20090731Lobb Direct Supporting Stipulation.pdf

BEFORE THE RECEIVEû
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IN THE MATTER OF THE APPLICATION
OF ROCKY MOUNTAIN POWER FOR
APPROVAL OF AN ENERGY COST
ADJUSTMENT MECHANISM (ECAM).
)
) CASE NO. PAC-E-08-08
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)
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DIRECT TESTIMONY OF RANDY LOBB
IN SUPPORT OF STIPULATION
IDAHO PUBLIC UTILITIES COMMlælON
JULY 31,2009
1
3
2 the record.
Q.Please state your name and business address for
A.My name is Randy Lobb and my business address is
5
4 472 West Washington Street, Boise, Idaho.
6
Q.By whom are you employed?
A.I am employed by the Idaho Public Utilities
8
7 Commission as Utili ties Division Administrator.
Q.What is your educational and professional
10
9 background?
A.I received a Bachelor of Science Degree in
11 Agricultural Engineering from the University of Idaho in
12 1980 and worked for the Idaho Department of Water Resources
13 from June of 1980 to November of 1987. I received my Idaho
14 license as a registered professional Civil Engineer in 1985
15 and began work at the Idaho Public Utili ties Commission in
16 December of 1987. My duties at the Commission currently
17 include case management and oversight of all technical Staff
18 assigned to Commission filings. I have conducted analysis
19 of utility rate applications, rate design, tariff analysis
20 and customer petitions. I have testified in numerous
21 proceedings before the Commission including cases dealing
22 with rate structure, cost of service, power supply, line
24
23 extensions, regulatory policy and facility acquisitions.
25 case?
Q.What is the purpose of your testimony in this
CASE NO. PAC-E-08-0807/31/09 LOBB , R . (D i ) 1
STAFF
1 A.The purpose of my testimony is to describe the
2 Stipulation (the Proposed Settlement) to establish an Energy
3 Cost Adjustment Mechanism (ECAM) for PacifiCorp in Idaho and
4 to explain the rationale for Staff's support.
5
6
Q.Please summarize your testimony.
A.Staff believes that the agreement to establish a
7 PacifiCorp ECA in Idaho is justified based on the
8 volatili ty of power supply costs experienced by the Company
9 in between rate cases and the current inability of the
10 Company to adjust its rates in a timely manner to reflect
11 that volatility . Staff believes the ECAM Settlement
12 represents a reasonable compromise of the parties, is fair
14
13 and reasonable and should be approved by the Commission. ~3
16
15 the Settlement?
