Q. Are there any other considerations mentioned 15
by the rating agencies that could point to future downgrade 16
risks? 17
A. Yes. Moody’s pointed to regulatory lag on 18
material investments that, in its view, overshadows 19
regulatory mechanisms that are in place in Idaho. 20
Specifically, Moody’s stated in July 2022 that: 21
… the utility’s financial profile has 22
historically lagged peers due to certain 23
regulatory constructs, such as flow-24
through tax accounting and long-lived 25 depreciation due to its hydro asset base. 26 Since Idaho lacks the suite of investment 27 and operating cost recovery mechanisms seen 28
in other states, Idaho Power’s cash flow 29
growth is primarily dependent on general 30
rate case filings, which it has not 31
benefited from for several years. 32
33 IPC’s last general rate increase was in 2011 34 and the company carries approximately $709 35 million in regulatory assets on its balance 36
sheet, net of regulatory liabilities, as of 37
31 March 2022. Some of the most sizable 38
unrecovered asset balances are associated 39
with Idaho Power’s Hells Canyon Complex 40
BUCKHAM, DI 24
Idaho Power Company
hydro-fueled generation facility, the 1 relicensing of which has been repeatedly 2
delayed in a lengthy permitting and 3
approval process since originally filed in 4
2003. The lack of rate cases and delayed 5
cash recovery of these investments has 6
eroded the timeliness of rate relief for 7 the company. 8
9 Q. What are Idaho Power’s expected near-term 10
capital needs? 11
A. Over the five-year period from 2023-2027, 12
Idaho Power anticipates spending between $2.95 and $3.2 13
billion, and approximately $1.5 billion in 2023-2024, on 14
new property, plant, and equipment to serve customers. For 15
comparison, Idaho Power’s annual capital expenditures have 16
averaged about $325 million over the five-year period from 17
2018-2022. This significant increase in capital 18
expenditures will increase the Company’s need for debt and 19
equity financing. 20
Q. Do you believe the relief requested in this 21
case will serve to stabilize or improve the Company’s 22
credit ratings going forward? 23
A. I believe it will stabilize the current credit 24
ratings but not improve them, particularly with the decline 25
in Idaho Power’s debt-to-equity ratio from 55 percent in 26
2022 to what the Company expects to be 51 percent by the 27
end of 2023. The credit rating agencies have built their 28
models and assumptions, in part, based on forecasts Idaho 29
BUCKHAM, DI 25
Idaho Power Company
Power has discussed with them over the past few years. 1
Those forecasts have contemplated the rate relief requested 2
in this case. In addition, this case requests additional 3
return of and return on rate base that has been placed into 4
service since the last general rate case, and that 5
substantial investment has carried regulatory lag from a 6
cash flow perspective over several years. Finally, the 7
credit rating agencies will view as positive the Company’s 8
requests in this case to begin to address needed cash 9
collections related to regulatory deferrals, such as those 10
related to wildfire mitigation and pension expenses, though 11
those collections have also been assumptions included in 12
their modeling. 13
Q. Aside from credit ratings, have equity 14
analysts changed their ratings on IDACORP recently, and for 15
what reasons? 16
A. Yes. IDACORP’s equity ratings by two of its 17
equity analysts declined relatively recently. Mizuho 18
Securities USA LLC downgraded IDACORP from a “Buy” to a 19
“Neutral” rating on April 4, 2023, generally citing risks 20
associated with higher capital expenditures and the impact 21
on financial results, along with regulatory uncertainty. 22
BofA Securities downgraded IDACORP from a “Buy” to a 23
“Neutral” rating on November 7, 2022, citing regulatory 24
uncertainty, growing O&M, and broad inflationary pressures 25
BUCKHAM, DI 26
Idaho Power Company
and their impact on small- and mid-capitalization 1
utilities, and a growing trepidation toward smaller 2
companies due to heightened risks. 3
Energy Market Volatility and Liquidity Challenges 4
Q. How have recent events in the energy markets 5
impacted the Company? 6
A. Higher and more volatile prices in the 7
electricity and natural gas markets have created additional 8
risks for the Company in two particular ways. First, by 9
increasing power supply costs. The power cost adjustment 10
mechanism (“PCA”) partially mitigates the effects of energy 11
market price volatility on financial results, but the 12
volatility levels can result in the Company absorbing 13
significant amounts of power supply costs. For example, for 14
the Company’s April 2022-March 2023 PCA year, total actual 15
power supply costs were $721.8 million, compared to base 16
power supply costs of $305.7 million. After 17
jurisdictionalization, the PCA mechanism’s 95 percent/5 18
percent sharing applied to most of the variance resulted in 19
$14.6 million of increased power supply costs being 20
absorbed by the Company. While this GRC will establish new 21
base power supply costs that will help mitigate some of 22
this impact, continued volatility will likely continue to 23
negatively impact the Company, and thus the return expected 24
by investors. 25
BUCKHAM, DI 27
Idaho Power Company
Second, the higher prices and volatility of power 1
and fuel impact the Company’s liquidity. While the PCA 2
mechanism mitigates in-part the potential adverse earnings 3
impacts to Idaho Power of fluctuations in power supply 4
costs, collection from customers of most of the difference 5
between actual power supply costs compared with those 6
included in retail rates is deferred to a subsequent 7
period, which can affect Idaho Power’s operating cash flow 8
and liquidity until those costs are recovered from 9
customers. In the Company’s recent PCA filing, the total 10
power supply costs that the Company had paid pending future 11
recovery from customers was $190 million, which was a 12
significant strain on operating cash flows. For the first 13
quarter of 2023, Idaho Power’s operating cash flows were 14
negative $93 million, reflective of Idaho Power absorbing 15
the cash flow impact of adverse lag in the PCA mechanism. 16
This negative cash flow was particularly alarming. 17
Further, wholesale commodity contracts often require 18
performance assurance collateral be posted with 19
counterparties. During recent energy market price spikes, 20
the Company was required to post very large amounts of cash 21
collateral, significantly straining its available 22
liquidity. To give an order of magnitude, as of March 31, 23
2023, Idaho Power had posted $63 million of cash 24
BUCKHAM, DI 28
Idaho Power Company
performance assurance collateral related to its energy 1
