20111004_3477.pdf

DECISION MEMORANDUM 1
DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER REDFORD
COMMISSIONER SMITH
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL

FROM: KARL KLEIN
DEPUTY ATTORNEY GENERAL

DATE: SEPTEMBER 30, 2011

SUBJECT: CASE NO. AVU-E-11-04
AVISTA’S 2011 INTEGRATED RESOURCE PLAN

On August 25, 2011 Avista applied to the Commission for an Order accepting
Avista’s 2011 Integrated Resource Plan (IRP).
THE APPLICATION
Avista is headquartered in Spokane, Washington and serves electric customers in
northern Idaho. Avista says its 2011 IRP “guides its strategy over the next two years and
indicates the overall direction of resource procurements for the remainder of a 20-year planning
horizon.” IRP Executive Summary at i. Avista also says that its “Preferred Resource Strategy
(PRS) is a mix of wind generation, energy efficiency, upgrades at existing generation and
distribution facilities, and new gas-fired generation.” Id.
The following summarizes the Company’s 2011 IRP filing:
Resource Needs
Avista says plant upgrades and conservation measures are integral to its IRP but
ultimately are inadequate to meet expected future load growth. Id. Absent new resource
additions or new conservation measures, Avista annual energy deficits begin in 2020, with loads
and a planning margin exceeding resource capability by 49 aMW. Id. Energy deficits rise to
218 aMW in 2026 and 475 aMW in 2031. Id. Absent new resource additions or new
conservation measures, the Company will be short 98 MW of summer capacity in 2019. Id. In
2026 capacity deficits rise to 352 MW and in 2031 they rise to 774 MW. Id. Winter capacity
deficits begin at 42 MW in 2020 and increase to 401 MW in 2026 and 883 MW in 2031. Id.
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Avista says increasing deficits result from forecasted 1.6% energy and capacity load growth
through 2031, along with the expiration of long-term purchase and sale contracts. Id.
Modeling and Results
Avista says it develops its PRS through a multiple-step approach. Id. at iii. The
Company begins by identifying and quantifying potential new generation resources to serve
projected demand needs across the West. Id. A Western Interconnect-wide study explains the
impact of regional markets on the Northwest electricity marketplace. Id. Avista then maps its
resources to the present transmission grid configuration in a model simulating hourly operations
for the Western Interconnect from 2012 to 2031. Id.
Avista says its model adds cost-effective new resources and transmission to meet
growing loads. Id. Monte Carlo-style analysis varies hydroelectric generation, wind generation,
load, forced outages, greenhouse gas emission cost estimates, and natural gas price data over 500
iterations of potential future market conditions. Id. The Company’s simulation estimates Mid-
Columbia electricity markets, and the iterations collectively form the IRP Expected Case. Id.
Avista says it then values each new resource and energy efficiency option against the
Expected Case Mid-Columbia electricity market to identify its future value to the Company, as
well as its inherent risk measured as year-to-year cost volatility. Id. These values, and their
associated capital and fixed operation and maintenance (O&M) costs, form the input into
Avista’s PRS Linear Programming Model (PRiSM). Id. PRiSM assists the Company by
developing optional mixes of new resources at each point on an efficient frontier. Id. The PRS
provides a “least reasonable cost” portfolio that simultaneously minimizes future costs and risks
given legislatively mandated or expected future environmental constraints. Id. An efficient
frontier helps determine the tradeoffs between risk and cost. Id. at iii-iv. Avista says the
approach is similar to finding an optimal mix of risk and return when developing a personal
investment portfolio. Id. at iv. As expected returns increase, so do risks. Reducing risk reduces
overall returns. Identifying the PRS is similar to an investor’s dilemma. There is a trade-off
between power supply costs and power supply cost variability. Lower power cost variability
comes from investment in more expensive, but less risky, resources. The PRS selection is the
location on the efficient frontier where the increased cost justified the reduction in risk. Id.
Avista notes that the IRP includes several scenarios that help identify tipping points
where the PRS could change under alternative conditions to the Expected Case. It includes
