20080403Vermillion Direct.pdf

DAVID J. MEYER
VICE PRESIDENT, GENERA COUNSEL,
GOVERNTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX- 3727
1411 EAST MISSION AVENUE
SPOKAE, WASHINGTON 99220-3727
TELEPHONE: [phone]FACSIMILE: [phone]
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REGULATORy2tme APR -3 lPril2: 53
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF AVISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AN CHAGES FOR ELECTRIC AN
NATURL GAS SERVICE TO ELECTRIC
AND NATURA GAS CUSTOMERS IN THE
STATE OF IDAHO
CASE NO. AVU-E-08-01
CASE NO. AVU-G-08-01
DIRECT TESTIMONY
OF
DENNIS P. VERMILLION
FOR AVISTA CORPORATION
(ELECTRIC AN NATURA GAS)
1
2
I. INTRODUCTION
Q.Please state your name, employer and business
3 address.
4 A.My name is Dennis P. Vermillion.I am employed
5 as the Vice President of Energy Resources by Avista
6 Corporation located at 1411 East Mission Avenue, Spokane,
7 Washington.
8 Q.Would you briefly describe your educational and
9 professional background?
10 A.I received a Bachelor of Science degree in
11 electrical engineering from Washington State University in
12 1985.I began working for Avista in 1985 and have held
13 positions in energy trading, marketing, risk management,
14 power transmission contracting, resource planning and
15 coordination and regulatory issues.I was appointed as
16 President and Chief Operating Officer of Avista Energy in
17 2001.I was appointed Vice President of Energy Resources
18 in 2007 at the close of the sale of Avista Energy.
19 Q. What is the scope of your testimony in this
20 proceeding?
21 A. My testimony will provide an overview of Avista' s
22 resource planning and power operations which includes
23 sumaries of the Company's resources, current and future
24 load and resource position, future resource plans, and a
25 brief discussion of the Company's decision to join the
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1 Chicago Climate Exchange. The next section of my testimony
2 discusses hydro and thermal proj ect upgrades.This is
3 followed by the Montana riverbed lease issue, hydro
4 relicensing issues, mercury abatement at Colstrip, and
5 Jackson Prairie storage.My testimony concludes with a
6 discussion of the Company's risk management policy.
7 A table of contents for my testimony is as
8 follows:
9
10
11
12
13
14
15
16
17
18
19
20
i.II.III.iv.
V.
VI.VIi.VIII
DescriptionIntroductionAvista i s Resource Planning and Power OperationsHydro and Thermal Proj ect Upgrades
Montana Riverbed Lease
Hydro Relicensing
Mercury Abatement At Colstrip
Jackson Prairie Storage
Avista's Risk Management Policy
Page
1
2
9
14
19
23
24
30
Q.Are you sponsoring any exhibits?
A.Yes.I am sponsoring Exhibi t No.4, Schedule 1
21 (Avista' s 2007 Electric integrated Resource Plan), Schedule
22 2 (Memorandum concerning Montana Riverbed Settlement),
23 Schedule 3 (Memorandum of Negotiated Settlement Terms), and
24 Schedule 4 (Avista' s Risk Policy) .
25
26
27
II..AVISTA'S RESOURCE PLAING AN POWER OPERATIONS
Q.Would you please provide a brief overview of
28 Avista' s power generating resources?
29 A.Yes.Avista's resource portfolio consists of
30 diverse assets including hydroelectric generation projects,
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1 base-load coal and natural gas-fired thermal generation
2 facilities, wood waste-fired renewable generation, natural
3 gas-fired peaking generation proj ects, long-term contracts
4 including wind and Mid-Columia hydroelectric generation,
5 and market power purchases and exchanges.Avista-owned
6 generation facilities have a total capability of 1,815 MW,
7 which includes 54% hydroelectric and 46% thermal resources.
8 Table No. 1 below sumarizes the present capability of
9 Avista's owned generation resources.The Company also has
10 long-term contractual rights for a total of 166 MW of
11 capabili ty from the Mid-Columia generation proj ects in
12 2009 that are owned and operated by the Public Utility
13 Districts of Grant, Chelan and Douglas counties.The
14 Company has a ten-year contract for 35 MW of wind
15 generation capability from the Stateline Wind Proj ect. The
16 Company also receives 100 MW of energy from several
17 contracts through 2010.
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1 Table No. 1 - Avista Generation
MW
541
261
18
10
15
15
90
36
Northeast CT
Kette Falls CT
Boulder Park
Rathdrum CT
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2
3 Q.Would you please provide an overview of Avista' s
4 resource planning and power supply operations?
5
6
A.Yes. The Company uses a combination of owned and
contracted-for resources to serve its requirements.
7 Dispatch decisions related to these resources are made by
the power supply section of the Energy Resources8
9
10
Department.The Department regularly studies capacity and
energy resource needs.The Company utilizes short and
11 medium-term wholesale transactions to balance resources
12 with load requirements.Longer-term resource decisions
13 requiring new resources, upgrading existing resources,
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1 demand-side management (DSM) ,and long-term contract
2 purchases are generally made in conjunction with the
3 Company's Integrated Resource Plan (IRP) and Request for
4 Proposals (RFP) processes.
5 Q.Please sumrize the current load and resource
6 position for the Company.
7 A.The Company has added a variety of resources to
8 its portfolio in recent years, including: the second half
9 of Coyote Springs 2; a ten-year agreement for 35 MW of wind
10 generation capability (estimated 7.6 aM); medium-term
11 purchases of 100 aM through 2010; the purchase of
12 approximately 7 aM of small hydroelectric generation from
13 the City of Spokane; hydroelectric upgrades at Cabinet
14 Gorge; approximately 7 aM of efficiency improvements at
15 Colstrip Units #3 and #4; and a new purchase agreement
16 signed with Grant County PUD for a continued share of the
17 output from the Priest Rapids and Wanapum hydroelectric
18 projects beginning in 2005.
19 The Company is currently in a balanced-to-surplus
20 energy position through 2017 on an average annual basis.
21 This assumes the addition of Lancaster, which is a 245 MW
22 gas-fired plant with an additional 30 MW of duct firing
23 capability; this resource will be described in more detail
24 later in my testimony.However, as I will explain later,
25 there are monthly and quarterly deficits and surpluses
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1 prior to 2017.The Company's annual energy net resource
2 position becomes deficient in 2018 and the deficiencies
3 increase from that time forward if additional resources are
4 not added.The average annual energy resource deficiency
5 beginning in 2018 is 8 aMW' and increases to 515 aMW in
6 2028.
7 The Company's capacity resource position is surplus
8 through 2018. Capacity deficiencies begin at 67 MW in 2019
9 and increase to 843 MW in 2028.Additional details
10 concerning the load and resource positions are in Company
11 witness Kalich's Exhibit No.5, Schedule 1.
12 Q.How does the Comany plan to meet future resource
13 needs beginning in 2018?
14 A.The Company has pursued the Preferred Resource
15 Strategy laid out in the 2007 Electric IRP. Avista' s 2007
16 Electric IRP is attached as Exhibit No.4, Schedule 1. The
17 IRP provides details about the need for additional
18 resources, specific cost and operating characteristics of
19 the resources evaluated for the Preferred Resource
20 Strategy, and the scenarios used for resource evaluations.
21 The Company's 2007 Electric IRP was submitted to the
22 Commission in August of 2007.The Company will continue
23 evaluating a mix of resource options to meet future load
24 requirements,including medium-term market purchases,
25 generation ownership, hydroelectric upgrades, renewable
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1 resources, customer load reduction (e. g., conservation),
2 long-term contracts, and generation lease or tolling
3 arrangements.As stated earlier, longer-term resource
4 decisions are generally made in conjunction with the
5 Company's IRP and RFP processes, pursuant to Commission
6 rules, al though the Company does acquire some resources
7 outside of formal RFP processes.The Company's Preferred
8 Resource Strategy in the 2007 IRP includes a mix of 87 MW
9 of DSM, upgrades to its existing plants, 350 MW of gas-
10 fired CCCT, 300 MW of wind, and 35 MW other renewable
11 generation (such as small co-generation, biomass and
12 geothermal) .
13 The Company continues to evaluate and acquire various
14 DSM measures. Avista has acquired approximately 96 aM of
15 DSM over the past eighteen years. This equates to 5.3% of
16 the Company's owned generation.Avista continues to
17 acquire cost-effective DSM and anticipates acquiring an
18 additional 87 aMW of DSM over the next decade.
19 Q.Can you please provide an overview of the Chicago
20 Climate Exchange and why the Company decided to become a
21 memer?
22 A.Yes, the Chicago Climate Exchange (CCX) is the
23 only North American marketplace for integrating voluntary,
24 verifiable and legally-binding emissions reductions with
25 emissions trading and offsets for all six of the greenhouse
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1 gases (GHG).The CCX binds memers to reducing their GHG
2 emissions by six percent through 2010 based on a baseline
3 level of emissions established by the rules of the CCX.
4 Members must buy credits through the CCX if they are unable
5 to meet their GHG emissions reductions goals up to a
6 maximum amount, or they may sell or bank credits up to a
7 specified amount if they exceed their reduction goals.