market contracts. 2
PURPA and PPA Expenditures and Associated Credit and Equity 3
Impacts 4
Q. What is the significance of PURPA and PPA 5
expenditures? 6
A. The Company has significant amounts of 7
financial commitments related to PURPA facilities and other 8
PPAs. Idaho Power has entered into a number of PPAs and 9
PURPA contracts since 2010, the last full year before the 10
Company’s last GRC. In Idaho Power’s Annual Report on Form 11
10-K, it cites contractual obligations associated with 12
these contracts of over $4.2 billion. Additional contracts 13
signed in 2023 and awaiting Commission approval push that 14
total to nearly $4.9 billion. 15
The base rate regulatory treatment of PURPA 16
qualifying facility (“QF”) contracts provides for a one-17
for-one recovery of dollars expended, while PPA recovery is 18
generally subject to the PCA mechanism’s 95/5 sharing 19
provision. Neither provides for any return to compensate 20
the Company for its long-term purchase obligation under the 21
applicable contract, despite it being a debt-like 22
obligation and long-term capital commitment. The Company 23
is, in effect, buying and selling energy (pursuant to a 24
legal mandate in the case of QFs) without any compensation 25
BUCKHAM, DI 29
Idaho Power Company
for providing this service. The mere dollar-for-dollar 1
recovery of QF expenditures and the significant size of the 2
obligation, with no return for the use of the Company’s 3
general and administrative resources, balance sheet, and 4
liquidity in managing QF programs and PPAs, is viewed as a 5
long-term contractual and debt-like obligation, and thus a 6
risk, by the rating agencies. The rating agencies are not 7
making a judgment related to the appropriateness of QF or 8
PPA-based energy purchase programs, but merely pointing out 9
the cost of the financial risk(s) arising from a QF or PPA 10
transaction, and that this risk should be reflected in a 11
higher ROE to recognize the impact of the Company’s QF and 12
PPA contracts. 13
Q. Do the rating agencies recognize the financial 14
costs of QF and PPA transactions beyond the contract price? 15
A. Yes. Like other electric utilities, when the 16
Company adds to its rate base, it must use some portion of 17
shareholder equity to fund the investment. The Company must 18
maintain its proportion of equity to debt above a certain 19
level as it continues this investment process. If it does 20
not, the debt level increases and the Company will face the 21
threat of a ratings downgrade. Conversely, when the Company 22
enters into a QF or PPA contract for purchased power, an 23
obligation is generally not reflected in the Company’s 24
financial statements; however, the rating agencies add to 25
BUCKHAM, DI 30
Idaho Power Company
the financial statement an imputed debt for the QF or PPA 1
contract, resulting in an increase in total debt and a need 2
to increase equity in order to maintain credit quality. 3
Unless an equity component is provided to offset the 4
debt-like obligation of long-term purchased power 5
contracts, the Company faces off-balance sheet financial 6
risk that threatens a reduction in credit ratings. For 7
financial commitments that are not presented on the balance 8
sheet, rating agency analysts impute the debt and interest 9
equivalents on the financial statements of the Company to 10
achieve a more accurate picture of the risk associated with 11
the investment and the Company’s related commitment. The 12
added equity needed to offset this imputed debt and 13
interest represents the effect that long-term purchased 14
power commitments have on the cost of capital. An increase 15
in the long-term obligation of a utility related to its 16
capacity and energy resources will have to be backed by an 17
appropriate amount of equity in the eyes of the ratings 18
agencies. 19
In reviewing its evaluation of the credit 20
implications of QF-related expenditures, in November of 21
2013, as stated below, S&P noted that it viewed such 22
agreements as creating “fixed debt-like financial 23
obligations” that must be considered in evaluating a 24
utility’s credit risks. 25
BUCKHAM, DI 31
Idaho Power Company
We view long-term purchased power 1
agreements (PPA) as creating fixed, debt-2 like financial obligations that represent 3 substitutes for debt-financed capital 4
investments in generation capacity. By 5 adjusting financial measures to incorporate 6
PPA fixed obligations, we achieve greater 7 comparability of utilities that finance and 8 build generation capacity and those that 9
purchase capacity to satisfy new load. PPAs 10 do benefit utilities by shifting various 11
risks to the electricity generators, such 12 as construction risk and most of the 13 operating risk. The principal risk borne by 14
a utility that relies on PPAs is recovering 15 the costs of the financial obligation in 16
rates. 17 18 …Risk factors based on regulatory or 19 legislative cost recovery typically range 20 between 0% and 50%, but can be as high as 21
100%. A 100% risk factor would signify that 22 substantially all risk related to 23
contractual obligations rests on the 24 company, with no regulatory or legislative 25 support. A 0% risk factor indicates that 26
the burden of the contractual payments 27 rests solely with ratepayers, 28 29 30 Q. How material are QF- and PPA-related 31
expenditures? 32
A. As of the end of 2022, Idaho Power had 133 33
signed cogeneration/small power production (“CSPP”)-related 34
contracts with QFs representing 1,212 megawatts (“MW”) of 35
capacity, as well as 596 MW of non-QF PPAs. 129 QF projects 36
with a nameplate capacity of 1,137 MW were online at the 37
end of 2022. In 2022, the Company incurred approximately 38
$189 million of expense related to QF projects and $45 39
BUCKHAM, DI 32
Idaho Power Company
million related to PPA projects. As of December 31, 2022, 1
the Company is obligated to pay approximately $4.2 billion 2
to QF and PPA developers over the remaining life of these 3
contracts. To provide context on how significant the $4.2 4
billion liability is to Idaho Power, the Company’s total 5
projected long-term debt obligation at year-end 2022 is 6
only $2.2 billion. The QF and PPA obligations are over 160 7
percent of the debt financing for all assets the Company 8
owns to serve customers. 9
Q. Are QF and PPA expenses increasing? 10
A. Yes. Idaho Power has been engaged in resource 11
procurement activities that the Company expects will result 12
in several new, large PPAs and Battery Storage Agreements 13
(“BSA”) to meet future resource needs. Currently, Idaho 14
Power has 340 MW of signed solar PPAs and 150 MW of BSAs in 15
development, with an additional substantial resource 16
procurement in the competitive bidding process. The 150-MW 17
