avue996.rl.doc

Q. Please state your name and business address for the record.
A. My name is Randy Lobb and my business address is 472 West Washington Street, Boise, Idaho.
Q. By whom are you employed?
A. I am employed by the Idaho Public Utilities Commission as Engineering Supervisor.
Q. What is your educational and professional background?
A. I received a Bachelor of Science Degree in Agricultural Engineering from the University of Idaho in 1980 and worked for the Idaho Department of Water Resources from June of 1980 to November of 1987. I received my Idaho license as a registered professional Civil Engineer in 1985 and began work at the Idaho Public Utilities Commission in December of 1987. My duties at the Commission include analysis of utility rate applications, rate design, tariff analysis and customer petitions. I have testified in numerous proceedings before the Commission including cases dealing with rate structure, cost of service, power supply, line extensions and facility acquisitions.
Q. What is the purpose of your testimony in this case?
A. The purpose of my testimony in this case is to evaluate the quantitative and qualitative reasons put forth by Avista Corporation d.b.a. Avista Utilities - Washington Water Power Division (Avista; Company) as justification for sale of the Centralia coal fired power plant (Centralia, the plant). Based on the evaluation, I will then provide a recommendation regarding the sale. I will also address the need to modify revenue recovery through rates should the sale of the plant proceed.
SUMMARY
Q. Would you please summarize your testimony.
A. The long-term economic analysis provided by the Company that compares the future cost of keeping the Centralia plant with selling the plant and purchasing replacement resources neither justifies nor precludes the transaction. Depending upon the escalation rates for coal and market resources and the actual replacement alternative chosen, keeping the plant could be more or less costly than likely generation alternatives over the plant’s remaining life.
Absent a clear economic reason for the sale, the justification must be based on the elimination of reclamation cost risk, the elimination of uncertainty associated with multiple project owners and on an equitable distribution of the gain. I believe that the
Company should be allowed to exercise its business judgement in addressing the qualitative issues associated with Centralia operation. I therefore, recommend that the sale be allowed to proceed. However, I also believe that the only tangible and quantifiable way to demonstrate that customers will not be harmed is to require that the gain be shared. I recommend that the reduction in revenue requirement associated with the gain be spread equally to all customer classes on a uniform percentage basis once the sale closes.
Finally, my analysis shows that the revenue requirement for Centralia replacement alternatives is projected to be higher in the future than the Centralia revenue requirement currently included in rates. This is true with or without continued Centralia operation. Mere projections however are not certainties and provide no basis for departing from test-year data. Therefore, I recommend that the revenue requirement not be changed to reflect future changes in power costs.
LOADS/RESOURCES
Q. Please describe Avista’s current load/resource situation.
A. According to Avista’s 1997 Integrated Resource Plan (IRP), the Company’s year 2000 peak obligations, including retail load and wholesale sales, are slightly more than available peak resources. Centralia provides 201 MW or approximately 9% of the peak
capacity for a system that according to the IRP has little or no peak reserves until wholesale sales contracts begin to expire in 2001. Based on information provided by Avista, I understand that the Company has acquired an additional 50 – 100 MW of short-term firm power through contracts that are not included in the 1997 IRP report.
Q. How does the cost of operating Centralia compare to other Company-owned resources and purchase prices?
A. Based on information provided in Case No. WWP-E-98-11, the fuel costs for the four dispatchable Avista thermal resources are 1) the Colstrip coal fired plant at $7.59/MWh, 2) the Centralia coal fired plant at $18.24/MWh, 3) the Rathdrum Gas fired turbine at $23/MWh and 4) the Kettle Falls wood fired plant at $9.86/MWh. While these prices represent the lion’s share of the variable cost of operating the plants, they do not include operation and maintenance or capital recovery costs.
The Company in Case No. WWP-E-98-11 calculated the weighted average unit price for secondary purchases and sales to be $18.32/MWh while the average weighted non-firm price at mid-Columbia from August 1, 1998 through July 31, 1999 was $20.75/MWh. These prices reflect the cost of non-firm energy without capacity.
The average weighted firm price at mid-Columbia for the same period of $26.27/MWh is comparable to the firm market price that is escalated by Avista to predict the
cost of replacing Centralia.
