20080919Walje Direct.pdf

RECEIVED
2HSEP 19 AHIO\l
UTIJI¥r~otclJ~i~SION
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE )
APPLICATION OF ROCKY )
MOUNTAIN POWER FOR )
APPROVAL OF CHANGES TO ITS )
ELECTRIC SERVICE SCHEDULES )
AND A PRICE INCREASE OF $5.9 )
MILLION, OR 4.0 PERCENT )
CASE NO. PAC-E-08-07
Direct Testimony of A. Richard Walje
ROCKY MOUNTAIN POWER
CASE NO. PAC-E-08-07
September 2008
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Please state your name, business address and present position with Rocky
Mountain Power (the Company), a division of PacifiCorp.
My name is A. Richard Walje. My business address is 201 South Main, Suite
4 2300, Salt Lake City, Utah 84111. I am the President of Rocky Mountain Power.
5 Qualifications
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Briefly describe your educational and professional background.
I have worked in the electrc utility industr since 1972 as a journeyman lineman,
field service engineer with General Electric and as a substation design engineer
for Rocky Mountain Power. At Rocky Mountain Power I have held numerous
management and executive positions with increasing levels of responsibility in the
areas of engineering, construction, transmission and distrbution operations,
customer service, procurement, information technology and community affairs. I
have served on PacifiCorp's Board of the Directors since 2000 and I am also
currently the Chairman of the Board of the PacifiCorp Foundation. I have a
Bachelor of Science in Electrical Engineering degree (1984) and a Master of
Business Administration degree (1991), both from the University of Utah. I have
received additional executive level instrction from the University of Michigan
and electrical engineering theory from General Electrc's Crotonville education
center.
What are your responsibilties as President of Rocky Mountain Power?
My responsibilities, as President of Rocky Mountain Power, cover all of the
Company's affairs in the states ofIdaho, Utah and Wyoming, including assuring
that the Company's strategy, infrastructure investments and operations result in
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the delivery of safe, reliable electrc energy to the Company's customers at
reasonable prices.
Please describe Rocky Mountain Power's presence in Idaho.
Rocky Mountain Power provides safe, reliable, and low-priced electric serice to
over 69,000 Idaho customers. Rocky Mountain Power also provides nearly 200
jobs in the communities of southeast Idaho. The Company owns and operates 94
substations in Idaho plus over 2,000 miles of transmission lines and 5,600 miles
of distribution lines. In addition, the Company purchases the output of the
Wolverine Creek wind generation facility located near Idaho Falls. Later in my
testimony, I wil describe in more detail the Company's commitment to the
environment, our communities and our customers.
In what other ways does Rocky Mountain Power support local Idaho
communities and the Idaho economy?
The Company works closely with the state and local governent agencies on
economic and community development projects and is actively involved in giving
back to our Idaho communities. In 2007, the Company's corporate giving
contributed $136,000 in contributions and sponsorships for activities in Idaho
communities. Rocky Mountain Power Foundation grants in Idaho exceeded
$37,000 for programs such as the Preston Senior Citizens Center, Dayton
Westside High School, Rigby North American Grouse parnership and other
worthwhile local programs. Rocky Mountain Power's Lend-a-Hand program
provides bil payment assistance to low-income households and the Company has
committed to ensure $40,000 from corporate funds, employee and customer
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1 donations, or other sources are contrbuted to the program each year. One of the
2 Company's core principles is exceptional customer service. We take our
3 responsibility as a good corporate citizen very seriously by providing exceptional
4 customer service through safe, reliable electrc service at reasonable prices.
5 Purpose of Testimony
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What is the purpose of your testimony?
The purpose of my testimony is to provide an overview of the Company's 2008
Idaho rate case. Excluding the current service agreement with our two large
industrial customers, the Company is requesting a $5.9 milion (4 percent) rate
increase over Rocky Mountain Power's current rates for the remaining customers.
The Company's analysis indicates a revenue requirement of approximately $217
milion is needed to cover the cost of service for all of its customers and would
require an overall increase of $16.3 milion absent the rate plan with the two
industrial customers on tariff contracts.
My testimony also presents policy issues and the implications of the
Company's and industry's need to address rising costs and capital investment
requirements. Specifically, I will provide a summary of the Company's filing and
introduction of the witnesses that wil address the Company's case. In addition, I
wil address in more detail the following:
. The need for a price increase;
· The major cost drivers underlying the need for the price increase,
including load growth, capital investment, and operating costs beyond the
Company's control;
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1 . The Company's efforts to control costs while maintaining reliable service
2 and customer satisfaction.
3 Need and Cost Drivers
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Please explain why the Company is requesting an Idaho rate increase?
This rate increase is driven by two key factors: first, the Company is in the midst
of an unprecedented, unavoidable capital investment cycle; and second, rising
costs of fuel and purchased power to serve our customers.