Q.Would you please describe the terms agreed to in
A.Yes. The Settlement Stipulation establishes an
17 annual Energy Cost Adjustment Mechanism to track deviations
18 in variable power supply costs as they vary from normalized
19 power supply costs embedded in base rates. ~2 The parties
20 agree that the ECAM will include a symmetrical 90%/10%
21 sharing percentage. ~5 The ECAM deferral period runs from
22 December 1 to November 30 with an annual filing on February
23 1 for an effective date of April 1 of each year. ~6
24 In addition to establishing an ECAM, the
25 Stipulation specifies that energy benefits of renewable
CASE NO. PAC-E-08-0807/31/09 LOBB , R . (D i ) 2
STAFF
1 generation resources that are on line but not included in
2 base rates will be tracked through the ECA at a cost of
3 $55/MWh (Renewable Resource Adder) until completion of the
4 next general rate case. ~8 In exchange for the Renewable
5 Resource Adder with the ECAM, the Company has agreed not to
6 file a general rate case prior to May 1, 2010. ~13 The
7 Company has also agreed to conduct a Risk Management hedging
8 seminar to educate all parties on the Company's risk
9 management practices and hedging strategies. ~12
10 Further, the Company has agreed to work wi th the
11 parties to develop ECAM rates that reflect line losses and
12 distinguish between transmission, primary and secondary
13 voltage service. ~11 Finally, the Stipulation provides for
14 the 90/10 % sharing of S02 proceeds through the ECAM as a
15 revenue credit (~14) and a write-off by the Company of three
16 regulatory liabilities that currently reduce revenue
17 requirement. ~15 These liabilities include the West Valley
18 lease, A&G expense merger commitment and the gain on the
19 sale of Goose Creek transmission. The parties agree that
20 the remaining $156,000 of unamortized liabilities will be
21 credited to the ECAM deferral to benefit customers and will
22 be written off upon approval by the Commission of the
23 Stipulation.
24 All parties stipulate that the ECAM will be
25 effective July 1, 2009, provided the Commission issues an
CASE NO. PAC-E-08-0807/31/09 LOBB, R . (D i) 3
STAFF
1 order approving the ECAM consistent with the terms of the
2 Stipulation. ~4
3 Q.What are the terms of the ECAM?
4 A.The proposed ECA is very similar to the Power
5 Cost Adjustment (PCA) mechanisms approved by the Commission
6 for Idaho Power and Avista. The mechanism tracks four
7 primary power supply accounts. They are: 1) Generation
8 fuel expense, 2) Market purchase power expense, 3) Surplus
9 energy sales revenue and 4) Variable transmission expense.
10 Actual net power supply costs above or below
11 normal costs established by the Commission in a general rate
12 case are identified on a system basis and then
13 jurisdictionally allocated to Idaho. They are then shared
14 90%/10% between the customers and the Company. In other
15 words, the customers pay 90% of the above normal costs and
16 the Company pays 10%. In credit situations, the customers
17 receive 90% of the cost savings and the Company receives
18 10%. ~5
19 The mechanism compares normal and actual costs on
20 a cost per kWh basis and includes a load growth adjustment
21 to assure that abnormal power supply costs are not over or
22 under collected as growth related load changes occur. The
23 Load Growth Adjustment Rate (LGAR) is set at $17.48 per Mwh
24 to reflect the Commission approved production related costs
25 embedded in rates. ~7 The established LGAR reflects the
CASE NO. PAC-E-08-0807/31/09 LOBB, R. (Di) 4
STAFF
1 fact that the ECAM mechanism compares normalized power
2 supply costs to actual power supply costs on a per kWh
3 basis, thus reducing the impact of growing load.
4 Q. What other features are included in the proposed
5 ECAM?
6 A.The proposed ECAM includes a carrying charge on
7 the deferral balance equal to the interest rate on customer
S deposits. ~9 The mechanism also includes a provision for
9 discussing in advance with interested parties, ECAM rate
11
10 changes that exceed 7% in a single year. ~10
13
12 Settlement on the ECAM in this case?
Q.What was the process leading to the Stipulated
A.The process leading to the ECAM proposed in this
14 case began several years ago with conversations between
15 PacifiCorp and the Staff regarding the possibility of such a
16 mechanism in Idaho. The Company believed it only fair that
17 it should be able to track its volatile variable power
1S supply costs in between rate cases just as Idaho Power and
19 Avista has for years. Staff maintained that the Power Cost
20 Adjustment (PCA) mechanisms in place for these companies
21 were designed to track variations in power supply cost due
22 to variability in hydro conditions. Staff also maintained
23 that such a mechanism was not financially necessary for
24 PacifiCorp in Idaho because Idaho represented such a small
25 portion of PacifiCorp's total system. Given Staff
CASE NO. PAC-E-OS-OS07/31/09 LOBB , R . (D i ) 5
STAFF
1 opposition, PacifiCorp was not willing to formally request
2 an Idaho ECAM.
3 Q.How did conditions change to allow an agreement on
4 an Idaho ECAM?
5 A.The Company continued to informally discuss with
6 Staff various methods of timely cost recovery including
7 fixed and variable annual costs trackers as well as
S forecasted rate case test years. The Company pointed to its
9 increased exposure to market electricity purchase/sales
10 prices and the addition of new gas fired base load
11 generation plants that increased its exposure to volatile
12 fuel prices. In addition, the Company pointed to increasing
13 coal price volatility, its fuel price volatility associated
14 with a generation base that included 30% hydro, increasing
15 wind generation and the implementation of ECAMs in other
16 state jurisdictions in which it operates.