BSA signed in April 2023, for example, contributes an 18
additional $440 million on top of the total contracted 19
obligation noted above. The substantial and increasing 20
obligations of PURPA QF and PPA agreements create a 21
material risk factor for Idaho Power and increase costs to 22
customers. 23
// 24
// 25
BUCKHAM, DI 33
Idaho Power Company
Wildfire Risks, Insurability, and Insurance Costs 1
Q. Please describe the increased risks associated 2
with wildfires. 3
A. Since the 1980s, wildfire activity in the 4
United States in terms of acres burned has more than 5
tripled and, according to the National Interagency Fire 6
Center, western states account for upwards of 95 percent 7
of the acres burned in recent years. While Idaho Power has 8
not experienced catastrophic wildfires within its service 9
area at the same level experienced in other western 10
states, such as California and Oregon, millions of acres 11
of rangeland and southern Idaho forests have burned in the 12
last 30 years. 13
A variety of factors have contributed to more 14
destructive wildfires, including climate change, increased 15
human encroachment in wildland areas, historical land 16
management practices, and changes in wildland and forest 17
health, among other factors. 18
Specific to Idaho Power, wildfires have the 19
potential to damage or destroy the Company’s facilities, 20
impact personnel, and cause significant harm to Idaho 21
Power’s customers and the communities in which the Company 22
serves. Company Witness Mr. Mitch Colburn provides a more 23
detailed discussion of wildfire risk in his testimony. 24
BUCKHAM, DI 34
Idaho Power Company
Q. Have Idaho Power’s overall insurance premium 1
costs increased in recent years? 2
A. Yes. While Idaho Power undertakes significant 3
efforts to manage the cost of insurance and obtain the 4
greatest insurance value possible for its customers, the 5
Company is to some degree a price-taker in the insurance 6
market. In that regard, despite annual assessment of its 7
insurance portfolio to identify the best value and the 8
retention of an experienced insurance broker, the Company 9
is subject to price increases as insurers raise premiums 10
due to losses, either pertaining to Idaho Power or to 11
insurers’ overall insured base. 12
As noted in the memo from Idaho Power's insurance 13
broker that was provided with the Company’s 2021 wildfire 14
mitigation cost deferral Application in Case No. IPC-E-21-15
02 (and included as Exhibit No. 19 to my testimony), much 16
of the increases in premiums is attributable to the 17
frequency and magnitude of Western-state wildfires in 18
recent years, as well as insurance providers’ perceptions 19
of Idaho Power's specific wildfire risk. The sizeable 20
increase in Idaho Power's premiums became particularly 21
prominent in 2021 due in part to a new "wildfire load" 22
charge of approximately $1 million that is being added 23
annually to electric utilities, such as Idaho Power, that 24
BUCKHAM, DI 35
Idaho Power Company
insurers have determined operate in high-risk zones for 1
wildfire. 2
To help manage the costs of insurance, Idaho Power 3
has taken actions such as marketing of its programs as 4
needed, formation of a captive insurance program to access 5
the reinsurance market, reviewing and adjusting of self-6
insured retentions, meeting regularly with insurers to 7
provide details on risk-mitigation practices, and regularly 8
assessing the adequacy of overall coverage. While these 9
efforts have resulted in benefits, costs of insurance for 10
the Company, and for the industry as a whole, have 11
increased notably in recent years. 12
Q. Does Idaho Power anticipate these premium 13
increases will continue? 14
A. Because insurance markets continue to be 15
volatile, premium increases are difficult to forecast. 16
Idaho Power anticipates that, notwithstanding its efforts 17
to negotiate favorable rates and coverage, premiums for 18
insurance will continue to increase for the foreseeable 19
future. This trend has been echoed by Idaho Power's third-20
party insurance broker, who has explained that insurance 21
premiums will continue to increase due to prior losses 22
incurred by insurance providers and projected increased 23
risks of losses by insurers from wildfires. 24
BUCKHAM, DI 36
Idaho Power Company
Q. Aside from insurance premium increases, which 1
are representative of third-party assessments of Idaho 2
Power’s wildfire risk, does wildfire risk impact the cost 3
of capital? 4
A. Yes, it does. In recent years, credit rating 5
agencies have inquired about Idaho Power’s wildfire risk 6
and the efforts it undertakes to mitigate the risk. 7
Investment analysts and current and prospective debt and 8
equity investors also frequently inquire about wildfire 9
risk and mitigation efforts. This was elevated by the 10
Pacific Gas & Electric bankruptcy that resulted in large 11
part from wildfire liability associated with numerous 12
California wildfires ignited by the utility. 13
Credit rating agencies, analysts, and investors have 14
inquired about operating practices, financial exposure, 15
insurance coverage, and other topics relevant to wildfire 16
liability, and the exposure the Company has to wildfires 17
factors. They then incorporate this information into their 18
decision about whether to purchase debt and equity 19
securities and in credit ratings, and thus ultimately the 20
cost of capital, in much the same way that exposure 21
influences insurance premiums. 22
Hydroelectric Facility Relicensing Risks and Costs 23
Q. What risks are associated with the Company’s 24
relicensing efforts for its hydroelectric facilities? 25
BUCKHAM, DI 37
Idaho Power Company
A. Relicensing of the Company’s hydroelectric 1
facilities will create additional obligations. It involves 2
large capital expenditures, increased operating costs, and 3
reduced hydropower generation, all of which can negatively 4
affect Idaho Power's results of operations and financial 5
condition. For the last several years, Idaho Power has been 6
engaged in an effort to renew its federal license for its 7
largest hydropower generation source, the Hells Canyon 8
Complex (“HCC”). Idaho Power is also in the process of 9
relicensing the American Falls hydroelectric facility. 10
Relicensing and ongoing permitting requirements 11
include an extensive public review process that involves 12
numerous natural resource issues and environmental 13
conditions. For instance, the existence of endangered and 14
threatened species in the watershed may result in major 15
operational changes to the region’s hydropower projects, 16
which may be reflected in hydropower licenses, including 17
for the HCC and the American Falls facilities. 18
In addition, new interpretations of existing laws 19