Please provide your perspective on Rocky Mountain Power's unprecedented
capital investment.
Today the Company's gross electric plant-in-service is just over $16 billon. Over
the next ten years the Company expects to spend approximately $20 bilion or, on
average, $2 bilion of new plant investment annually, adding significant new
supply-side generation resources, transmission lines and distribution facilities.
This major construction program is necessary to meet customer demand, to
replace expiring power contracts and to continue to provide safe, reliable service.
Unfortnately, this investment cycle comes at a time when costs for fuel and
building materials are increasing at rates significantly greater than the rate of
inflation. Assuming these trends continue, the Company wil need frequent price
increases over the next several years to allow it to recover its costs to serve
customers. This situation is not unique to Rocky Mountain Power as nearly all
utilities are attempting to deal with increasing costs and rising customer prices.
While no one likes increasing electric rates, it is critical that rates reflect the costs
expected to be incurred during the period the rates are in effect; otherwise
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customers and elected official wil not receive the price signals they need to make
sound economic decisions regarding efficient energy usage. Additionally, over the
long term, the Company cannot sustain the high levels of capital investment
required to meet its obligation to serve and maintain the high degree of reliability
and customer satisfaction without adequate relief through compensatory price
Increases.
After years of relative stable investment levels, why are you experiencing
such dramatic increases now?
Seven of the eleven Company coal plants (approximately seventy-five percent of
its coal generation) were built in the nineteen seventies and early eighties. For
over two decades these plants allowed the Company to meet its customers' energy
requirements and offset costs through sales into the wholesale market;
unfortnately, customers' demands now exceeds that capacity and requires that
the Company invest more in new generation facilities. The Company is now
faced with decisions with long term implications on how best to meet our
customers' ever-growing consumption of electricity. In 2006 and 2007 the
Company invested over $ 1.1 bilion, which added over 1,100 megawatts of new
natural gas fueled generation and 240 megawatts of wind resources. When you
include the investment in generation resources added in 2008, the Company has
added over 1,600 megawatts of natural gas and 400 megawatts of wind
generation. Despite this sizeable investment and power supply expansion, much
of our generation is fully utilized. In addition to new supply side resources, the
Company's transmission investments playa key role in providing affordable
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1 electrcity by connecting PacifiCorp's east and west control areas. These
2 investments provide access to additional supply resources and increases load-
3 serving flexibility. The Company has dramatically increased its electricity
4 demand management efforts to reduce the growth in electric energy
5 consumption and peak demand. The Company's demand-side-management
6 efforts can help reduce demand, but they won't completely offset the need for
7 new assets and purchased power. The Company must add new capacity with
8 additional generation and transmission facilities.
9 Cost Control Efforts
10 Q.Explain some of the efforts the Company has made to control costs and keep
11 electricity prices reasonable?
12 A.The first and most cost effective approach is to encourage more efficient use of
13 electrcity. Electricity has been and continues to be a key resource driving the
14 economic development of this country. One of Rocky Mountain Power's six core
15 principles of business is Environmental Respect. Just as natural resources are
16 essential in the production of energy, so is protecting those resources and the
17 environment for future generations. The Environmental RESPECT policy, which
18 serves as our environmental compass in the areas of Responsibilty, Effciency,
19 Stewardship, Performance, Evaluation, Communication and Training drives our
20 energy decisions. The Company has dramatically increased its demand
21 management efforts to attempt to slow the demand for energy. Over the last ten
22 years ending December 2007, the Company's demand side management efforts
23 have saved over 1,800,000 megawatt-hours and have reduced system demand by
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over 300 megawatts. In comparison, over the next ten years the Company seeks
to acquire an additional 4,600,000 megawatt-hours and reduce system demand an
estimated 750 megawatts, a 140 percent improvement. In addition to the energy
effciency resources, the Company continues to grow its load management
programs. Today, the Company has over 300 megawatts of air conditioning and
irrgation load paricipating in our demand reduction programs. Again, these
programs can improve energy efficiency, reduce system peak demand and reduce
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customers' costs, but the programs canot entirely eliminate increased energy
usage in Idaho.
Please explain steps the Company has taken to mitigate increasing cost
pressures of running the business.
Since the acquisition by MEHC in 2006, the Company has reduced administrative
and general expenses over $40 milion, from $228 milion to $ 1 88 milion. The
Company has partially mitigated health care cost increases and pension cost
increases with internal cost control initiatives. For example, the Company's
transition for health insurance premium costs was completed on Januar 1, 2008,
and now requires employees to pay a larger amount of the health insurance
premium. The Company has also implemented a change to a cash balance
pension plan for non-union employees.
Effective management of power and operating costs is another of the key
elements of the Company's strategy to keep electricity prices as low as possible.
