20031017Norwood Direct.pdf

Avista Corp.
1411 East Mission PO Box 3727
Spokane, Washington 99221J..3727
Telephone [phone]
Toll Free 800-727-9170
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UTILITIES COf-H"'IISSION
September 25, 2003
State of Idaho
Idaho Public Utilities Commission
Statehouse
Boise, ill 83720
Attention: Ms. Jean D. Jewell, Commission Secretary
RE: Case No. A VU-02-
Enclosed for filing with the Commission is an original and nine copies of the testimony
of Mr. Kelly Norwood, in the Case referenced above. Mr. Norwood's testimony provides
additional information in support of the Joint Petition of A vista and Potlatch Corporation
dated August 22 2003, which requests approval Power Purchase and Sale Agreement
between the two companies. Related to this matter, the two companies have also
executed a Generation Interconnection Agreement, which will be provided to the
Commission.
If you have any questions regarding this filing, please call Kelly Norwood at 509-495-
4267 or Brian Hirschkom at 509-495-4723.
Sincerely,
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Kelly NoJod
Vice-President, Rates and Regulation
Enc.
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 25th day of September 2003, I caused to be served a
true and correct copy of the foregoing by the method indicated below, and addressed to the
following:
Ms. Jean Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
PO Box 83720
Boise, Idaho 83720-0074
US Mail
Hand Delivery
Facsimile
Overnight Mail
Electronic Mail
Pamela Mull
Associate General Counsel
Potlatch Corporation
601 W. Riverside Ave., Suite 1100
Spokane, W A 99201
US Mail
Hand Delivery
Facsimile
Overnight Mail
Electronic Mail
Conley Ward
Givens Pursley LLP
277 North 6th Street, Suite 200
PO Box 2720
Boise, Idaho 83701
US Mail
Hand Delivery
Facsimile
Overnight Mail
Electronic Mail
Howard Ray
Potlatch Corporation
Idaho Pulp & Paperboard Division
803 Mill Road
O. Box 1126
Lewiston, ill 83501
US Mail
Hand Delivery
Facsimile
Overnight Mail
Electronic Mail
DAVID J. MEYER
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
A VISTA CORPORATION
O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
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R. BLAIR STRONG
PAINE, HAMBLEN, COFFIN, BROOKE & MILLER, LLP
717 WEST SPRAGUE AVENUE, SUITE 1200
SPOKANE, WASHINGTON 99201-3505
TELEPHONE: [phone]
FACSIMILE: [phone]
ATTORNEYS FOR A VISTA CORPORATION
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
POTLATCH CORPORATION CASE NO. A VU-02-
Complainant
DIRECT TESTIMONY
A VISTA UTILITIES,
Respondent KELLY O. NORWOOD
Please state your name, business address and present position with A vista
Corporation?
My name is Kelly O. Norwood and my business address is 1411 East
Mission Avenue, Spokane, Washington. My present position is Vice-President of State
and Federal Regulation.
Would you describe your educational background and professional
experience?
I am a graduate of Eastern Washington University with a Bachelor of Arts
Degree in Business Administration, majoring in Accounting. I joined the Company in
June 1981. Over the past 22 years, I have spent approximately eleven years in the Rates
Department with involvement in cost of service, rate design and revenue requirements. I
have spent approximately eleven years in the Energy Resources Department (power
supply and natural gas supply) in a variety of roles with involvement in resource
planning, system operations, resource analysis, negotiation of power contracts and risk
management. I was appointed Vice-President of State and Federal Regulation in March
2001.
What is the scope of your testimony in this proceeding?
My testimony in this proceeding will describe the essential terms of the
proposed Power Purchase and Sale Agreement (Agreement) between A vista (Company)
and Potlatch. I will also describe the proposed regulatory/accounting treatment of the
Agreement, as well as the estimated revenue requirement effects of this proposal.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
Would Commission approval of the Agreement result in a settlement of
Case No. A VU-02-08, a complaint filed by Potlatch against Avista regarding Avista
purchase of Potlatch's generation?
Yes it would.
Would you please describe the electric service provided to Potlatch by
A vista in the past, as well as the disposition of Potlatch's generation.
