keithhessing.pdf

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AVU-E-01-11
08/28/01 Staff
Q.Please state your name and business address
for the record.
A.My name is Keith D. Hessing and my business
address is 472 West Washington Street, Boise, Idaho.
Q.By whom are you employed and in what
capacity?
A.I am employed by the Idaho Public Utilities
Commission as a Public Utilities Engineer.
Q.What is your educational and experience
background?
A.I am a Registered Professional Engineer in
the State of Idaho. I received a Bachelor of Science
Degree in Civil Engineering from the University of
Idaho in 1974. Since then, I have worked six years
with the Idaho Department of Water Resources, and two
years with Morrison-Knudsen. I have been continuously
employed at the Commission since August 1983.
As a member of the Commission Staff, my
primary areas of responsibility have been electric
utility power supply, revenue allocation and rate
design.
Q.What is the purpose of your testimony in
this proceeding?
A.This is Avista’s first PCA filing since its
PCA methodology was changed effective January of this
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AVU-E-01-11
08/28/01 Staff
year. I review the application of the methodology and,
using Exhibit No. 101, I categorize and quantify the
actual PCA costs deferred through the first 6 months of
2001. I comment on the Company’s proposal to project
PCA deferrals and review the proposed rate design.
Q.Would you please summarize your testimony?
A.After reviewing the recently revised PCA
methodology employed by the Company to obtain actual
PCA deferrals, I conclude that the Company has applied
the methodology approved by the Commission. I briefly
examine expected PCA rate adjustment scenarios with and
without projected PCA deferrals and conclude that rates
will be more stable when projected PCA deferrals are
included. I discuss the true up that occurs between
actual PCA deferrals and actual PCA revenues at the end
of 2003. I review the Company’s proposed rate design
and agree that it is consistent with Commission
approved methodology and that the Company calculated
rates are the rates that the Commission should put in
place.
PCA METHODOLOGY
Q.Are the PCA methodologies used by the
Company to quantify and defer power supply costs for
the period October 2000 through June 2001 methodologies
approved by the Commission?
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AVU-E-01-11
08/28/01 Staff
A.Yes. This time period includes two PCA
methodologies approved by the Commission. The
methodology for October through December 2000 was last
approved in Case No. AVU-E-00-6, Order No. 28616. This
case modified previously existing PCA methodology.
The PCA methodology applied beginning
January 2001 was approved in Case No. AVU-E-01-1, Order
No. 28775. The final order in that case approved very
substantial modifications to the previously existing
PCA methodology.
Q.Have you prepared an exhibit that shows the
impact on the PCA deferral balance of each PCA
component separately?
A.Yes, I have. Staff Exhibit No. 101 shows
individual component impacts on PCA deferrals as
proposed by the Company. These will be discussed in
greater detail in the testimony that follows.
Q.Did you review the Company’s calculations
for the October through December of 2000 time period?
A.Yes.
Q.What was the balance carried forward into
the 2001 time period?
A.The PCA for that time period accumulated a
deferred credit or refund to ratepayers of $3,341,000.
This is shown on Line 1 of Exhibit No. 101.
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AVU-E-01-11
08/28/01 Staff
Q.What have PCA deferrals been during the
first six months of 2001?
A.The Company’s calculations indicate that
PCA deferrals for the first six months of 2001 are
$33,348,057 to be surcharged to customers. This is
shown on Line 13 of Exhibit No. 101. The 2000 – 2001
net PCA deferral balance at the end of June 2001 was
$30,007,057 which the Company proposes to surcharge to
customers. This balance is shown on Line 14.
Q.What are the components of the PCA
methodology that became effective January 2001?
A.The components of the modified methodology
were defined in Case No. AVU-E-01-1 and enumerated in
Order No. 28775. The 2001 PCA methodology is based on
the difference between actual and authorized power
supply costs. Actual account balances are now used
instead of computer modeled account balances. In
general the power supply cost difference is calculated
for Account 501 – Thermal Fuel, Account 547 –
Combustion Turbine Fuel, Account 555 – Purchased Power
and Account 447 – Sales for Resale. The cost
differences are accumulated for each month, Idaho’s
jurisdictional share is determined and 90 percent of
that amount is deferred in the PCA for recovery or
rebate at a later time.
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AVU-E-01-11
08/28/01 Staff
Q.What are the approximate Idaho PCA deferral
amounts associated with these accounts in the first 6
months of 2001?
A.The Purchased Power deferral is $114
million to surcharge, the thermal fuel deferral is $2
million to rebate, the CT fuel deferral is $13 million
to surcharge and the Sales for Resale deferral is $86
million to rebate. These net to a surcharge of
approximately $39 million dollars.