The Company is making significant investments in renewable wind generation
resources which have zero fuel costs. In addition, the Company has worked hard
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to strike a balance between operational expenses, customer service and preventive
maintenance on the Company's transmission and distribution facilities. This
approach helps to achieve maximum value for each dollar spent on maintaining
and operating the growing electric network.
While these efforts provide value to customers, they are not and wil not
be enough to offset the cost increases in these areas, let alone from capital
investments and increased power costs. We recognize that any rate increase is
significant to our customers and that some customer classes are affected more
than others on a percentage basis. The increase in rates that the Company is
requesting is necessary to allow the Company to recover its prudently incurred
costs and is vital to the public's long-term interest. The Company is operating in
a cost efficient and effective maner and takes seriously its duty to meet the
challenges it faces in providing reliable service at a reasonable price to customers.
What effort has the Company made to communicate and train customers to
be more efficient?
The Company provides customer communication and training in multiple sources
utilizing media, public meetings and individual consulting. Monthly the
Company mails, with customers' bils, Voices, an information brochure with
energy effciency tips, information on demand side management and other
Company programs, such as its Blue Sky renewable tarff. The Company also
runs informational and efficiency ads in the local radio and news media. Also, the
Company holds public meetings with our customers to inform them of issues the
Company is facing. This year Company representatives held information
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1 meetings in many communities throughout our Idaho service tertory to update
2 customers on issues from the Bonnevile Power Administration residential
3 exchange, demand-side management program enhancements, the irrgation
4 dispatchable program, the proposed Populus to Terminal transmission line and a
5 Senior Executive presentation to customer and community leaders. In addition to
6 media and public meetings, the Company's customer and community managers
7 are assigned to work closely with each of our larger customers.
8 Rate Case Overview
9 Q.Please explain the Company's requested rate increase in this application.
10 A.As previously mentioned, the Company is requesting an increase of $5.9 milion
11 supported by an overall revenue requirement needed to cover cost of service of
12 $217 milion. Historical data from calendar year 2007 was used as a base to
13 develop the test period used in this case, with known and measurable adjustments
14 through December 2008. The test period used in this case is essential in
15 providing the Company with an opportnity to receive sufficient revenues from
16 Idaho customers to recover its costs, maintain service levels and earn a reasonable
17 rate of return. Company witness Mr. Brian S. Dickman, Manager, Revenue
18 Requirement, wil discuss the test period, the requested revenue increase and the
19 sources of the data used in determining the normalizing adjustments related to
20 revenue, operations and maintenance expense, net power costs, depreciation and
21 amortization, taxes and rate base in developing the Idaho revenue requirement.
22 Mr. Dickman's analysis is based on a cost of capital that includes a request
23 for a return on equity of 10.75 percent, which is the Company's expected cost of
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equity capital, and a capital structure with an equity percentage of 50.4 percent.
Mr. Bruce N. Wiliams, Vice President and Treasurer, wil testify concering the
Company's cost of debt, preferred stock and capital structure. Additionally, Dr.
Samuel C. Hadaway, FINANCO, Inc. wil testify concerning the Company's
return on equity. He wil also describe the unique operational risks that Rocky
Mountain Power faces and why the Commission should authorize a return on
equity that recognizes the Company's increased risks and operating challenges.
The financial requirements, operating challenges and risks that Dr.
Hadaway discusses in his testimony are demonstrably reaL. The Company is in a
period of load and capital investment growth, and the Company's required
ongoing level of investment far exceeds both its net operating income and
depreciation expense. As a result, the Company requires substantial levels of new
financing to fund the investment necessary to meet its customers' power needs.
If the requested rate increase proposed in this application is not approved,
wil the Company have a reasonable opportunity to cover the costs it incurs
to serve our customers?
No. As a consequence of the additional investments made by the Company,
coupled with rising operation, maintenance, depreciation and other costs, it wil
not be possible for the Company to cover its cost to serve customers and make an
adequate return on its investments necessary to serve these customers.
Every new generation plant, every transmission line and every distribution
facility is significantly more costly than similar facilties currently included in
rates. In addition, the cost of fuel and purchased power is rising for both existing
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and futue customers. The level of capital investments that are being made by the
Company and the increase in energy costs cannot be entirely offset by
productivity gains achieved by the workforce through the effective
implementation of technology or through increased sales. The costs are real, and
the level of revenues requested in this case is necessary to enable the Company to
satisfy its obligation to serve its customers with safe and reliable service.
Reflecting the actual cost of providing electric service in rates is also necessar to
provide customers with accurate price signals regarding the cost of their usage so
they can better manage their electricity consumption.
How wil the proposed rate increase sought in this application contribute to
Rocky Mountain Power's financial health in Idaho?
The proposed rate increase wil give the Company a reasonable opportunity to
ear its allowed rate of return. The increased revenues requested in this
application wil contribute to favorable credit ratings from the financial markets,
thereby keeping debt costs for customers at reasonable levels. In addition, the
requested revenues wil allow the Company to maintain and operate its system
reliably. Finally, the revenues requested wil permit the Company to continue its
extensive investment program in generation, transmission and distrbution
facilities to serve Idaho customers.