Yes. Prior to January 1, 1992, Potlatch utilized its generation to serve a
substantial portion of its load requirements, with the balance of its load requirements
served by Avista under tariff Schedule 25. From January 1, 1992 through December 31
2001, Avista purchased 55 average megawatts of Potlatch's generation and served
essentially all of Potlatch's load requirements under a special contract. The rates, terms
and conditions for power purchases and sales under the contract were negotiated between
the Parties and approved by the Commission in Order No. 23858 in Case No. WWP-
91-5. As part of that Case, Avista proposed, and the Commission approved, special
regulatory/accounting treatment of the contract, due in part to the size of the load and the
unique nature of the contract. .
Avista and Potlatch agreed, in a Joint Motion dated August 17, 2001 , filed in Case
No. A VU-0l-5, that upon expiration of the special contract on December 31 , 2001
Potlatch's load would be served at Schedule 25 rates. From January 1, 2002 through
June 30, 2003 , Potlatch used its approximate 60 average megawatts of generation to
reduce its load requirements while purchasing the remainder (approximately 40 average
megawatts) from Avista.
Please describe the essential terms of the proposed Agreement.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
The essential terms of the proposed Agreement are as follows:
Term of Agreement (Section 3 of Agreement)
The Agreement is for a ten-year term, beginning July 1 2003 and ending June 30,
2013. The Agreement is conditioned upon approval by this Commission of:
the Agreement,
direct assignment of all Power Purchase costs paid by A vista to Potlatch to
A vista s Idaho Operations, and
deferral and recovery of 100% of all Power Purchase costs paid by A vista
to Potlatch through Avista s Idaho Power Cost Adjustment (PCA) or otherwise recovered
through base retail rates.
In the event the Agreement is not finally approved by this Commission by
December 31, 2003 , the Agreement shall be terminated and subject to a "True-
Process " which provides for a refund of amounts paid under the Agreement to reflect
revenues and expenses that would have been incurred by both Parties absent the
Agreement.
A vista Purchase of Potlatch Generation (Section 4 of Agreement)
Avista will be the sole purchaser of Potlatch's generation.A vista will pay
Potlatch $42.92 per megawatt-hour for up to 543,120 megawatt-hours (544 608 during a
leap year) generated by Potlatch during each July 1 through June 30 period ("Operating
Year ) of the Agreement. This amount is equivalent to 62 average megawatts and is
referred to in the Agreement as the "Base Generation Amount." This Base Generation is
illustrated in the graph attached as Exhibit No.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
Amounts generated by Potlatch in excess of the Base Generation Amount each
Operating Year ("Excess Generation Amounts ) will either be purchased by A vista at
85% of the applicable Mid-Columbia firm index price, with a price cap of $55 per
megawatt-hour, or used by Potlatch to reduce its load requirements from A vista. The
purchase of Potlatch's Excess Generation Amounts by Avista is limited to 43,800
megawatt-hours (5 average megawatts) each Operating Year; Excess Generation
Amounts above this level would be used by Potlatch to serve its load requirements. The
disposition of Potlatch's Excess Generation Amounts up to 43,800 megawatt-hours will
be at Potlatch's election each Operating Year, subject to the notification provisions in
Section 4 (c) ofthe Agreement.
Additionally, Potlatch has the capacity to generate additional amounts
Incremental Generation Amounts ) under certain circumstances.The Agreement
provides for the purchase by A vista of Incremental Generation Amounts when it is
mutually beneficial to both parties, as set forth in Section 4 (e) through (h) of the
Agreement.
The Base, Excess and Incremental Generation Amounts, as described above, are
illustrated on Exhibit 1. As shown on Exhibit 1 , Potlatch's Base Generation amount will
vary from hour to hour, however, it is limited to 543,120 megawatt-hours per year. The
illustration also shows an example of Excess Generation Amounts, assuming Potlatch'
generation exceeds the Base Generation Amount during an Operating Year. Also shown
are examples of Incremental Generation Amounts, which can occur at any time by mutual
agreement between the parties.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
A vista Sale of Power to Potlatch (Section 5 of Agreement)
A vista will serve Potlatch's load requirements at Potlatch's Lewiston Plant under
its Extra Large General Service Schedule 25 rates, including the present Power Cost
Adjustment (PCA) surcharge and all other applicable rate adjustments, unless the
Commission issues an order in the future authorizing different billing rates. Nothing in
the Agreement prejudices either Party s right to propose, or the Commission to order in
future rate proceedings, that Avista s service to Potlatch should be priced at rates other
than Schedule 25.