8 Avista decided to join the CCX in order to gain
9 experience and develop the internal infrastructure to trade
10 GHG credi ts .The Company believes this skill will be
11 necessary in anticipation of state or federal legislation
12 regarding GHG emissions in the near future, as discussed in
13 our 2007 Electric IRP. The CCX was also chosen because the
14 Company anticipates that we will have credits to sell in
15 this market. The exact numer of credits through 2007 will
16 be known after the baseline audit is completed in the first
17 quarter of 2008. The decision of how or when to dispose of
18 the excess credits has not been made at this time, but will
19 be done after the audit has been completed and the official
20 baseline and reduction goals have been established.The
21 Company plans to pass the net proceeds of the sale of any
22 credits on to customers through the Power Cost Adjustment
23 (PCA) mechanism.
24
25
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1
2
III. HYRO AN THERM PROJECT UPGRAES
Q.Please provide an update on the generation
3 upgrades completed on the Cabinet Gorge proj ects.
4 A.The Company completed an upgrade of Cabinet Gorge
5 Unit #2 in March 2004. This project consisted of removing
6 the original 1952 propeller runner and replacing it with a
7 current design mixed-flow runner.The upgrade resulted in
8 a 17 MW increase in capacity, from 55 MW to 72 MW, and an
9 increase in energy of approximately 3 aM.The Company
10 completed a similar upgrade project in 2001 for Cabinet
11 Gorge Unit #3. The capacity of the unit was increased from
12 55 MW to 72 MW which resulted in an estimated 4.5 aM of
13 additional energy.
14 The Company completed upgrading Cabinet Gorge Unit #4
15 in early April 2007, and obtained an additional 10 MW of
16 capacity and 1.1 aM of energy from the project at a total
17 investment of $6.2 million (system). Company witnesses Mr.
18 Kalich and Mr. Johnson have reflected the additional
19 capacity and energy values in their adjustments, and
20 Company witness Ms. Andrews included the investment costs
21 of the upgrade.
22 Q.Can you provide an overview of the repairs that
23 have been completed and the capital improvements that are
24 scheduled to be done on the Noxon Rapids Project?
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1 A.Yes. On June 9, 2006, the Unit #4 stator winding
2 failed at the Noxon Rapids Proj ect. This unit was already
3 scheduled to be upgraded in 2007, so the project timeline
4 was accelerated to start in June 2006. The total cost for
5 the core and rewind proj ect was approximately $7.2 million
6 (system), which included $4.8 million for the rewind and
7
8
$2.4 million for the core.Ms. Andrews has reflected
Idaho's share of this investment in her adjustments.The
9 second step to complete the Unit #4 upgrade involves
10 replacement of the turbine runner, which will be done
11 between 2011 and 2012.
12 Currently, work is being done on Unit #5, the largest
13 and most efficient unit at the project, which was installed
14 in 1977. This reliability work began in September 2007 and
15 is expected to be completed by April 2008. The work is not
16 expected to increase the units 92.0% efficiency rating or
17 the 125 MW unit rating, but is expected to solve several
18 reliability concerns. The reliability concerns for Unit #5
19 include stator frame distortion, varying air gap, numerous
20 forced outages, and the need to have a one-hour pre-warming
21 of thrust bearings prior to the unit being started.The
22 costs associated with this work is approximately $1.6
23 million (system) and has been included in this case as
24 further described in Company witness Mr.DeFelice's
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1 testimony and Company witness Ms. Andrews includes the
2 Idaho share of these costs in her adjustments.
3 Q.Please explain the capital improvements that have
4 been done on Colstrip units 3 and 4?
5 A.Capital improvements on Colstrip Units 3 and 4
6 began in 2006 to improve operating efficiency, enhance
7 reliabili ty, and to increase generation.Work began on
8 Colstrip unit #4 on May 8, 2006 with the installation of a
9 new high-pressure steam turbine rotor, which resulted in
10 approxima tely 28 MW ( 4 . 2 MW Company share) in addi tional
11 capacity using the same amount of fuel.The original
12 analog plant controls were also replaced with digital
13 controls to optimize plant operation. The unit was brought
14 back on line on June 25, 2006. Avista' s share of the total
15 investment cost for the Unit #4 upgrade was approximately
16 $3.0 million (system).
17 On Colstrip Unit #3, the analog to digital control
18 conversion was completed in 2006 and additional capital
19 improvements were completed in May and June of 2007 at a
20 total investment for Avista of $3.8 million (system).
21 These improvements included the installation of a new high-
22 pressure steam turbine rotor to improve output and
23 efficiency and the installation of NOx controls on the
24
25
boiler.These changes are added approximately 28 MW (4.2
MW Company share)in additional capacity.Company
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1 witnesses Mr. Kalich and Mr. Johnson have included the
2 additional benefits and operating costs from the upgrades
3 in their adjustments, and Company witness Ms. Andrews has
4 reflected the investment costs in her testimony.
5 Q.Could you sumrize the costs and timing of the
6 hYdro and ther.l upgrades included in this case?
7 A.Yes.Table No.2, Generation Proj ect Costs,
8 lists the in-service dates, system investment costs, and
9 the Idaho allocation for each project.Ms. Andrews
10 explains the Idaho allocation of rate base and revenue
11 requirements associated with these upgrades.
12
13 Table No. 2 - Generation Proj ect Costs
In-Service
Generation Projects (1)Cost: System /10 (OOOs)Date
Cabinet Gorge Unit 4 $6,200 / $2,119 Mar-07
Noxon Rapids Unit 4 $7,189/ $2,456 Sep-07
Colstrip Unit 4 $2,949/ $1,008 Jun-06
Colstrip Unit 3 $3,760/$1,285 Jun-07
Total $20,098/ $6,868\ii The additional generation from the Cabinet Gorge Unit 4 and Colstrip Units 3 & 4 project
upgrades has been included in the AURORA model as discussed by Company witness Mr.
Kalich.
14
15 Q.Please describe the additional upgrade proj ects
16 planned for the Noxon Rapids generating units starting in
17 2009.
18 A.The Company plans to upgrade the Noxon Rapids
19 generating units 1 through 4 (currently using 1950' s
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1 technology). The upgrades on these four units are expected
2 to add an addi tional 30 MW of capaci ty and 6 aMW of energy
3 to the Noxon Rapids project and improve reliability on
4 these units.One upgrade is planned for completion
5 annually, starting in March 2009 with completion of each of
6 the upgrades by 2012. Table No.3, Noxon Rapids Upgrades,
7 sumarizes these upgrades:
8
9 Table No. 3 - Noxon Rapids Upgrades
Noxon Rapids Schedule of Additional Capacity Additional Effciency
Unitt Completion
1 Mar. 2009 7.5MW 5.0%
2 Feb. 2010 7.5MW 6.0%
3 Feb. 2011 7.5MW 7.8%
4 Feb. 2012 7.5MW 4.7%
10
11 For Uni t # 1, we plan to replace the s ta tor core,
12 rewind the stator, install a new turbine and have a
13 complete mechanical overhaul completed from July 2008
14 through March 2009.This upgrade is expected to increase
15 the unit's efficiency from 87.5% to 92.5% and the unit
16 rating from 105 MW to 112.5 MW.The upgrade will also
17 solve several reliability concerns for the unit including
18 mechanical vibration, the age of the stator, and increase
19 in partial discharge activity and the low efficiency of the
20 unit.
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1 The remaining upgrade work on Uni ts #2 through #4 is
2 planned from 2009 to 2012. Unit #2 is scheduled to have a
3 new turbine and complete mechanical overhaul between August
4 2009 and February 2010.This upgrade is planned to
5 increase unit efficiency from 89.0% to 95.0% and boost the
6 uni t rating from 105 MW to 112.5 MW. The upgrade work at
7 Unit #3 involves the installation of a new turbine and a
8 complete mechanical overhaul from August 2010 through
9 February 2011. The Unit #3 upgrade is planned to increase
10 unit efficiency from 87.2% to 95.0% and boost the unit
11 rating from 105 MW to 112.5 MW. The work planned for Unit
12 #4 includes the installation of a new turbine and a
13 complete mechanical overhaul from August 2011 through
14 .February 2012.This upgrade is planned to increase uni t
15 efficiency from 90.3% to 95.0% and boost the unit rating
16 from 105 MW to 112.5 MW.
17 The costs for these future Noxon Rapids upgrades for
18 units 1 through 4 have not been included in this case, but
19 will be dealt with in a future rate proceeding.
20
21
22
iv. MONTAN RIVERBED LEASE
Q.Can you provide background infor.tion on
23 litigation surrounding the Montana riverbed lease?
24 A.Yes. The Montana riverbed lease involves payment
25 for the use of the land that is located underneath the
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1 Clark Fork River Project located in the State of Montana.
2 This includes the entire Noxon Rapids Project and the
3 portion of the Cabinet Gorge Project within Montana
4 borders, which includes most of the reservoir.The
5 litigation began in October 2003 when residents of Bozeman,
6 Montana, with children in the Montana public school system,
7 filed a lawsuit against the owners of all privately-owned
8 hydroelectric project owners in the state,including
9 Avista, PPL Montana, LLC and PacifiCorp, seeking payment
10 for the use and occupancy of School Trust Lands.This
11 lawsuit was joined by the school districts from Great
12 Falls, Montana and the State of Montana in March of 2004.
13 Although the matter was dismissed by the Federal District
14 Court on jurisdictional grounds, a subsequent declaratory
15 judgment was brought in the state court in Novemer of
16 2004, in order to resolve the issue.