and regulations could be adopted or become applicable to 20
hydropower facilities, which could further increase 21
required expenditures for endangered species protection and 22
other environmental compliance obligations and reduce the 23
amount of hydropower generation available to meet Idaho 24
Power’s generation requirements. Idaho Power cannot predict 25
BUCKHAM, DI 38
Idaho Power Company
the requirements that might be imposed during the 1
relicensing and permitting process, or the financial or 2
operational impact of those requirements. 3
Q. Are there other hydroelectric relicensing-4
based financial risks considered by the investment 5
community? 6
A. Yes. For any particular generating facility, 7
the worst possible outcome would be the loss of the license 8
to a competing party. Along with the uncertainty as to the 9
eventual receipt of licenses and the costs involved in 10
preparing for the license applications, costs of 11
protection, mitigation and enhancement (“PM&E”) related to 12
these projects are also difficult to quantify. The 13
potential financial magnitude of these PM&E costs and their 14
effect on the Company’s low-cost hydro generation resources 15
threaten the financial stability of a company the size of 16
Idaho Power and the ultimate rates it must charge its 17
customers. These amounts will vary among facilities; 18
however, in all cases, they can be significant due to lost 19
generation capacity, generation at a higher cost, and the 20
decreased ability of the Company to time and control water 21
releases. If the Company cannot generate when it is most 22
advantageous for the system, then some of the economic 23
value of the generation will be lost even if the amount of 24
total generation does not change. 25
BUCKHAM, DI 39
Idaho Power Company
Q. What will occur when the Company receives a 1
new license for the Hells Canyon facilities? 2
A. The amounts in construction work in progress 3
(“CWIP”), net of the accrued balance in the regulatory 4
liability account for pre-collected amounts received 5
relative to the allowance for funds used during 6
construction (“AFUDC”), will be transferred to plant in 7
service and the accumulation of AFUDC will cease and the 8
amortization of the relicensing costs will start. The 9
result will be an increase in rate base with earnings of 10
the Company declining substantially until this additional 11
amount is included in rate base and reflected in rates, 12
since there will be no ongoing contribution to earnings 13
from AFUDC. This is a notable risk to the Company’s 14
financial condition. Because this is a relicense of an 15
existing hydro facility, there will be no increase (and 16
potentially a decrease due to operational changes) in the 17
generation of power and thus no increase in sales revenues. 18
An investor’s perspective of the risk, upon receipt 19
of the license, includes the following: (1) the Company’s 20
earnings will immediately decrease (no continuing AFUDC and 21
an increase in amortization expense of the relicensing 22
costs), (2) the Company’s plant in-service will increase 23
(transfer from CWIP), and (3) no additional sales revenues 24
(same plant but new license) will result. If the completion 25
BUCKHAM, DI 40
Idaho Power Company
of relicensing is not aligned perfectly with the allowance 1
of new effective rates that recognize the transfer of 2
previously deferred relicensing costs into rate base, the 3
Company will be financially harmed. For the period of time 4
the new rate base is under review by the Commission, the 5
Company will earn no return on over $200 million of net 6
investment. This potential regulatory lag, combined with 7
investors’ potential expectation that there could be some 8
amount of cost disallowance, is a significant risk factor 9
based upon the size of the investment the Company has made 10
in relicensing the HCC. 11
Q. What is Idaho Power’s current HCC relicensing 12
cost in CWIP? 13
A. Relicensing costs of $432 million for the HCC 14
were included in CWIP as of March 31, 2023. As of March 31, 15
2023, Idaho Power's regulatory liability for collected 16
AFUDC relating to the HCC was $213 million. 17
Q. What other risks does the relicensing process 18
create? 19
A. As Idaho Power’s largest single generating 20
resource, continued operation of the HCC and failure to 21
renew a federal license for HCC could have a dramatic 22
operational impact. Further, imposition of onerous 23
conditions in the relicensing and permitting processes 24
could result in Idaho Power incurring significant 25
BUCKHAM, DI 41
Idaho Power Company
additional capital expenditures, increase operating costs 1
(including power purchase costs), and reduce hydropower 2
generation, which could negatively affect the financial 3
condition of the Company and the prices its customers pay 4
for electricity. 5
Reliability Risk and Execution Risk on Infrastructure 6
Q. What issues with reliability are creating 7
additional risk? 8
A. The transition to intermittent renewable 9
energy resources in the region, transmission constraints, 10
retirement of baseload fossil fuel plants, aging 11
infrastructure, demand growth, weather conditions and 12
wildfires, and other factors have all impacted the 13
Company’s ability to reliably provide energy. As noted in 14
Ms. Grow’s testimony, the Company is making a concerted 15
effort to maintain reliability using a variety of programs. 16
However, the aforementioned items do subject the Company to 17
greater reliability risks than existed in the past. 18
Q. Besides the risk of not being able to deliver 19
energy, what other risks does reliability entail? 20
A. Idaho Power could be subject to regulatory 21
penalties, reputational harm, legal claims, and operational 22
changes if it violates mandatory reliability and security 23
requirements. The obligation to provide reliable service 24
also entails a significant commitment of capital, both for 25
BUCKHAM, DI 42
Idaho Power Company
operating and maintenance expenses and for capital 1
improvements. As I noted previously, Idaho Power is in a 2
stage of significant capital investment, constructing the 3
resources needed to reliably serve customers. The capital 4
needed to maintain reliability introduces two elements of 5
risk: the ability of the Company to attract that required 6
capital, and the recovery of the investments on a deferred 7
basis and subject to the uncertainty of the regulatory 8
process. 9
There are also significant efforts at the national 10
level to reshape energy policy, and that can put upward 11
pressure on that spending and the associated need to 12
attract capital. New federal energy policies are evolving 13
and could introduce new spending requirements to meet 14
reliability standards and regulatory requirements. 15
