20090218PacifiCorp Response.pdf

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Februar 18,2009
201 South Main, Suite 2300
Salt Lake City, Utah 84111
VI OVERNIGHT DELIVERY
Rick Sterling
Idaho Public Service Commission
472 W. Washigton Street
P.O. Box 83720
Boise, Idaho 83720-0074
rick.sterlingtßuc.idaho. gov
RE: Case No. GNR-E-09-1 - Anua Adjustment of Avoided Cost Rates.
Rocky Mountain Power (the "Company") would like to provide you and the Idaho Commission
with our comments regardig the draft avoided cost rates for small non-fuel projects less than ten
megawatts that you circulated on Januar 26, 2009. Although the Company agreed with the
stipulation's logic for computing and updating capita costs, heat rate, and O&M Costs in the
SAR methodology, the Company is concerned that the overall Qualifyg Facility ("QF")
avoided cost price that the SAR methodology yields is too high. The assumptions underlying the
avoided cost prices in the Janua 26, 2009 draft paper are representative of elevated pricing and
bullish economic perceptions in the first half of 2008 and are not representative of costs that
reflect the dramatic recessionar environment that is forecast by most experts to be deep and
long. The primar, but not sole driver to the high QF avoided costs in the Janua 26, 2009 dr
paper is the result of using the Northwest Planing and Conservation Council's (''NPCC'') Draft
Fuel Prices for the Sixth Power Plan, December 29,2008.
The NPCC price forecast includes five different levels to captue a rage of possible outcomes
(low, medium low, medium, medium-high, and high). When the NPCC price forecast was fit
used in the SAR methodology, the Commssion expressed confdence tht the medium forecast
had the highest probabilty of being right (Order No. 29124, pg. 10). Given the rapid pace of
decline in global economic conditions in recent months, the Company feels the medium NPCC
gas price forecast is, at present, not the most accurate representation of curent market
conditions. The NPCC Draf Fuel Prices for the Sixth Power Plan states:
"The low case assumes slow world economic growt which reduces the pressur on
energy supplies. It is a futue where world supplies of natual gas are made available
though aggressive development of LNG capacity, favorable nonconventional supplies
and the technologies to develop them, and low world oil prices providing an alternative to
natu gas use. The low case would also be consistent with a scenaro of more rapid
progress in renewable electric generating technologies, thus reducing the demand for
natual gas..."
Idaho Public Utilties Commission
Februar 18,2009
Page 2
"The intermediate cases are varations on the medium case that are considered reasonably
likely to occur. The medium-high case would contan elements of the high scenaro,
however, not to the same degree. Similarly, the medium-low case would contain some of
the more optimistic factors described for the low case."
There are a number of market "sign posts" that align well with NPPC's description of their low
case:
. World economic growth has slowed and reduced pressure on energy supplies.
. There are a number of signficant liquefaction projects coming online in 2009 and
2010, with projects in Indonesia, Qata, Russia, and Yemen expected to contrbute
nearly 7 BCF/d of new capacity to the global market.
. In 2008, there was more LNG regasification capacity added than in the four prior
years combined, with even larger growt expected for 2009.
. Technological advancements in horizontal drllng and hydrulic fractung have
enabled growth in nonconventional natual gas supplies to outpace declines in
conventional production and imports.
. Despite OPEC's efforts to cut production, oil prices remain much lower than the
recent highs experienced this past sumer. As of Janua 30, 2009, prompt month
WTI crude settled below $42 per bareL.
At the time the NPCC medium gas price forecast was first adopted, there was very little liquidity
in the forward markets beyond 12 to 18 months, and thus the abilty to test which of the NPCC
five forecast levels was most reflective of then curent market conditions was limited. However,
since 2002, the forward markets have become more liquid, and NYMX now offers physical
contracts for Henr Hub though 2021. The figue below shows how the medium, medium-low,
and low NPCC price forecasts compare to NYMEX forwards as of market close on Janua 30,
2008.