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Q.Please provide details on the major cost drivers necessitating the requested
additional rate relief.
As previously noted, the growth in customer demand for energy and peak load
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1 growth drives the company's capital investment plan. The Company's obligation
2 to serve necessitates that its Idaho revenues are suffcient to cover its rapidly
3 increasing costs and necessary investments. The Company's fundamental
4 business inputs are not within its direct control. These cost increases canot be
5 entirely offset by the Company's efficiency measures. I wil explain each of these
6 cost drivers in more detaiL.
7 Load Growth
8 Q.Please explain the load growth in Rocky Mountain Power's service territory.
9 A.The economy and related electrical load in Rocky Mountain Power's service
10 terrtory has been booming. Growth has exceeded the national average and is
11 expected to continue. North American Energy Reliability Corporation (NERC)
12 forecasts that electric energy consumption growth in the Rocky Mountain region
13 through 2016 wil be higher than any other region ofthe nation.
14 While this high rate of growth is good for the local economy, it contrbutes
15 to the rising cost of electric service, as the marginal cost of new generation and
16 power delivery resources are double the average cost of existing generation
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18 Capital Investment
19 Q.What is Rocky Mountain Power's current projection of total capital
20 investment?
21 A.The Company's most recent Form 1O-K, filed with the Securities and Exchange
22 Commission on Februar 29,2008, indicates that the Company's unavoidable
23 capital expenditure program exceeded $1.5 bilion in 2007 and wil reach at least
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$20 bilion over the next ten years. This case includes over one bilion dollars in
new plant investment the Company has made or wil make between December 31,
2007, and December 31, 2008, including the investment in two new wind
facilities, Goodnoe Hils and Marengo, and the costs of the recently purchased
Chehalis natual gas power plant. This level of investment necessitates Rocky
Mountain Power's request for additional revenues.
How would a failure to address these issues affect Rocky Mountain Power's
abilty to attract new capital required to serve new load and maintain its
system?
Absent supportive regulatory treatment in this, and future rate cases, the
combination of: 1) the Company's current capital investment program; 2) rising
labor, equipment, materials and fuel costs; and 3) risks involving resource
coordination among the six states served by the Company could adversely affect
the Company's credit ratings, which would make it more difficult for the
Company to obtain the cost effective capital it needs. Credit ratings are
particularly critical when companies are in a "build" cycle and challenging credit
market as Rocky Mountain Power now is. Low costs of debt and equity help keep
customer prices low.
The Company has greatly benefited from its ownership by MEHC, which
has invested a total of $615 milion in cash contributions and has returned $900
milion in retained earnings to the business to support its service to customers.
PacifiCorp has not paid one dollar in dividends since the acquisition on March 21,
2006. The Company's parent wil provide an additional cash equity contrbution
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of $150 milion before the end of the test period. However, the Company stil
relies on external parties for its significant debt financing needs. The debt
securities markets are competitive, and to the extent investors perceive higher risk
in Rocky Mountain Power because of regulatory uncerainty or unfavorable
regulatory decisions, they wil require higher interest rates from the Company's
borrowings. Higher interest rates on debt wil result in higher rates for our
customers.
Has the Company's recent rating agency report taken note of the large
capital expenditure program?
Yes. Exhibit NO.1 is Standard & Poor's (S&P) recent credit report on
PacifiCorp, which was issued on April 17,2008. Page 2 ofthe S&P report
contains the following comment:
"In 2007, the company invested $ 1.5 bilion in capital projects that
was funded with approximately $1.0 bilion of debt.. .$200 milion
in MEHC equity infusions, and the balance with operating cash
flow. The company is embarking on a 10-year, $20 bilion capital
program, of which an estimated $14 bilion wil be incurred in the
next five years."
Please explain the major generation additions in Rocky Mountain Power's
capital investment strategy that are included in this case.
To address load growth challenges the Company is in the process of completing
or adding significant new generation resources. Mr. A. Robert Lasich, President
ofPacifiCorp Energy, explains in his direct testimony the prudent steps taken by
the Company in meeting its obligation to serve customers through adding new
generation resources. The Company's new generation investments include the
Marengo II and Goodnoe Hils wind projects and the Blundell Bottoming Cycle
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geothermal plant addition. In addition, the Company is adding over 500
megawatts including the purchase of the Chehalis natural gas fueled power plant.
This plant wil be acquired at a cost that is less than half the Company's estimate
of what it would cost to build a similar facility. This acquisition provides an
extraordinary benefit to Idaho customers. Mr. Stefan A. Bird, Senior Vice
President, Commercial and Trading wil testify in support of the proposed
Chehalis acquisition, including investment and prudence information.
