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Home My WebLink Aboutpeseau.pdfD. Peseau, Dir. Case No. AVU-E-01-11 Page - 1 Q.PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.1 A.My name is Dennis E. Peseau. My business address is Suite 250, 1500 Liberty2 Street, S.E., Salem, Oregon 97302.3 Q.BY WHOM AND IN WHAT CAPACITY ARE YOU EMPLOYED?4 A.I am the President of Utility Resources, Inc. (“URI”). URI has consulted on a5 number of economic, financial and engineering matters for various private and6 public entities for more than twenty years.7 Q.PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND WORK8 EXPERIENCE.9 A.My resume is attached as Exhibit No. 201. I have testified before the Idaho10 Public Utilities Commission on various revenue requirement and cost of service11 issues on numerous occasions since the early 1980s.12 Q.FOR WHOM ARE YOU APPEARING IN THIS CASE?13 A.I am appearing on behalf of Potlatch Corporation.14 Q.WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY?15 A.The purpose of my testimony is to briefly review the circumstances that cause16 Avista Corporation (“Avista”) to request in excess of $53 million in extraordinary17 and expedited rate relief over a twenty-seven month period and seek an18 additional $34.6 million in an accelerated credit on the PGE transaction. Given19 the short lead time in this case, I have not attempted to investigate every facet of20 Avista’s request, but have instead concentrated on what I consider to be the21 most important policy issues.22 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 2 My testimony recommends that the Commission grant only a portion of the1 relief requested. I agree that Avista should recover its power cost expenses2 incurred to date, but I do not agree with the request to recover anticipated future3 power supply expenses that have not yet been incurred or recorded. Moreover,4 any increase approved by the Commission, of expenses incurred to date as well5 as any future expenses, should be subject to refund after a prudency review is6 conducted. This prudency review should be conducted in a timely but thorough7 manner.8 Q.PLEASE SUMMARIZE YOUR CONCLUSIONS.9 A.In my judgment, Avista’s testimony offers a prima facie case for emergency rate10 relief. But I would also point out that emergency relief should be granted very11 sparingly, and it should always be subject to refund if there are any questions12 about either the reasons for, or size of, the request. In the present case, there13 are a number of issues that cannot be resolved in this expedited proceeding.14 Accordingly, I conclude that:15 1.Avista in this proceeding is not requesting a PCA surcharge in any normal16 sense of PCA proceedings. Avista is really requesting a rate increase17 based on projected costs and events over a twenty-seven month future18 test period.19 20 2.The apparent need for this approximate $88 million request is largely the21 result of a market position Avista took beginning in late 2000 on power22 supplies for the period July 1 - December 31, 2001. It turns out that this23 position was a bad one.24 25 3.Avista in this proceeding ought to be granted a rate increase of no more26 than 14.7%, but not for the twenty-seven month period requested by the27 Company.28 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 3 1 4.The IPUC staff and other parties should be given an opportunity to2 investigate the prudence of Avista’s management of its resources and3 power supply purchases. If the Commission decides to grant Avista’s4request for emergency relief in this case, the necessary review should5 take place in a follow up proceeding. Any relief granted in this proceeding6 should be subject to refund pending the completion of this review.7 8 5.Shortly after December 31, 2001, Avista should be allowed to file for9additional relief based on its July 1, 2001 to December 31, 2001 recorded10 balances comparing actual power costs to PCA rates.11 12 Q.PLEASE EXPLAIN IN GREATER DETAIL THE REASONS FOR THE AVISTA13 RATE REQUEST?14 A.In the last sixteen months we have witnessed more price volatility and escalating15 prices in the Northwest electricity markets than ever before. Avista witnesses16 explain in detail this