Q. Are there other risks associated with Idaho 16
Power’s build-out of infrastructure to address reliability? 17
A. Yes. There are several considerable risks. 18
These risks include, as examples: 19
• the ability to timely obtain labor or materials 20
at reasonable costs; 21
• defaults and delays by suppliers and contractors, 22
including delays for specialty equipment that require 23
significant lead times; 24
• increases in price and limitations on 25
BUCKHAM, DI 43
Idaho Power Company
availability of commodities, materials, and equipment; 1
• imposition of tariffs on commodities, materials, 2
and equipment sourced by foreign providers; 3
• equipment, engineering, and design failures; 4
• credit quality of counterparties and suppliers 5
and their ability to meet financial and operational 6
commitments; 7
• unexpected environmental and geological problems; 8
• the effects of adverse weather conditions; 9
• catastrophic events, natural disasters, 10
epidemics, pandemics and other public health or 11
disruptive events that could result in supply chain 12
disruptions, as well as permitting and construction 13
delays; 14
• availability of financing; 15
• the ability to obtain approval from local, state, 16
or federal regulatory and governmental bodies and to 17
comply with permits and land use rights, and 18
environmental constraints; and 19
• delays and costs associated with disputes and 20
litigation with third parties. 21
The occurrence of any of these risks could cause Idaho 22
Power to operate at reduced capacity levels, increase 23
BUCKHAM, DI 44
Idaho Power Company
expenses, incur penalties, and adversely affect Idaho 1
Power’s financial condition. 2
Environmental Issues and Risks 3
Q. Please describe the Company’s increasing risks 4
related to environmental issues. 5
A. Idaho Power's operations are subject to 6
numerous federal, state, and local environmental statutes, 7
rules, and regulations relating to climate change, air and 8
water quality, natural resources, endangered species and 9
wildlife, renewable energy, and health and safety. 10
Compliance with environmental regulations can significantly 11
increase capital spending, operating costs, and plant 12
availability and can negatively affect the affordability of 13
Idaho Power's services for customers. 14
Q. What are the costs associated with 15
environmental compliance? 16
A. Idaho Power’s current estimated compliance 17
expenditures for the three-year period from 2023 to 2025 18
are $156 million of capital expenditures and $99 million of 19
operating expenses, based on current environmental laws and 20
regulations. Idaho Power anticipates that finalization, 21
implementation, or modification of federal and state 22
rulemakings and other proceedings could result in 23
substantial changes in operating and compliance costs. 24
Idaho Power is unable to estimate the changes in costs that 25
BUCKHAM, DI 45
Idaho Power Company
could result, given the uncertainty associated with 1
existing and potential future regulations, but Idaho Power 2
expects the expenditures will remain substantial 3
regardless. 4
Q. What other impacts could environmental 5
compliance requirements have? 6
A. In some cases, the costs to obtain permits and 7
ensure facilities are in compliance may be prohibitively 8
expensive. In other instances, the permitting process might 9
substantially delay the Company’s ability to acquire 10
resources in accordance with its resource planning process. 11
Furthermore, Idaho Power may not be able to obtain or 12
maintain all environmental regulatory approvals necessary 13
for operation of its existing infrastructure or 14
construction of new infrastructure. 15
Q. What would be the impact of prohibitively 16
expensive compliance costs or inability to acquire 17
regulatory approval to operate facilities? 18
A. If new regulations render generating 19
facilities uneconomical or impossible to maintain or 20
operate, Idaho Power would need to identify alternative 21
resources for power, potentially in the form of new 22
generation and transmission facilities, market power 23
purchases, demand-side management programs, or a 24
combination of these and other methods. 25
BUCKHAM, DI 46
Idaho Power Company
Q. What impact do lengthy permitting processes 1
have on the ability to operate facilities and the Company’s 2
financial condition? 3
A. Idaho Power’s resource procurement and 4
planning process, its Integrated Resource Plan (“IRP”), 5
assumes the ability of the Company to timely plan and 6
procure the necessary resources to serve load. Lengthy 7
permitting processes impact the Company’s ability to 8
execute on its lowest-cost, least-risk resource portfolios. 9
For example, the Boardman to Hemingway (“B2H”) 10
transmission project was first identified in the preferred 11
portfolio of the Company’s 2009 IRP, with an estimated in-12
service date of 2015. Since that time, B2H has remained in 13
subsequent IRP preferred portfolios, and the Company has 14
continued to work to obtain the permits and approvals 15
necessary for construction of B2H, but the process has 16
significantly delayed construction and commercial operation 17
of the project. As of March 31, 2023, the Company has $58 18
million in CWIP for future recovery. Similar to the HCC 19
relicensing, the prolonged B2H permitting process 20
negatively impacts liquidity and recovery of the costs is 21
subject to regulatory lag. 22
Physical Security and Cyber Security Risks 23
Q. What risks do physical security and 24
cybersecurity pose? 25
BUCKHAM, DI 47
Idaho Power Company
A. Idaho Power operates in an industry that 1
requires the continuous use and operation of sophisticated 2
information technology and increasingly complex operational 3
technology systems and network infrastructure. In addition 4
to those cyber assets, Idaho Power's generation and 5
transmission facilities and its grid operations are 6
potential targets for terrorist acts and threats, acts of 7
war, social unrest, cyber and physical security attacks, 8
and other disruptive activities of individuals or groups, 9
including by nation states or nation state-sponsored 10
groups. 11
Q. Have there been recent examples of such 12
attacks? 13
A. Yes. There have been recent cyber and physical 14
attacks within the energy industry on infrastructure such 15
as electric substations and fuel pipelines, with notable 16
reports in the media of electric industry infrastructure 17
specifically being targeted for and impacted by physical 18
attacks more recently. Unfortunately, there will be 19
additional attacks in the future. Idaho Power and its 20
vendors have been subject to, and will likely continue to 21
be subject to, continuous attempts to gain unauthorized 22
access to systems and confidential information, and efforts 23
