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With Idaho Power and the PUC, a delicate balance

Kim TroutIn one form or another, all businesses analyze potential investments of capital and time against current market forces, seeking to strike the perfect balance of risk and reward.

As a regulated utility, Idaho Power is required to provide certain services in exchange for the opportunity to earn a “fair” return on its investments. This creates an inherent incentive for the utility to increase its investment in infrastructure, and the IPUC holds the responsibility to verify whether costs qualify to be included in the base rates paid by ratepayers. With changes in the regulatory environment and the advent of new technologies, the IPUC’s task of balancing the interests of the utility with those of ratepayers will continue to be more challenging.

CEO Lynn Good of Duke Energy, in its second quarter earnings call, states: “New technologies, new regulations and ongoing cost pressures are just some of the forces that require new thinking and action. As we position the company in the industry for the future, we must innovate every part of the business to address these challenges.”

In the traditional view of regulating monopolies, the IPUC’s role would be to exercise its power of regulation, in part, as the substitute for market forces that would come from competition. This ‘traditional view’ operates under the theory that in exchange for the monopoly, the utility receives a rate sufficient to cover its “costs” and in addition, a “fair” rate of return. The IPUC in turn, determines which “costs” qualify to be included in the base rates paid by all ratepayers, including those operating businesses, as customers of Idaho Power. Likewise, through its ratemaking role, the IPUC establishes the rates which also fund the ‘fair’ return to Idaho Power as an IOU, “Investor owned utility”. In the period from 1998 to 2012 Idaho Power’s actual return measured in earnings per share growth rose an average of 14.8 percent. As a frame of reference, according to data from Bloomberg and Thomson Financial, in the same 15-year period, Idaho Power returns were 117.9 percent higher than the S&P/Dow Jones Industrial Average indices for the same period.

Idaho Power recently sought approval from the IPUC for Idaho Power’s investment in emission controls on the Jim Bridger coal plant in Wyoming. The emission controls are required as part of increasing governmental regulation of coal emissions. Significantly, Idaho Power requested that the IPUC approve “a binding commitment to provide rate base treatment” for Idaho Power’s expenditure. This ‘binding commitment’ would have guaranteed payment by the ratepayers to cover Idaho Power’s “costs” and “fair” return.

Environmental groups urged the IPUC to deny the request on the grounds that Idaho Power’s proposal did not adequately consider energy efficiency, demand response, or renewable energy as alternatives to investing in out-of-state coal facilities.

The December 2, 2013 ruling by the IPUC spotlights the issues. The IPUC recognized that the uncertainty as to the potential for more federal or state emission control requirements could make Idaho Power’s investment a big gamble. It is not inconceivable that during the installation of the upgrades, “a tipping point could be reached making them uneconomic,” the commission said.

As to the opponents, the IPUC commented that the inability to outline viable alternatives (in renewable resources and energy efficiency) “in the near-term” did not support denial of Idaho Power’s request.

However, the IPUC recognized the significant concerns of the public as measured by the 200 plus written comments and the public testimony of 30: “The detrimental effects of long-term coal use on human health, the climate, wildlife, land and water are well-documented.”

The IPUC ultimately granted the certificate for the investment, but declined, for the moment, to include the costs in the Idaho Power binding rates. “Because of the uncertain future of coal-fired generation, we find it unreasonable to prematurely commit ratepayer dollars to support Idaho Power’s investment,” the commission said. Approval of such treatment would provide the company with economic, social and political assurance it seeks, while leaving ratepayers to “bear the risk of environmental uncertainties,” the commission said. However, the IPUC left the door open to Idaho Power to gain inclusion of these costs in the rate base.

Idaho case law states “[t]he public interest is the paramount consideration of the commission. . ..”. Only time will reveal how the IPUC will implement “a fair, just and reasonable balance of interests between the Company and the Company’s ratepayers.” The decision that Idaho Power, rather than ratepayers, should bear the risk of new investments in the Bridger coal facilities appears to be a first step in addressing the ‘delicate balance’ as to environment, technology, and the future of alternative energy in Idaho.

Kim J. Trout is managing member of Trout Law, PLLC. Kim specializes in business, real estate, and litigation-related matters. He can be reached at ktrout@trout-law.com.

 

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