20200304Comments.pdf

DAYN HARDIE
DEPUTY ATTORNEY GENERAL -L 96 12 3IDAHOPUBLICUTILITIESCOMMISSION'
PO BOX 83720
BOISE,IDAHO 83720-0074
[phone]
IDAHO BAR NO.9917
Street Address for Express Mail:
11331 W CHINDEN BLVD,BLDG 8,SUITE 201-A
BOISE,ID 83714
Attorneyfor the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF AVISTA'S )APPLICATION FOR AN ORDER )CASE NO.AVU-E-20-01
AUTHORIZING ACCOUNTING AND RATE )MAKING TREATMENT OF COSTS )ASSOCIATED WITH THE ENERGY )COMMENTS OF THE
IMBALANCE MARKET )COMMISSION STAFF
STAFF OF the Idaho Public Utilities Commission,by and through its Attorneyof
record,Dayn Hardie,Deputy AttorneyGeneral,submits the followingcomments.
BACKGROUND
On January 10,2020,Avista Corporation (Company)applied to the Commission for an
order allowingthe Company to defer incremental Operation and Maintenance (O&M)costs
associated with joiningthe California IndependentSystem Operator's (CAISO)Western Energy
Imbalance Market (EIM).The Company seeks to defer those costs until they can be included in
base rates through a general rate case proceeding.The Company signed an EIM implementation
agreement with the CAISO on April 25,2019.
An energy imbalance market pools generationof interconnected electricity providers
within a region and dispatches those resources with the goal of more accurately matching actual
production with actual demand.See Order No.33706.An energy imbalance market operates on
STAFF COMMENTS 1 MARCH 4,2020
a nearly real-time basis with multipleparticipants,as opposed to more conventional long-term,
bilateral contracts which deliver energy in hourly blocks.
In November 2014,the CAISO and PacifiCorp formed the EIM.The EIM is a five-
minute market administered by the CAISO.The market utilizes an automatic model to identify
the least-cost energy resources to serve real-time customer demand.EIM participants bid
resources into the market,and the operator dispatches those resources based on the marginal
price for energy imbalances factoring in load and available generation.The Company has been
actively monitoringthe operation and expansion of the EIM.The Company also regularly
participates in regional meetings and dialogue associated with the EIM,including the potential
expansion of the EIM to a day ahead market.
The Company expects to "go live"with the EIM by April 1,2022.The Company's
decision stems from the risk associated with being a non-EIM participanti and the changing
resource portfolio in its Balancing Authority Area (BAA).
The Company has recently signed two renewable energy power purchase agreements2
and expects to integrate more projects as state clean energy policies change and prices continue
to drop for renewables.3 The Company stated that the ability to balance and regulate load and
renewable resources by leveraging EIM resources,instead of relying solely on Company owned
resources for regulation and flexible ramping,provides operational benefits.
According to the Company's Application,over 75 percent of the load in the western
interconnection has committed to joiningthe EIM by the end of 2022,and non-participation will
cause growing liquidity risk,forcing those non-participating utilities to hold more reserves to
minimize in-hour fluctuations.*
Based on a third-partyconsultant's assessment,the Company estimates it will cost
between $21.4 million and $26.7 million,on a system basis,to fully prepare for market entry.
I Recently Idaho Power and Powerex have integrated into the EIM.In addition,Seattle City Light,Northwestern Energy,andBonnevillePowerAdministrationwillalljointhemarketinthenexttwoyears.2 The Company has recently signed power purchase agreements for 20 Megawatts ("MW")of Solar that came online inDecember2018and145MWsofwindthatwillcomeonlineinlate2020.
3 As additional variable resources are integrated into the Avista BAA and the EIM grows,it will become more efficient and cost-effective for Avista to rely on the EIM to help meet the in-hour variability,instead of holding back and dispatching Avista-ownedresourcestomeettheflexiblerampingrequirements,according to the Company's Application.4 The Company cites "EIM participants are less likely to conduct bilateral transactions close to the operating hour,due to the needtopassEIMsufficiencyandflexiblerampingtestsandmeetothermarkettransactionsclosingtimesthatoccurwellbeforetheoperatinghour.Holding additional reserves will lead to higher overall power supply costs since excess available resources can'tbefullyoptimizedoradditionalresourcesmayneedtobepurchased,"according to the Company.
STAFF COMMENTS 2 MARCH 4,2020
These costs,which the Company seeks to defer for later recovery in rates,are primarily related to
developing the network model per the CAISO's requirements including Energy Management
System (EMS)/Supervisory Control and Data Acquisition (SCADA)integration,development of
a generationresource bid strategy and population of the generationresource master file,
conducting request for proposals and selecting new market related software applications,
completion of modeling into the CAISO test environment,and employee training.
The Company expects to incur $3.5 million to $4.0 million in system costs per year to
operate in the EIM.These ongoing,annual costs will include maintenance costs for software
licenses and communication networks,adding approximately 12 new employees to facilitate
market operations and settlements,a new five-person 24x7 hour EIM operating desk,and
CAISO EIM fees.