price behavior. As a result of these escalating prices, some17 level of rate increase may be expected. But, despite record low streamflows and18 rising market prices, certain circumstances in Avista’s rate request are unique.19 These circumstances are highlighted in the following quotes:20 “.. The dramatic increase in the PCA balance of $30 million (Idaho21 jurisdiction) at June 30, 2001 to $72 million (Idaho jurisdiction) at22 December 31, 2001 is driven primarily by purchases at high prices in the23 short-term market to cover the deficiencies for July-December caused by24 the record low stream flow conditions for Avista.” (Kelly Norwood, Page257; emphasis added.)26 27 “... The Company chose to cover those deficiencies in advance through28 short-term fixed-price contracts among other measures, rather than risk29 the potential for even higher prices as the summer drew nearer ...” (Kelly30Norwood, Page 8, Lines 1-3; emphasis added.)31 32 “... It was the Company’s intent that surplus power resources available in33 2002 and 2003 would be sold into the wholesale market to work the34 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 4 deferred cost balances back to zero. However, although forward power1 prices are still above historic levels embedded in our retail rate cost2 recovery structure, the value of surplus sales will not be adequate to offset3 current deferral balances and additional amounts that will be deferred4during the remainder of 2001 ...” (Jon Eliassen, Page 4, Lines 14-19.)5 6 Thus Avista went “long” on power supplies at fixed prices in the hope of hedging7 potentially higher summer 2001 prices, and to have surplus power from new8 generating plants to sell into the wholesale markets at a significant profit in 20029 and 2003. Unfortunately, a different market strategy would now appear to have10 been a better alternative.11 Q.ARE YOU STATING THAT AVISTA’S PURCHASING ACTIVITES ON BEHALF12 OF ITS REGULATED ELECTRIC UTILITY WERE IMPRUDENT?13 A.No. At this juncture, there is insufficient evidence to determine whether or not14 Avista’s actions were prudent. I will propose below a means that will allow15 parties a prudency review at a time when future actual PCA deferral balances are16 known.17 Q.WHAT IS THE SIGNIFICANCE OF THE JULY 1, 2001 TO DECEMBER 31, 200118 PERIOD?19 A.As the quotes above indicate, Avista predicts that its PCA deferred balances will20 increase by $42 million during this six-month period alone. This is despite the21 fact that wholesale market prices have fallen precipitously since June. For22 reasons that are only touched upon in Avista witnesses’ direct testimony, Avista23 apparently acquired power supplies beginning in late 2000 for the July through24 December 2001 period. Avista’s timing could hardly have been worse, and the25 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 5 economic consequences are, to say the least, very unfortunate. Wholesale1 prices both before and after late 2000 and early 2001 were much more favorable.2 To highlight the significance in these proceedings of the period July 1 -3 December 31, 2001, I refer to Avista Exhibit No. KON-3, Page 6 of 6, which I4 reproduce as my Exhibit 202. The steep climb in projected balances from July5 2001 to January 2002 indicates the damage done by Avista’s long position.6 Q.ARE THERE ANY OTHER NOTEWORTHY ASPECTS OF EXHIBIT 202?7 A.Yes. As the exhibit states, the projected PCA deferred balances after January8 2002 are based on July 3, 2001 forward prices. These prices no longer9 represent existing realities. As of this writing, Northwest forward prices are10 approximately $33/mwh. Substituting current forward prices would undoubtedly11 show a decrease in the projected deferred balances beginning in January 2002.12 This precipitous price drop illustrates the point that Avista’s request to set13 rates today for projected deferral balances through December 2003 is neither14 necessary nor advisable to cope with the Company’s stated financial difficulties.15 Q.WHY DO YOU STATE THAT SETTING A PCA RATE IN THESE16 PROCEEDINGS FOR THE COMPANY’S REQUESTED TWENTY-SEVEN17 MONTH PERIOD IS NEITHER NECESSARY NOR ADVISABLE?18 A.The twenty-seven month deferral period requested by Avista