Would you please explain the derivation of the $42.92, which is the
proposed payment for Potlatch's Base Generation Amount (up to 62 average megawatts)?
Yes.The proposed $42.92 per megawatt-hour payment is Avista
estimated lO-year levelized avoided cost contained in its most recent Integrated Resource
Plan (IRP), filed with the Commission in May 2003.
Has the Commission Staff reviewed this IRP filing?
Yes.In the Commission Staffs written comments it recommended
Commission acceptance of the Company s IRP filing, and the Commission accepted the
IRP filing on August 29,2003.
How does the power purchase rate of $42.92 compare to the most recent
administratively determined avoided cost rates ordered by this Commission for
cogeneration projects less than 10 megawatts?
The comparable rate ordered by the Commission in Case No. GNR-02-
for projects less than 10 megawatts is $44.43 per megawatt-hour.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
Do you believe that $42.92 per megawatt-hour is a reasonable amount to
pay for Potlatch's Base Generation, given the other terms and conditions contained in the
Agreement?
Yes. The proposed Agreement represents negotiated terms and conditions
that both Parties believe are fair and reasonable. The $42.92 amount is a recently
determined avoided cost and is supported by all of the analysis behind the development
of Avista s IRP. The other terms and conditions contained in the Agreement represent a
balancing of the interests of the Parties.
Would you explain how the other terms and conditions contained in the
Agreement balance the interests of Potlatch and Avista, as well as Avista s other retail
customers?
Yes. The Agreement provides Potlatch with operating flexibility for its
generating units, as well as the opportunity to generate additional amounts to the mutual
benefit of Potlatch and Avista s other Idaho customers. The Agreement provides Avista
with a reasonable level of certainty regarding Potlatch's load requirements for the ten-
year term of the Agreement. With regard to the operating flexibility afforded Potlatch
Potlatch's generation level has historically been relatively constant and predictable.
However, the level can vary from hour-to-hour and is "unit-contingent " i., subject to
unscheduled outage or maintenance on one or more of its generating units.
Additionally, the Agreement provides the opportunity for Potlatch to generate
additional amounts, referred to in the Agreement as Incremental Generation Amounts,
when it makes economic sense for both Parties. Potlatch has additional generation
capacity over and above its Base Generation level of approximately 60 megawatts.
Direct Testimony of Kelly O. Norwood
Avista Corporation
Case No. A VU-02-
Potlatch has agreed to make this generation available to A vista when econOmIC
conditions are favorable. The benefits from the Incremental Generation Amounts would
accrue to Potlatch and Avista s other Idaho customers.
You stated that, "The Agreement provides A vista with a reasonable level
of certainty regarding Potlatch's load requirements for the term of the Agreement." Why
is this important?
Avista will be the sole purchaser of Potlatch's generation during the term
of the Agreement.Absent an agreement between the two companies, Potlatch, for
example, could sell its generation output to a third party when it made economic sense to
do so, i.e., when it could net more from a sale to a third party than to use the generation
to reduce its own load requirements. A sale to a third party could be long-term or short-
term, but could occur anytime when market prices rise to a level that exceeds Avista
Schedule 25 rates. If Potlatch sells its generation to a third-party, its load requirements
from A vista would increase by the amount of generation it sells, i., approximately 60
average megawatts. Under a high wholesale market price scenario, this could result in
significant cost exposure to A vista s other retail customers. For example, if electric
wholesale prices escalated to $100 per megawatt-hour, Potlatch would sell its generation
to a third party rather than generate into its own load, which would cause Potlatch's net
load requirements from A vista to immediately rise from approximately 40 average
megawatts to 100 average megawatts.This could require A vista to purchase an
additional 60 average megawatts at these high wholesale market prices to serve the
additional 60 net average megawatts of Potlatch load, resulting in a substantial increase in
costs to Avista s other customers.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
Could you please explain the provisions contained in Section 3 of the
Agreement regarding the accounting/regulatory treatment of the power purchase costs
associated with Avista s purchase of Potlatch's generation?