17 Staff informally agreed that these factors
1S warranted consideration of a PacifiCorp ECAM in Idaho. On
19 October 23, 200S, PacifiCorp filed its Application for an
20 Idaho ECAM. Since that time, Staff and interested parties
21 have further evaluated the need for the ECAM, considered the
22 most appropriate ECA methodology and assessed the likely
23 impact of an ECA on Idaho customers.
24 Parties to the case met formally on February 26,
25 2009, May 11, 2009 and June 2, 2009, to conduct settlement
CASE NO. PAC-E-OS-OS
07/31/09 LOBB, R . (D i) 6
STAFF
1 negotiations regarding the merits of an Idaho ECAM and how
2 such a mechanism, if any, should be implemented. Other
3 discussions were held with various parties to the case on
4 January 5, January 15, February 1 7, March 4, and June 1,
5 2009. The resulting Settlement Stipulation signed by all
6 parties was filed with the Commission on June 29, 2009.
7 Q.Why does Staff support the Settlement establishing
S an ECAM mechanism for PacifiCorp in Idaho?
9 A.Staff supports the Settlement establishing the
10 ECAM because it is now equitable to do so and as designed
11 reasonably balances the interests of PacifiCorp (Rocky
12 Mountain Power) shareholders and Idaho retail customers. As
13 indicated earlier, PacifiCorp's resource portfolio has
14 expanded to include a much larger portion of natural gas
15 fired generation. The Company's portfolio also consists of
16 30% hydropower and increasing wind generation. Given the
17 variability of hydro generation and wind generation along
1S with the volatility in natural gas and electric market
19 prices, Staff believes the Company's variable power supply
20 cost exposure is similar to that of other electric utilities
21 that have PCAs in Idaho.
22 Q.What do PacifiCorp's Idaho retail customers get in
23 exchange for an Idaho ECAM?
24 A.The proposed ECAM is designed to be symmetrical so
25 customers benefit when variable power supply costs are less
CASE NO. PAC-E-OS-OS07/31/09
LOBB, R. (Di) 7
STAFF
1 than normalized costs included in base rates. However, the
2 ECAM could have customer benefits even if variable power
3 supply costs are above normal. For example, more timely
4 recovery of variable power supply costs between rate cases
5 may reduce the frequency of general rate cases. It may also
6 reduce the need for a forecasted test year in general rate
7 case filings. Finally, as more of the PacifiCorp state
S jurisdictions adopt ECAMs, borrowing costs should decline
9 even in the face of increased infrastructure investment.
10 Q.Would you please expand on the potential for
11 decreased borrowing costs?
12 A.Yes. The ECA with the Renewable Resource Adder
13 most importantly increases cash flows. Increased cash flow
14 and increased earnings are a result of reflecting current
15 operating conditions with a very timely ratemaking
16 mechanism. For instance, the impact of the ECAM if in place
17 for the 12-months ending December 31, 200S, would have been
1S over 400 basis points or $1S million in Idaho on a system
19 net power cost differential of $292 million.
20 This increased cash flow impact in Idaho combined
21 with the impact from mechanisms in other states, improves
22 financial ratios and will stabilize or possibly even improve
23 rating reviews. Increased cash flows also results in lower
24 borrowing requirements for capital additions. The
25 adjustments for the Renewable Resource Adder and the
CASE NO. PAC-E-OS-OS07/31/09 LOBB , R . (D i ) S
STAFF
1 regulatory liabilities will also be viewed as positive by
2 rating agencies. The ECA Settlement, if adopted, will
3 continue to identify Idaho as a state with favorable
4 regulatory environment while being responsive, fair, just
5 and reasonable to the Company and its customers. All of this
6 in turn could result in improved ratings and lower borrowing
7 costs with the benefit flowing to customers.
S Q.You indicated that the proposed ECAM is very
9 similar to the existing PCA mechanisms of Avista and Idaho
10 Power. Could you please explain the similarities and the
11 differences?