Q.Exhibit 101, Line 2 shows that actual
purchased power costs are significantly above normal or
authorized levels. Is this due to the change in PCA
methodology?
A.No. Low water levels lead to reduced
generation from the Company’s hydro power generation
facilities causing the Company to purchase more power
on the market to meet its loads. This coupled with
extremely high market prices result in much higher than
normal purchased power costs.
Q.Exhibit 101, Line 5 shows that actual Sales
for Resale revenues are significantly above normal or
authorized levels. What would cause this?
A.Sales for resale revenues are up
significantly from normalized levels. Sales for Resale
dollar amounts are approximately 76% of purchased power
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AVU-E-01-11
08/28/01 Staff
costs, $288 million more than normalized base levels.
This appears to be a very large increase in Sales for
Resale revenues during a time period when the Company
is short on resources and purchasing energy to meet
native load requirements. Staff will continue to
review the load/resource situation of the Company for
the January through June 2001 period as this case
proceeds. Severe time constraints have prevented Staff
from being able to fully answer this question at this
time. Based on my review to date, I have no reason to
believe that there is a problem.
Q.What adjustments to PCA deferral account
balances were approved when the Commission last
modified the PCA methodology?
A.The approved adjustments to PCA methodology
that are contained in the previously cited order are
(1) an Idaho Retail Revenue Adjustment, (2) a Centralia
Capital and Operation and Maintenance Credit, (3) a PGE
Capacity Revenue True up, and (4) accumulated interest
during the deferral period.
Q.Are there other costs in the PCA deferral
balance that the Commission has approved for recovery?
A.Yes. The Commission has approved PCA
deferral treatment for three separate Avista energy
buy-back programs. These programs are discussed in
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AVU-E-01-11
08/28/01 Staff
more detail in Staff witness Stockton’s testimony.
NORTHEAST CT EMMISSIONS EXPENSE
Q.Is the Company requesting PCA recovery of
other costs not previously approved by the Commission?
A.Yes. In this filing the Company is
requesting recovery of emissions-related expenses
associated with increasing the allowable operating
hours for the Northeast combustion turbine. When
market price is higher than the variable operating cost
of the turbine, PCA deferrals are reduced because power
purchases are reduced, or fuel costs are reduced, or
secondary sales revenues are increased or any
combination of the three. To the extent that the
Company economically operated the Northeast CT during
hours that it could not have otherwise operated, these
benefits are captured in the appropriate power supply
accounts. Staff witness Stockton further discusses the
treatment of these costs in her testimony.
IDAHO RETAIL REVENUE ADJUSTMENT
Q.The Company has included an “Idaho Retail
Revenue Adjustment” in it’s PCA deferral calculations.
Is this part of the approved PCA methodology?
A.Yes. In Case No. AVU-E-01-1 the Commission
issued Order No. 28775 directing the Company to include
this adjustment in its revised PCA calculations. The
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AVU-E-01-11
08/28/01 Staff
adjustment is included in recognition of the fact that
when retail load grows power supply costs increase, all
else being equal. The increased power supply costs are
captured in the difference between the actual and
authorized power supply account balances and thus in
the PCA deferral.
The Company also recovers power supply
costs in retail rates charged to new customers. In the
case of retail load growth, the 2.123 ¢/kWh credit
applied to the load growth reduces the PCA deferral,
which is designed to prevent the double recovery of
power supply costs by the Company. If retail load
decreases, the revenue adjustment calculation increases
PCA costs which, the Company contends, partially
compensate it for lost revenues.
CENTRALIA CAPITAL AND O&M CREDIT
Q.The Company has included a “Centralia
Capital and O & M Credit” in its PCA deferral
calculations. Is this part of the approved PCA
Methodology?
A.Yes. When the Commission revised the
Company’s PCA methodology with Order No. 28775 issued
in Case No. AVU-E-01-1, it directed the Company to
include this adjustment. The adjustment reflects the
reality that Avista’s base rates, set in its last
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AVU-E-01-11
08/28/01 Staff
general rate case, include Centralia as a resource. In
May of 2000 Avista’s interest in the plant was sold and
a replacement power contract was entered into. Actual
power supply costs without Centralia and with the
replacement contract are reflected in the actual power
supply accounts used to calculate the monthly PCA
deferral. Base rates reflect the Centralia capital
costs such as return on investment and Centralia
operation and maintenance costs. In order to be
consistent, base rates need to be adjusted to reflect
current conditions. The Centralia credit is designed
to offset the Centralia Revenue requirement that is
still part of base rates. The Centralia credit should
not be subject to 90/10 sharing.
Q.What does a review of the PCA deferrals
tabulated in Exhibit No. 101 show?