DECISION MEMORANDUM 3
scenarios for load growth, capital costs, higher energy efficiency acquisitions, and greenhouse
gas policies. Id.
Electricity and Natural Gas Market Forecasts
Avista says the forecasted levelized average Mid-Columbia market price is $70.50
per MWh in nominal dollars over the next 20 years; the off-peak price is $63.94 per MWh and
the on-peak price is $75.42 per MWh. Id. at iv, v. These prices include the market impacts of
greenhouse gas mitigation beginning in 2015. Id. at v.
Avista observes that electricity and natural gas prices are highly correlated because
natural gas fuels marginal generation resources in the Northwest during most of the year. Id.
The Company reports that the nominal levelized expected case natural gas prices at Henry Hub
and the range of forecasts from the 500 Monte Carlo iterations performed for the case result in an
average, $6.70 per decatherm over the next 20 years results. Id.
Energy Efficiency Acquisition
Avista says it commissioned a 20-year Conservation Potential Assessment in 2010.
Id. at vi. The study analyzed over 4,300 equipment and measure options for residential,
commercial, and industrial applications. Id. Avista based its IRP conservation potential
evaluations on the study’s data. Id. Avista contends that energy efficiency decreases its energy
requirements by 120.2 aMW, or approximately 10%. Id. Further, by 2031 energy efficiency
reduces load by 310 aMW (288 aMW net after measure life expectancy adjustments). Id.
Preferred Resource Strategy
Avista says the PRS included careful consideration by the Company’s management
and the Technical Advisory Committee of the information gathered and analyzed in the IRP
process. Id. at vii. It meets future load growth with efficiency upgrades at existing generation
and distribution facilities, conservation, wind, and simple- and combined-cycle natural gas-fired
combustion turbines. Id. The Company says the PRS has changed only modestly from the 2009
IRP. Id. at viii. According to the Company, the PRS resources for the 2011 IRP, on a nameplate
capacity basis, are: 120 (Nameplate) MW of NW Wind by the end of 2012 and 2019-2020; 83
MW of SCCT by the end of 2018 and 46 MW by 2029; 4 MW of Existing Thermal Resource
Upgrades by the end of 2019; 83 MW of SCCT by the end of 2020; 270 MW of combined-cycle
combustion turbine (CCCT) by the end of 2023 and 2026. Id. Efficiency improvements on a
DECISION MEMORANDUM 4
peak reduction (MW) basis are: 28 MW of distribution efficiencies by the end of 2012-2031; and
419 MW of energy efficiency by the end of 2012-2031. Id.
Avista says the present value of the investment required to support the 2011 PRS is
just over $0.84 billion; the nominal total capital expense is $1.7 billion over the IRP timeframe.
Id. at ix. Avista also forecasts spending $1.4 billion over the IRP timeframe on conservation
acquisitions. Id.
Greenhouse Gas Emissions
As with all Avista IRPs since 2007, Avista has included the costs of greenhouse gas
policies in the Expected Case for this IRP. Id. The Company says that since the 2009 IRP, less
certainty exists around the direction of future of greenhouse gas policies. Id. To address this
uncertainty, the 2011 IRP considers four policies. Each represents a different policy alternative
beginning in 2015. Id. The policies are: (1) a regional cap and trade regime, (2) a national cap
and trade regime, (3) a national carbon tax, and (4) the absence of any greenhouse gas policy. Id.
The impacts of greenhouse gas policies on the Expected Case are the result of a weighted
average of these policies as included in the stochastic analysis of the IRP. Id.
Action Items
Avista says its 2011 Action Plan outlines activities and studies between now and the
2013 Integrated Resource Plan. Id. at xi. Avista states that the Action Plan includes input from
Commission Staff, the Company’s management team, and the Technical Advisory Committee.
Id. Action item categories include resource additions and analysis, demand-side management,
environmental policy, modeling and forecasting enhancements, and transmission planning. Id.
STAFF RECOMMENDATION
Staff recommends that the Commission process the Company’s Application under
Modified Procedure with a 60-day comment period, followed by a 14-day reply comment period.
COMMISSION DECISION
Does the Commission wish to process the Company’s Application under Modified
Procedure with a 60-day comment period, followed by a 14-day reply comment period?

M:AVU-E-11-04_kk