The Company retained a different third-partyconsultant to assess potential EIM benefits.
The assessment estimated the Company could see system annual benefits between $2 million and
$12 million.The assessment used four main assumptions:(1)the amount of flexible hydro bid
into the market;(2)the amount of transmission that is made available for market transactions;
(3)the amount of renewable generationintegrated into the Company's BAA,and (4)data
sources from other EIM participants estimated benefits.The assessment produced 24 scenarios
that the Company used to estimate annual benefits of $5.8 million.
Using the cost and benefit assessments,the Company performed a breakeven analysis.
To break even in ten years with integration costs of $21.4 million,the Company must realize
system annual benefits averaging about $5.0 million.If the integration costs increase to $26.7
million,the Company must realize system annual benefits averaging about $6.0 million per year.
STAFF ANALYSIS
Staff reviewed the Company's Application,accompanying exhibits,workpapers,and the
responses to Staff's production requests.Based on its review,Staff recommends Commission
approval of the Company's request to defer the incremental Operation and Maintenance costs
related to joiningthe Western EIM.
Staff believes the Company has demonstrated it is reasonable for it to join the EIM.The
Company proposes that hardware,software,and personnel investments made to facilitate
participation in the EIM will allow them to leverage market resources to more efficiently meet
STAFF COMMENTS 3 MARCH 4,2020
intra-hourvariability by providing access to market liquidityfor flexible ramping and load
regulation.With the five-minuteimbalance market that EIM investments provide,Avista also
has the potential to increase surplus sales and access lower-cost generation,which can result in
net power supply expense savings and benefit to customers.
Staff has reviewed the Company's estimates of EIM investments and believes they are
reasonable;however,Staff notes the Company remains responsible for demonstrating its
investments were prudent prior to recovery from customers.Staff recommends the Company file
a report after one year of participation,to detail any additional expenditures and inform the
Commission of ongoing costs and benefits of EIM participation.
Estimated Cost and Benefit Analysis
Staff performed preliminarydue diligence to determine if the Company's decision to
move forward with EIM participation is prudent.The purpose of the review was to ensure there
are no egregious shortcomings in the Company's analysis prior to authorizing an accounting
order to defer costs.Staff will perform a full prudence review of actual costs at the time the
Company seeks to recover costs in a future rate case.With that said,Staff believes the cost and
benefit analyses provided by the Company are reasonable.Additionally,the analysis suggests
breakevenshould occur in under ten years.Staff also focused its review on (a)the Company's
comparisons between Avista's EIM estimated costs and benefits,and (b)actual costs and
benefits from EIM implementations performed by similar utilities.
Cost Estimates
Staff believes the cost estimates the Company used in its cost analysis are reasonable
because the Company used an experienced consultant to help develop the estimates and because
Staff used comparisons of actual cost information from other utilities that have recently joined
the EIM.Staff has some concern with individual line item costs,especially operational labor,
but Staff understands the current cost estimates will change and will be reviewed in detail in a
future case.
The Company used consulting services from Utilicast,a company with experience
helping utilities prepare for EIM market entry and operations.The Company estimated EIM
capital cost at $21.4 million but included a 25%contingency estimate which could push the cost
STAFF COMMENTS 4 MARCH 4,2020
to $26.7 million.The Company estimated ongoing annual operating costs of between $3.5
million and $4.0 million.
Staff compared Avista's EIM costs to EIM costs for Idaho Power Company (IPC)and
Portland General Electric (PGE).Staff used comparisons from these utilities because Avista
states in its Application,"[the Company's]resource mix and transmission connection to other
EIM participants most closely matches IPC and PGE."However,the Company's EIM cost
estimates are $8 million and $10 million more than the published EIM start-up costs for IPC and
PGE,respectively.
Staff requested information regarding these cost differences.The Company responded
that the major cost drivers influencingcost for utilities to the join the EIM are the number of
meters,controls,software applications,communication networks,and employees that are added
or upgraded.For example,PGE was able to avoid the cost of upgraded meters,generation
controls,and management systems because many of the components already installed met EIM
requirements and did not require upgrade.Further,the higher upfrontcost estimates compared to
those for IPC were primarily due to the Company requiring more replacement meters and upfront
integration labor.
Another reason why the Company's cost estimates are higher is the Company has
benefitted from the other utilities'experience and was able to include in its upfrontestimates,the
costs that the other utilities had incurred after implementation.For example,the Company had
discussions with several regional utilities and gained a better understandingof application
capabilities and market requirements.From these discussions,the Company included a full suite
of applications in its estimates to ensure efficient EIM operation and avoid upgrading or
replacing software after implementation.
Staff also inquired about the amount of operational labor included in the Company's
estimates to operate EIM.Given the Company's explanation,Staff remains concerned with the
amount of labor that the Company included in its estimates.Staff plans to investigate these labor
costs in greater detail when the Company files a case for rate recovery.
