20150812AVU to Staff 56.doc

AVISTA CORPORATION
RESPONSE TO REQUEST FOR INFORMATION

JURISDICTION: IDAHO DATE PREPARED: 07/30/2015
CASE NO.: AVU-E-15-05/AVU-G-15-01 WITNESS: Scott Kinney
REQUESTER: IPUC RESPONDER: Scott Kinney
TYPE: Production Request DEPARTMENT: Energy Resources
REQUEST NO.: Staff - 056 TELEPHONE: [phone]

REQUEST:

Please explain how the Company evaluates the potential benefits and risks associated with an Energy Imbalance Market (See Kinney DI, pg. 7, line 21). Please provide the specific calculations and assumptions.

RESPONSE:

Please see Avista's response 056C, which contains TRADE SECRET, PROPRIETARY or CONFIDENTIAL information and exempt from public view and is separately filed under IDAPA 31.01.01, Rule 067 and 233, and Section 9-340D, Idaho Code, and pursuant to the Protective Agreement between Avista and IPUC Staff dated June 4, 2015.

Avista has been participating in and funding the NWPP MC initiative since June of 2012. The MC initiative is in its fourth of five planned phases. The first phase of the initiative included a benefit analysis performed by the MC Initiative Analytical Team that showed a range in total annual regional benefits from operation of an Energy Imbalance Market (EIM) in the Northwest Power Pool area, from $40 million to $90 million per year. A number of relevant sensitivities yielded results clustering in the range of $70 to $80 million dollars in regional benefits. If the EIM enables participating Balancing Authorities to collectively lower the quantity of with-in hour balancing reserves they must carry because of the benefit of regional load and generation diversity, this could significantly increase annual regional benefits to $130 million or more. The MC Initiative Analytical Team developed a methodology to parse the regional benefits down to the individual utilities. The parsing methodology resulted in Avista observing 4.77% of the regional benefits. The potential range of annual benefits for Avista could range from $1.9 to $6.2 million, with the typical benefit being around $3.8 million. See Appendix 3 page 1 in the attached MC Initiative Final Phase 1 Report. (Staff_PR_056 Attachment A)

The MC initiative also received preliminary costs from potential market operators to run the NWPP EIM. See page 17 in the attached MC Initiative Final Phase 1 Report (Staff_PR_056 Attachment A). Non-binding estimates were received from the Southwest Power Pool and CAISO. The SPP estimate was for $37.4 million start-up and $12.1 million ongoing annual costs. This market design more closely matched the proposed NWPP MC EIM design. The CAISO estimates were $10.5 million start-up and $6.7 million on-going. The CAISO estimate was based on the NWPP MC joining the CASIO EIM which is a different design than the proposed NWPP EIM. Avista also developed preliminary internal cost estimates to integrate into the market. Preliminary internal cost estimates were $3.3 million start-up and $1.2 million annual. See attached spreadsheet Avista NWPP_EIM_MP_Costs_Updated_5-9-14 (CONFIDENTIAL), provided as Staff_PR_056C Confidential Attachment A.

Avista performed a 10 year Net Present Value analysis based on these numbers. The results are shown in the attached PowerPoint slides MC EIM Cost Benefit Analysis (CONFIDENTIAL). The breakeven analysis shows that Avista would need to achieve between $2.8 million and $5.1 million in annual benefits based on the different scenarios of costs and benefits. These values fall within the range of estimated benefits allocated to Avista in the Phase 1 benefit study for the different scenarios that were analyzed.

Based on these preliminary costs and benefits, Avista decided to continue to participate in the NWPP MC EIM initiative. Avista believes the benefits developed in Phase 1 are conservative based on the methodology used in the production cost modeling approach. The Company also believes there are other benefits to participating in a regional EIM. If the region implemented an EIM and Avista did not participate, then our opportunity to either sell excess generation or purchase needed generation from other regional utilities would be reduced. The reduction in bilateral counterparties could significantly add to the resource costs to serve our customers. Further the future landscape of renewable energy integration into our service territory and the interconnection of other Independent Power Producers are unknown. If additional generation, especially renewable generation, is added within our service territory, then the EIM will provide an economic opportunity to provide ancillary services to these resource developers without Avista needing to build additional generation with fast ramping capabilities.

If the region collectively chooses to implement an EIM, Avista will conduct a more thorough analysis including additional benefit studies and detailed cost estimates both internal and external to inform our decision to participate.

Page 2 of 2

Page 1 of 2