is not necessary19 because Avista’s actual PCA deferral balances in its filing are $30 million, not the20 $88 million it seeks authority to collect. Authorizing a full 27-month recovery is21 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 6 not necessary to protect Avista’s bond ratings and forestall the immediate cash1 flow problems Avista anticipates.2 The Avista request is not advisable because granting immediate relief for3 projected deferral balances would greatly reduce Avista’s incentive to mitigate4 the high contract wholesale market prices. Moreover, Avista’s proposal is5 subject to all the usual infirmities that accompany ratemaking based on projected6 costs.7 Q.ARE THERE MEANS AVAILABLE TO AVISTA TO MITIGATE THE JULY 1 -8 DECEMBER 31, 2001 POWER PRICES IT HAS APPARENTLY LOCKED IN?9 A.Quite possibly. One simple means to lower the average power prices is to10 extend the term of purchase to reflect the much lower prices now available on the11 market. There may well be other mitigation measures that could be taken, but12 there is no way to assess these possibilities in such an accelerated proceeding.13 Q.ARE YOU RECOMMENDING THAT AVISTA EXTEND THE TERM OF THE14 JULY 1 - DECEMBER 31, 2001 CONTRACTS?15 A.No, not without further study. What I am recommending is that Avista be given16 every opportunity and incentive to correct and mitigate these high-cost contracts.17 Q.DO YOU HAVE A RECOMMENDATION THAT LIMITS AVISTA’S RECOVERY18 TO ACTUAL PCA DEFERRAL BALANCES, BUT ALSO GIVES IT INCENTIVES19 TO REDUCE FUTURE POWER COSTS?20 A.Yes. I recommend first that, in this proceeding, Avista be allowed to raise its21 rates by no more than the net 14.7% it requests, and for no more than a twelve-22 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 7 month period. This would allow it to begin collecting the present June 30, 20011 balance of $30 million. This recovery should be accomplished in a manner2 similar to that proposed by Avista. That is, the $30 million should be recovered3 over twelve months from the 14.7% PCA increase, plus whatever accelerated4 PGE monetization credit is necessary to make the exact $30 million recovery.5 This gives Avista a cash infusion for the near term.6 I also recommend that the Commission schedule a proceeding to7 thoroughly investigate the prudency and reasonableness of Avista’s power8 supply purchases and mitigation efforts. At such time, Avista should be required9 to justify its power purchase policies leading up to the high cost contracts as well10 as all mitigation practices it has undertaken since. The most convenient time for11 this review would be shortly after January 1, 2002, at which time Avista also12 should be allowed to file for recovery of any PCA deferral balances from the13 period July 1, 2001 - December 31, 2001.14 In the meantime, the increase approved in this proceeding should be15 subject to refund, in whole or in part, if Avista fails to prove that its power supply16 management has been prudent.17 Q.ARE THERE ANY OTHER REASONS WHY THE COMMISSION SHOULD NOT18 GRANT THE FULL TWENTY-SEVEN MONTHS OF RELIEF AVISTA IS19 REQUESTING?20 A.Yes. The request is essentially equivalent to an extended future test year,21 despite the Company’s intent to eventually substitute actual costs for the22 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 8 projected costs contained in its filing. Granting an emergency increase on this1 basis would establish a terrible precedent that would alter the balance of2 responsibilities and risks between shareholders and ratepayers.3 My proposal would grant Avista rate relief and an immediate increase in4 cash flow on an expedited basis, although for a briefer period of time than Avista5 requests. But a follow up prudency review would also protect the ratepayers6 from the possibility that this expedited proceeding may result in rates that are7 ultimately proved to be unjustified. Scheduling a complete and timely review of8 this matter provides a measure of protection to both Avista and the ratepayers.9 Q.YOU STATE THAT ANY INCREASE SHOULD BE SUBJECT TO REFUND10 PENDING A PRUDENCY REVIEW. WHAT ARE THE ISSUES THAT SHOULD11 BE EXAMINED IN SUCH A REVIEW?12 A.I cannot predict all the issues that