to disrupt operations. 24
BUCKHAM, DI 48
Idaho Power Company
Q. Besides attempts to damage utility 1
infrastructure, are there other cybersecurity risks? 2
A. Yes. In the normal course of business, Idaho 3
Power or its vendors collect and store sensitive and 4
confidential customer and employee information and 5
proprietary information of Idaho Power. Idaho Power’s 6
technology systems are dependent upon connectivity to the 7
internet and third-party vendors to host, maintain, modify, 8
and update its systems, which may experience significant 9
system failures or cyberattacks that could compromise the 10
security of Idaho Power’s assets and information. All 11
information technology systems are vulnerable to 12
disability, unauthorized access, unintentional defects, 13
user error, errors in system changes, and cybersecurity 14
incidents. 15
Idaho Power is in the process of pursuing complex 16
business system upgrades, and these significant changes 17
increase the risk of system interruption. Any data security 18
breaches, such as misappropriation, misuse, leakage, 19
falsification, or accidental release or loss of information 20
maintained in Idaho Power's information technology systems 21
or on third-party systems, including customer or employee 22
data, could result in violations of privacy and other laws 23
and associated litigation and liability for damages, fines, 24
and penalties; financial loss to Idaho Power or to its 25
BUCKHAM, DI 49
Idaho Power Company
customers; customer dissatisfaction or diminished customer 1
confidence; and damage to Idaho Power’s reputation, all of 2
which could materially affect Idaho Power's financial 3
condition and results of operations. 4
No security measures can completely shield Idaho 5
Power's systems, infrastructure, and data from 6
vulnerabilities to cyberattacks, human error, intrusions, 7
or other events that could result in their failure or 8
reduced functionality, and ultimately the potential loss of 9
sensitive information or the loss of Idaho Power's ability 10
to fulfill critical business functions and provide reliable 11
electric power to customers. Despite the steps Idaho Power 12
may take to detect, mitigate, or eliminate threats and 13
respond to security incidents, the techniques used by those 14
who seek to obtain unauthorized access, and possibly 15
disable or sabotage systems or abscond with information and 16
data, change frequently and Idaho Power may not be able to 17
protect against all such actions. 18
Although Idaho Power continues to make investments 19
in its cyber and physical security programs, including 20
personnel, technologies, and training of personnel, there 21
can be no assurance that these systems or their expected 22
functionality will be implemented, maintained, or expanded 23
effectively; nor can security measures completely eliminate 24
the possibility of a cyber or physical security breach or 25
BUCKHAM, DI 50
Idaho Power Company
incident. Further, the implementation of security 1
guidelines and measures has resulted in, and Idaho Power 2
expects to continue to result in, increased costs. 3
Climate Change Risks 4
Q. Are changes in weather conditions and climate 5
concerns creating increased risk for the Company? 6
A. Yes, in a number of ways, including the 7
following: 8
• Due to regulations and associated costs 9
originating from climate change concerns, Idaho Power 10
is retiring fossil fuel generating units that have 11
provided reliable and affordable generation and 12
replacing it with intermittent resources and utility-13
scale batteries that fit within the confines of 14
federal regulation and infrastructure development 15
risks. This transition creates reliability issues, as 16
discussed above, and additional uncertainty regarding 17
resource costs and impacts on wholesale energy 18
markets, particularly as other utilities make the same 19
transition away from fossil fuel generating plants and 20
baseload energy sources. If new greenhouse gas (“GHG”) 21
emissions reduction rules were to become effective, 22
they could result in significant additional compliance 23
costs that could negatively impact Idaho Power's 24
future financial position, results of operations, and 25
BUCKHAM, DI 51
Idaho Power Company
cash flows if such costs are not timely recovered 1
through regulated rates. Moreover, the possibility 2
exists that stricter laws, regulations, or enforcement 3
policies could significantly increase compliance costs 4
and the cost of any remediation that may become 5
necessary. 6
• The price of power in the wholesale energy 7
markets tends to be higher during periods of high 8
regional demand that often occur with weather 9
extremes, which may cause Idaho Power to purchase 10
power in the wholesale market during peak price 11
periods, increasing power supply costs. The PCA helps 12
mitigate the effects of energy market price 13
volatility, but the volatility levels can result in 14
the Company absorbing significant amounts of power 15
supply costs. As described above, the Company’s April 16
2022-March 2023 PCA year, total actual power supply 17
costs were $721.8 million, compared to base power 18
supply costs of $305.7 million, and a large part of 19
this variance resulted from high market prices. 20
• The Company’s hydroelectric generating base 21
depends on water conditions in the Snake River Basin. 22
Warmer temperatures and changes in precipitation 23
levels and sustained drought conditions can adversely 24
affect the amount of energy generated by its 25
BUCKHAM, DI 52
Idaho Power Company
hydroelectric generation facilities. Low water 1
conditions in the Snake River Basin, as well as in 2
other areas, can increase wholesale market prices due 3
to a lack of hydroelectric generation in the region 4
and a reliance on more costly energy sources. This can 5
result in power supply cost variances that are 6
absorbed by the Company, as noted previously in my 7
testimony. 8
• The increased frequency and severity of storms, 9
lightning, high winds, icing events, droughts, heat 10
waves, fires, floods, snow loading, and other extreme 11
weather events can damage transmission, distribution, 12
and generation facilities, causing service 13
interruptions and extended or mass outages, which 14
increases costs and impairs Idaho Power's ability to 15
meet customer energy demand. 16
• The costs of repairing and replacing 17
infrastructure or any costs related to Idaho Power’s 18
liability for personal injury, loss of life, and 19
property damage from utility equipment that fails, 20
including as a result of significant weather and 21
weather-related events and fires, is not covered in 22
full by insurance. 23
• Customers' energy use could increase or decrease 24
based on variable weather conditions, impacting the 25