A.A review of the deferrals shows that most
of the money has accumulated in the power supply
expense accounts with net adjustments reducing the
deferral balance. The net of deferrals for purchases
and sales is approximately $28 million to surcharge.
Increased fuel costs from the two fuel cost accounts
represent approximately $11 million dollars in Idaho
surcharge deferrals. These deferral amounts are
consistent with above normal market purchases during
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AVU-E-01-11
08/28/01 Staff
drought conditions when market prices were 10 times
those used to calculate base rates. In general this
was the situation that existed through most of the
deferral period.
POWER COST PROJECTION
Q.Does the Company’s proposed rate increase
include recovery of PCA amounts expected to be deferred
after June of 2001?
A.Yes, it does. The Company proposes to
project PCA deferrals for the period July 2001 through
December 2003.
Q.What are the PCA deferral amounts projected
by Avista?
A.For the period July through December of
2001, Avista projects PCA surcharge deferrals of
approximately $37.2 million with surcharge interest of
approximately $1.6 million. For the 2002 calendar year
Avista projects PCA rebate deferrals of approximately
0.75 million with surcharge interest of approximately
$4.3 million. For the 2003 calendar year Avista
projects PCA surcharge deferrals of approximately $11.3
million and surcharge interest of approximately $4.8
million. The amount of the Company’s projected
surcharge including interest is approximately $58.5
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AVU-E-01-11
08/28/01 Staff
million.
Q.Briefly describe the assumptions used by
the Company in its projection.
A.The Company projects that water conditions
will gradually return to near normal by the end of 2003
and that market prices will fall from $75.77/MWh to
$41.75/MWh for a flat product by the end of 2003. The
Company’s projection also includes expected resource
additions and power supply contract expirations.
Q.What is your opinion of the Company’s
projection?
A.It is a projection based on a number of
assumptions. As such, it will not be completely
accurate. The two big assumptions are assumptions
about market prices and stream flows. I believe that
the Company’s projection is reasonable based on the
information that was available at the time of the
projection. I also believe that it is reasonable for
the Commission to use this information in establishing
PCA rates in this case as long as differences between
PCA revenues and PCA deferrals are trued-up. The true
up is discussed later in this testimony.
PGE CREDIT
Q.What else, other than actual and projected
PCA deferrals, is included in the Company’s rate
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AVU-E-01-11
08/28/01 Staff
proposal?
A.The Company is proposing to include a
15-month amortization of a PGE credit that reduces the
surcharge deferral. Staff witness Stockton discusses
the deferral in more detail in her testimony.
RECOVERY ALTERNATIVES
Q.The projected PCA deferral is larger than
the actual deferral. Is there a customer advantage to
approving a PCA rate increase that includes larger
projected costs than actual costs?
A.If the projections are relatively accurate,
it could provide a relatively stable PCA rate for the
27-month period.
Q.What if the projections prove to be
inaccurate?
A.If the projections prove to be
significantly inaccurate, the Company proposes to file
to adjust rates during the 27-month period. It is
Staff’s proposal that the Company make annual formal
filings including actual PCA deferrals and
recommendations on whether rates should be modified.
This provides the opportunity for a formal review and
makes detailed information concerning PCA deferrals and
their recovery available to all interested parties.
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AVU-E-01-11
08/28/01 Staff
Q.What happens at the end of the 27-month
period?
A.At the end of 2003, regardless of whether
there have been mid-period rate adjustments, there will
be a difference between the actual PCA deferrals under
the approved methodology and PCA costs recovered
through the applied rates. This difference will be
determined and placed back in the deferral account for
future surcharge or rebate. In other words the
difference between actual PCA deferrals and rates put
in place to recover them will be trued-up.
Q.Is it possible to design PCA rates without
including projected deferrals?
A.Yes, it is. Company witness Falkner
discusses what the resulting increase would be if rates
were put in place for one year based on actual PCA
deferrals through June of 2001. He indicates that the
rate increase would be 20%. (Falkner, Page 4)
Q.Is it possible to exclude the projection
and not increase annual rates more than the Company has
proposed?
A.It may be. The application of an
appropriate amount of the PGE credit along with actual
PCA cost deferrals may allow rates for one year that do
not exceed those proposed by the Company.
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AVU-E-01-11
08/28/01 Staff
Q.What would be the result of applying
approved PCA methodology after rates were put in place
to recover deferrals through June of 2001?
A.If the Company’s projections are anywhere
near correct, the surcharge trigger, currently set at
$3 million, would be exceeded monthly and the Company
would apply for additional PCA surcharges or carry the
amounts forward with interest in the deferral account.