might arise if Avista’s power supply13 management is subject to a detailed examination. However, some issues are14 obvious. Beginning with the Centralia sale, Avista made a decision to rely more15 heavily on market purchases than it had previously. The Commission needs to16 determine whether this strategy was prudently adopted and competently17 managed. Obviously the relationship between Avista’s regulated and18 unregulated trading activities will be a prominent issue in this investigation.19 Finally, the Commission must consider whether Avista’s mitigation efforts are20 properly executed.21 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 9 Q ARE THERE ANY OTHER ISSUES THAT REQUIRE FURTHER1 INVESTIGATION?2 A.Yes. Avista’s request for emergency relief is largely predicated on the need to3 immediately generate additional cash flow to preserve its bond ratings and4 continue the funding of construction projects, the most notable of which is the5 Coyote Springs II facility. While Potlatch is not taking a position in these6 proceedings on the Coyote Springs II project or other generation projects, clearly7 the recent dramatic drop in market prices requires a reassessment of Coyote8 Springs’ economic feasibility and timing.9 Avista also needs to explain and justify the extent to which its unregulated10 businesses have contributed to its current financial difficulties. From prior cases11 and trade news, the Commission should be somewhat familiar with the scope12 and financial results of Avista Energy’s trading activities. But this is not the only13 unregulated activity that impacts the earnings and cash flow of the parent14 company. To cite but one example, Avista’s Information and Technology15 businesses lost $.19 per share and Avista Ventures lost $.09 per share during16 the last quarter. This total loss of $.28 per share exceeded Avista Utilities’17 quarterly earnings of $.20 per share. Nor were these losses a one-time18 phenomenon. Avista Information and Technology and Avista Ventures both had19 comparable losses in 2000 as well. Given the fact that Avista is arguing that20 emergency action is necessary to meet cash flow deficiencies and protect its21 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 10 bond ratings, the unregulated companies’ financial results become a relevant1 issue.2 Finally, the Commission should also be apprised of Avista’s efforts, if any,3 to recover a portion of its high priced purchases in the pending Northwest refund4 hearings before the FERC, and Avista should be required to justify any positions5 it has taken in that proceeding.6 Q.ARE THERE ANY OTHER RELEVANT MATTERS YOU WOULD LIKE TO7 BRING TO THE COMMISSION’S ATTENTION?8 A.Yes. Avista’s deferral balances attributable to Idaho electric operations are only9 about 15% of its total deferrals as of June 30, 2001. Avista clearly needs the10 vast majority of its requested rate relief from other jurisdictions, and if that relief is11 not forthcoming it is doubtful whether Idaho rate increases would be sufficient to12 avoid the end of the year financial problems Avista is forecasting. I mention this13 obvious fact only in order to point out that the Idaho Commission should carefully14 follow the companion proceedings in Washington, which will have a15 disproportionate impact on Avista’s financial situation.16 Q.PLEASE SUMMARIZE YOUR TESTIMONY.17 A.The Commission should grant Avista’s request for a net rate increase of up to18 14.7%, but only for a limited period of time, and subject to refund after a full19 prudency review is conducted. This review should be scheduled and completed20 as soon as possible for the protection of both Avista and the ratepayers.21 Coincidentally, this recommendation is apparently very similar to the reported22 D. Peseau, Dir. Case No. AVU-E-01-11 Page - 11 recommendations of the WUTC staff, which were filed in Avista’s companion1 case in Washington as this testimony was being finalized. 2 Q.DOES THIS CONCLUDE YOUR TESTIMONY?3 A.Yes.4 BEFORE THE IDAHO PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION )BY AVISTA CORPORATION FOR A PCA ) CASE NO. AVU-E-01-11 SURCHARGE IN ELECTRIC RATES ) DIRECT TESTIMONY OF DENNIS E. PESEAU ON BEHALF OF POTLATCH CORPORATION