Yes. The provisions state that the costs associated with the purchase of
Potlatch's generation will be directly assigned to the Company s Idaho operations and be
deferred in its entirety (100%) and recovered through the present Power Cost Adjustment
(PCA) mechanism, or otherwise recovered through base retail rates.
Could you please summarize the estimated effects, as well as the timing of
these effects, on A vista s other customers that would result from Commission approval of
the Agreement?
Yes. The change in the PCA deferral balance resulting from the proposed
Agreement, as compared to the costs currently included in base retail rates, would be an
annual reduction (benefit) of approximately $1.2 million, until such time as the present
surcharge expires or the present surcharge rates change. This net benefit is comprised of:
1) Potlatch's contribution of $5.3 million annually based on the present surcharge in
effect included in Schedule 25 rates, and 2) the $4.1 million net cost of the new
Agreement.
The Company s next general rate filing would reflect an additional revenue
requirement of $4.1 million, or approximately a 2.3% rate increase, representing the
change in base tariff rates for all Idaho customers. The $4.1 million revenue requirement
essentially represents a "permanent" rate change for Idaho customers for the term of the
Agreement, while the PCA surcharge paid by Potlatch (presently $5.3 million per year) is
a temporary benefit to customers as long as the present surcharge level remains in effect.
Direct Testimony of Kelly O. Norwood
Avista Corporation
Case No. A VU-02-
Why do the Parties believe it is appropriate to directly assign the
purchased power costs associated with Potlatch's generation to Idaho?
There are several compelling reasons for the Parties' allocation proposal.
The first, and perhaps the most important, is that the proposal properly matches the
jurisdictional changes in revenues and expenses that are produced by the Agreement.
When Potlatch ceased generating into its own load on July 1, 2003, Avista s Idaho PCA
surcharge revenues automatically increased by approximately $5.3 million per year.
Even after the deduction of the $4.1 million in increased costs for purchases from
Potlatch, the net effect is an immediate reduction of $1.2 million annually in the deferred
costs in the Idaho PCA. If the Agreement's costs are not directly assigned to Idaho,
Avista s Washington customers would be asked to shoulder roughly two-thirds of the
costs, but they would get none of the benefits from the increased Potlatch revenues.
Idaho is also the primary beneficiary of what I will characterize as the
secondary" benefits of the Agreement. To the extent this Agreement helps to insure
Potlatch's continued operation in Idaho, the benefits from continued employment, a
bolstered tax base, and economic spin-off benefits for other businesses flow primarily,
and in some cases exclusively, to Idaho and its citizens.
In addition, it is important to note that this Agreement represents the settlement of
issues before the Idaho Commission and Idaho courts. In many respects, this is an Idaho
solution to an Idaho "problem." In crafting this Agreement, the Parties also looked
the Idaho Commission s policies on PURPA issues. Under these circumstances, it is both
fair and reasonable for Idaho to accept both the benefits and the detriments of an
Agreement driven primarily by Idaho law and public policy.
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
As the Commission may be aware, the Washington Utilities and Transporation
Commission takes a much different view of PURP A purchases, and this Agreement
contains a number of provisions that may not be supported in the Washington
jurisdiction. Consequently the WUTC may not accept the ratemaking consequences of
this Agreement, and this is especially true where Washington would be asked to shoulder
most of the costs of the Potlatch purchases, but receive none of the benefits from the
increased sales to Potlatch. Without the direct assignment of revenues and expenses to
Idaho, the result of the Agreement would be an additional annual revenue requirement of
approximately $6.8 million in Washington. I believe this result would not be viewed
favorably by the Washington Commission.
This Agreement eliminates potential inter-jurisdictional disputes, and will make it
much easier for the Idaho Commission to exercise plenary jurisdiction over one of the
state largest electric customer without possible conflicts with its Washington
counterpart.