Please explain the other major additions in Rocky Mountain Power's capital
investment strategy that are included in this case?
The Company continues to make significant transmission, distribution and other
investments which have been included in this case. Mr. Dickman has included
exhibits in his direct testimony supporting the plant additions, all of which are
necessary to provide service to our Idaho customers.
In addition, on May 30, 2007, the Company announced the construction of
two major 500 kilovolt transmission projects of approximately 600 miles each
that wil originate in Wyoming and connect into Utah, Idaho, Oregon and the
desert southwest. Siting, permitting and other initial work for the varous
segments of the projects are underway. None ofthe costs ofthese proposed
projects are in this case as they are scheduled for completion between 2010 and
2014, but these costs wil add additional upward pressure on rates when they
begin to show up in future rate cases.
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1 Externally Influenced Costs
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Please explain external business factors that are driving cost increases.
In addition to general inflation, the Company is experiencing significant upward
cost pressures in several areas including construction material and equipment,
property, rights of way and easements, net power costs, and certain labor-related
costs.
Please explain the cost pressures on the Company and its customers related
to net power costs.
Net power costs consist of fuel, net wholesale transactions (purchases from and
sales to other utilties and power marketers) and transmission wheeling expenses.
In total these costs represent nearly 30 percent of the Idaho revenue requirement.
Even with the addition of more than 2,000 MW of new generation capacity over
the last six years, the Company does not currently own sufficient resources to
meet customers' peak power needs on its own. Therefore, we must buy and sell
power in the wholesale market to meet our load requirement and to balance
hourly, daily and seasonal load fluctuations. Net power costs continue to trend
upward, remain volatile, and are one of the primar cost drivers in this general
rate case. The majority of the 2,000 MW added is fueled by natural gas, the
combination of higher fuel prices and wholesale market volatilty has produced a
more volatile environment for all participants in the wholesale energy markets,
including regulated utilities.
On a total-Company basis, net power costs are expected to be
approximately $982 milion during the test year, an increase of more than $120
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1 milion above the level supported by the Company in the 2007 general rate case.
2 The use of historic test periods for ratemaking under current economic conditions
3 results in persistent under-recovery of the actual level of power costs incurred
4 during the period that rates are in effect. For example, the Company expects that
5 actual net power costs wil be about $1.109 bilion for the period through June
6 2009, not the $982 milion sought in this case. Mr. Gregory N. Duvall, Director,
7 Long Range Planning and Net Power Costs, wil testify in support of the
8 Company's net power costs and describe this in more detail in his direct
9 testimony.
10 As opposed to most other investor-owned utilities, including those in
11 Idaho, Rocky Mountain Power does not have a mechanism for more timely
12 reflection in rates ofthe changing costs of power. Given the current conditions
13 described in Mr. Duvall's testimony, the Company believes that the absence of
14 such a mechanism creates greater risks for it than for those utilities that have such
15 mechanisms. But, the Company understands that compensating the Company in
16 its allowed regulatory return on common equity for this incremental risk can be
17 difficult. As a result, the Company has concluded that prudent operation of its
18 business necessitates that it seek to implement ratemaking mechanisms that allow
19 the Company a reasonable opportity to reflect in rates the costs of power that it
20 incurs while those rates are in effect. The Company expects to propose a power
21 cost mechanism to the Commission within thirty days after filing this case. That
22 timing wil permit the Commission to consolidate that filing with this case, if it
23 concludes that consolidation is appropriate.
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1 Customer Satisfaction
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Has the Company continued to improve customer service and power quality
while undertaking cost containment initiatives?
Yes. As acknowledged by TQS Research and J.D. Power & Associates, the
Company's overall satisfaction continues to improve across all sectors.
Improvement to customer service pedormance is demonstrated by the continuous
reductions in both customer complaints and customer guarantee failures since the
service quality commitments were implemented.
Has the Company made improvements in service reliabilty?
Yes. The Company has improved service reliability in Idaho, via replacement
and reinforcement of transmission and distrbution assets to reliably serve new
and existing customers. These investments have resulted in improvements in
reliability performance as measured by key performance metrcs. Specifically,
during the period between April 1, 2005, and March 31, 2008, the Company
delivered on its Service Standards Pedormance Standards Commitments, which
are direct measurements of some of these key performance metrics.
What other actions has the Company taken to advance servce reliabilty?
Beginning in 2007, the Company has further refined its maintenance approach to
incorporate the outage history of individual customers and circuits, while
evaluating overall electric system and circuit level performance. This program is
known as "Customers Experiencing Multiple Interruptions" (CEMI). It further
refines the Company's maintenance and reliabilty improvement plans to target
those areas that need the most attention. In conjunction with the CEMI approach,
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Rocky Mountain Power now uses a central scheduling approach and reliabilty
work plans to more efficiently and effectively target its distribution maintenance
expenditures.
What has the Company done to reduce the impact of this rate increase on
Idaho customers?