17 This action in state court involved extensive
18 discovery and motion practice around a numer of key issues
19 surrounding navigability of the Clark Fork River and the
20 proper measure of damages for any prior trespass since
21 construction of the Noxon Rapids and Cabinet Gorge Proj ects
22
23
in the early 1950' s.Future ongoing damages were also
sought.At time of trial, the State of Montana was
24 prepared to assert damage claims that exceeded $200 million
25 for prior damages and $8.4 million per year for future
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1 trespass. Exhibit No.4, Schedule 3 is an overview of the
2 litigation that describes the nature of the claims and the
3 basis for the ultimate settlement.
4 PacifiCorp was dismissed from the lawsuit in June 2006
5 after entering a voluntary settlement with the State of
6 Montana.Avista was also dismissed from the lawsuit in
7 October 2007 after entering into a voluntary settlement
8 wi th the State.PPL Montana,LLC was the only
9 hydroelectric owner in the lawsuit that elected to proceed
10 to trial. The outcome of the lawsuit has not been decided
11 at this time.
12 Q.What issues were decided by the court in advance
13 of trial?
14 A.In Septemer and October of 2007 the Montana
15 District Court made several determinations as a matter of
16 law in advance of trial:The Clark Fork River was deemed
17 "navigable" for the express purposes of the establishment
18 of the State's claim to title of the riverbed.The State
19 owns the Clark Fork riverbeds and may therefore charge the
20 hydroelectric owners for the use of the beds. The riverbed
21 lands are School Trust Lands.There are no statutes of
22 limitation or equitable defenses which would limit claims
23 back to the time when the hydroelectric proj ects were
24 cons tructed.Because the ri verbeds were deemed to be
25 School Trust Lands, there was an obligation to pay rents
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1 under the Montana Hydroelectric Resources Act.The water
2 rights held by the hydroelectric owners do not preclude the
3 State from seeking damages and rents.The State is not
4 precluded from presenting evidence based upon the shared
5 net benefits theory, taking into account the value of the
6 generation produced by the facilities. Finally, the damage
7 claims are not limited to the actual footprint of the dam
8 itself; the claim may include the use of upstream State-
9 owned riverbeds.Accordingly, only the question of
10 damages remained to be determined at trial, with the State
11 seeking in excess of $200 million for prior trespass and
12 $8.4 million per year for future rents.
13 Q.What are the details for the settlement agreement
14 regarding the Montana riverbed lease issue?
15 A.A settlement was reached between Avista and the
16 State of Montana in October 2007, on the eve of trial. It
17 represented the culmination of several months of settlement
18 discussions with the support of a mediator. On October 19,
19 2007, the Company reached a settlement with the State of
20 Montana resolving this matter. (See Exhibit No.4, Schedule
21 3 "Memorandum of Negotiated Settlement Terms") Pursuant to
22 this settlement, Avista agreed to make lease payments in
23 the initial amount of $4 million per year beginning
24 February 1,2008,for the calendar year 2007,and
25 continuing through calendar year 2016, adjusted each year
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1 by the Consumer Price Index (CPI), with no payment for
2 prior damages.The level of payments, the start date of
3 payments, as well as other settlement terms and conditions,
4 were all integral to the resolution of these claims.
5 On or before June 30, 2016, Avista and the State of
6 Montana will determine whether the annual lease payments
7 remain consistent with the principles of law as applied to
8 the facts and negotiate an adjusted lease payment for the
9 remaining term of Avista's FERC license for its
10 hydroelectric facilities on the Clark Fork River, which
11 expires in 2046. If Avista and the State of Montana do not
12 agree on an adjusted lease payment, the parties will engage
13 in advisory arbitration and submit the arbitrator's
14 recommendations to the State Board of Land Commissioners
15 ("Land Board") for approval. The settlement also contains
16 provisions that could reduce the amount of Avista' s lease
17 payments as a result of future judicial determinations in
18 related cases or governmental actions.As mentioned,
19 Avista will not make any lease payments for the periods
20 prior to 2007.
21 Q.Why did the Company settle the case instead of
22 going to trial?
23 A.The Company decided to settle the case to avoid
24 liability for retroactive rents and to avoid a large
25 potential judgment against it.The State of Montana was
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1 demanding over $200 million for past rents combined with
2 ongoing lease payments of approximately $8.4 million per
3 year.The settlement also stipulated that the Company
4 could reduce the amount of future lease payments if future
5 judicial determinants, court cases or governmental actions
6 indicated that a lower lease amount was appropriate.
7 Accordingly, the settlement avoids the potential costly
8 li tigation and exposure to very substantial claims by the
State of Montana.The Noxon Rapids and Cabinet Gorge9
10 hydroelectric proj ects are the Company's lowest-cost
11 resources and are integral to the Company's resource base.
12 The Company continues to make every effort to preserve the
13 generation from these projects for the benefit of its
14 customers at the lowest possible cost.Ms. Andrews has
15 included the Idaho share of these costs in her pro forma
16 adjustments.
17
18
v.HYDRO RELICENSING
Q.Would you please provide an update on work being
19 done under the existing FERC operating license for the
20 Company's Clark Fork River generation projects?
21 A.Yes.Avista received a new 45-year FERC
22 operating license for its Cabinet Gorge and Noxon Rapids
23 hydroelectric generating facilities on March 1, 2001. The
24 Company has made significant progress working in
25 collaboration with 27 signatories to the Clark Fork
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1 Settlement Agreement toward meeting the goals, terms, and
2 conditions of the Protection, Mitigation and Enhancement
3 (PM&E) measures under the license.The implementation
4 program has resulted in the protection of approximately
5 2,500 acres of bull trout, wetlands, uplands, and riparian
6 habitat.The fish passage program, using electrofishing
7 and trapping with over 150 adults radio tagged and their
8 movements studied,has rees tabl i shed bull trout
9 connecti vi ty between Lake Pend Oreille and the Clark Fork
10 River tributaries above Cabinet Gorge Dam.Avista has
11 worked with the U. S. Fish and Wildlife Service to develop
12 two experimental fish passage facilities.The testing of
13 these facilities has not produced a design that will
14 attract adult bull trout.However, studies will continue
15 to seek solutions for developing a volitional fish passage
16 facility.Juvenile bull trout on their downstream
17 migration are collected in tributary streams, tagged, and
18 transported to the Clark Fork River downstream of Cabinet
19 Gorge Dam to test the survival of adults.The costs
20 associated with the PM&E measures were reviewed in a prior
21 case and are included in retail rates.
22 Recreation facility improvements have been made to 30
23 sites along the reservoirs.Finally, tribal members
24 continue to monitor known cultural and historic resources
25 located within the project boundary to ensure that these
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1 sites are appropriately protected.The costs associated
2 wi th the PM&E measures were reviewed in a prior case and
3 are included in retail rates.
4 Total dissolved gas levels occurring during spill
5 periods at Cabinet Gorge Dam was an unresolved issue when
6 the current Clark Fork license was received. The license
7 provided time to study the actual biological impacts of
8 dissolved gas and subsequent development of a dissolved gas
9 mi tigation plan.The studies documented no biological
10 impact from dissolved gas below the project; however, the
11 stakeholders ultimately concluded that dissolved gas levels
12 should be mitigated, in accordance with federal and state
13 law.A plan to reduce dissolved gas levels was developed
14 with all stakeholders, including the Idaho Department of
15 Environmental Quality. The original plan called for the
16 modification of two existing diversion tunnels which could
17 redirect streamflows exceeding turbine capacity away from
18 the spillway.The plan originally called for modification
19 of the first tunnel by 2010 at an estimated cost of $38
20 million. The second tunnel would only be constructed after
21 a performance analysis and an evaluation of the
22 environmental benefits of the first tunnel. The Company,
23 with the support of engineering contractors, spent several
24 years developing feasibility and cost studies to retrofit
25 the firs t tunnel.
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1 Q.Would you please provide an update on the current
2 status of the Cabinet Gorge Bypass Tunnels Proj ect?
3 A.Yes.The 2006 Preliminary Design Development
4 Report for the Cabinet Gorge Bypass Tunels Proj ect
5 indicated that the preferred tunnel configuration did not
6 meet the performance,cost and schedule criteria
7 established in the approved Gas Supersaturation Control
8 Plan (GSCP). Analysis of the predicted total dissolved gas
9 (TDG) performance indicated that the tunnel would increase
10 TDG by up to 18% rather than the 4% stipulated in the GSCP.
11 The total estimated cost of the first tunnel was determined
12 to be $58 million, which is an increase of $20 million over
13 the original estimate. The schedule for completion of the
14 first tunnel also slipped to March of 2012 instead of the
15 2010 date set by the GSCP.These findings led the Gas
16 Supersaturation Subcommittee to determine that the Cabinet
17 Gorge Bypass Tunels Proj ect is not viable to meet the
18 GSCP. The subcommittee is currently amending the plan with
19 alternatives to the original GSCP and the results are
20 expected by the end of 2008.wi th the completion of the
21 Bypass Tunnel analysis in 2008, the Company is proposing
22 recovery of these costs of approximately $5.4 million in
23 this case through rate base treatment of the costs over the
24 remaining life of the Cabinet Gorge Proj ect.