Amounts carried forward would have to be surcharged
later if they were not offset by future rebate
deferrals. Carrying significant surcharge amounts in
the deferral account would negatively impact the
Company’s cash flow and ability to borrow.
Q.Other than the proposed deferral
methodology, does the Company propose a PCA methodology
in this case which departs substantially from
Commission approved methodology?
A.Yes. The Company proposes to do three
things that depart from approved PCA methodology.
First, the Company proposes to “project” PCA deferrals.
This is not without precedent. Idaho Power
“forecasts” power supply costs, however, Idaho Power’s
forecast is more limited in scope than Avista’s
projection.
Second, Avista proposes to ignore the PCA
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AVU-E-01-11
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trigger which is currently set at $3 million with a
maximum surcharge or rebate of $12 million in place at
any one time. However, the approved methodology does
allow the Commission to waive the $12 million ceiling
if necessary.
Finally, the Company proposes to offset the
PCA surcharge amount with a PGE contract credit. This
is unprecedented in the history of Avista’s PCA.
Q.Why should the Commission consider the
Company’s rate proposal?
A.The Company appears to have forsaken a
portion of the approved methodology for a situation
specific practical approach. The Company’s approach
levelizes PCA rates over what otherwise could be a very
volatile period and meets lenders requirements so that
Avista can obtain necessary loans for short term
financing and long term financing of capital assets.
Q.Does the Staff support the PCA deferral
recovery methodology proposed by the Company?
A.Yes, with the true up to actual that occurs
at the end of 2003 and with the annual reviews and
possible mid-course rate adjustments previously
discussed.
RATE DESIGN
Q.How does the Company propose to design
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AVU-E-01-11
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rates?
A.The Company proposes to assign the annual
revenue requirement associated with the surcharge to
each customer class on an equal percentage basis.
Within each class the increase would be recovered by
increasing the energy rate except in the lighting class
where the increase would be a uniform percentage
increase to the monthly lighting rates.
Q.Is this rate design methodology consistent
with currently approved PCA rate design methodology?
A.Yes, it is.
Q.You mentioned earlier in your testimony
that PCA revenues are trued-up with actual deferrals
over the 27-month recovery period. How is that done?
A.At the end of each month actual PCA
deferrals are calculated by applying the approved PCA
methodology. Also at the end of each month revenues
from the PCA rates in place during the month are
calculated. For non-lighting classes, the number of
actual kWh sold in the month are known and the ¢/kWh
PCA rate is known. This allows the calculation of the
actual PCA revenue received by the Company for each
class. For the lighting class, actual revenues
received are known and the percentage of those revenues
associated with the PCA is known. This allows the
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AVU-E-01-11
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calculation of actual PCA revenues received from the
lighting class. The lighting and non-lighting PCA
revenues are compared to actual PCA deferrals on a
monthly basis. At the end of the recovery period any
under or over recovery can be determined and trued-up
as previously discussed.
Q.In the most recent Idaho Power Company PCA
surcharge case a large rate increase was passed on to
customers. The Commission implemented a three tiered
inverted block energy rate structure for the
residential class. What is Avista’s proposal for
residential rate design?
A.Avista’s Residential base rates currently
include a two tier inverted energy block rate
structure.
The Company’s proposed rate design increases rates in
each block by an equal percentage amount such that
class revenues increase by the proposed 19.4%. So
doing maintains the inverted block structure. The
energy rate for the first 600 kWh becomes 5.507 ¢/kWh
and the energy rate for all other kWh’s becomes 6.408
¢/kWh. Maintaining the inverted block rate structure
continues to send price signals to residential
customers that encourage conservation.
Q.Does the Company currently have PCA rates
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in effect?
A.Yes, it does. Commission Order No. 28627
issued in Case No. AVU-E-00-9 allowed the Company to
increase rates by 4.8% to recover approximately $5.7
million from Avista’s Idaho customers. These rates
were put in place for a one-year period beginning
February 1, 2001.
Q.In this rate request, how does Avista
propose to treat these existing PCA rates?
A.Avista proposes that the existing PCA rates
not expire at the end of January 2002 as scheduled, but
be continued through the end of 2003. The Company has
incorporated the impact of doing this in the rates that
it is proposing in this case.
Q.Does the Staff support the Company’s
proposal?
A.Yes. It is part of the Company’s package
designed to recover the needed revenues through
relatively stable rates over the 27-month recovery
period.
Q.Does the Staff agree that the Company
proposed rate design is acceptable?
A.Yes.
Q.The Company proposes that the new rates
become effective September 15, 2001. Does Staff agree
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AVU-E-01-11
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that this should be the effective date?
A.Yes.
Q.Does this conclude your direct testimony in
this proceeding?
A.Yes, it does.