20020715_191.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
BILL EASTLAKE
LOU ANN WESTERFIELD
DON HOWELL
RANDY LOBB
KEITH HESSING
TERRI CARLOCK
BEV BARKER
ALDEN HOLM
RICK STERLING
TONY A CLARK
GENE FADNESS
WORKING FILE
FROM:LISA NORDSTROM
DATE:JULY 11, 2002
RE:IDAHO POWER'S MOTION FOR APPROVAL OF SETTLEMENT AND
SETTLEMENT STIPULATION ON RISK MANAGEMENT AND HEDGING
ISSUES. STATUS REPORT ON AFFILIATE TRANSFER PRICING ISSUES.
CASE NO. IPC-01-16.
The parties in this case have agreed to a settlement of a portion of the remaining issues in
this proceeding, particularly those issues relating to the Company s risk management and hedging
practices. This settlement does not address the issues relating to the pricing of transactions between
Idaho Power and IDACORP Energy, LP ("IE"). The parties represent that this settlement is just, fair
and reasonable, in the public interest, and in accordance with the law and regulatory policy.
Accordingly, Idaho Power requests the Commission issue its Order approving this Stipulation
without material change or condition and find that the Stipulation and the policies included in the
risk guidelines are fair, just and reasonable and in the public interest.
DECISION MEMORANDUM
BACKGROUND
In February and March 2001 , Idaho Power filed applications for authority to increase its
rates under its PCA rate schedule. These applications were docketed as Case Nos. IPC-Ol- 7 and-
11. In Order No. 28722, the Commission allowed Idaho Power to immediately recover $168.
million through the PCA mechanism and deferred recovery of approximately $59 million pending
further investigation. As a part of that investigation, the Commission held an evidentiary hearing
examining Idaho Power s ". . . trading practices (to include hedging, transmission and wheeling
charges, Mid-C pricing, and the use of weighted-average pricing), the November trading event and
the Company s resource planning." Order No. 28722 at 17.
In Order No. 28731 the Commission separated a number of the issues identified for
investigation in the -7 and -11 cases into a third case which was docketed as IPC- E-O 1-16 ("the -
case ). In Order No. 28731 the Commission described the issues to be addressed in the -16 case as
. . . interim and prospective issues regarding Idaho Power s trading practices (to include hedging,
transmission and wheeling charges, Mid-C or Palo Verde pricing indexes, and use of weighted-
average pricing for real-time purchases); the pricing, hedging and transmission terms of the IES
Agreement and Order No. 28596; and the flexibility of the Company s short-term planning. . . .
Order No. 28731 at 5.
Subsequently, on August 24, 2001 , in response to a joint motion by the parties, the
Commission issued Order No. 28831 in which it bifurcated the issues in the -16 case. Testimonyand
exhibits relating to the Company s trading practices (hedging, transmission and wheeling charges
Mid-C pricing and weighted-average pricing) prior to March 1 2001 were presented in hearings held
on August 28-2001 in Phase 1 ofthe -16 case. All of the other issues identified for review in the
16 case, i., Idaho Power s approach to hedging and risk management strategies, additional
compensation to Idaho Power for transmission system and other system resource usage by IE, and a
question of whether the transfer prices for both day-ahead and real-time transactions between Idaho
Power and IE approved in Commission Order No. 28852 should be modified on a prospective basis
were assigned to Phase 2 of the -16 case with the expectation that the parties would make a good
faith effort to settle the case.