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1
2
Q.Would you please give a brief update on the
status of efforts to relicense the Spokane River
3 Hydroelectric Projects?
4 A.Yes. The Company filed applications with FERC in
5 July 2005 to relicense five of its six hydroelectric
6 generation projects located on the Spokane River.The
7 Spokane River Project, which is currently under a single
8 FERC license, includes Long Lake, Nine Mile, Upper Falls,
9 Monroe Street, and Post Falls. Little Falls, the Company's
10 sixth project on the Spokane River, is not under FERC
11 jurisdiction, but operates under separate Congressional
12
13
authority.Our current license for the Spokane River
Project expired in August 2007.The Company is currently
14 operating under an annual license at this time, but expects
15 to receive a new 50-year license by the end of 2008.
16 Company Witness Mr. Howard provides detailed testimony
17 about the entire Spokane River Hydroelectric Project
18 relicensing process and costs associated with the
19 relicensing effort and Ms. Andrews has included the pro
20 forma costs in this case.
21
22
VI.MERCURY ABATEMNT AT COLSTRIP
Q.Please provide a sumry of the mercury abatement
23 project for Colstrip Units 3 and 4.
24 A.Mercury emissions laws in Montana are going into
25 effect January 1, 2010 with a second phase going into
Vermillion, Di 23
Avista Corporation
1 effect in 2018.Testing of two different mercury control
2 technologies was initiated at Colstrip to comply with the
3 new regulations. The tests did not meet the targets set by
4 the Montana Department of Environmental Quality, but
5 optimization of the mercury control systems is expected to
6 meet the required emissions levels. More testing is being
7 done at this time and we expect to begin full mercury
8 control operations by mid-2009 to ensure enough time to
9 fine tune the system with Colstrip plant operations.
10 The largest expense involved with the mercury control
11 project will be a significant increase in O&M costs.The
12 Company's share of the new O&M costs is expected to be
13 approximately $3 million per year.The current capital
14 budget for Colstrip is estimated to be sufficient to meet
15 the capi tal expendi tures for this proj ect .This increase
16 in O&M costs is expected in June 2009, therefore Ms.
17 Andrews has included six months or $1.5 million of the
18 annual expenditures in her pro forma adjustments in this
19 case.
20
21
VII.JACKSON PRAIRIE STORAGE
Q.Can you please provide an overview of Avista' s
22 involvement with Jackson Prairie Storage?
23 A.Yes, the Jackson Prairie Storage Proj ect is an
24 underground reservoir proj ect located near Chehalis,
25 washington.Avista was one of the three original
Vermillion, Di 24
Avista Corporation
1 developers of this storage facility.Avista, Puget Sound
2 Energy and Northwest Pipeline own equal shares of this
3
4
underground storage facility.Development began in the
1960' s and the project entered service in 1972.A numer
5 of expansions have occurred since the facility opened and
6 Avista currently holds a total of 8,308,694 Dth of seasonal
7 capacity and 294,667 Dth of daily withdrawal capacity at
8 Jackson Prairie.
9 Q.Is the Company participating in any other storage
10 expansion projects?
11 A.Yes. In 2006, Avista and its partners started an
12 expansion project at Jackson Prairie (FERC Certificate in
13 CP06-412) for deliverability that will be in service in the
14 Fall of 2008 and will result in Avista' s daily
15 deliverability increasing by 104,000 Dth.
16 Q.What analysis was done to support the
17 deliverability expansion costs?
18
19
A.Avista's performed analysis on the Jackson
Prairie deliverability expansion.This analysis compared
20 the total expected costs of current infrastructure and
21 supply compared to the total expected costs including the
22 deli verabili ty expansion.Resul ts showed the Company's
23 total costs were lower when including the deliverability
24 expansion.In addition to this review, the Company also
Vermillion, Di 25
Avista Corporation
1 examined the potential for improved reliability of supply
2 and peak pricing mitigation benefits.
3 Q.You mentioned improved reliability of supply,
4 please explain.
5 A.The Company relies on monthly and longer-term
6 seasonal and annual contracts for supply to satisfy its
7 projected average daily demand. For daily swings in load,
8
9
above and below average,the Company relies on a
combination of storage and daily purchases and sales.In
10 today's market virtually all physical short-term purchases
11 are done at market hubs like Sumas/Huntingdon. While these
12 purchases are generally reliable there is a risk of
13
14
delivery failure.There are a numer of reasons why
delivery risk can be problematic.First, using the
15 Sumas/Huntingdon Hub as an example, gas may change hands
16 (trade) three or four times between parties.The failure
17 of one party in the chain relying on interruptible
18 transportation, or a less than secure supply source, can
19 resul t in supply loss on any given day. A second reason is
20 that it only takes one scheduling error in the supply chain
21 to result in a supply loss. And third, actual physical
22 problems like well freeze-offs or pipeline force majeure
23 situations along the transportation path can also result in
24 supply loss.Access to additional storage deliverability
Vermillion, Di 26
Avista Corporation
1 provides the Company with more control and therefore more
2 reliability of supply during these events.
3 Q.Please explain what you mean by peak pricing
4 mitigation.
5
6
A.As with most local distribution companies in the
Northwest,Avista's demand is extremely tempera ture
7 sensitive. The result is that Avista is a "winter peaking"
8 utility. During severe cold weather events in its service
9 terri tory, or cold events in large market centers on the
10 eastern seaboard,natural gas prices may increase
11 dramatically.To the extent that the Company can rely on
12 storage withdrawals, the purchase of potentially higher
13 priced spot gas may be avoided during these events.
14 Q.You mentioned potentially higher spot prices; can
15 you identify the magnitude of these price deviations?
16 A.Yes, the Company performed a frequency analysis
17 of Gas Daily pricing at Sumas/Huntingdon for the period
18 from January 1, 2000 to date.This analysis showed that
19 during this period the daily price exceeded $10.00 per Dth
20 97 times and the average price for those occurrences was
21 $13.77 per Dth.Approximately half of those occurrences
22 exceeded $12.00 per Dth at an average price slightly over
23 $17.00 per Dth.
24 Q.How does additional daily deliverability from
25 storage benefit customers during these price deviations?
Vermillion, Di 27
Avista Corporation
1
2
A.As men tioned above,these price deviations
usually occur during periods of high demand.The ability
3 to withdraw larger volumes of storage gas on any day allows
4 the Company to directly offset higher costs that others in
5 the marketplace may have to bear.
6 Q.What other benefits accrue to customers through
7 the Company's participation in expansion projects that
8 increase storage capacity and daily deliverability?
9 A.The larger deliverability allows the Company to
10 deliver gas to its service territory utilizing currently
11 available transportation contracts for longer periods of
12 time before reaching the decline curve of the proj ect. The
13 decline curve is the reduction of daily deliverability that
14 occurs as gas is withdrawn and the pressure in the field
15 declines. Jackson Prairie can currently provide 100% daily
16 deliverability until 40% of the working capacity has been
17 withdrawn.Then there is a gradual decline in
18 deliverability until the pressure and resulting working gas
19 in storage reaches contractual minimums.
20 Q.How will the new daily deliverability be split
21 between Avista's service territories?
22
23
A.The Company has firm demand in Idaho, Oregon and
Washington.The demand is split between washington/Idaho
24 and Oregon on a 75%/25% basis. This demand allocation was
25 determined by using the estimated Oregon average load of
Vermillion, Di 28
Avista Corporation
1 approximately 9.360 million Dth, in comparison to the
2 estimated Company total average load of approximately ,
3 36.833 million Dth in the Company's 2007-2008 procurement
4 Plan.The Company proposes to allocate this new
5 deliverability based on that ratio.
6 Q.IS there any pipeline transportation capacity
7 available to provide delivery of these storage volumes?
8 A.Yes, although no new capacity is available,
9 existing transportation contracts from Sumas can be used to
10 redeliver storage volumes.The Company will avoid a
11 portion of winter purchases and utilize storage as a
12 substitute for this supply.Therefore,the same
13 transportation contracts currently utilized for physical
14 supply purchases will be used for storage gas delivery.
15 Q.Is the Company requesting specific rate relief or
16 accounting treatment for the cost of the Jackson prairie
17 Storage deliverability expansion project at this time?
18 A.Yes.The Company has included Idaho's share of
19 the Jackson Prairie deliverability expansion project cost.
20 The deliverability expansion will be completed in the fall
21 of 2008.At that time, the benefits associated with this
22 additional Jackson Prairie deliverability will begin
23 accruing to customers via the PGA mechanism.Ms Andrews
24 includes the Jackson Prairie expansion costs in her pro
25 forma adjustments in this case.
Vermillion, Di 29
Avista Corporation
1 Q.Has the company discussed the proposed allocation
2 of this new Jackson Prairie capacity, and associated costs,
3 with Commission Staff?
4 A.Yes.The Company has had discussions with
5 Commission Staff and they have indicated initial support
6 for the Company's proposal in regards to the new Jackson
7 Prairie capacity as described above.
8
9
VIII.AVISTA'S RISK MAGEMNT POLICY
Q.Can you provide an overview of Avi sta' s ri sk
10 management program for energy resources?
