VI. Revenue Requirement

DRA is the only party that submitted results of operations and revenue requirement testimony in response to PacifiCorp's 2007 test year revenue requirement request. DRA recommended that PacifiCorp be authorized an increase in its revenue requirement of $3.4 million for its 2007 test year. The DRA proposal was $9.4 million, or 75.8% lower than PacifiCorp's 2007 test year request.

A. Proposed Settlement

This large revenue requirement difference between PacifiCorp and DRA resulted in meetings between the two parties in an attempt to resolve their differences. On June 29, 2006, PacifiCorp and DRA reached a verbal agreement resolving all revenue requirement issues, including test year revenues, expenses, ratebase, capital structure, return on equity, multi-state cost allocations and attrition year mechanisms.

An all party settlement conference was held on July 7, 2006. Parties participating in that conference included PacifiCorp, DRA, CFBF, County of Siskiyou, KWUA and the Western Manufactured Housing Community Association. Following that settlement conference, PacifiCorp and DRA finalized and signed a Revenue Requirement Settlement Agreement. That agreement was filed with the Commission on July 7, 2006 as a PacifiCorp and DRA joint motion seeking adoption of their settlement agreement on revenue requirement issues. A copy of that agreement, excluding supporting schedules and attachments is attached to this order as Attachment A.¹⁹

The proposed agreement provides for a revenue requirement increase of $7.3 million for the 2007 test year, approximately 57.0% of PacifiCorp's $12.8 million request.

B. Discussion

Rule 12.1(d) of the Commission's Rules of Practice and Procedure holds that the Commission will not approve settlements, whether contested or uncontested, unless they are reasonable in light of the whole record, consistent with law, and in the public interest. In San Diego Gas & Electric Company (1992) 46 CPUC 2d 538, the Commission held that as a precondition to approval of an all party settlement the Commission must be satisfied that: the settlement commands the sponsorship of the active parties; the sponsoring parties are fairly reflective of the affected interests; the terms of the settlement do not contravene statutory provisions or prior Commission decisions; and, sufficient information exists to assess the reasonableness of the agreement and permit the Commission to discharge its future regulatory obligation with respect to the parties and their interests.

Although the settlement is not the result of an all party settlement, it was between the active parties interested in the revenue requirement. There was no opposition to the proposed revenue requirement agreement.²⁰ Hence, the settlement commands the sponsorship of the active parties. The settlement also fairly reflects the affected interest of shareholders through PacifiCorp and PacifiCorp's ratepayers through DRA. A review of the revenue requirement settlement enables us to conclude that no term of the settlement contravenes any statutory provision or any Commission decision.

Finally, we address whether sufficient information exists to assess the reasonableness of the agreement. For that, we review PacifiCorp's and DRA's individual test year results of operations, positions, and agreed upon position.

The single largest adjustment agreed to by PacifiCorp and DRA is the rate of return, which reflects a decrease from PacifiCorp's requested 11.8% return on a 52.8% equity ratio to a 10.6% return on a 50.0% equity ratio. That adjustment reduces PacifiCorp's requested revenue requirement by $2.7 million, which is approximately 60.0% of the adjustment initially proposed by DRA. The agreed upon capital structure is 50.0% common equity, 1.0% preferred stock and 49.0% long term debt. That capital structure approximates PacifiCorp's actual capital structure. Those agreements bring PacifiCorp's return on equity and capital structure in line with the most recent authorized returns on equity and capital structure for California's major energy utilities' (Pacific Gas and Electric Company, Southern California Edison Company, and San Diego Gas & Electric Company) returns on equity and capital structure approved in D.05-12-043.

Another large adjustment, $800,000, results from a compromise on reductions to electric plant in service. The total plant-in-service adjustment initially proposed by DRA was based on a removal of PacifiCorp's Lakeside power plant. However, with the understanding that the power plant is under construction and scheduled to go into commercial operation in the spring of 2007, PacifiCorp and DRA agreed to adjust plant-in-service by $800,000.

The following table summarizes the revenue requirement positions of DRA, PacifiCorp and the settlement proposal in thousand of dollars. A more detail comparison is set forth in Appendix A to the agreement, submitted as part of its motion to adopt the revenue requirement, settlement agreement.

Category	DRA	PacifiCorp	Agreement
Operating Revenue	$ 92,262	$101,753	$ 96,243
Operating Expenses
Operating & Maintenance	53,916	54,587	54,428
Administrative & General	4,258	5,464	3,811
Depreciation & Taxes	19,731	23,101	21,384
Total Operating Expenses	77,905	83,152	79,623
Net Operating Income	14,357	18,601	16,620
Rate Base
Gross Rate Base	380,181	403,370	396,941
Rate Base Deductions	200,797	202,237	202,113
Net Rate Base	179,384	201,133	194,828
Return on Rate Base	8.003%	9.248%	8.531%

Other DRA proposed adjustments were accepted by PacifiCorp as appropriate, or, in several cases, accepted, in whole or in part, in order to reach a compromise on the revenue requirement. Those adjustments included a $200,000 adjustment attributed to a PacifiCorp rebasing initiative, a $132,000 adjustment to corporate overhead costs; a $127,000 adjustment to pension and benefit expenses; a $99,000 adjustment to miscellaneous distribution and transmission costs; a $49,000 adjustment to the weatherization programs; a $47,000 adjustment due to a change in the treatment of fuel stock cost; and a $29,000 adjustment due to the capitalization of Lakeside overhead expenses. PacifiCorp also agreed to a $1.2 million revenue requirement reduction as an incentive for it to identify and implement efficiency improvements.

Finally, PacifiCorp and DRA agreed that PacifiCorp should be permitted to implement an ECAC mechanism, PTAM, and a method for recovery of the shortfall in PacifiCorp's revenue requirement that will result from the transition of Klamath Project Customers to generally-applicable rates approved by D.06-04-034, as detailed in the attached agreement. This agreement puts PacifiCorp on equal footing with California's other regulated energy utilities which were each authorized an ECAC mechanism and PTAM several years ago.

When reviewed as a total product, the agreement represents significant compromises on behalf of their respective constituents. The agreement is reasonable in light of the record, consistent with law, and in the public interest.

¹⁹ A signed copy of the agreement was filed as part of the joint motion.

²⁰ Reporter's Transcript Vol. 3, page 275 through 277.