Workshops to discuss settlement were held on September 20, October 12, December 18
2001 , February 28 , March 14, and April 23 , 2002. Representatives from Idaho Power Company, the
DECISION MEMORANDUM
Commission Staff and various customer groups attended the workshops. The customer groups in
attendance included the AARP, the Industrial Customers ofIdaho Power, Micron Technology, Idaho
Irrigation Pumpers Association, the l.R. Simp lot Company and the Idaho Retailers Association.
this agreement, these customers are collectively referred to as the Customer Advisory Group
CAG"
In early April 2002, Idaho Power advised the parties that because of problems with the
transfer pricing methodology in use for real-time transactions under the Supply and Management
Agreement, Idaho Power requested that the settlement discussions be restructured to separate the risk
management and hedging policy issues from the issues relating to the transactions between Idaho
Power and IE. This would allow the parties to complete the risk management and hedging portions
of the settlement and take up the balance of the -16 case issues at a later date. Idaho Power filed a
status report with the Commission (discussed in greater detail below) to address the current status of
the parties' efforts to resolve the issues relating to the transactions between Idaho Power and IE.
STIPULATED SETTLEMENT OF
RISK MANAGEMENT AND HEDGING ISSUES
Based on the discussions at the workshops and subsequent discussions with the CAG and
the Commission Staff and in furtherance of a settlement of this case, Idaho Power has agreed to
implement a number of changes to its existing practices for managing risk and initiating hedging
purchases and sales. Those changes are more particularly described in the following:
1. Risk Management.Idaho Power has developed an extensive set of policies and
guidelines to more clearly define when and how Idaho Power will initiate short-term resource
acquisitions and sales and carry out hedging transaction strategies to balance loads and resources.
The Company s primary risk management objective is to manage "worst-case" price risk
within a tolerable level. This tolerable level shall be described in the Risk Guidelines as the System
Risk Limit or Tier One. Worst case is defined as a 95% confidence interval price move. For the
2002-2003 PCA year, the System Risk Limit was initially set at $100 million based upon market
price information that existed at the end of September 2001. The $100 million System Risk Limit
implies that the Company, its customers and the Commission do not want to experience an increase
in the system PCA balance greater than $100 million (before jurisdictional allocations and sharing).
Despite the establishment of a System Risk Limit, uncontrollable violations of the risk limit can
occur. Accordingly, Idaho Power will expeditiously advise the Commission, Commission Staff and
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CAG of any Tier One risk limit violations and describe the actions the Company has taken to address
such violations.
Hedges will initially be put on at a minimum of 25 MW and unwound in 50 MW
increments whenever the PCA calculation under the low water/high price scenario exceeds the
System Risk Limit. Hedges will be established first in near months and will be only extended into
more distant months if required.
In an effort to provide a more effective consumer price signal and allow timely recovery
of extraordinary power supply costs, Idaho Power agrees to confidentially advise the Commission
when it enters into a forward monthly term purchase where the price exceeds the Market Review
Trigger ("MR T"). The MR T will be initially set at $60 per MWh and will be reviewed annually by
the CAG and RMc. Should Idaho Power fail to provide the MRT notification for a purchase, the
Commission may find full recovery of expenditures for that purchase to be unreasonable. After
considering the then-current circumstances (e., market prices, water conditions, time left in the
PCA year, etc.) on a case-by-case basis, the Commission may wish to implement a temporary
emergency surcharge or other mechanism that allows power supply costs exceeding the MR T level to
be recovered in a time frame more consistent with when the costs are incurred.
When "worst-case" risk lies within the Tier One System Risk Limit, the Company after
consultation with the RMC will undertake transactions to mitigate normal-course market risk. Idaho
Power labeled this secondary risk management objective as the Volumetric Limit or Tier Two risk
management. Tier Two transactions in the form of short or long hedges will protect customers from
exposure to price deterioration for forecast surplus months, and a price rise in forecast deficit
months. For the 2002-2003 PCA year the Company will maintain no more than a 100 MW open
position, computed for both Heavy Load (HL) and Light Load (LL) hours for any month.
Deficiencies will be managed to the expected water case and surpluses will be managed to the low
water case. Hedges will be put on at a minimum of 25 MW and unwound at 50 MW increments.
Hedges will not be initiated that serve to increase worst-case risk scenario above the predetermined
System Risk Limit.
