20050118Stewart Direct.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF P ACIFICORP DBA
UTAH POWER & LIGHT COMPANY
FOR APPROVAL OF CHANGES TO ITS
ELECTRIC SERVICE SCHEDULES
CASE NO. PAC-O5-
) Direct Testimony of John W. Stewart
ACIFICORP
CASE NO. P AC-05-
January 2005
Please state your name, business address and present position with
PacifiCorp (the Company).
My name is John W. Stewart, and my business address is One Utah Center, Suite
2300, 201 South Main Street, Salt Lake City, Utah. I am the Managing Director
Regulation for PacifiCorp s Eastern Service States.
Qualifications
Briefly describe your education and business experience.
I have a degree in Business Studies from the University of Strathclyde, I am a
graduate of the Institute of Personnel and Development and I have completed the
ScottishPower Business Leadership Program conducted by the Wharton
Management School, University of Pennsylvania. I have worked for the Scottish
Power Group of companies in a variety of management roles in.
What are your responsibilities in your current position at PacifiCorp?
As Managing Director, Regulation, my responsibilities include managing the
regulatory proceedings in the states of Utah, Wyoming and Idaho, including the
management of all filings that are made by PacifiCorp with the Idaho Public
Utilities Commission (Commission).
Purpose and Summary of Testimony
What is the purpose of your testimony?
The purpose of my testimony is to provide an overview of the Company s 2005
Idaho general rate case filing, including a discussion of the following points:
The rate increase request, test period, and inter-jurisdictional cost allocation
methodology,
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The cost drivers that led to this rate case filing,
The implications of this filing on the Company s financial integrity,
The Company s efforts to mitigate impacts on its Idaho customers,
The Company s cost control efforts
The reasonableness of the requested increase, and
An introduction of Company witnesses.
Rate Case Overview
What is the total rate increase requested by the Company is this case?
The Company s requested net overall price increase is $11.4 million, or 9.
percent. The 9.2 percent increase represents an average across all customer
classes. The specific impacts on customer classes are discussed in the testimony
on Mr. William R. Griffith. The requested rate increase is capped in accordance
with the terms of the Multi-State Process (MSP) stipulation which is currently
awaiting approval by the Commission. The MSP cap is discussed in the
testimony of Mr. David L. Taylor. Further, the requested rate increase reflects the
impact of the expiration of the Power Cost / Tax surcharge (Schedule No. 93),
which ends at the same time as the effective date of the proposed rates in this
case.
What test year has PacifiCorp used to determine its revenue requirement in
this case?
The Company has used an historical test year that begins April 1, 2003 and ends
March 31 , 2004 (FY 2004). The base test year is adjusted for known and
measurable costs and investments as presented in the testimony of witnesses in the
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case. This approach is consistent with the past practice of the Commission which
has favored the use of an historical test period with known and measurable
adjustments extending beyond the end of the historical test period. The purpose
of the known and measurable adjustments is to match as closely as possible the
change in rates with related costs being incurred to serve Idaho customers.
Y 00 mentioned the MSP stipulation. Does this filing incorporate the Revised
Protocol inter-jurisdictional cost allocation methodology proposed in the
MSP stipulation pending before the Commission?
Yes. As Mr. Taylor explains in his testimony, the Company s request was
developed under the Revised Protocol inter-jurisdictional cost allocation
methodology. In accordance with the MSP stipulation, the Company s request in
this case was limited by the Rate Mitigation Cap. The application of this cap
resulted in a requested rate increase that is $1.8 million less than the increase
calculated using the Revised Protocol without a cap.
Rate Case Drivers
Please explain why the Company is filing for a requested increase at this
time.
The last general rate case in Idaho was filed in 1985 with rates being set in April
1986. Due to a number of limited issue base rate reductions since 1986
PacifiCorp s ongoing base rates are actually about 7 percent lower today than they
were in 1986. These intervening base rate reductions have totaled over $7
million.
