ipce9913.cccrl.doc

CHERI C. COPSEY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5142

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO FUND ITS CONTINUING PARTICIPATION IN THE NORTHWEST ENERGY EFFICIENCY ALLIANCE, INC. )
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CASE NO. IPC-E-99-13

COMMENTS OF THE COMMISSION UTILITIES DIVISION STAFF

COMES NOW the Utilities Division Staff of the Idaho Public Utilities Commission, by and through its attorney of record, Cheri C. Copsey, Deputy Attorney General, and in response to the Notice of Application, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on February 1, 2000, submits the following comments.

THE COMPANY’S APPLICATION
On December 30, 1999, Idaho Power Company (Idaho Power) filed an Application with the Commission requesting an order authorizing the funding of Idaho Power’s continued participation in the Northwest Energy Efficiency Alliance, Inc. (NEEA). NEEA is a nonprofit corporation established to transform regional markets to improve the efficiency of electrical use. Idaho Power specifically requests that the Commission determine if it is in the public interest for the Company to continue participation in NEEA for the period 2000-2004. If continued participation is in the public interest, Idaho Power also requests that the Commission establish a mechanism that allows it to recover NEEA expenditures.
In support of its request for continued participation, Idaho Power attached copies of previous Commission Orders approving its participation in NEEA for the period 1997 through 1999 and the recovery of NEEA expenditures using revenue sharing funds. Idaho Power also points out that it has discontinued system demand side management programs to participate in the regional market transformation programs provided by NEEA. Idaho Power noted that the Commission has approved discontinuance of its DSM programs, at least in part because of its participation in NEEA.
Idaho Power asserted that its participation in NEEA has been in the public interest and satisfies its obligation to conduct DSM activities as part of service obligations specified in prior Commission orders. Idaho Power described the goal of NEEA as increasing the adoption in the market place of energy efficient technologies and practices. Idaho Power believes that this type of market transformation needs to be undertaken on a collaborative basis rather than an ad-hoc basis because markets cut across utility and regional boundaries.
Idaho Power provided additional support for its request by describing NEEA purposes and practices and highlighting NEEA activities. Idaho Power points to the favorable operational and financial audits conducted by Pricewaterhouse Coopers and Moss-Adams LLP respectively. It also provided a detailed description of NEEA’s program development methodology and project evaluation process. Finally, Idaho Power provided a summary of NEEA programs in Idaho.
If the Commission determines that Idaho Power should continue participation in NEEA, the Company proposes two possible methods of reimbursement for NEEA contributions. The $1.3 million annual contribution could be provided from revenue sharing funds or through a separate charge similar to the Avista Corporation conservation charge. Idaho Power stated that the revenue sharing method is simple, straightforward and causes no change in rates charged to Idaho Power’s customers. Idaho Power indicated that the conservation charge methodology would allow the Commission to adjust customer allocations and pricing structures. While Idaho Power recommended the revenue sharing approach, either method would be acceptable to the Company.

PRIOR STAFF COMMENTS REGARDING NEEA
The Commission Staff originally filed comments in Case No. IPC-E-96-26, offering qualified support of Idaho Power’s participation in NEEA. The Staff stated:

With some reservations Staff supports the concept and organization of the alliance. Staff believes that permanently transforming energy efficiency markets through temporary education and incentive programs is a desirable goal and that the implementation of such programs on a regional basis has at least the potential to benefit Idaho’s electricity ratepayers more than if such programs are implemented separately by each utility. However, Staff also believes that, in addition to creating a new administrative layer on electricity efficiency efforts, such a region wide group as the alliance has the potential to under-represent Idaho public interests and to misrepresent private interests as being in the public interest.