The foundation for the Company s tertiary risk management objective is the recognition
that even if the Company s worst-case risk exposure lies within the System Risk Limit, there is a
price point at which customers would be satisfied to lock in a purchase price on forecast deficit
DECISION MEMORANDUM
positions. Labeled Floor Limit or Tier Three risk management, this type of hedge assumes that
customers are willing to forego the benefit of a further price fall in return for price stability and
mitigated exposure to severe price increases. For the 2002-2003 PCA year the Company will seek to
cover expected deficiencies whenever prices fall below $30/MW for HL and $15/MW for LL.
Additionally, the Company will seek to cover low water deficiencies whenever prices fall below
$201MW for HL and $10/MW LL. Floor Limit positions will be put on in 25 MW minimum
increments and unwound ifthere are changes to the position greater than 50 MW.
The parties to this Stipulation have reviewed the Risk Guidelines and agree that it would
be desirable for Idaho Power to utilize the Risk Guidelines to formalize its decision-making process
for short-term resource acquisition and sales, and hedging decision-making. Once the Manual and
initial Risk Guidelines receive final approval by the Idaho Power Board of Directors, the parties will
review them and submit a follow-up stipulation or comments to the Commission for review and
approval.
2. Separate Risk Management Committees. In response to criticism of its single Risk
Management Committee (RMC), Idaho Power has formed a risk management committee that is
separate and distinct from any risk management committee operated by IDACORP. The Idaho
Power RMC will maintain separate records documenting the decisions ofthe Idaho Power RMC for
resource planning, acquisition, sales and hedging transactions. These records will be subject to audit
by the Commission Staff consistent with Staff s regulatory audit authority and the audit agreement
contained in the settlement stipulation entered into in Case No. IPC-OO-13.
3. Long-Term Resource Planning. In its testimony in the -16 case, the Commission
Staff addressed a number of resource planning issues that came to the forefront as a result of the
Company s need to make significant purchases of energy on the wholesale market during calendar
years 2000 and 2001. Idaho Power agreed to address all of the concerns raised by the Commission
Staff in its 2002 Integrated Resource Plan (IRP) which was recently filed with the Commission for
review and approval in Case No. IPC-02-8. With the exception ofincorporating the IRP review in
the annual collaborative review of the Risk Guidelines prior to October 1 , the parties to this
Stipulation agreed that it is preferable for these resource-planning issues to continue to be addressed
in the context of the 2002 IRP. The parties also agreed that the relationship between the RMC and
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the integrated resource planning process will be explained at the time ofthe initial review ofthe Risk
Guidelines and updated as necessary thereafter during the annual review of the Risk Guidelines.
4. Term Agreements Idaho Power agreed that term market purchases or sale
transactions will be undertaken by Idaho Power, not IE.
5. Annual and Two Year Reviews. The Company agreed to file with the Commission an
analysis of its three-tiered risk management strategy detailing its effect on customers, the Company
and IDACORP Energy once it has been in place for two years. The analysis will include a monthly
comparison of loads, resources and RMC strategy, demonstrate that Idaho Power considered
purchase alternatives consistent with its IRP, and show what hedge products it considered and used.
The report shall also include any recommended changes or modifications that the Company may
have to its three-tiered risk management program. Staff will review the Company s analysis and
make recommendations to the Commission to modify the three-tiered risk management strategy as
necessary. In the context of the collaborative annual review of the Risk Guidelines that will take
place prior to October 1 , the CAG, other interested parties and Staff may recommend prospective
changes to Idaho Power and the Commission. The parties recognize that the Idaho Public Utilities
Commission maintains the right to review and modify the three-tiered risk management program as
necessary after reviewing the analysis of the first two years or as circumstances dictate.
In addition to these reviews, Idaho Power s Motion indicated that it will seek input from
Commission Staff with respect to desired risk tolerances and solicit up front support for proposed
implementation procedures. Idaho Power will also provide Commission Staff with regular updates
on the status ofthe Idaho Power risk position and its impact on the Power Cost Adjustment balance.