To help mitigate increases, the Company has made intensive efforts to manage
peak growth in Idaho with our existing demand side management (DSM)
programs. Participation in the Irrgation Load Control Credit Rider Dispatch
program in Idaho increased from approximately 50 MW to over 200 MW during
2008. The objective of these programs is to help educate our customers to be as
efficient as possible with our electric resources to reduce electricity use and peak
demand. The programs that target reductions in peak demand help to reduce
stress on the existing electrical infrastrcture and reduce expensive power
purchased on the wholesale market at peak times.
Mr. Jeffery W. Bumgarner, Director of Demand Side Management wil
present testimony explaining the various programs the Company offers and
respond to the Commission's order from Case No. PAC-E-08-01, directing the
Company to provide the information necessar for a prudency deterination in its
next general rate case, as well as explain the development of DSM strategy and
management of DSM programs, implementation and delivery.
Additionally, Rocky Mountain Power supports low-income households by
joining in partnership with our customers and other agencies through the HELP
and the Low Income Weatherization programs.
Walje, Di - 19
Rocky Mountain Power
1 Pricing
2 Q.
3 A.
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
How do the Company's rates compare to other electric rates in the country?
Rocky Mountain Power's current overall average price (5.72 cents per kWh)
places Idaho's rate in the lowest quarile among U.S. investor-owned utilities
according to the Edison Electrc Institute. Since 1986, the Company's overall
Idaho base rates collected from the rate schedule classes (i.e., standard tarff
customers excluding special contracts) have increased only three times, and the
overall base rates for these rate schedule classes have increased less than one
percent. Including the effects of the full increase proposed in this case, overall
base rates for the major rate schedule customers excluding special contract tarff
customers in Idaho wil have increased less than five percent since 1986. Over
that same 22-year period, the Consumer Price Index has increased by over 96
percent. The Company's rates in Idaho have historically been and wil remain
among the lowest in the nation, even after incorporating the price increase
proposed in this application. Mr. Michael J. Zimmerman, Regulatory
Consultant, Pricing and Cost of Service wil present the Company's rate spread
and rate design proposals that determine the ultimate prices customers wil see.
Mr. Mark E. Tucker, Regulatory Analyst in the Pricing and Cost of Service
Department wil present the Company's class cost of service study.
20 Conclusion
21 Q.
22 A.
23
Please provide a conclusion to your testimony.
The electric utility industry is enterng a period where the only certain thing is
uncertainty. In the midst of the rapidly evolving landscape related to climate
Walje, Di - 20
Rocky Mountain Power
1
2
3
4
5
6
7
8
9
10 Q.
11 A.
change, state and federal enérgy policies, rapidly increasing raw material costs,
and generation and transmission shortages; Rocky Mountain Power continues to
effectively plan to meet our customers' energy needs.
The Company manages its business according to six core values which
are: 1) customer service; 2) employee commitment; 3) financial strength; 4)
environmental respect; 5) regulatory integrity; and 6) operational excellence. I
believe Rocky Mountain Power is an excellent company that cares about its
customers, employees and the communities it serves. The proposed increase
wil allow us to continue to be a provider of excellent energy services to Idaho.
Does this conclude your direct testimony?
Yes.
Walje, Di - 21
Rocky Mountain Power
HOISE? '9 AMI€) 41
IDAHO PUBLIC
UTILITIES COMMISSION
Case No. PAC-E-08-07
Exhibit No. 1
Witness: A. Richard Walje
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of A. Richard Walje
Standard & Poors - PacifiCorp Review
September 2008
(22-Apr-2008J Sumar: PacifiCorp Roc Montain Powe
Exhibit No. 1 Page 1 of 3
Case No. PAG--C-07
Witness: A. Richard Walje
RESEARCH
Summary:
PacifiCorp
Publication date:
primary Credit Analyst:
22-Apr-2008
Anne 5eltlng, sa Francisco (1) 415-371-5009;
anne._selting~standardandpoors.com
Credit Rating:A-/Stable/A-l
Rationale
The 'A-' corprate creit rating (CCR) on Padfrp reßect the consolidated credit profile of parent, MidAmerin Eney
Holdings COmpany (MEHC; 'A-/Stable'). The rating Incorprates MEHC's 'excellent busines risk position, an 'aggreive'
financial profile, and the explicit and implicit support from Berkshire Hathaway ('AAStable/A-l+'), which is the majority
owner of MEHC. Explicit support frm Berkshire Hathaway is in the fonn of a $3.5 bilio equity commitment agreement,
which, in Standard &. Por's Ratings Services' view, woW be called on -- if necessary -- to support MEHC's rating or that of
Its reguiated subsldianes, Including PacifiCorp. Consolidated MEHC debt, including current maturities and short-tenn debt,
totled $19.8 billiOn as of Dec. 31, 2007.