12 A.Once Staff believed an ECAM was justified for
13 PacifiCorp in Idaho, Staff maintained that the operation of
14 the ECA should mirror that of existing PCAs. The terms of
15 existing PCAs have all been approved by the Commission and
16 have been in place for many years. Many of the proposed
17 ECAM terms are identical. For example, the mechanism
1S compares base net power costs for the same expense and
19 revenue accounts established in the last rate case to actual
20 net power costs incurred on a monthly basis. Like Avista's
21 PCA, the difference is then accumulated in a deferral
22 account with interest at the customer deposit rate for true-
23 up once a year.
24 The proposed ECAM also contains a load growth
25 adjustment calculated in a manner similar to that of
CASE NO. PAC-E-OS-OS07/31/09 LOBB , R . (D i ) 9
STAFF
1 existing PCAs. Once the deferral amount is known, it is
2 spread over the expected annual energy consumption for the
3 next year. Any deferred amount over or under-recovered
4 remains in the deferral account for subsequent true-up
5 during the next ECAM period. Finally, the mechanism
6 contains a 90%/10% sharing percentage as does the Avista PCA
7 to align the interest of the Company and its customers and
S assure that power supply costs are as cost effective as
9 possible.
10 Q.Are there any significant differences between
11 existing PCAs and the proposed ECAM?
12 A.Yes there are a few. For example, the comparison
13 between base power supply costs and actual power supply
14 costs is made on a cost per kWh basis. Staff believes that
15 comparing power supply costs on a kWh basis reduces the
16 effect of load growth and limits the necessary size of the
17 load growth adjustment.
1S The proposed ECAM also contains two elements of a
19 temporary nature. The first element is that the ECA will
20 only apply to Idaho tariffed customers because Nu West and
21 Monsanto are served under special contract approved by the
22 Commission through 2010.(Duvall Direct pp S, 9) Staff
23 supports the exclusion noting that any Idaho jurisdictional
24 power supply costs subject to recovery (or disbursement)
25 through the ECAM will be prorated to remove power supply
CASE NO. PAC-E-OS-OS07/31/09 LOBB, R. (Di) 10
STAFF
1 costs associated with special contract load.
2 The other temporary provision is the Renewable
3 Resource Adder. ~S This adjustment will be made to actual
4 ECAM power supply costs until completion of the next general
5 rate case. i will describe this provision in greater detail
6 later in my testimony.
7 Q.Have you performed an analysis to estimate the
9
S effect of the ECAM on the Company's Idaho rates?
A.Yes. With the assistance of the Company, a back
10 cast for the period January through May of 2009 was
11 prepared. The period was analyzed to see what the effects
12 of the ECAM would have been had it been in place.
13
15
14 resul ts of the back cast?
Q.What observations would you make based on the
A.The back cast showed the components of the ECA
16 and the amounts that accumulated over the five month period.
17 It showed that the single largest deferral component, at
1S approximately $70S, 000, was the Renewable Resource Adder.
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20
Q.What is the Renewable Resource Adder?
A.The Renewable Resource Adder is a temporary ECAM
21 component that allows the Company to recover the fixed cost
22 of new wind generation until those costs are included in
23 base rates in the Company's next general rate case. The
24 Renewable Resource Adder is an appropriate ECAM cost because
25 the power supply cost benefits of new wind generation are
CASE NO. PAC-E-OS-OS07/31/09 LOBB, R. (Di) 11
STAFF
1 automatically captured in the ECAM. New wind generation
2 reduces fuel costs and purchased power costs and increases
3 secondary sales revenues. Requiring the Shareholders to pay
4 the fixed costs while passing nearly all the benefits on to
5 customers is an inequitable ratemaking practice. The
6 Renewable Resource Adder is easily quantified in the ECAM at
7 $55/MWh and works to increase the deferral balance. The
8 impact on Net Power Costs of these new wind resources is not
9 easily quantified but is substantial and works to reduce the
10 deferral balance. In fact it may entirely offset the
11 $55/MWh cost.
12 The second largest ECA component is the Net Power
13 Cost deferral at approximately $373,000 after the load
14 growth adjustment and 90/10 sharing.(583,000 - 168,000 x
15 .90 = 373,000) This amount increases the deferral balance
16 in the five month review period in spite of the fact that
17 new wind generation reduced these costs from what they
18 otherwise would have been. Some possible explanations for
19 this increase might be: higher fuel costs, higher market
20 prices coupled with above normal market purchases and/or
21 lower secondary sales volumes at lower market prices.