11 A.Yes,Avista Utili ties uses a variety of
12 techniques to manage the risks associated with serving load
13 and managing Company resources.The Company's risk
14 management approach uses price diversification by forcing a
15 layering strategy for forward purchases and sales, and by
16 using stop-loss pr~ce controls to protect against market
17 price run-ups and run-downs by utilizing upper and lower
18 price control limits.The Energy Resources Risk Policy
19 provides general guidance to manage the Company's energy
20 risk exposure, as it relates to electric power and natural
21 gas resources over the long (more than 18 months), short
22 (monthly and quarterly periods out to 18 months), and
23 immediate terms (present month).The purpose of the Risk
24 Policy is not to develop a specific procurement plan for
25 buying or selling power or natural gas for generation at
Vermillion, Di 30
Avista Corporation
1
2
any particular time.Several factors, including the
variabili ty associated with loads,hydroelectric
3 generation, and electric power and natural gas prices, are
4
5
6
considered in decision-making process regardingthe
procurement of electric power and natural gas for
generation.The Risk Policy addresses the types of risks
7 that are covered, power and natural gas supply positions,
8 authorized transactions, resource optimization, reports,
9 credit and contracts, information systems, confirmation and
10 settlement, and employee conduct.There are also five
11 exhibi ts covering authorized products, the electric hedging
12
13
natural hedging roles andthegasplan,plan,
responsibili ties,and transaction authority levels.
14 Exhibit No.4, Schedule 4 is a copy of the Avista Utili ties
15 Energy Resources Risk Policy.
16 What types of risks are addressed in the RiskQ.
17 Policy?
18 The Risk Policy defines several different typesA.
19 of risk and how they are addressed by the Risk Policy.
20 Exhibit No.4, Schedule 4 provides specific details
21 concerning each of these risks.The Risk Policy does not
22 supersede the responsibilities of other areas of the
23 Company that are responsible for other risk management
24 issues, such as Treasury, State and Federal Reguiation, and
25 corporate Information Systems.The most relevant types of
Vermillion, Di 31
Avista Corporation
1 defined risks addressed in the Policy are the mitigation of
2 market risks and the description and assignent of roles
3 and responsibilities in internal operations risks.
4 Q.What is the power supply position and how does it
5 fit into the Risk Policy?
6
7
A.The power supply position is the difference
between electric resources and requirements.Surplus
8 positions occur when resources exceed requirements and
9 defici ts occur when requirements exceed resources.Power
10 supply position considers all of the variables that affect
11 short term power supply.The dynamic nature of the power
12 supply position ls actively managed "by establishing
13 control processes for load and obligation estimation,
14 resource estimation, and management of the expected net
15 surplus or deficit position." All of these areas are under
16
17
my respons ibi 1 i ty as the vice President of Energy
Resources.The same types of position issues are also
18 addressed in regards to natural gas supplies. Any changes
19 to practices are communicated to the Risk Management
20 Commi t tee.
21 Electric loads and obligations are estimated based upon
22 an analysis of historic loads, adjusting for weather
23 variabili ty, expected additions or decreases in large
24 customer loads, all known wholesale contract obligations,
25 and adjustments, as necessary, based on analysis of prior
Vermillion, Di 32
Avista Corporation
1 estimating accuracy and other factors.Electric resources
2 are estimated based on expected output after consideration
3 for variability in conditions such as streamflow, forced
4 outages, maintenance, and environmental concerns.
5 Electric surplus and deficit positions are hedged using
6 the electric hedging plan as a guide which can be deviated
7 from based on management judgment of each surplus or
8 deficit situation.All changes to the Short Term electric
9 position are reported every business day in an electric
10 position report.
11 Q.Please describe the current electric hedging
12 plan.
13 A.The electric hedging plan, detailed in Exhibit 2
14 of the Risk Policy (Exhibit No.4, Schedule 4), relies
15 heavily upon the Hedge Scheduler.The Hedge Scheduler is
16 the analytical tool that the Company utilizes to guide
17 hedging positions over the next 14 to 18 months. The tool
18 manages open positions of 25 aMW of generation.Open
19 positions that are greater than 25 aMW are cured with
20 electric commodity transactions or fuel transactions.
21 Price control limits and time periods are employed to
22 trigger purchases or sales to cure open positions.The
23 curing transaction occurs whenever a price control limit is
24 exceeded or the cure period expiration date is crossed.
25 The Hedge Scheduler does not make the final decisions, but
Vermillion, Di 33
Avista Corporation
1 is an important tool that is utilized to aid in management
2 discretion in the Company's electric hedging plan.
3 Q.How does the Hedge Scheduler work?
4 A.The Hedge Scheduler covers a period of time from
5 the next whole calendar month out to 14 to 18 months. The
6 14 to 18 month electric load and resource forecast is used
7 by the Hedge Scheduler to model a series of transactions to
8 "systematically reduce the net open position" (the gap
9 between expected load obligations and proj ected power
10 resources) which limits the Company's projected financial
11 exposure to less than 25 aM in any given month.The
12 transactions are generally in 25 aM increments which
13 include a mixture of electric commodity purchases or fuel
14 transactions (natural gas purchases to fuel thermal
15 generation) .
16 The actual operation of the Hedge Scheduler utilizes
17 separate schedules for on- and off-peak positions.The
18 position is cured in 25 aM pieces where price limits are
19 established based on the price volatility for the delivery
20 period.Upper and lower confidence limits are initially
21 established as the standard deviation of the prior 365 days
22 of forward prices for the delivery period being considered.
23 The values are centered around the set price. The periods
24 are established by calculating the time remaining divided
25 by the numer of 25 aM pieces that need to be cured.
Vermillion, Di 34
Avista Corporation
1 Q.What is hydro bias and how does it affect the
2 Electric Hedging Plan?
3 A.Hydro bias is a physical power quantity held in
4 the load and resource position to protect against below
5 normal hydro conditions.Abnormal hydro conditions can
6 result in significant price risk, particularly in the
7 upward direction.In low hydro conditions, purchasing
8 power in the spot market can result in high upside price
9 risk up to the $400/MW price cap.During high hydro
10 condi tions, there is downside price risk associated with
11 selling excess power in an oversupplied market, but the
12 price cannot go below zero. The Hydro Bias is used in the
13 Hedge Scheduler to provide a conservative estimate for
14 hydro generation which mitigates the potentially adverse
15 financial impacts of poor hydro conditions. The allowance
16 for lower than normal hydro conditions is recognized as an
17 estimated power obligation within the current (18 month
18 forward period) hydro operating year.The size of the
19 Hydro Bias is developed by analyzing generation variability
20 under historic conditions from the 70-year hydro record
21 (1928-1998). Above normal hydro conditions are limited to
22 normal levels, while below normal conditions are left in
23 tact.These levels are multiplied by a one standard
24 deviation confidence factor to determine the Hydro Bias
25 value.The Hydro Bias decreases as the delivery period
Vermillion, Di 35
Avista Corporation
1 approaches and better hydro forecasts are available.The
2 Hydro Bias goes to zero before the delivery month is
3 reached.
4 Q. Could you please describe when and what triggers
5 purchases or sales of natural gas for ther.l generation
6 used to serve load?
7 A. Yes, the Hedge Scheduler triggers described above
8 provide a guideline for when to purchase or sell power or
9 fuel.When a transaction is indicated by the Hedge
10 Scheduler, either purchase or sale, the economics of
11 thermal plants are evaluated for the period to determine if
12 the power needed should be met with gas generation. (A
13 portion of the daily position report analyzes the "Economic
14 Fuel Requirements" of each gas-fired thermal plant.)If a
15 need for power is indicated by the Hedge Scheduler and a
16 thermal plant is economic and available for the time
17 period, natural gas is purchased to resolve the trigger.
18 The thermal resources are evaluated daily to determine if
19 any previously-purchased natural gas has become uneconomic
20 versus the forward power market.When uneconomic natural
21 gas has been verified by market quotes, the natural gas is
22 sold and power is purchased to replace the reduction in
23 generation. Although the transaction may result in a loss
24 on the gas sale, the lower cos t of the power being
Vermillion, Di 36
Avista Corporation
1 purchased offsets the loss and the net impact is always a
2 benefit to customers.
3 Q.How do natural gas purchases for ther.l
4 generation impact the power supply position?
5 A.The volume of power generation resulting from
6 natural gas purchases is included as a resource in the
7 power supply position calculation.To the extent that
8 fixed price (i.e. hedged) natural gas has not been
9 purchased for a thermal plant, the generation for that
10 plant is not counted as a resource in the power supply
11 position.
12 Q.What is the impact of the hedge scheduler on the
13 cost of gas for generation?
14
15
A.The hedge scheduler causes gas purchases for
generation to be purchased in layers over time.As
16 economic purchases and sales are made, the gas price
17 reflects the market at the time the transaction is made.
18 This results in a cost of gas that is an average of all the
19 transactions rather than a price at a point in time.
20 Q.What are the benefits of the "hedge scheduler"
21 approach?
22
23
A.The hedge scheduler causes long or short power
positions to be resolved over time.The benefits of this
24 approach are: it layers in purchases and sales of power and
25 fuel over a rolling period of time so that all purchases or
Vermillion, Di 37
Avista Corporation
1 sales are not made when prices may be unusually high or
2 low; it allows purchases and sales to occur as more and
3 better information comes available on generation resources
4 (e.g. snow pack, rainfall, and hydro conditions) and loads;
5 and it resolves open positions by the time we get to the
6 relevant period.