THE ECONOMIC ANALYSIS
Q. Have you reviewed the Company’s testimony regarding the economic impact of selling the Centralia power plant?
A. Yes, I have reviewed the testimony of all Company witnesses including that of Mr. Johnson, a Power Contracts Analyst for the Company. Mr. Johnson specifically provides an analysis that compares the future costs, on a net present value basis, of operating Centralia to the future cost of selling Centralia and replacing the generation with market purchases.
Q. What does Mr. Johnson’s analysis show?
A. Mr. Johnson’s analysis shows that the levelized cost of Centralia over the next 20 years is projected to be $32 per MWh while the levelized replacement cost over the same period is projected to be $31.37 per MWh. This represents a projected difference of 2% in the net present value of the annual revenue requirement with and without Centralia. Based on its analysis showing this reduction, the Company states that the sale will not harm existing customers.
Q. Is the 2% cost reduction shown by the analysis sufficient to conclude that no harm will come to customers as a result of the sale?
A. No, I don’t believe that it is in this case because the small reduction is based on twenty years of projected expenses. Over this period, a small change in a single critical assumption can turn a projected expense reduction into an expense increase.
Q. What are the critical assumptions in the economic analysis and what effect do changes have on the results?
A. Staff Exhibit No. 101 is a graphical representation of the components that make up the Centralia annual revenue requirement. As the graph shows, just over 60% of the revenue requirement is for coal to fuel the plant. Therefore, the coal escalation rate over the twenty-year period is critical in determining the cost of operating Centralia over its remaining life.
Company witness Johnson chose to use a coal escalation rate of 2% per year to ultimately derive the annual net savings of $7.7 million. If the 1999 Standard and Poor’s DRI Coal escalation rate of 1.73% for the same period is used, the annual savings are reduced to $1.3 million or 0.3% of annual revenue requirement. If the
historic, 1989-1998 actual coal escalation rate of 1.53% or the 1.4% base coal escalation rate provided by PacifiCorp in Case No PAC-E-99-2 (the Centralia sale
case) are used in the calculation, net annual expenses will actually increase by $3.3 and $6.2 million respectively.
Q. Are there other assumptions that are critical to the economic analysis?
A. Yes. Mr. Johnson’s analysis assumes that replacement power costs purchased from the market over the twenty-year period will essentially escalate at the rate of 2.5% per year. If energy rates escalate at 2.8% per year, the annual expense reduction of $7.7 million is eliminated entirely and a slight increase results. The high market rate projects shown by Mr. Johnson on Exhibit No. 1, page 2 of 2 represent an equivalent energy escalation rate of approximately 4% and result in net increased revenue requirement of nearly $36 million per year. The table provided in Staff Exhibit No. 102 shows how projected savings change with changes in variables.
Q. Are there any other reasons that lead you to conclude that benefits demonstrated in the economic analysis are unreliable?
A. Yes, the purchase of market resources that escalate at a fixed rate is just one of a number of
possible replacement alternatives. Mr. Johnson indicates that a combined cycle combustion turbine (CT) with a cost equivalent to the high market purchase price in 2003 is
also being explored. Standard and Poor’s DRI projects natural gas escalation rates of nearly 4.3% over the 2001 to 2020 period. Gas escalation rates in this range will not only significantly increase the cost of CTs over time, they could likely cause market purchase prices to increase faster than anticipated in the Company’s analysis.
Mr. Johnson also points out that the Centralia plant is dispatchable and can be shut down when it is not economical to operate. Market purchases are not dispatchable and therefore, are less advantageous from a resource flexibility perspective. Finally, I believe Mr. Johnson correctly points out in testimony on page 3 that: “Since no power replacement options have been finalized, the actual cost is not known.”
Q. What do you conclude from the net present value analysis conducted by the Company?
A. The net present value analysis with and without Centralia provides one estimate of how annual revenue requirement might be affected when certain conditions are projected over the next twenty years. The analysis also shows that the impact can be positive or negative when conditions vary within a reasonable range. Furthermore, the analysis does not compare the future cost of Centralia to the cost of resources actually
chosen as a replacement by the Company. Consequently, I do not believe that the Company’s estimated 2% reduction in annual revenue requirement alone provides sufficient justification for selling the plant nor does it reasonably or reliably satisfy the no-harm to customers standard.
SALE BENEFITS
Q. What other benefits are cited by the Company as justification for the sale?
A. Company witness Ely states that the Company and its customers will benefit through reduced exposure to mine reclamation costs and by enabling Avista to conduct resource optimization strategies more independently.
