IV. Financial Status

PacifiCorp prepared its test year results by making adjustments to the recorded results for the test year. The primary issue between the parties regarding the test year operating costs is net power costs. PacifiCorp estimated its test year net power costs based on data for June through September 2000. The result was $760 million on a total company basis. PacifiCorp believes that actual 2001 net power costs will be higher because of its previously executed contracts for 2001 power purchases. Actual net power costs for the first six months of 2001 were $561 million.

Roseburg provides adjustments to PacifiCorp's estimate that would lower the test year total company power costs to $138 million. However, Roseburg does not estimate that PacifiCorp's costs will be $138 million. Instead, it says that its adjustments demonstrate that PacifiCorp's estimates are flawed. Roseburg says that it is nearly impossible to adjust PacifiCorp's test period to accurately reflect costs during the first half of 2002.

PacifiCorp argues that Roseburg's adjustments were selective, one-sided adjustments to the test period. If the Commission were to consider them, it would also have to adjust all of the other cost and revenue elements of the summary of earnings such as load, fuel expenses, ratebase, etc.

PacifiCorp is correct in saying that Roseburg's adjustments do not include all cost and revenue elements. In addition, Roseburg's adjustments are illustrative of its view that PacifiCorp's estimates are flawed, as opposed to specific recommended adjustments. However, we find some merit in Roseburg's arguments, such as the adjustment of power sales contracts that expire before 2002. PacifiCorp's 1999 actual net power costs, $432 million on a total company basis, were more in line with historical power costs than its test year estimate. Basing PacifiCorp's test year California results of operations on 1999 actual net power costs yields a return on equity of 1.2% for California operations. This is close to PacifiCorp's actual total company return on equity for the test period of 1.166%. We note that the Oregon and Utah Commissions recently adopted total company net power costs of $595 million and $589 million, respectively for similar test periods. We are also mindful of the fact that the requested increase is for interim rates. The test period summary of earnings has not been as thoroughly investigated as it would be in a general rate case. Therefore, for the purpose of considering an interim increase, we will be conservative and assume PacifiCorp's test year results of operations based on 1999 actual power costs. As a result, the test year return on equity is 1.2% for California operations. PacifiCorp says a one-cent per kWh increase, based on test year results of operations using 1999 actual power costs, would result in a 5.8% return on equity. No party disputed this calculation, and we will use it to estimate the impacts of a rate increase on PacifiCorp's earnings for 2002.