Additionally, since 1986 PacifiCorp has recovered, with Commission
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approval, a net amount of approximately $16 million through three temporary
surcharges and three temporary surcredits. As measured by ongoing base rates
however, the Company has implemented the above rate reductions in the face of
significant cost increases experienced over the same period. As measured by the
Producer Price Index (PP!), for example, which tracks changes in the wholesale
prices of finished goods, prices have increased some 38.9 percent since 1986. If
the Company s 1986 operations and maintenance (O&M) costs had increased at
the same rate as the PPI, ongoing base rate increases of approximately $10 million
in Idaho would have been necessary since that time. This is in contrast with over
$7 million in base rate reductions actually experienced by the Company s Idaho
customers and illustrates the efforts that the Company has made to effectively
manage costs for the benefit of its Idaho customers.
The combined impact of decreasing rates and the continuing impact of
increasing inflation on the Company s operating costs is clearly a significant
driver in this rate case. In addition, specific issues have triggered the need for
requesting rate relief, including:
Increases in pension costs and costs related to providing health care
coverage to employees, and
Recovery of investments required for new generation resources.
What is driving the increases in pension costs and costs related to providing
health care coverage to employees?
As Mr. Rosborough discusses in more detail, the Company has incurred increased
costs related to pensions and health insurance. External factors, such as the
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downturn in the financial markets and significant increases in medical costs, are
driving these increases. Although the Company has mitigated some of the impact
of those increases with internal cost control initiatives, these externally driven
costs are largely unavoidable. Rising costs in these areas are not unique to
PacifiCorp or even to the utility sector. Personnel-related costs such as pension
and health benefits are a significant portion of the Company s overall costs.
Please describe the investments the Company has made in new generation
resources referenced above.
Three long-term system resources are or will be in-service during the relevant
periods in this case: the West Valley lease agreement, the installation of three
General Electric LM -600 generation units at the Gadsby plant site, and Phase I of
the 525 MW combined cycle combustion turbine generating facility at Currant
Creek. Mr. Watters' testimony demonstrates that these resources were prudently
acquired and provide system-wide benefits to all of the Company s customers
particularly the Company s Idaho customers.
Impacts of Rate Case on Company s Financial Integrity
What is the Company s current rate of return and how does that compare
the request in this application?
PacifiCorp is currently earning a normalized return on equity of only 5.8 percent
in Idaho, as described in Mr. Weston s testimony. This is considerably lower than
the 13.40 percent approved in Utah Power s 1985 general rate case, and when
applied to current conditions, falls substantially short of the 11.125 percent return
on equity supported by Dr. Hadaway s testimony in this proceeding. Dr.
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Hadaway s testimony indicates a range of appropriate levels of return on equity
from 10.7 percent to 11.4 percent. The Company is requesting that the
Commission approve a return on equity of 11.125 percent which reasonably falls
toward the middle of the range identified by Dr. Hadaway. An allowed return on
equity in range proposed by Dr. Hadaway would send a positive signal to the
capital markets at a time when the Company is embarking on a cycle of significant
capital investment.
How will the rate increase sought in this case contribute to PacifiCorp
financial strength?
The requested rate increase will support the financial strength of the Company by
allowing the Company an opportunity to earn a reasonable return on investment.
As explained by Mr. Watters, PacifiCorp s 2003 Integrated Resource Plan (IRP)
calls for the development of 4 000 megawatts of power supply resource by FY
2013. This growth cycle will require that the Company maintain a financial rating
that will permit access to capital markets at reasonable costs. By granting the
Company s requested rate increase, the Company will be able to maintain the
financial strength necessary to attract the capital required to meet the growing
needs of customers through the acquisition or development of the power supply
resources projected in the IRP.
Without the requested rate increase, it will be very difficult for the
Company to meet the challenges presented by increasing costs and investment
requirements necessary to meet the growing electrical service needs of its Idaho
customers.
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Mitigation of Impacts on Customers
What efforts has PacifiCorp made to help its Idaho customers mitigate their
energy costs?
The Company has mitigated the impact on customers by diligently pursuing
available credits from the Bonneville Power Administration (BP A) for eligible
Idaho customers. Throughout the 1980s and most of the 1990s, PacifiCorp' s
Washington, Oregon, and Idaho customers enjoyed substantial energy credits from
BPA's Residential Exchange Program. During this time, PacifiCorp s Idaho
customers received annual benefits in the range of $15 - $26 million. In 1997, the
total annual BPA credit for PacifiCorp s Idaho customers fell to $3 million and
stayed roughly at that level for the following three years. In 2000, conscious of
Idaho s needs as an agricultural state, PacifiCorp began negotiations with BPA to
secure a higher level of credit for its Idaho customers. PacifiCorp successfully
negotiated two separate agreements spanning BPA's Fiscal Years 2001 - 2006
that provided Idaho customers with $36 million in annual benefits. This level of
benefit currently provides a credit of $0.039/kWh, or a discount of over 50 percent
for the average irrigation customer, and a credit of $0.023/kWh for non-irrigation
customers.