Q. Are these legitimate benefits that can be quantified?
A. They may be legitimate benefits but I do not believe they are readily quantifiable. Clearly, final reclamation of the Centralia coal mine represents a significant cost liability to Avista. PacifiCorp testimony in Case No.PAC-E-99-2 (the Centralia sale) indicates that reclamation costs could vary widely depending upon the reclamation method used but could be as high as $350 million in 1999 dollars with mine shutdown near the year 2020. It should be noted however,
that Avista would only bear a share of the reclamation cost and according to the testimony of Mr. Johnson, expenses to fund current estimates of future reclamation costs are included in the net present value economic analysis.
With respect to problems associated with multiple plant owners, Company witness Ely indicates in testimony that plant closure with associated plant dismantling costs and mine reclamation costs is possible absent the sale. The Centralia ownership agreement requires that there be unanimous agreement between owners before any capital investment at the plant is undertaken. The owners did not reach unanimous agreement for scrubber investment at Centralia but the agreement provides no recourse in such a situation.
Theoretically, the Company and its customers could wind up paying plant closure costs and resource replacement costs if the sale falls through and the plant closes. Although the likelihood of such an event is impossible to predict, Avista seems to believe that the plant would continue to operate should the sale not take place given its willingness and commitment to purchase plant shares owned by other companies.
Q. Is the exposure to potentially high mine reclamation costs and the threat of plant closure absent the sale justification for the sale? Is it a sufficient
showing that customers will not be harmed?
A. Company witness Eli states in testimony that the decision to sell was based on business judgement, qualitative factors surrounding continued ownership, projected replacement power costs and the price offered by the buyer. I believe that the Company’s right to exercise its business judgement regarding the qualitative factors surrounding continued operation of Centralia provides sufficient basis for allowing the sale to proceed. However, I also believe that the reasons for allowing the sale to proceed while potentially beneficial to customers are unquantifiable and an insufficient showing that customers will not be harmed.
RECOMMENDATION
Q. What do you recommend?
A. I recommend that the sale be allowed to proceed but that the gain on the sale be shared with ratepayers to sufficiently demonstrate that customers will not be harmed by the transaction. I believe that the purchase price offered by the buyer and the resulting profit from the sale, is an important justification for the sale and should be shared with customers. Moreover, I believe it is the only tangible way to show that customers will not be harmed given the intangible potential qualitative benefits and the unreliability of replacement power cost projections.
Q. Staff witness Stockton has determined that the revenue requirement associated with the rate base reduction from the gain represents 0.551% of the total Idaho jurisdictional revenue requirement authorized by the Commission in Case No. WWP-E-98-11, Stockton Exhibit No. 104. How do you propose to return the revenue associated with the gain to Idaho ratepayers?
A. I recommend that the revenue requirement for all customer classes, excluding special contracts, be decreased by a uniform percentage once the sale closes. I further recommend that the rate components within each class be reduced by 0.551%
REVENUE REQUIRMENT ADJUSTMENT
Q. If the sale is allowed to proceed, should the revenue requirement approved by the Commission in Avista’s last general rate case be modified to reflect replacement power costs?
A. No, it should not be modified at this time. My analysis using the Company’s power supply model and portions of Mr. Johnson’s economic analysis show that the authorized revenue requirement for Centralia is lower than the future revenue requirement projected for replacement power. Staff Exhibit No. 103 compares the estimated revenue requirement authorized for Centralia in the last rate case with two power replacement scenarios. The first scenario uses the dispatch simulation model to replace Centralia with secondary power purchases. An additional cost increment is then added for capacity and shaping. The second scenario uses the dispatch simulation model to replace Centralia with the 1999 medium market price as shown in Company Exhibit No. 1, page 2 of 2.
Exhibit No. 103 shows that when all revenue requirement components are included, both power
replacement scenarios have a higher projected revenue requirement than what is currently included in rates for Centralia. After the transaction is complete, the perceived difference in revenue requirement will be the relative difference between the revenue requirement of Centralia if it were not sold and the revenue requirement of replacement resources. These differences to the extent they materialize would be captured in a subsequent rate case.
Q. Does that conclude your testimony?
A. Yes it does.

AVU-E-99-6 LOBB, R (Di) 1
12/02/99 STAFF

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