7 Q.How are transactions authorized in the Risk
8 Policy?
9
10
A.The Risk Policy establishes parameters for
different types of transactions.These parameters specify
11 individuals and positions along with the types and lengths
12 of transactions they are authorized to carry out.The
13 details of transaction authorizations are provided in
14 Exhibit 1 of the Risk Policy (Exhibit No.4, Schedule 4).
15
16
Q.Are other topics covered in the Risk Policy?
A.Yes.Besides subjects that are specifically
17 related to non-fuel gas resources, there are a variety of
18 areas that are covered under the Risk Policy. These areas
19 include reports, credit terms, counterparty contracts,
20 information systems, confirmation and settlement, employee
21 conduct, and risk policy updates. Additional details about
22 these areas are contained in Exhibi t No.4, Schedule 4.
23 Q.Does this conclude your pre-filed direct
24 testimony?
25 A.Yes it does.
Vermillion, Di 38
Avista Corporation
DAVID J. MEYER
VICE PRESIDENT, GENERA COUNSEL, REGut~;~l- Q PM 12: 5~
GOVERNNTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKAE, WASHINGTON 99220-3727
TELEPHONE: ( 509 ) 495 - 4 316
FACSIMILE: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-08-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-08-01
AUTHORITY TO INCREASE ITS RATES )
AN CHAGES FOR ELECTRIC AN )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 4
AND NATURAL GAS CUSTOMERS IN THE )STATE OF IDAHO ) DENNIS P. VERMILLION
)
FOR AVISTA CORPORATION
(ELECTRIC AN NATURA GAS)
Integrated Resource Plan (IRP)
Compact Disc Exhibit
Also Available At
htt://ww.avistautilties.com/inside/resources/irp/electric/Pages/ default.aspx
Exhibit No.4
Case Nos. A VU-E-08-01 and A VU-G-08-01
D. Vermion, Avista
Schedule 1, P. 1 of 1
AVU-E-08-01 / AVU-G-08-01
DENNIS P.VERMILLION'S
EXHIBIT 4
SEE THE FILE FOLDER
FOR THE CD OF AVISTA'S
2007 ELECTRIC
INTEGRATED RESOURCE
PLAN - IT IS ALSO
AVAILABLE
ELECTRONICALLY IN
CASE NO. A VU-E-07-08
BACKGROUN OF SETTLEMENT OF CLAI
BETWEN AVITA CORPORATION AND
STATE OF MONTANA
(10/31/07)
1. Introduction.
Avist Corporation's federally licensed Clark Fork Project is locåted on the Clark Fork
River) a trbuta of the Columbia River. The Clark Fork Project includes the 527 megawatt
Noxon Rapids da and reservoir located in Montana and the 261 megawatt Cabinet Gorge Dam
located in Idaho near the Monta-Idaho border. The reseroir for the Cabinet Gorge Dam is
located alost entiely in Montaa.
In October 2003, Richard Dolan and Denise Haymen, residents of Bozeman, Monta
with children in Monta's public school system, fied an action in U.S. Distrct Cour in
Missoula, Montaa agaist Avista Corporaton (llAvistll)) PPL Montaa, LLC, ("PPL
Montana") and PacfiCorp (collectively "Hydroelectrc Owersll). Shorty thereafer, Dolan and
Haymen were joined by school distcts from Great Falls, Montaa, which sought to intervene as
additional par plaitiffs.) Together, the Pnvate Plaitiffs alleged tht the State's riverbed are
being utilized by the Hydroelectrc Owners, that those riverbeds are IISchool Trut Lands" under
the Montaa Consttution, and tht compensation is owed by the Hydrlectrc Owners to the
State on account of their use and occupancy of State lands.
In March 2004, the State of Montaa, though the Attorney General, intervened as a pary
plaintiff in the action. Ultiately, however, the Federal Distrct Comt dismissed the lawsuit,
i Dolan, Haymen d the Grea Fals School Distrcts are collectvely reerrd to herein as the "PrvatË~rlö.4
Case No. AVU-E-08-01 & AVU-G-08-01
D. Vermilion, Avista
Schedule 2, p. 1 of 10
concluding th the Private Plaitiffs lacked standing and tht the Cour did not possess
jursdiction over the matter.
In November 2004, the Hydroelectrc Owners fied a declartøry judgment action in
Montaa Distct Cour in Helena, Montan In response, the State filed ai Answer,
Counterclai and a Motion for Sumar Judgment. BeCause it represented a case of fist
impression in Monta and the Unìted States, the litigation resulted in briefing and ruings on
numerous issues of Constitutiona and sttory signficance. It fuer resulted in thee major
cour heags, consistig of multiple hours of ora arguments before the Montaa Distrct Court;
extensive discovery, includig the exchage of thousands of pages ofwrtten documents; and the
depositions of35 par representatives, exper and related witnesses.
In June 2006, PacifiCorp and the Stae entere into a volunta settement, and
PacifiCorp was subsequently dismissed from the lawsut. On October 19, 2007-just thee days
prior to tral and with the State's damage clai stiI pendig, A vista ard the State also entered
into a volunta settement. Trial of the State's clais agaist PPL Montaa began on October
22,2007. Those proceedings are ongoing as of ths dae.
2. Nature of the Lawsuit.
The clais of the Private Plaitiffs, subsequently echoed by the Monta Attorney
General's pleadigs in both federal and ste cour ar sumard, in pertent par as follows:
a) The beds of navigable waters with Montaa's borders became the propert of
the Stae under the "Equa Footig" doctre of the Unìted States Constitution.
That doctre provides that, upon their entr to statehood the sttes assumed
ownersp of the lands beneath navigable waters on an equa footig with the
theen origial states.
b) Under the Montaa Constitution, the lands beneath navigable waters with the
State are "School Trust Lands." Under Montaa law, the State ha a fiduciar
obligation to collect ful market value for the use of such lands on behalf of the
Montan School Trust
Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-012 D. Vermilion, Avista
Schedule 2, p. 2 of 10
c) In 1931, Monta enacted the Montaa Hydroelectrc. Resources Act, which
requis a liceI1e or leas for the occupancy of State-owned lads. Although
never before interpeted Or applied to the Hydröelectc Owers' facilities in
Monta the Act requies those intendi to use state-owned lands to apply for a
leae and pay ful maket rental for such use.
d) The renta obligations of the Hydroelectrc Owners began when they conscted
the hydroelectrc projects at issue. Therefore, dames owed to the State go back
to the origi constrction of the projects, without regard to any sttute of
limitations that might otherwse apply.
e) Avist has wrongfuly occupied the Clark Fork River though its operation of the
Noxon Rapids Dam and Reservoir, which are wholly located in the State of
Monta. Likewise, althoug the Cabinet Gorge Dam is located in Ida, most of
the Cabinet Gorge Reservoir is located in Montaa and, as a consequence, its
operation by Avista alo .results in the wrongf occupation of State-owned lands.2
f) As applied to Avist, the Stae is entitled to pas dages frm 1954 to the
present, together with futue rents at the ful market renta value of the land.
3. Potential Exposure.
The State of Montaa employed Dr. John Dufeld, a professor at the University of
Montana who is well-known for his expertse in the caculation of natal resource daages, as
its expert economist. Dr. Dufeld employed a t'shard net benefits
II methodology to measure the
purorted dages owed to the State by vie of the Hydroelecc Owners' occupancy of State-
owned lands. Previously, the shaed net benefits methodology had been applied only by the
Federal Energy Reguatory Commssion and federal cours in determinng the amount of anua
chages to be paid to Indian Tribes under Section 1 O( e) of the Federa Power Act. Only the State
of Maine had applied the methodology in a cae not involving trballands.
Prior to Dr. Dueld's June 2007 report the precise magntude of the State's daage
clai was not fuy known. In hi report however, Dr. Dufeld assered th based upon the
State's claied ownership of all lands beneath the navigable waters at issue, A vist owed the
2 Although discovery had been conducted regarding the Cabinet Gorge Dam, the facilty was not offcialy
incorporated into the case unti the State sought to amend its Counterclai to conform the evidence on the eve oftral. Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
3 D. Vermilion, AvistaSchedule 2, p. 3 of 10
State in excess of $542.000.000 for cumulative pas rents, and in excess of $24.000.000 for
curent 2006 rent. with anua renta payments to contiue, as adjused for the remaing term
of A vist's FERC license (Le., unti 2046).
The intial litigation position of thê State Còncerng daages was revied afer the
Distrct Cour grted A vist and PPL Monta's motion that cert submerged land under the
reservoirs was not owned by the State, and that only the origi strambeds were at issue. The
revised litigation position of the State. as filed with the Distrct Cour on October 15.2007, was
that the ful maket value renta due on Avista's Clark Fork Project was $200,374,752 for past
occupation, together with fu rents of $8,416,510 per year stang in 2006, to be adjusted
anualy by the Consumer Price Index with a recalculaton of the original base amount every 10
yeas according to the shared net benefits methodology.