Benefit Estimates
The Company's EIM benefit analysis showed benefits of between $2 million to $12
million with base case benefits of $5.8 million.These results are approximately $1.3 to 2.3
STAFF COMMENTS 5 MARCH 4,2020
million more than the estimated base case benefits for IPC and PGE.Staff believes the benefit
estimates are reasonable because an experienced consultant performed the analysis and the
analysis methodology has been refined to include actual results from current EIM participants.
The Company hired Energy and Environmental Economics (E3)to perform the EIM benefit
analysis.The Company selected E3 because they had previously conducted multiple market
benefit assessments for other EIM participants,and is believed to have the best available system
model.E3 has been refining its methodology for calculating benefits since performing studies
for IPC and PGE and has seen actual EIM benefits that have been higher than estimates for most
EIM participants.Consequently,E3 has been able to utilize actual results to validate their
models and to incorporate actual market conditions into their assumptions.Staff believes that
this should have improved the accuracy of E3's models and resulting benefit estimates.
Proposed Accounting Treatment
Avista seeks to defer its incremental O&M EIM implementation costs.The Company
requests that the Commission issue an order authorizing the Company to defer its Idaho
jurisdictional share of incremental O&M costs related to participation in the EIM.The Company
would defer these costs until they are authorized for recovery in a future rate proceeding.The
Company proposes to defer the EIM-related expenses monthlyin Account 182.3 -Other
Regulatory Assets.
The Company is not requesting a carrying charge on the deferral balance.Staff agrees
with this proposal.The ability to defer the costs for future recovery provides sufficient benefit to
the Company,therefore a carrying charge is not necessary.If normal ratemaking treatment is
followed,then the Company would expense the O&M costs in the year in which they occur,the
capital costs would be booked to the appropriate Plant-in-Service account once the investment is
placed in service,and depreciation on the investment would begin at the Commission-approved
rates.In the next general rate case,the prudentlyincurred ongoing O&M costs,including
depreciation expense,would be built into rates.The return on the prudentlyincurred capital
investments,net of accumulated depreciation,would also be built into rates.In this Application,
the Company has not requested to defer the capital costs,justthe O&M costs.Allowingthe
Company to defer these O&M costs preserves them for future recovery from customers.It is
STAFF COMMENTS 6 MARCH 4,2020
appropriate to defer these costs to more closely match the benefits that customers will receive
once the Company joins the EIM in April 2022.
Finally,the Company would request recovery of the actual incremental costs of joining
the EIM in a future rate proceeding,and the Company would propose an amortization period at
that time for the recovery of the deferral balance from customers.Staff recommends the
Company cease deferring expenses at the time the Company officially joins the EIM.Recovery
of any operational cost associated with membership in the EIM after the Company's go-live date
should be determined in a future proceeding.At that time,a prudency review should be
conducted to determine the reasonableness of recovering the deferrals from Idaho customers.
Customer Notification
Since rates are not impacted,customer notice is not required.However,Avista created a
webpage to provide general information about the EIM.'It was made available the same day as
the filing.In addition to general information about the EIM,the webpage also includes a
"Frequently Asked Questions"section.The frequentlyasked questions address the following:1)
what are the benefits of joiningthe EIM;2)can solar and wind resources be effectively
integrated without joiningEIM;3)what are the implications for not joining the EIM;4)will the
Company maintain operational control of its generationresources and balancing authority
obligations;and 5)when will participation in the EIM become official.
Customers were given until March 4,2020 to file comments.See Order No.34550.As
of March 4,2020,no customer comments were filed.
STAFF RECOMMENDATION
Staff recommends the Commission approve the Company's Application requesting an
Accounting Order to defer the incremental O&M costs associated with the implementation of
EIM.Staff recommends that the Company cease deferring the incremental implementation costs
at the go-live date.Staff also recommends that the Company file a report after one year of
participation,to detail any additional expenditures and inform the Commission of ongoing costs
and benefits of EIM participation.
*The webpage can be accessed at :https://www.mvavista.com/about-us/our-commitment/western-enerey-
imbalance-market
STAFF COMMENTS 7 MARCH 4,2020
Respectfully submitted this day of March 2020.
ayn HAÍie
Deputy AttorneyGeneral
Technical Staff:Kathy Stockton
Michael Eldred
Rachelle Farnsworth
Curtis Thaden
i:umisc/comments/avue20.ldhkismerfcomments
STAFF COMMENTS 8 MARCH 4,2020
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 4TH DAY OF MARCH 2020,SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF,INCASENO.AVU-E-20-01,BY MAILING A COPY THEREOF,POSTAGE PREPAID,TO THE FOLLOWING:
PATRICK EHRBAR DAVID J MEYERDIRECTORREGULATORYAFFAIRSVP&CHIEF COUNSELAVISTACORPORATIONAVISTACORPORATIONPOBOX3727POBOX3727SPOKANEWA99220-3727 SPOKANE WA 99220-3727E-mail:[e-mail] E-mail:[e-mail]
SECRETARY
CERTIFICATE OF SERVICE