The Staff was particularly concerned about the potential for conflict of interest when board members are faced with choosing between the interests of NEEA and the members’ own constituency. Another potential conflict of interest cited was the selection of projects and programs on the basis of personal benefit or profit rather than on the basis of public interest.
The Staff also expressed concern regarding NEEA’s interference in markets using ratepayer money with reduced Commission oversight. Staff stated that the Commission would be less able to ensure that programs targeted appropriate customer groups, that programs were reasonably administered and that programs were cost effective.
In Case No. IPC-E-98-12, the Commission Staff filed comments regarding the Company’s request to use revenue sharing money to fund its 1997 and 1998 contributions to NEEA. The Staff stated that it supported Idaho Power’s participation in NEEA in Case No. IPC-E-96-26 and review of information available in the IPC-E-98-12 case had not changed its opinion. The Staff supported its recommendation to allow the Company to recover 1997 NEEA funds by citing the two independent financial audits showing few weaknesses in NEEA’s internal controls and the fact that 1997 was the startup year for NEEA. Staff noted the lack of information available to determine cost effectiveness and identified what it believed to be a lack of effective, independent evaluation of NEEA programs by Idaho Power.

In Case No. IPC-E-99-7, the Commission Staff filed comments stating:

Based on Staff’s observation of NEEA at its board of directors meetings and workshops and our review of NEEA programs and reports, Staff believes NEEA is an effective organization for transforming electricity efficiency markets in the Northwest. Further, we believe Idaho Power has demonstrated that for 1998 its customers have received their money’s worth of benefits through its active participation on the NEEA board of directors as well as through its local push of NEEA projects.

In further support of its recommendation to allow Idaho Power to recover 1998 NEEA expenditures, the Staff noted the adaptive NEEA program evaluation process and the independent financial and operational audits of NEEA that demonstrated sound fiduciary processes and no major deficiencies in financial controls. Staff continued to recognize the difficulty in conducting reliable cost-effectiveness analysis of NEEA programs on a short-term basis.

UTILITIES DIVISION STAFF ANALYSIS
Since NEEA’s inception in 1996, Staff has supported the regional market transformation concept and the financial participation of Idaho Power Company. Although that support has not been without some concern, many of the potential problems identified in prior Staff comments have either not materialized or have been addressed. While the potential for conflict of interest still exists, it appears that NEEA’s existing conflict of interest rules and its process for evaluating programs have effectively limited the opportunity for inappropriate profit or programs. Financial and operational audits have not identified any major deficiencies.
The Commission has also reviewed NEEA’s activities in association with Idaho Power recovery of NEEA expenditures. This review process allowed interested parties to comment on Idaho Power’s participation in NEEA and provided the Commission a more direct oversight of NEEA programs and practices. NEEA and Idaho Power, through the cost recovery review process, have addressed several concerns expressed by Staff in previous comments. For example, NEEA added a customer representative to the Board to obtain input from the group that will ultimately pay for the programs. NEEA also expanded its programs within Idaho to provide a better return on funds contributed by Idaho customers. Idaho Power improved its participation in NEEA both at the Board of Directors level and within Idaho through increased contact with its Idaho customers and improved promotion of available NEEA programs. In 1999, Idaho Power conducted seven workshops, designed to educate customers about NEEA programs, with as many as 60 customers attending each workshop. It plans to continue to hold such workshops.