PacifiCorp recently completed a new round of negotiations in an effort to
extend the BP A credit past 2006. The result of these negotiations is a new
agreement, based on a formula for the difference in BP A rates and market prices,
that will provide PacifiCorp s Idaho customers with annual credits in the range of
$8.6 - $21.3 million for the five-year period 2007 - 2011. PacifiCorp s efforts to
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work with BP A and the Idaho Commission on behalf of its Idaho customers has
resulted in reduced energy prices for Idaho customers that are among the lowest in
the nation.
What else has the Company done to soften the impact of this requested rate
increase and to help customers manage their energy costs?
Pursuant to Commission Order No. 29034, PacifiCorp committed to work with
irrigators to develop an optional load control program beginning with the 2003
irrigation season. The Irrigation Load Control Credit Rider program was designed
to help irrigators manage their energy costs by providing energy credits for
voluntary load curtailment during specified periods. The 2003 program enjoyed
considerable success, with 207 customers participating at 403 individually
metered sites. The program curtailed in excess of 20 megawatts per day and
resulted in a total of $277 584 of credits being paid to participating customers
over the four-month irrigation season. Enrollment for the 2004 irrigation season
increased more than 50 percent from the 2003 program with 340 customers
participating at 734 sites and resulted in a total of $410 325 of energy credits
being paid to participating customers. This resulted in a daily load curtailment in
excess of 30 megawatts during the 2004 irrigation season.
In response to feedback received from PacifiCorp s irrigation customers
PacifiCorp proposed modifications to the load control program for the 2005
irrigation season that have been filed and approved by the Commission. These
modifications expand the options for participating customers by providing
additional choices for curtailment intervals to best match the individual needs of
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our irrigation customers. We anticipate the participation in 2005 will build on the
success achieved in the past two seasons and enable additional customers to
actively participate in the management of their energy costs.
Are there other efforts the Company has made to help Customers manage
their energy costs?
Yes. The Company s experience is that information about the Company
planned rate changes and the reasons for those changes is helpful to customers as
they make decisions which may affect their energy consumption. Over the last
several months, the Company has met with almost 100 customers, community
leaders, and legislators to explain the reasons necessitating this general rate case
and other rate filings before the Commission. In these public meetings, we have
explained the background behind the current and expected BP A credit levels, the
Company s rate case activity in other states, the history of rate cases in Idaho, and
the reasons for this rate case filing. We further explained that the expected timing
of the effective date of the price increase from this rate case will occur at the end
of the 2005 irrigation season, leaving almost a full year for irrigators to plan their
farming operations and energy consumption prior to the beginning of the next
irrigation season.
Of course, the reaction of the meeting participants is that no one wants
either rate increases or reduced BPA credits levels. However, participants
generally appreciated the information provided by the Company because it helps
them understand the reasons for rate changes, and plan for and manage expected
changes in their energy costs.
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Company Cost Control Efforts
What efforts has the Company made to mitigate the need for rate increases
through cost controls?
Cost control efforts are one of the main reasons the Company has been able to
provide excellent value to its Idaho Customers and to achieve declining base rates
since 1986, in spite of inflationary pressures that have caused the PPI to increase
38.9 percent over that time period.
PacifiCorp has achieved cost efficiencies through many different
initiatives, including improved call center operations, new procurement cost
savings, and implementing internal process changes. For example, the Company
has controlled costs by modifying its planning and budgeting processes to better
match the regulatory process and the rate impacts of its business decisions. All
budgets are reviewed with regard to the level a particular cost is currently being
recovered in customer rates. In this way line managers are more aware of the
consequence each cost increase will have in the form of customer rate increases.
This approach establishes a discipline within all areas of the organization to
recognize and manage the impact of business decisions and cost increases on the
prices customers pay.