BUCKHAM, DI 53
Idaho Power Company
predictability of revenues and earnings. 1
• Stakeholder actions and increased regulatory 2
activity related to climate change and reducing GHG 3
emissions, could negatively impact the Company in 4
capital markets transactions. Idaho Power has seen a 5
rise in certain stakeholders, including investors and 6
lenders, placing increasing importance on the impact 7
and social cost associated with climate change. GHG 8
emissions, including, most significantly carbon 9
dioxide, could be further restricted in the future in 10
response to stakeholder expectations with respect to 11
environmental and climate change issues. The 12
increasing focus on climate change and associated 13
stricter regulatory and legal requirements may result 14
in Idaho Power facing adverse reputational risks 15
associated with certain of its operations that produce 16
GHG emissions or that mine coal. If Idaho Power is 17
unable to satisfy the increasing climate-related 18
expectations of certain stakeholders, IDACORP and 19
Idaho Power may suffer reputational harm. This could 20
cause IDACORP’s stock price to decrease or cause 21
certain investors and financial institutions not to 22
purchase the companies’ debt securities or otherwise 23
provide the companies with capital or credit on 24
favorable terms, which may cause IDACORP’s and Idaho 25
BUCKHAM, DI 54
Idaho Power Company
Power’s cost of capital to increase. 1
Company Size and Geographic Concentration 2
Q. Does IDACORP’s size have an impact on 3
investors’ perceived level of risk? 4
A. Yes, IDACORP’s relatively small market 5
capitalization compared to its peers is a factor that makes 6
IDACORP riskier than the average electric utility holding 7
company. IDACORP’s $5.7 billion market capitalization is 8
much smaller than the $22.8 billion average market cap of 9
the electric utilities used by Mr. McKenzie to estimate the 10
range of acceptable ROEs. There is well-documented evidence 11
that investors in smaller companies expect higher rates of 12
return than larger companies but also face higher risk. 13
Idaho Power does not have a corporate parent with a large 14
balance sheet and strong credit ratings to rely on during 15
times of financial stress given the fact that Idaho Power 16
is the primary subsidiary of IDACORP. 17
Also, the Company faces a concentrated regulatory 18
risk compared to many of its peers because 95 percent of 19
its retail revenues come from one jurisdiction. Both equity 20
analysts and the credit agencies consistently identify 21
regulatory risk as one of the chief risk factors for the 22
Company. This risk from lack of diversification, combined 23
with the relatively small size, gravitates toward a higher 24
required return from investors compared to many of Idaho 25
BUCKHAM, DI 55
Idaho Power Company
Power’s peers. 1
Growth and Regulatory Lag 2
Q. What will prevent the Company from earning 3
its authorized or allowed ROE, absent approval of this rate 4
request? 5
A. In light of the substantial infrastructure 6
development Idaho Power is undertaking, and will be 7
undertaking for the foreseeable future, in my opinion, the 8
reliance on historical test year information is a primary 9
reason the Company may have difficulty earning its 10
authorized or allowed ROE going forward. Idaho Power is in 11
a position of applying to recover its costs on a historical 12
basis when its costs are constantly increasing on a 13
prospective basis. As a result, there is and will continue 14
to be a consistent recovery lag. 15
Q. What effect does growth have on the use of 16
historical data? 17
A. Growth inherently worsens the effects. 18
Separate from rising operation & maintenance costs that 19
must accommodate that growth, the allowed rate of return is 20
applied to a rate base from a prior historical period, and 21
thus new plant additions suffer some period of 0 percent 22
return awaiting eventual rate base treatment. 23
BUCKHAM, DI 56
Idaho Power Company
III. CAPITAL STRUCTURE 1
Q. Would you please describe Exhibit No. 21? 2
A. Exhibit No. 21 details the forecasted year-end 3
2023 capital structure for long-term debt and common equity 4
prepared under my direction, the resulting recommended 5
overall rate of return, and the calculation of the 6
Company’s weighted average cost of long-term debt. 7
Q. The capital structure presented on Exhibit No. 8
21 incorporates changes to the Company’s financial 9
reporting of its capital structure. Could you please 10
discuss the rationale for the variance? 11
A. For financial reporting purposes, the American 12
Falls Bond Guarantee is included in the long-term debt 13
portion of the capital structure. For ratemaking purposes, 14
it is excluded as the interest costs associated with the 15
American Falls debt securities are treated as operation and 16
maintenance expenses. 17
Q. What is the rationale for proposing a capital 18
structure of 51 percent equity and 49 percent debt? 19
A. This is the projected actual capital structure 20
as of the end of 2023. Idaho Power believes a higher equity 21
proportion than the typical 50/50 split is needed to help 22
support the Company's credit ratings, particularly with the 23
significant QF and PPA debt-like obligations I referred to 24
above, which are not included in the debt component of the 25
BUCKHAM, DI 57
Idaho Power Company
ratio. The equity portion of the projected capital 1
structure is lower than the 55 percent year-end equity 2
average over the past six years because of new debt 3
issuances in 2023 to support increased capital spending. 4
Q. Has the higher equity ratio over the past six 5
years help the Company’s credit rating? 6
A. Yes. The Company began increasing the equity 7
ratio immediately following the last GRC. In fact, the 8
year-end 2012 equity ratio was 53 percent and it grew from 9
that level to 55 percent at year-end 2022. The increased 10
equity ratio has had a significant positive impact to the 11
Company’s credit ratings, partially offsetting some of the 12
lower ratios the rating agencies use for calculating 13
applicable ratings. 14
Another factor to consider in the capital structure 15
is the amount of imputed debt due to QF and PPA contractual 16
obligations the rating agencies consider when evaluating 17
the creditworthiness of the Company, as I have discussed 18
previously in my testimony. Although neither Moody’s nor 19
S&P currently publish a specific amount of imputed debt for 20
Idaho Power, S&P published a white paper detailing how they 21
calculate imputed debt for PPAs.2 Using that methodology, a 22
conservative estimate would be almost $600 million of 23

2 Standard & Poor's Methodology For Imputing Debt For U.S. Utilities'
Power Purchase Agreements. Attached as Exhibit No. 20.