Cost Effectiveness
Without question the single most important and difficult issue previously identified by Utilities Division Staff is determining whether NEEA is cost effective. In comments filed over the past three years, Staff has consistently emphasized the need for both NEEA and Idaho Power to evaluate NEEA’s effectiveness to determine if customers are getting their money’s worth.
For the period 1997 through 1999, NEEA’s budget was $65.5 million to undertake market transformation programs throughout the northwest. Idaho Power customers contributed 6.5% of that amount or approximately $4.3 million. The contribution translated to approximately $2.50 per residential customer per year. According to information provided in Idaho Power’s Application, NEEA spent a total of $51.34 million region wide and $6.1 million in Idaho as of June 23, 1999. While this amount represents approximately 11.9% of total NEEA expenditures, it includes expenditures in areas of Idaho served by public power companies, Avista Utilities, PacifiCorp and Idaho Power. On a prorated basis Idaho investor owned utilities contributed approximately $5.3 million or 8.1% of NEEA’s total budget.
The energy savings in Idaho according to Idaho Power’s Application is estimated to be 4.2 average megawatts (aMw) during the contract period and 34 aMw over a ten-year period. Once again, while these savings represent approximately 7.5% of all estimated NEEA savings, they also include energy use reduction in all electric service areas of Idaho.
The overall levelized cost of NEEA’s programs from the utility’s perspective is estimated to be 0.15 cents per kWh or 1.5 mills per kWh. This amount is comparable to a current, weighted market price for firm energy of about 28 mills per kWh and an Idaho Power embedded cost of generation of about 23 mills/kWh. The weighted cost of energy saved in Idaho is estimated to be about 0.184 cents per kWh or 1.84 mills per kWh. Thus, the incremental increase in the cost of purchasing energy on the market is significantly larger than the estimated increase resulting from NEEA energy saved in Idaho. In 1996, Idaho Power spent $4.35 million on intra-company DSM programs that produced weighted, real levelized energy savings at a cost of approximately 5.7 mills per kWh. The intra-company DSM included such programs as Low Income Weatherization and Manufactured Home Acquisition at levelized utility costs of 23.8 mills/kWh and 18.7 mills/kWh respectively.
Continued participation by Idaho Power through 2004 will cost slightly less on an annual basis than it did for the 1997 through 1999 period. Idaho Power will contribute $1.3 million per year or slightly less than $2 per year on average for each residential customer. Funding contributed by Idaho Power customers will represent approximately 6.3% of NEEA’s annual revenue and will fund expanded NEEA programs that consist primarily of those shown on Attachment 1. Although not specifically stated, Utilities Division Staff anticipates that some of the market transformation programs will be discontinued while others are added as opportunities are identified.
In trying to determine whether or not Idaho Power customers are getting their “money’s worth,” the Utilities Division Staff recognized that customers derive the benefits of energy efficiency in several ways. Idaho Power customers who actually participate in the energy efficiency programs and reduce their power bills derive direct benefits. These benefits are usually the most recognizable by customers. However, market transformation programs can make this benefit less obvious by providing “built–in”, and often unrecognized energy efficiency characteristics in the products customers buy.
Idaho Power customers who do not participate in the programs but experience a lower rate from lower overall power supply costs derive a more indirect benefit. While these benefits can be estimated, they are dependent upon customer growth within a service territory, the embedded cost of supply and the cost of supply alternatives to meet that growth. A comparison of the NEEA costs of energy saved within Idaho to the incremental increase in the cost of supply alternatives such as market purchases demonstrates the potential for this benefit.
Idaho Power customers can also indirectly experience a lower rate due to reduced regional demand and market prices. Although the effect of reduced regional demand on regional market prices and local rates is difficult to determine, it is a potential indirect benefit that should be recognized.
Finally, as a member of society, Idaho Power customers experience less tangible societal benefits derived from increased energy efficiency. These benefits include improved environmental conditions from reduced consumption of fossil fuels, reduced environmental impact from fewer generating facilities and the reduced consumption of natural gas and water resources.
Utilities Division Staff reviewed NEEA’s methodology for estimating program energy savings and is satisfied that it is logically and reasonably based on the most up to date information available. However, with few exceptions, the energy savings estimates for NEEA’s market transformation programs depend upon the critical assumption of what would have happened in the market place without the program. While it is relatively easy to determine the status of a market at any point in time, it is nearly impossible to prove or disprove that changes within that market were due solely, or even partly, to the activities of NEEA.
Because there is no way to prove what the markets would have been like without NEEA programs, NEEA’s energy savings estimate and the extent to which utility customers benefit without direct participation are vulnerable to the charge that they are speculative. This uncertainty in estimating energy savings is significantly offset by the nearly three to one cost differential between the incremental increased cost of acquiring new resources and the estimated cost of NEEA energy savings. Consequently, the evidence supports a decision that NEEA programs are in the public interest.

NEEA Funding Mechanism
Idaho Power proposes to set aside a reserve of $5,462,388 from the 1999 revenue sharing funds to pay the NEEA payments in the years 2000-2004. The annual NEEA payments are $1.3 million. Using an estimated jurisdictional allocation factor of 95.5%, the Idaho portion is $1,241,500 annually or $310,375 quarterly. The reserve would accrue interest at the annual rate set for customer deposits, currently 5%.
The accrued funds for the 1999 revenue sharing are approximately $8.8 million. The final amount of revenue sharing will be determined using current allocation factors and a filing will be made simultaneously with the PCA. The proposed reserve of $5,462,388 for the NEEA payments in the years 2000-2004 would be established from this amount. This year’s revenue sharing filing will also account for existing revenue sharing reserve funds. These reserves include: (1) the 1998 revenue sharing deferral of approximately $2.6 million due customers except for Schedule 19 and special contract customers who received rebates for their share in 1999; (2) the 1999 NEEA payment differential of approximately $160,000; and (3) the Ag Choices reserve of approximately $240,000 after the 1999 and estimated 2000 payments. These reserves also accrue interest at the 5% rate. The remaining revenue sharing amounts to be distributed if the proposed NEEA funding is accepted will be approximately $6.5 million.