As the Counterclai Defendant, Avi assertd that the State had the burden of proving
its ov.mership of the lands at issue, the preise acreage of those lands, and the proper mease-of
damages. In addition, A vista was prepared to offer into evidence the testiony of Dr. Thoma
Zepp, an economist from Salem, Oregon with extensive lmowledge and experience inutlity
economics and regulation, as well as the shared net benefits methodology. Dr. Zepp was
prepared to testify that Dr. Dueld1s methodology resuted in a substatial overstaement of
potential rents owed by Avista Additionaly. Avista was prepared to introduce testmony from
Bruce M. Jolicoeur, MA, a certfied land appraiser in the States of Monta Idaho and
Washigton, that the appropriate method of valuing riverbed lands is by reference to adjoing
riparan lands.
For its par, PPL Montaa employed Dr. Gar Saleba another regionally known expert
on utility economics, as its pricipal damages witness. His conclusions, although somewhat
4
Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
D. Vermilion, Avista
Schedule 2, p. 4 of 10
different in method, were expected to be very simlar to the conclusions of Dr. Zepp and Mr.
Jolicoeur.
4. Litigation Summary.
The intial clai fied by the Private Plaitiffs were subsequently adopted by the State
Attorney General and, as discussed below, were later reinorced by the ruings of the Monta
Distrct Cour.
To defend the action, Avistaretaed, asjoint counel, the law fi of Paine Hamblen
LLP of Spokane, Washigton--a :f with extensive history representig both publicly and
privately owned utilities, includig in cases involving the shared net benefits methodology; and
Garlington, Lohn & Robinon, PLLP of Missoula, Monta--a respected and 10ng-established
Montaa law firm. PPL Montan and PacifiCorp, respectively, retaed K&L Gates of Seattle
and Stoel Rives LLP of Seattle as their pri counl, as well as Montana-based counsel.
In response to the Complaint of the Private Plaitiffs, and similarly in respnse to the
state cour Complait of the State of Monta Avita intially moved the Federal Cour to
dismiss the action on the grounds that federa law preempts Monta law to the extent that the
latter requies payment of rents by federaly licensed Hydroelectrc Owners. Additionally, Avista
moved to dismiss the Private Plaitiffs for lack of stading. PPL Monta and PacifCorp filed
simlar motions.
The Federa Distct Cour rued agai the Hydroelectrc Owners on the issue of federa
preemption, but granted their motions to disms the Private Plaitiffs for lack of standig.
Subsequently, the Hydrelectrc Owers filed motions to dismiss the federal cour action on the
grounds tht the Cour lost jursdiction of the matter when it dismissed the Private Plaintis. In
response, the Federal Cour dismissed the lawsuit and vacated its prior rugs.
5
Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
D. Vermilion, Avista
Schedule 2, p. 5 of 10
Thereafer, ìn November 2004, theHydroelectrkOwners intiated a declaratory judgment
action ìn Monta State Disct Cour ìn Helena, Monta In responses the State filed an
Answer, Counterclai and a Motion for Sumar Judgment Likewise, Avist PPL Monta
and PacifiCoip filed varous motions assertng, among other thgss the defenes of federal
preemption, prescnptive eaement, estoppels laches, sttue of limitations, waiver and breach of
agreement These motions were heard by the Montaa Distrct Cour on June 28, 2005, at which
time they were taen under advisement. In April 2006, the Distct Cour rued tht (a) neither
the Federal Power Act nor the Federal Navigation Servtude facially preempted the State from
obtaig renta compensation uider the Montaa Hydroelectrc Resources Act; and (b) that the
Hydroelectrc Owners' equitable defenses were UIavaiable agai the State. In addition, the
Cour rejected Avista's attempts to assert the Clark Fork Settlement Agreement (an agreement
involvig Montana, Idaho and other staeholders ìn the relicensing of A vist's Clark Fork
Project) as a defense to the Stae's Counterclaim. The Cour did, however, allow A vist to
cb.enge the navigabilty of the Clark-Fork River (later ruìng, however, that it was navigable).
Followig these decisions, the Distrct Cour established a procedural schedule for
discovery, disclosue of expert report and fig of dispositive motions. Trial was origína11y
scheduled to be~ without a jur, on October 15, 2007. Between 2006 and 2007, the pares
exchanged thousands of pages of documents ìn discover, prepared and exchaged detaled
expert report and conducted 35 depositions of par representatives, expert and other witnesses.
In late 2006, a secnd series of motions for sumar judgment and motions to exclude
evidence were fied by the pares. In tota, the pares fied over 1,300 pages of briefs, not
ìncluding exhbits, on the may legal issues raied by the proceedìngs. In September and
October, 2007, the Montaa Distct Cour issued orders on pendìng motions. Among other
thìngs, the Distrct Cour made the following determtions as a matter of law:
6
Exhibit No.4
Case No. AVU-E-08-'01 & AVU-G-08-01
D. Vermilion, Avista
Schedule 2, p. 6 of 10
a) The Clark Fork River is navigable for puioses of estalishig the State's claimto
title;
b) The State owns the beds of the Clak Fork River and may charge rent to
Hydroelectrc Owners for theìr use;
c) Riverbed lands are School Trust Lads;
e) There are no statutes of limtaon or equitable defenses tht limit the State's
clais with respect to School Trut Lads and, as a consequence. the State may
seek dages back to the ongial consction of the da at issue?
f) Because the lands in question are School Tru Lands, rents are owed by
Hydroelectrc Owners under the Montaa Hydroelectrc Resources Act for their
use and occupancy;
g) Water rights held by the Hydroelectrc Owners do not preclude the State fromseekig daes and rents;
h) The State is not preluded from presenting eviden.ce of its daages based upon a
"shaed net benefits" theory; and
i) The State's damage clai is not limted to the physica footpnnt of the dam itself.
but may extend to include the use of upstea nverbes owned by the State.
The Distct Cour also rued that State's ownership interest extends only to the nverbed
lands before the das were buit. and does not extend to lands that were subsequently inundated
as a resut of the Hydroelectric Owners' projects. Ths ruing was signficat, as it diminished the
potential recovery of the State by nearly two-thìrds. Nonetheless, as a resut of the Distrct
Cour's other rugs, the Stae was grted the nght to seek daages from A vist back to 1954.
A vist and PPL Montaa sought interlocutory review of the Distrct Cour's ruings by
the Montaa Supreme Cour. With one dissent, the Monta Supreme Cour declied to exercìse
interlocutory jursdiction, meanng th the pares would be forced to wait unti a fi judgment
was entered before seeki appellate review of the Distct Cour's ruings.
3 Although the Cour bad earlier addressed the statute of liations as a defene, it bad not considered A vis' s
additional arguent that the Montaa Code § 27-1-318. lis a par's relief for cer clais to five yea.
Significatly, the Cour's subsequent decision on ths issue aginst the Company (thereby exposing the Company to
damages back to 1954) was received jus hour af the settement between A vist and the Stae was reahed. If
received earlier, it may have impacted the State's willngness to waive all of its claim for pas daag!Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
7 D. Vermillon, AvistaSchedule 2, p. 7 of 10
As a result of the Distct Cour's niingsin September and October 2007, the followig
issues remained to be deteed at tral:
a) The acree of the State-ov.ed lands atìšsue;
b) The appropriate method for deteg prospective rentas and retroactive
damages; and
c) The amount of such rentals and daes.
As stated before, the State's tral position, as set fort in the Pretral Order entered with
the Cour. wa that Avìs owed $200,374,752 in daages accrug back to 1954, and
$8.416,510 on an anua basis going forward, adjusted anualy by the Consumer Price Index.
S. Settlement Discussions and Mediation.
Beging in late 2006, A vist intiated a seres of inormal settement discusions with
the State4. In fuerance of those efforts, on September 6 and 7, 2007, a medation was
conducted in Helena Monta by Jack Mudd, a respected former Dean of the University of
Montaa Law SchooL. At that tie, however, Avist and the State were unle to bridge the gap
between the State's expected level of daages and AVIsta's settement position. Inormal
discussions continued. and on October 17, 2007, representatives of Avista and the State met in
Helena for a fial effort. on the eve of tral, to arve at a mutu settement. Th fial round of
negotiations resulted in a tentative settement tht wa subsequently memorialze in a
Memorandum of Negotiated Settlement Term, dated October 19, 2007. A copy of that
Memorandum is attched to the Petition as Appendi 2.
6. Terms of Settlement.
For puroses of settement, Avist has ageed to pay rent to the State each year,
begig in the caendar yea 2007, in the amolUt of $4,000,000 per yea. These renta
4 PacifiCorp setted with the Stat in June, 2007. The amount oftbe settement in anual rentals is between $50,000
and $60,000, which reflects the ver small siz of the PacifiCorp project at issue (only 4 Mws.) Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
8 D. Vermilion, AvistaSchedule 2, p. 8 of 10
payments are to be made in arears, with payment due on or before each Febru 1 for the
previous calenda year. Rent will be adjused each year by the Consumer Pnee Index (CPI)
anua average for the calenda year for which payment is due. The State ha agreed that the
payment of such rent represents the fu1 market value of Avist's use of the Clark Fork River. No
later th June 30, 2016, Avista and the State wil meet and confer to revìew the term of the
leae for the balance of the ter of Avist's license, with adviory arbitrtion in the êvènt of
disageement. As par of the settement, the .State has also agreed to waive its. clai to past
daages of $200,374,752 in its entirety.
The pares have also agreed to jointly move the Distrct Cour to enter the terms of the
Memorandum of Negotiated Settlement Term as par of a fi judgment in a Consent Decree.