22 The other two ECAM components, S02 credits and
23 interest, amount to a few thousand dollars each. The total
24 five month deferral would have been approximately $1,072,000
25 had the ECAM been in place during the first five months of
CASE NO. PAC-E-08-08
07/31/09 LOBB, R. (Di) 12
STAFF
2
1 2009.
4
3 ECAM deferral trend have on Idaho's tariffed customers?
Q.What rate impact would the continuation of this
A.If the back cast level of deferral continued for
5 12 months the deferral amount would be approximately $2.6
6 million. The Company's current approved annual revenue
7 requirement for tariffed customers is $147.8 million. The
9
8 rate increase would be about 1.8%.
Q.Could ECAM customer impacts vary significantly
11
10 from your estimate?
A.Yes. The Company's actual power supply costs vary
13
12 dramatically from year to year based on many factors.
Q.You have previously described several other issues
14 identified in the Settlement document including ECAM start
15 date, voltage level rate design, write off of remaining
16 regulatory liabilities and a Company provided hedging
17 seminar for interested parties. Why did the Staff agree to
19
18 these terms?
A.Staff agreed to these terms as part of the overall
20 negotiation process. The hedging seminar for interested
21 parties will provide valuable information regarding the
22 Company's hedging strategy and how it reduces risk. The
23 agreement to write off three existing regulatory liabilities
24 simply includes a $156,000 credit in the ECA now rather
25 than continued amortization of these costs in base rates
CASE NO. PAC-E-08-0807/31/09 LOBB, R. (Di) 13
STAFF
1 after completion of the next general rate case.
2 An evaluation of voltage level rate design was an
3 issue important to the large industrial customers that were
4 parties to the case. Staff believes that an ECAM rate
5 design that recognizes reduced line losses at high service
6 voltages has merit and warrants consideration.
7 The ECAM start date of July 1, 2009 was an
S accommodation to show good faith in support of the
9 Settlement. At the same time, it recognized Staff time
10 constraints in filing supporting testimony. The only
11 significance of the July 1 date is the recording of power
12 supply cost deferrals. The recorded deferrals will not be
13 subj ect to recovery should the Commission rej ect the ECAM
14 Settlement.
15 Q.Does this conclude your testimony in this
17
16 proceeding?
1S
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A.Yes, it does.
CASE NO. PAC-E-OS-OS07/31/09 LOBB, R. (Di) 14
STAFF
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 31sT DAY OF JULY 2009,
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LODD IN
SUPPORT OF STIPULATION, IN CASE NO. PAC-E-08-08, BY MAILING A COPY
THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
TED WESTON
MGR, ID REGULATORY AFFAIRS
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-MAIL: ted.weston(fpacificorp.com
DATA REQUEST RESPONSE CENTER
PACIFICORP
825 NE MUL TNOMAH STE 2000
PORTLAND OR 97232
E-MAIL: dataequest(fpacificorp.com
KATIE IVERSON
BRUBAKER & ASSOCIATES
17244 W CORDOVA COURT
SURPRISE AZ 85387
E-MAIL: kiverson(fconsultbai.com
ERICLOLSEN
RACINE OLSON NYE BUDGE & BAILEY
201 ECENTER
PO BOX 1391
POCATELLO ID 83204
E-MAIL: elo(fracinelaw.net
DANIEL SOLANDER
SENIOR COUNSEL
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-MAIL: daniel.solanderifacificorp.com
RANDALL C BUDGE
RACINE OLSON NYE BUDGE & BAILEY
201 ECENTER
PO BOX 1391
POCATELLO ID 83204
E-MAIL: rcb(fracinelaw.net
JAMES R SMITH
MONSANTO COMPANY
E-MAIL: jim.r.smith(fmonsanto.com
ELECTRONIC COPIES ONLY
ANTHONY Y ANKEL
29814 LAK ROAD
BAY VILLAGE OH 44140
E-MAIL: tony(fyanel.net
il~
SECRETARY
CERTIFICATE OF SERVICE