Pacifiorp serves 1.7 million customers in portons of the six wesern states of Utah, Oreon, Wyoming, Washingon, Idaho,
and california, operating as Pacific Poer (Oreon, Washington, and california) and Rocky Mountain Power (Utah, Wyoming,
and Idaho). The company's two largest markets, Utah and Orgon, comprise about 70% of the company's retil eletric
operating revenues. As of Dec. 31, 2007, the utilit's stndalone debt, including current maturitie and preferr stoc, was
approximately $5.2 bilion.
MEHC purchaed PacifCOrp fr Scottish Power Pic. in March 2006 and owns the utlllty via PPW Holdings LLC, a specil-
purpos, nonrated entit with no debt outstanding. Through nng-fencing, Paclfiorp's CCR could potentially be as high as
thre notches above MEHC'S rating, provided its standalone credit quality support such an elevation. However, on a
standalone basis, PacifiCorp currently has credit metries that are in the 'BBS' category.
Funds from operatlons (FFO) rose modestly in 2007 to $995 milion frm $928 milliOn In 2006. As of Dec. 31, 2007,
PacifiCOrp's adjusted FFO to total debt was 16.7%, and FFO interes coverage was 3.7x. Adjust debt to total capitalization
stood at about 54%, which includes adjustments to reßeet debt-like obligations, the largest of which is the inclusion of $450
milion In power purchase payments. As part of the acquisition, Paclflrp is limited in making dividends to MEHC unles it
maintains a common equity ratio of 48.25% through 20.08, decreasing annually to 44% by 2012. (These reuirements
exclue current maturiies and short-term debt in the calculation of leverage.)
Key drivers of performance for the year Included the 2006 settlement of rate cases In all six states it seres, which prided
about $270 millon In rate relief (of which $187 milion flowed to the company in 2007); a 3% Increse in energy sale
driven by weather; custer growth of 2%; and improved plant availabilty. Revenues from wholesal sale were slightly
down for the year at about $1 billion.
4128/2008
(22-Apr-2008) Sumar: PacifiCorp
Rocy Mounin Power
Exhibit No. 1 Page 2 of 3
Case No. PAC-E-08-07
Witnes: A. Ricard Walj
Major challenges facing the utilit include managing six separate reulatory environments to ensure timely recvery of
costs, controllng fuel costs given the absence of power supply adjusters (PSAs) In Utah, Washington and Idaho, and
executing on its large capital program.
In 2007, the company invested $1.5 billon in capital projec that was funded with approximateiy $1.0 bilion of debt (total
issuance in 2007, net of $165 millon in matunng debt and preferred stoc), $200 million in MEHC equity infusIOns, and the
balance with operating cash flow. The company is embarking on a 10-year, $20 billon capital program, of which an
estimated $14 billon wil be incurred in the next five years. The largest component of investment is an estimated $4.1
bllion to build Energy Gateway, a l,200-mile multistate transmission projec that wil be energized in phases fr 2010 to
2014.
Other project include invesment in renewable generation to me renewabie portlio standards. In 2007, the company
placed Into service the 140 MW Marengo wind projec. Another seven proec, totaling 520 MW, are planned. As part of the
company's integrated resource plan (IRP) file in May 2007, the copany has identified 3,870 MW needed by summer
2016. Utah has acknowledged the IRP, and Oregon, Idaho, and Wasington regulators are exped to respond In 2008.
The company's IRP does not contempla any new coal-.fired resources. captllnvestment also indud environmental
work; the company pledged $812 milion for emission reductions as part of MEHC's acquisition. About 64% of the company's
power supply in 2007 was coal fired.
The company last week announced It has reache an agreement to buy a SOO MW plant. Details of the acquisition have not
been disclosed. Its 2007 IRP identified a need for two approximately 500 MW gas plants in the 2012 timeframe. As a result,
the transction would reuire the company to cloe th purchase an estimated four years in advanc of reuiring the
capacity. The company is currently seeking regulatory approval needed in Utah and Oregon to bypass the request fo
proposals process, which would allow it to purchase the plant without a forml bid solicitation procss. In Utah state statute
also permits preapproval of the acquisition.
The capital program undersores the need for what is expeed to be sizable rate relief in the coming years. To date,
PacifiCrp's new owners have been only modesly tested in their abilty to manage rate case outcom, as most of the rate
cases resolved in 2007 were all initiated by Scottish Power. Utah wil be an Important state to monitor. By this summer, the
company is expected to file It third rate case in less than three years. Cumulative rate Incrses over this period could be
17% or more. (A 10% retail rate Increase was approved in late 2006, and the copany's revised current reques Is for a 7%
increase. It has not made public the amount it wil seek in a propoed June 2008 filing.)