BUCKHAM, DI 58
Idaho Power Company
imputed debt, which is not reflected in the Company’s 1
financial reporting of debt and is not included in the 2
Company’s cost of capital exhibit. After incorporating even 3
that conservative imputation of debt, the ratio biases more 4
heavily to debt. 5
Q. What is the Company’s proposed cost of debt? 6
A. As shown on page 2 of Exhibit No. 21, which 7
details the calculation of the cost of debt used in the 8
estimated year-end 2023 capital structure, the Company’s 9
proposed cost of debt is 4.895 percent. 10
Q. What was the Company’s cost of debt in its GRC 11
filed in 2011? 12
A. In that case, the Company filed a cost of debt 13
of 5.728 percent. 14
Q. Has there been any significant refinancing 15
since the last GRC? 16
A. Yes. Idaho Power has taken advantage of the 17
low interest rate environment since the last GRC to lower 18
the overall cost of debt by approximately 83 basis points. 19
At the same time, Idaho Power was able to lengthen its 20
weighted average maturity on the debt portfolio from 15.3 21
years at the end of 2011 to 19.3 years at the end of 2023. 22
The Company’s efforts over the past decade provide a 23
significant savings to customers. 24
BUCKHAM, DI 59
Idaho Power Company
Q. What method did the Company use for 1
calculating its cost of debt in this case? 2
A. Idaho Power applied a debt calculation method 3
to fully consider the effect of discounts, premiums, and 4
expense of issue on the annual cost of each bond, adopting 5
the bond yield to maturity method. 6
Q. Please explain the cost of debt calculation on 7
page 2 of Exhibit No. 21. 8
A. The calculation takes the settlement date, 9
maturity date, coupon rate, and net proceeds at the 10
issuance date for each debt issue to produce a bond yield 11
to maturity. The bond yield was then multiplied by the 12
principal amount outstanding for each debt issue, resulting 13
in an annualized cost of each debt issuance in column 12. 14
The total in column 12 for all the debt issuances produces 15
a total annual effective cost of debt in line 32. This 16
total was divided by the total in column 6, line 32 to 17
produce the weighted average cost for all long-term debt in 18
column 11, line 32. This method is appropriate because the 19
expense of issuance associated with a bond is essentially 20
prepaid interest, and the net proceeds, not the principal 21
amount of the bond, are all that is available to be 22
invested in property, plant, and equipment (rate base). 23
Q. Does the Company use variable rate securities 24
in its long-term capitalization? 25
BUCKHAM, DI 60
Idaho Power Company
A. No. The Company retired its only variable rate 1
security, the Port of Morrow (Boardman) Pollution Control 2
Revenue Bonds, in 2022 upon the demolition of the Boardman 3
plant and its pollution control equipment, and previously 4
repaid in full its variable-rate term loan entered into in 5
March 2022. 6
IV. OVERALL COST OF CAPITAL 7
Q. What is the overall cost of capital for Idaho 8
Power? 9
A. As shown on page 1 of Exhibit No. 21, using 10
the Company’s projected year-end 2023 capital structure, 11
the Company’s cost of debt as presented in my testimony, 12
and incorporating the recommended 10.4 percent cost of 13
equity, the resulting overall cost of capital for Idaho 14
Power is 7.702 percent. This is an appropriate rate of 15
return to be utilized by the Commission when deriving the 16
Company’s revenue requirement. 17
Q. How does that compare to the cost of capital 18
approved in Idaho Power’s 2011 GRC request? 19
A. It represents a decrease. The overall cost of 20
capital for Idaho Power approved in the prior GRC was 7.86 21
percent. 22
Q. Does this conclude your direct testimony in 23
this case? 24
A. Yes, it does. 25
BUCKHAM, DI 61
Idaho Power Company
DECLARATION OF BRIAN BUCKHAM 1
I, Brian Buckham, declare under penalty of perjury 2
under the laws of the state of Idaho: 3
1. My name is Brian Buckham. I am employed by 4
Idaho Power Company as Senior Vice President and Chief 5
Financial Officer. 6
2. On behalf of Idaho Power, I present this 7
pre-filed direct testimony and Exhibit Nos. 19 through 21 8
in this matter. 9
3. To the best of my knowledge, my pre-filed 10
direct testimony and exhibits are true and accurate. 11
I hereby declare that the above statement is true to 12
the best of my knowledge and belief, and that I understand 13
it is made for use as evidence before the Idaho Public 14
Utilities Commission and is subject to penalty for perjury. 15
SIGNED this 1st day of June 2023, at Boise, Idaho. 16
17
Signed: ___________________ 18 Brian R. Buckham 19
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