CONCLUSION AND RECOMMENDATIONS
This is the fourth time that Staff has evaluated Idaho Power’s participation in NEEA and filed comments. In this instance, as in the other three, Utilities Division Staff continues to support the concept of market transformation and recommends that Idaho Power be authorized to participate with the expectation that prudently incurred costs will be recovered. In Case No. IPC-E-96-26, Staff recommended Idaho Power participation with little historic information regarding the operation of the NEEA Board, the evaluation and modification of NEEA programs, the geographic and customer class distribution of programs or the amount of NEEA oversight available to the Commission. Staff believed in the concept and concentrated on identifying potential problem areas and recommending improvements in the process.
Through subsequent expense recovery proceedings and continuous participation by Staff on the NEEA Board, Utilities Division Staff has significantly more information on which to base its recommendation in this case. After three years of operation, NEEA has 21 projects in various stages of market transformation with a track record of evaluation and modification. Concerns previously expressed by Staff regarding potential conflicts of interest have lessened with its direct observation of how the NEEA Board operates and how NEEA staff develop and propose programs. Commission Staff, interested parties and the Commission have had an impact on the operation of NEEA over the three-year period. Participation by Idaho Power in NEEA operations has improved, as has the participation by end-use customers on the NEEA Board of Directors. NEEA has also, with the assistance of Idaho Power, improved the number of energy efficiency programs and participants within the state of Idaho.
Utilities Division Staff recommends that annual review of NEEA activities with comments/reports to the Commission continue as part of the Idaho Power expense recovery process to allow continued input on NEEA operations.
Utilities Division Staff has reviewed NEEA’s energy savings cost analysis and finds that it provides a reasonable estimate of the energy saved as a result of NEEA program expenditures. An analysis of NEEA results also shows that the energy efficiency programs of NEEA in Idaho are lower cost than the current cost of new supply resources. Moreover, the estimated cost of energy saved by NEEA in Idaho is significantly less than the estimated cost of energy saved by prior Idaho Power efficiency programs in Idaho. However, it is also recognized that NEEA energy savings estimates are based on somewhat subjective assumptions regarding markets without NEEA programs. Variations in assumptions could significantly change the estimated cost of energy savings.
Nevertheless, many Idaho customers do participate in NEEA and those who don’t, receive benefits within Idaho Power’s service area, within the region and on a societal scale. NEEA is at least, in part, a public purpose program similar to Idaho Power’s current low-income program. Both programs benefit society beyond cost effective conservation.
Utilities Division Staff recommends that revenue sharing funds be used to fund Idaho Power’s continued participation in NEEA. The Commission has used this revenue stream in the past to fund the program and it is reasonable to continue this method of funding in this case. The problems associated with increasing rates to fund NEEA, at the same time that revenue sharing funds are available, clearly out weigh any potential benefit that could be gained by a rate increase. Use of revenue sharing funds avoids unnecessary changes in rates and promotes rate stability. Revenue sharing funds were used to fund Idaho Power’s NEEA participation in the years 1997, 1998 and 1999 respectively. (Order No. 27877).
Utilities Division Staff recommends accepting Idaho Power’s proposed reserve for 2000-2004 NEEA payments. The 1999 revenue sharing funds are due all customers. By targeting 1999 funds, all customers will contribute to NEEA funding.

Dated at Boise, Idaho, this day of March 2000.

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Cheri C. Copsey
Deputy Attorney General
Utilities Division Staff: Randy Lobb
Terri Carlock

CCC:RL:gdk:i:umisc/comments/ipce9913.cccrl

UTILITIES DIVISION STAFF COMMENTS 8 MARCH 9, 2000