95808.docx

DECISION MEMORANDUM
TO:COMMISSIONER NELSON
COMMISSIONER SMITH
COMMISSIONER HANSEN
MYRNA WALTERS
TONYA CLARK
STEPHANIE MILLER
DAVE SCHUNKE
RICK STERLING
DON HOWELL
GARY RICHARDSON
WORKING FILE
FROM:BRAD PURDY
DATE:AUGUST 8, 1995
RE:ADJUSTMENTS TO AVOIDED COST MODEL
Staff proposes to make several changes to the avoided cost model to more accurately reflect costs of a gas-fired combined cycle combustion turbine (CCCT), the surrogate upon which the avoided cost rates are based for projects smaller than 1 MW.  Staff is not proposing to change any of the generic or utility-specific variables adopted by the Commission in the recent avoided cost case, but rather is simply proposing changes in the method in which these variables are used to calculate avoided cost rates.  Some of the proposed changes correct inconsistencies in the calculation methods employed for fueled and non-fueled rates, others more accurately levelize costs, while still others are cosmetic only and are intended to better accommodate annual updates to generic variables.
In addition to model changes, Staff wishes to suggest alternative methods of presenting avoided cost rates.  Current methods are deceiving, difficult to explain and difficult for many people to interpret.
Finally, Staff wishes to make a proposal concerning annual updates to avoided costs.  Clearly, the adjustable component of avoided costs is intended to capture changes in the cost of natural gas and should be applied for fueled rates.  However, it has never been addressed whether the starting fuel price assumed for non-fueled rates should be reset annually or left unchanged from the price set in the most recent avoided cost proceedings.
The following is a brief summation of the changes Staff proposes.  A more detailed explanation will be provided to the Commission later if a formal case is initiated as requested by Staff.
Inconsistency in Calculation of Levelized Rates for Non-Fueled Projects
Currently, in computing levelized rates for non-fueled projects, surplus energy prices prior to the first deficit year are not being included.  Instead, the levelized rates are based on fuel costs, fixed O & M, and variable O & M during the deficit period.  This is inconsistent with the computation methods used for non-levelized rates for non-fueled projects, and for both levelized and non-levelized rates for fueled projects.  This inconsistency was pointed out in Staff’s post-hearing brief, but the Commission chose to forego making a model change because of its minimal effect on rates and because it could potentially affect only very short term levelized contracts.  However, the effect of the inconsistency becomes more significant as utilities’ first deficit years are extended further into the future as in the case of WWP.
Staff’s proposed change is to base all rates prior to the first deficit year on surplus energy prices, whether for fueled, non-fueled, levelized, or non-levelized contracts.  The effect of this change alone is very minor, and the result is slightly lower levelized, non-fueled rates.
Levelization of Surplus Energy Rates
Staff also proposes that surplus energy prices be included in computing levelized rates for fueled and non-fueled projects.  Under the current calculation methodology, the value of a levelized contract exceeds the value of a non-levelized contract.  On a present worth basis, the value of both types of contracts should be equivalent.
In addition to these changes in the levelization methodology, Staff proposes that fixed O & M and variable O & M be combined in the model’s computations, since both are escalated at established rates and neither are subject to annual adjustment.  In other words, variable O & M is variable but not adjustable; consequently, it should be treated the same as fixed O & M.
The effect of all of the computational changes is to increase the levelized rates for both fueled and non-fueled projects.  The increase ranges from less than one mill for non-fueled levelized rates to nearly 10 mills for fueled levelized rates, depending on the utility.  Exhibit 10 shows the effect of the model changes on rates for 20-year contracts for each utility.  Staff contends that rates calculated using the proposed methodology more accurately reflect the levelized and non-levelized costs of the CCCT surrogate.
Presentation of Rates
Staff also wishes to suggest alternative ways of presenting avoided cost rates and solicit comments from the utilities on which alternative is preferred.  Whichever method is chosen, Staff recommends that one standard be adopted for all utilities to maintain consistency.
Annual Updates of Avoided Costs
Staff believes the intent of the Commission is that fuel costs, as used by the avoided cost model, be adjusted annually.  It appears clear that these annually updated fuel cost should be applied to fueled rates.  However, it is not clear whether these annually updated fuel costs should be applied to non-fueled rates.
Staff believes a non-fueled contract, once established, should not be subject to changes in rates for the duration of the contract.  The starting gas price and established escalation rate in effect at the time of contract signature should serve as the basis for rates throughout the life of the contract.  However, in the case of new contracts, the question is should new rates be published every year for new contracts based on the annually updated fuel prices?  Put another way, should a project that signs a contract in 1999 have 1999 gas prices as the starting basis for rates, or should 1995 gas prices which have been escalated at six percent for four years be used as the starting basis for the contract?
Conclusion
Staff believes that its proposed changes to the avoided cost model are fairly non-controversial.  Staff suggests that the Commission initiate a formal case to address Staff’s proposal and that it be handled under modified procedure.  Staff proposes that a single document be issued containing an Order initiating the case and a Notice of Modified Procedure with the full text of Staff’s proposal, including tables and charts, soliciting comments.
Commission Decision
Does the Commission wish to initiate a formal case to consider Staff’s proposed modifications to the avoided cost model?

Brad Purdy
JR\M-ACM.BP2