Reasonableness of Requested Increase
Why do you believe the Company s requested rate increase is reasonable?
The Company takes seriously its obligation to keep customer prices as low as
possible and does not take the request of a price increase lightly. The base data in
this case has been used as the basis for the Company s recent rate cases in Utah
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and Oregon. Through the scrutiny of these rate cases we have refined and
improved the data to meet the objective of keeping our rate increase request as
conservative as possible, while seeking to recover the revenue necessary to allow
the Company an opportunity to earn a reasonable return on investment.
Further, as discussed earlier in my testimony, we work hard to help
customers mitigate their energy costs and to limit the need for rate case increases
by controlling our own operating costs. The Company has been able to limit the
net overall price increase in this case through the efforts discussed and through a
deliberate effort to seek a price increase that is as conservative as possible.
As noted earlier, since base rates were last set by the Commission in 1986
PacifiCorp rates have decreased. PacifiCorp s request for a net overall price
increase of 9.2 percent based on rates that are lower than they were in 1986
clearly reasonable and will continue to represent an excellent value to Idaho
customers.
If approved as filed, how will PacifiCorp s Idaho prices compare with other
utilities?
As stated in the Commission s Fiscal Year 2004 Annual Report
, "
Idaho
electricity rates are among the lowest in the nation." Based on information from
the Edison Electric Institute, PacifiCorp s current retail average rates rank 171
lowest out of 172 utilities. If the full rate increase were granted PacifiCorp rates
would rank as the 165th lowest among 172 utilities. On a regional basis, as shown
in the chart below, PacifiCorp rates in Idaho are very low when compared to other
Idaho utilities, and other regional utilities.
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Total average retail rates (cents per kilowatt-hour)
63 Mountain Region Average
When comparing PacifiCorp s electric rates to that of other utilities,
PacifiCorp s request for a net overall price increase of $11.4 million, or 9.
percent, is reasonable. Granting this request would allow the Company an
opportunity to earn a reasonable return on investment and to continue meeting the
growing electrical service needs of customers in Idaho by providing safe and
reliable energy.
Introduction of Witnesses
Please list the Company witnesses and provide a brief description of their
testimony.
The Company witnesses filing direct testimony are:
Samuel C. Hadaway, FINANCO, Inc., will testify concerning the Company
return on equity. Based on a DCF (Discounted Cash Flow) methodology
confirmed by a risk premium analysis, as well as a review of the current market
the electric utility industry, and company-specific factors, Mr. Hadaway proposes
a point value for PacifiCorp s cost of equity of 11.125 percent.
Bruce N. Williams, Treasurer, will testify concerning the Company s cost of debt
and preferred stock. Mr. Williams will show the Company s embedded cost of
long-term debt to be 6.34 percent and the embedded cost of preferred stock to be
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64 percent. He will also explain the calculation of the average capital structure
for the utility for the test year.
J. Ted Weston, Regulation Manager, will present the Company s overall revenue
requirement based on normalized results of operations for a FY 2004 test year
with known and measurable adjustments. Mr. Weston will present the
normalizing adjustments to actual test period results related to revenue, operation
and maintenance expense, net power costs, depreciation and amortization, taxes
and rate base.
Mark T. Widmer, Director, Net Power Costs, will describe the operation of the
GRID model, including the new VISTA model for hydro normalization, and the
calculation of net power costs.
Stan K. Watters, Senior Vice President, Commercial & Trading, will provide
information regarding the West Valley lease, the Gadsby Project and the Currant
Creek generation project.
Daniel J. Rosborough, Director of Employee Benefits, will testify to the
Company s increased pension and employee benefit costs. Mr. Rosborough will
also address the actions the Company is taking to control these rising costs.
David L. Taylor, Principal Regulatory Consultant, explains the cost allocation
procedures that apply following the adoption of the new MSP Protocol in Idaho.
Mr. Taylor also presents testimony on class cost of service and functional revenue
requirement.
William R. Griffith, Director of Pricing and Regulatory Operations, will present
testimony on three primary areas: 1) description of the Company s pricing
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objectives, 2) the Company s proposed rate spread, and 3) the Company
proposed changes in price design for the affected rate schedules.
Does this conclude your direct testimony?
Yes.
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