You stated earlier that the near term impact of the Agreement will
decrease Idaho deferred PCA cost by $1.2 million per year. What would be the estimated
long term effect on the Company s Idaho customers from the Agreement?
Without taking into account the current PCA surcharge revenues being
paid by Potlatch, the result to the Company s Idaho operations is an increased revenue
requirement of approximately $4.1 million per year, or approximately 2.3% of current
retail revenue. This $4.1 million amount is the difference between the amount that is
included in the Company s present base tariff rates, which reflects the prior purchase and
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
sale agreement between the Company and Potlatch, and the effect of the proposed
Agreement (power purchase cost less Schedule 25 base tariff revenue).
Over time, however, to the extent that Avista s overall costs rise, e., through
general rate case increases, the negative impact of the Potlatch contract will decrease.
This is the nature of a purchased power contract with a levelized price, which remains
fixed as other power costs increase.
Finally, we should not ignore the potential benefits Idaho customers could receive
from the purchase of occasional Incremental Generation Amounts from Potlatch. These
benefits, which would also be directly assigned to Idaho, would also mitigate a portion of
the negative impact on Idaho customers.
Is the Company requesting a rate increase in this proceeding?
No. As I stated earlier, the immediate impact of the Agreement will be
positive for Idaho ratepayers through a reduction in the PCA deferral balance. Any
change in base retail rates related to this Agreement would be addressed in the
Company s next general filing. Until such time as a general rate change is approved by
the Commission, the $4.1 million would be deferred through the PCA mechanism for
future recovery together with the PCA surcharge revenu~s received from Potlatch.
The Company is proposing that 100% of the costs associated with the
purchase of Potlatch's generation be deferred through the PCA. Has this Commission
approved recovery of 100% of PURP A generation purchases for deferral by other electric
utilities it regulates?
Yes. It is my understanding that the Commission has approved 100%
deferral of the costs associated with some PURP A purchases by Idaho Power. The
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
generators owned by Potlatch are Qualifying Facilities (QFs) under PURPA, and the
purchase of Potlatch's generation by Avista satisfies any obligation that Avista may have
to purchase power from Potlatch under PURP A. The magnitude of the purchase is an
additional factor underlying the Company s request.
In addition, through this filing, A vista and Potlatch are requesting specific review
and approval of the Agreement, as well as the ratemaking treatment of the Agreement.
Therefore, following review of the Agreement through this proceeding, if the Agreement
is approved we believe it is appropriate to provide 100% recovery of the costs.
Would you please summarize your testimony?
Yes. The Company and Potlatch request approval of the proposed Power
Purchase and Sale Agreement between the Parties. The Agreement provides for the
purchase by Avista of Potlatch's Base Generation up to 62 average megawatts each year
at $42.92 per megawatt-hour. The Agreement also provides for the purchase of Excess
and Incremental Generation Amounts under the terms and conditions set forth in the
Agreement. Avista will serve Potlatch's load requirement of approximately 100 average
megawatts under Schedule 25 rates, unless the Commission issues an order authorizing
different billing rates.
The Company also requests that the Commission approve the direct assignment of
the costs associated with the purchase of Potlatch's generation to the Company s Idaho
operations, as well as inclusion of 100% of the costs in the PCA deferral balance until the
costs are otherwise recovered through base retail rates.
During the duration of the present PCA surcharge, direct assignment of the power
purchase cost to Idaho would be flowed through the Company s PCA and would produce
Direct Testimony of Kelly O. Norwood
A vista Corporation
Case No. A VU-02-
a net annual benefit to customers of about $1.2 million when combined with the PCA
surcharge revenue received from Potlatch under Schedule 25 rates. Following expiration
of the surcharge, under the present Schedule 25 rates, the Agreement would result in an
annual revenue requirement of $4.1 million, or the equivalent of a 2.3% rate increase.
However, to the extent that future general rate increase requests are spread to Schedule
, and to Potlatch's load, it would have a mitigating effect on the costs borne by other
Idaho retail customers.
Does that conclude your prepared testimony?
Yes it does.
Direct Testimony of Kelly O. Norwood
Avista Corporation
Case No. A VU-02-
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. A VU-O2-
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