Tle case currently pending before the Utah PubliC Service Commission (UPSC) was originally flied in December 2007, and
was based on a forecst, 12-month tes year ending June 30, 2009. Tle company sought a $161 million general reques, or
about an 11% rate increase. But In February 2008, the UPSC ruled that the test period should end on Dec. 31,2008, which
lowered the company's request to about $100 millon (a 7% increase). The revenue requirement portion of the case should
be completed in early June with initial rates, if approved, going into ef August 2008. This month, PacifiCorp notified the
UPSC that it expe to file another rate request around June 6, 2008. This implies that two cases may be pending before
the UPSC at the same time.
In other states, Paciflcorp also has an actve $35 millIOn rate case (a 15% Increase) in washington. Filed In February 2008,
rates are expecte to be in place no later than January 2009. The company was last granted a 6% increase in June 2007 as
part of a fall 2006 filing.
In Wyoming, a final order is pending that coifies an oral rullng last month by the Wyoming PubliC Servic Commission
approving a $23 million settlement. Tle settement represents a 5% increase, relative to the original $36 milion PaCifirp
sought. New rates are expect to go Into effect In May 2008. The last rate Increase in the stte was fo 7%, granted to
PaclflCorp in March 2006. Paciflrp has no other active cases in the three other states it serves. (In Oreon, the copany
last had a rate Increse of 5% in September 2006. In Idaho, a $6 millIOn rate increase, or 8%, authorized in late 2007
began on Jan. 1, 2008. In california, a $5 millon increse, or 7%, was approved in association with increase in energy and
power cost and went into eft January 2008.)
Through an absence of PSAs in Utah, Washingtn, and Idaho (about 56% of Its retail elecric revenue In 2007), the
company has below-average regulatory protection from fuel and purchased power cot escalation. In 2008, Wyoming
regulators approved a PSA through April 2011, and in California the company benefits from PSA-lik. mechanisms that up
costs ex-pot to adjust for changes in operating costs. In Oregon there is also no true PSA, but the company does benefit
from an annual proceeding that updates fuel and purchased power cos based on forest cost, which mitigates the
potential for sizable mismatch between actual fuel and purchased power cost and costs authorized in retil rates. In
California, the company reeives dollar-for-dollar recovery of costs in exces of rates, with some restrictions. The absence of
PSAs is somewhat mitigated by the company's heavy reliance on coal, which exhibits reasonable cos stabilty, but the
company's dependence on gas Is expeed to grow. .
412812008
(22-Apr-2008) Summary: PacifiCorp
Rock Mountain Power
Exhibit No. 1 Page 3 of 3
Case No. PAC-E-QS-07
Witness: A. Ricard Walje
Short-term creit factors
PacífCorp's 'A-1' short-term rating considers the equit commitment of MEHC's ultimate parent, Berkhire Hathaway, to
which it has strong ties. Without these ties, th short-term rating on the company would be 'A-2'. Berkhire Hathaway's
extremely strong liquidity poition is assumed to be available to PaciflCorp via MEHC in the unlikely event that PaclfiCrp
could not repay its CP obligations. Explicit support exist in the form of a $3.5 bilion equity commitent agrement
between Berkshire Hathaway and MEHC that could be called upon to support the liquidity requirements of MEHC's reulate
subsidiaries, including PaciflCorp.
PacifiCorp cash and cash equivalents totaled $228 mílion as of Dec. 31, 2007, in addition to an unscured reolvng credit
agrement for $800 millon through July 2011, reduced to $760 milion In ending July 2012. The company also has a send
credit agrement for $700 milion that is through October 2012. Both support th company's CP program and were undrawn
at De. 31, 2007. CP balances were zero as of the same date. PacifiCorp IS limited by regulators to having no more than
$1.5 blilon.in short-term debt.
The company also has $518 milion of standby letters of credit and standby bond purchase agreements available to supprt
variable-rate pollution contrl bonds that were fully available at year-end 2007.
The company has two signiflcantmaturltle In May and September 2008 of $200 million each, with total maturities fo the
year at $414 million, which includes capital lease obiigations. Pacifiorp's large capitl expenditure program wil require
substantial external funding, Including equity contributions from MEHC. We expect that PaciflCorp wìl not be in a position to
make distributions to its parent while it Is execting its capital program.
Outlook
The stable outlook refects our expecttion that MEHC wil delevera PaclflCorp through equity infusions, as needed, and
reinvest cash flow Into its extensive capital expendlture.program, as well as maintain reulato relationships suffcint to
support needed rate increase. It Is also assumed that via MEHC Berkhire Hathaway wil provide creit support and future
investment capital, as need, to PacifiCOrp. PaclflCOrp'S rating could fall to a level commensurate with Its standalone creit
qualit If MEHC's rating Is lowered. PaciflCorp's rating has limited near-term upside, as its credit metrics on a standalone
basis fall well short of the 'A' category.
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decisions. Acrdingly, any user of the information contained herein should not rely on any creit rating or other opinion cotained herein
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4128/2008