7. Favorable AspecISoftheMemoradum of Negotiated Settement Terms.
The negotiated term of the pares' settlement presents a favorable resolution to A vista of
hotly contested matters, parcularly tag into account the pnmar elements of the settement.
These include the following:
a) The negotiated anua rent on a prospective basis represents oriy 48% of
the State's litigation position, as set fort in the Pretr Order ($8.4
milion). Signcat1y~ the State wi also not receive any retroactive or
histncal damges, notwthtadin the Montaa Distrct Cour'sruìngs
tht would have allowed evidence of such daages (the state was claimig
$200 milion).
b) Assumg tht PPL Monta which rema in the case, achieves a more
favorable outcome at trial or though settlement, Avist will recive the
. benefit of that outcome. In parcular, if the aggregate anual rent
determned by settement or litigation for PPL Monta is less than 48%
of the base year rent claied from PPL Monta by the State ìn its case-
ìn-chief, Avista's aggegate anua rent will be decreased proportonally.
c) If subsequent governental action with Montaa results in a rental
payment more favorable to A vi th the rent calculated under the
Memoranum of Negotiated Settlement Terms, the ret paid by A vista wil
be modified to incoiporate the more favorable terms.
9
Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
D. Vermilion, Avista
Schedule 2, p. 9 of 10
d) If, durg the term of A vist's PERC license, a cour determines tht i) the
Clark Fork River is not navigable for title puroses, ii) the shaed net
benefits method is not a lawf method of calculatig the ful market value
of land interests, or ii) no compenation or reduced compenstion in the
natue of rentas is owed to Monta for occupancy of State-owned
nverbeds, and the applicaon of sùch determtion or deterttions
would reult in a renta payment mOre favorable to A vi or otherwse
extigush Avist's obligation of pay rentas. A vista's obligation to pay
rent will be modified.
By vire of these provisions, the Memorandum of Negotiated Settlement Terms insures
to A vista and its cusomers the up-side benefits of any subsequent governental actions or
judicial determations in Montaa. Although these tys of re-openers or off-ramps are
uncommon in litigaton, it is a fair accmmodation to the interests of A vista and its customers in
ths case.
Finally, it should be remembered tht the Montaa Supreme Cour is the author of the
cases upon which the State's School Trut Land renta obligation is predicated. Moreover, any
appeal from an unavorable ruing by the Montaa Supreme Cour would have to be taen to the
United States Supreme Cour which accepts review in only a sm.l percentage of cases
submitted to it, and which may be reluctat to interfere with the Montana Supreme Cour's
interpretation of its own stte laws. Therefore, considerig the risks of contiued litiga.tion,
together with the limited potential for a successfu appea, the settement reflects a reasonable
compromise, and a fai accommodation to the interes of Avista and its cusomers.
10
Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
D. Vermilion, Avista
Schedule 2, p. 10 of 10
. Memorai:um ofN
o
Th me out th key te of the ag in prple rehe
be Avi Comton an th Sta ofMon:taa to relve al issues pég
beee th in Cau No. COV 200846, Mont Fir Judci DiçtCoun Le &
Clai County.
1. Rent. For pu of seem Avi ag 10 pa re to th St
eac yea beginning caenda ye 207, an cont th the reing te of
Avist's FEC lice for the Cla Fork Project Avist acknwleges th th Sta
own 3,158 acs of river wi th Clark Fork Prject The Sta acowledges th
the ten re th fu ma vaue of the Sta inte or"este beg us by
Avist in connon with it opon of th Clar Fork Prjec '(whch inlude both the
Noxon ds prjec an that porton of th Cainet Gorge prjec with Monta).& . in me~ wi paen àu on or befo ea Febru i for th
previous caen yea. The-intial amout of th re wi be $4 millon pe yea. The
ret wi be adus ea ye as foow
L Benning wi ca ye 2008, an coiing tlug
canda ye 2016, th bas am of $4 min pe ye sh be adjus
upwa by the Conser Price ln (CPl) anua averge for the çaenda yea
for whch payment is du.
b. Not la th Jun 30, 201 6~ th paes wi mee an cor to
det wheter the anua reta re cons with th prciple of law
as applied to the fa. In the even either par believ the anua reta no
longer is costt wi aplicale: la aplied to the fac th paes wi
negotiate in goo fa to det an apprat adjus re ra. If the
pares do not agr up an adjus re ra by Sept 30, 2016, th
pares win engae in adviry aritron an sut th ar1rr's
remenaton to th State Boa of La Commsson ("Land Boar") for
approva.
2. Le Terms. The paes ag to jointly remmen to th Lad Boa
a lea of a power si pur to th prvlsions of the Hydrlecc Reou Act
Mont Coe'An §§ 774-201. etseq. AJpaoftbremi the Stte an
A vi ag to stat th th re ag up by th paes rerese fu maet
vaue for the lea of3,lS8 ac of Clar For riverbe be us by Avis in
coction with th Clar Fork Prjec 11 dur of
th lea wi be not le th the
res te of Avista:s PE lice.
3. Most Favore Nati.- Clae. If co PPL Mont. LLC~ eith by
litigaon thjlgmen an any ~ or thug seemen reve a
deerinaon th th ful maet value of it la in at is in the ligaon is
bas lln fa mo favole to it th th ooed in th seement with '
i Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01D. Vermillon, Avista
Schedule 3. Pace 1 of 3
Avi thè Avi re wi be adus by an am ne to re th mofavorble detinon Forpu oftb cla a more favle deon wi
occ jf~ aggga am re deed by seem or litigaon for PPL Mont
("Dtein PPL Re is les than 48% of the ag amout ofba yea re
("Claed PPL Re clai by the St in its ca in chef at tr If
th oc th
S4 minion ba re to be pa by Avi shl be rerey stg on thda of fi juden on th PPL Mo cl or seent by a pe eq to
the Dete PPL Ret divided by the Claimed PPL Ret. Se Attmen A fot an
ilus of th cacuàtoD.
4. Reopener for Subseuent Goeneita Actin. if, du the te of
the Avi lea, tl La Boa the Mon Legiat th De ofNat
Reour an Co.nOD, or any oth Sta entity with jucton en or adopt a
renta st tu, or policy aplicable to leas iss un the Hydrlec
Resur Act th wou ret ii a re paymnt more faorale to A vi th the rentcacU UD pah I, th ret pa by Avi sha bè moed retrvely
st on th da of enent or adption to iirpra th irore favorle te
S. Reopener for Subquent Judici Detrmintion. It durg the term
of th Avi lea, th re of th Clar Fork Rivei within th boun of A vi's
FBC lice is de by a cour of comptjurcton to be nø ~gale fÇtI
title pu, Avi's obli to pa ret shl ce 1; dug th te of
the
Avi lea, a cour of co jurct dein th (a) th shre ne bets
me is not aJawt me to caatc th fu mavau. ofla in or (b)no compon orre compe hi th na ofieta is owe.to tl.Sta of
Monta for oe of st dv an th àpçaonof suhdeteninaton or deton would ret in a re paen mor favole to A'Vth th re ca uner pah i, or Dtb ex Avi's oblion to
pay renta A ~'s obligaon to pay ret win be moed reacvel st on the
da of detinaon to reflec a metod of cacu ren th is costnt with the
cour deteon or deons Of.Avì's obligaon to pay rent sh ce,acy.
6. Coiienl Deeee Th paes wi agee on th for for, an jointly move
the entr as a fi judgmen of a CO de tl(a) inrpra th te ofth
Mem; (b) cotans ft re of Avi an th Sta for al ma at isue in
the .. 'on; (c) al for apprpn pu1icnotice an coen (d) cees that .
in fu compJi with th te of the Hydrlee Reur Act an (e)
include apat oth ~ su as di reuton, forc majeu an so fort
STATE OF MONTANA AVIA CORPRATION
By:
$ ej ~r. A.Gt.()~ "f '2Î
Ba;V---H'".",. li/!-
Da L d lí,.2 ftDate:
2 Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01D. Vermillon, Avista
Schedule 3. Paae 2 of 3
.1,.--,..
..
I
ATlACH A. .If th De PPL Rent ls le th 41% ofthc Cl PFL :R Avi anrent sh be recu ac to foowi foim
Am R.cu Avi Re == A x (D + C) Wh:
A - 18,416,51,0 (Am of $m re døjni by th St in th
St's Co0J9.A of th Pr Or)
D == De PPL Re
c := Cl PPL Re se fort ii $ta's ca in chf
As al iltr if De PPL Rc ~ S3,OOl~ an th Clai PPL Ren is .
$1.252,804, th Am Avi R. ~ be cacu as follows:
Amua RecuAvistRei: S3,4Sli.347. S8,416,5iOx ($3,00,00
+$7 .252,8()
3 Exhibit No.4
Case No. AVU-E-08-01 & AVU-G-08-01
D. Vermillon, Avista
Schedule 3. Pace 3 of 3
RECEIVED
2008 liPR - 3 PH 12= S5
CONFIDENTIA
A vista Utities Energy Resources Risk Policy
THESE PAGES ALLEGEDLY CONTAIN TRAE SECRETS OR
CONFIDENTIA MATERIS AN AR SEPARTELY FIED.
Exhbit NO.4
Case No. A VU-E-08-01 & A VU-G-08-01
D. Verilion, Avista
Schedule 4, p.l th 25