(This space is intentionally left blank)
Idaho Public Utilties Commission
Februar 18,2009
Page 3
Comparison of Henry Hub Natural Gas Prices (Nominal)l
$14
$13
$12
$11
$10
....~e $9e.,
$8
$7
$6
$5
$4
200 2010 2011 2012 2013 201420152016 201720182019 20202021 2022 2023 2024 2025 202620272028 2029 2030
I.. NPCC Medium -+ NPCC MediumLow.. NPCC Low ~ NYX (01/30/2009) 11The average NYX price from March 2009 though December 2009 is $4.99 per mmtu. Because ths is a
parial year average, it is not shown as a comparson against the NPCC forecasts in the figue above. The NPCC
forecasts were converted from 2006$ to nomial using a 2% per year escalation rate.
While not shown in the figue above, market forwards for the balance of 2009 are considerably
lower than even the low NPCC price forecast. Market forwards in 2010 are most closely aligned
with the low NPCC price forecast. Beyond 2010, the medium-low NPCC price forecast begin
to align reasonably well with curent market forwards. Over the entire NYMEX strp, the NPCC
medium case projection is considerably higher than curent market. Whle the Company had
previously supported using the median NPCC price forecast, given the NPCC's description of
their low case forecasts, curent market "sign posts," and curent market forwards, the Company
strongly believes that the low and medium-low NPCC price forecasts are a better indicator of
curant market conditions than the medium case.
According to the methodology circulated on Januar 26,2009, the draf avoided cost rate will be
a nominal levelized $87.42 per MWh for a twenty year contract for projects on-line in 2009.
This rate is 27% higher than curent Idaho avoided cost of $68.66 and 15% higher than any
avoided cost price Rocky Mountain Power has experienced in other states, where QF avoided
cost prices for the same lengt of contract range from approximately $55 to $74 per MWh
nomial levelized. Ths rate also exceeds those included in the Company's curent IRP and that
of recently acquired renewable resources. Based on the Revised Protocol agreement, costs
..
Idaho Public Utilities Commssion
Februar 18,2009
Page 4
associated with new QF contracts which exceed the costs PacifiCorp would have otherwse
incured acquirig comparable resources will be assigned directly to the state approving those
contracts. After correcting an error in the draft avoided cost calculation, the revised
methodology results in a nominal levelized avoided cost rate of $89.95. The Company is
concerned with the impact that establishig an avoided cost of $89.95 per MWh could have on
its Idaho customers. The Company's concern is that these extreme rates wil become a "magnet"
for out-of-state or off-system QF projects seekig the highest prices for their project at a cost to
the Company's Idaho customers. To ilustrate this point, over the past 5 years, the Company had
received a total of a half dozen requests for wind QF projects totaing 100 MW, of which only
one resulted in a signed power purchase agreement. Withn three days after the Janua 26th
draft methodology and prices were circulated by Staff, the Company received six wind QF
project requests, totaing 235 MW. All of these proposed projects are off-system QFs with
scheduled deliveries into an already transmission constrained area.
The Company believes that the medium natural gas price cure from NPCC yields a price that is
too high, and is not a tre reflection of curent gas costs. The impact of using the draft medium
NPCC fuel cure is approximately two-thrds of the 27% increase in the avoided costs and the
Company feels that warants, at a minmum, postponig Commssion approval of the gas cure
component until the NPCC fuel prices are fmal. The Company is also requesting additional time
be provided in order to more thoroughly review all of the assumptions used in the NPCC forecast
and requests a techncal conference be conducted to allow the paries to revisit the existing
methodology and come up with a solution in light of the curent economic forecasts. Given the
dramatic global economic downtu and extraordinar downward impact on commodity costs
that has occured in the last few months, the Company questions the timing of an update that
does not appear to reflect curent market conditions and suggests the Commission consider
updating the price forecast after conditions have become more stable. Accordingly, the Company
requests that the Commission reevaluate its use of ths draf price cure before QF prices are
established using these inflated costs so that Idaho customers are not impacted by potentially
above market QF prices.
Please let me know if you have any furter questions.::T:Y~~/~
Vice President, Regulation
Rocky Mountain Power
Enclosures