6. Relationship to IPC-OO-13 Settlement.This Stipulation does not supersede the
Stipulation entered into in settlement of Case No. IPC-OO-, which was filed with the
Commission on November 17 2000 and approved on December 19 2000 in Order No. 28596.
7. Future Modification.The parties agree that this Stipulation, is in the public interest
with respect to the issues covered by it and that all of the terms of the Stipulation are fair, just and
reasonable at the time this Stipulation was reached. However, all parties agree that the Stipulation
may need to be modified in the future to account for unforeseen circumstances and ensure that the
Risk Guidelines continue to function in the public interest.
DECISION MEMORANDUM
RISK MANAGEMENT POLICY MANUAL
The Idaho Power Risk Management Policy Manual (Manual) contains Idaho Power s risk
management objectives as well as policies, guidelines, controls and internal procedures. This
Manual was included in the Company s filing as Attachment 2. The Manual will be updated
periodically through the collaborative process described above. The parties anticipate that if the
Manual is approved by the Idaho Power Board of Directors at its July 18 meeting, the Idaho Power
Risk Management Committee will then formally implement the risk management strategy.
Moreover, the parties have agreed to support a future submission to the Commission ofthe Idaho
Power Board-approved Manual and the initial risk guidelines for final review and approval by the
Commission.
STATUS REPORT ON AFFILIATE TRANSACTION PRICING ISSUES
On July 21 2002, IDACORP announced it planned to wind down its power marketing
trading business. IDACORP Energy will not seek new customers and will set its maximum value at
risk limits to less than $3 million. Idaho Power stated that IDACORP made this decision because of
changing liquidity requirements brought on by rating agencies, continued uncertainty in the
regulatory and political environment, and the reduction of creditworthy counter-parties.
With IDACORP Energy substantially reducing its market presence and in light
continuing regulatory concerns associated with the affiliate relationship, Idaho Power has concluded
that it will re-establish in-house capability to buy and sell wholesale electricity beginning August 1
2002. Idaho Power s scope of wholesale energy transactions would be limited to purchases and sales
of electricity to support its operations and the Company stated that it has no intention of speculating
on the wholesale market.
With the decision to substantially eliminate power trading and power marketing at the
IDACORP level, the two contracts under which Idaho Power would sell additional transmission and
resources services to IE in exchange for $6 million are no longer viable and will not be presented to
the Commission for approval. However, Idaho Power stated that it supports the continued PCA
flow-through of $2 million in benefits to the Idaho retail customers during the winding down
process.
DECISION MEMORANDUM
PARTIES' RECOMMENDATION
All formal parties to this case that participated in the workshops, as well as additional
interested parties that formed the Customer Advisory Group, have signed the Stipulation resolving
IPC- E-O 1-16' s risk management and hedging issues. Thus, the matter is ripe for Commission review
and determination of whether the stipulated settlement is just, fair and reasonable, in the public
interest, or otherwise in accordance with law or regulatory policy.
The parties recommend that based upon the Stipulation, the Commission accept this
settlement as presented without material change or condition. However, all parties agree that the
Stipulation may need to be modified in the future to account for unforeseen circumstances and
ensure that the Risk Guidelines continue to function in the public interest. The parties further
recommend that once the Idaho Power Board approves the Manual and the initial Risk Guidelines
are developed, the Commission accept this Stipulation and the record in Phase 1 of this case as a
reasonable resolution of the risk management and hedging practices issues raised in the -16 case.
COMMISSION DECISION
Does the Commission wish to accept/approve by its Order the Stipulation and Settlement
Agreement based on the record currently before it?
If the Commission does not wish to accept the Agreement based on the current record
does the Commission wish to establish the procedure by which it will consider and evaluate it?
;t~ ~W~
Lisa Nordstrom
M:IPCEOl16 In settlement
DECISION MEMORANDUM