gnre991.swr.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE INVESTIGATION OF THE CONTINUED REASONABLENESS OF USING VARIABLE COSTS ASSOCIATED WITH THE OPERATION OF COLSTRIP FOR ANNUAL ADJUSTABLE RATE CALCULATIONS AS PREVIOUSLY AUTHORIZED IN COMMISSION ORDER NOS. 23449, 26080 AND 23738.
)
)
)
)
)
)
)
)
)
CASE NO. GNR-E-99-1

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of Avista Letter and Notice of Comment Solicitation issued on October 23, 2000, submits the following comments.

BACKGROUND
The Public Utility Regulatory Policies Act of 1978 (PURPA) requires electric utilities to enter into fixed term obligations to purchase energy from qualifying cogeneration and small power production facilities (QFs). The rate to be paid for such power is not to exceed the “incremental cost” to the utility of alternative electric energy, commonly referred to as a utility’s avoided cost. One of the earliest methods for calculating avoided cost rates, adopted by the Commission in Case No. U-1500-170 (–170 Case), was based on the use of a Surrogate Avoided Resource (SAR). A hypothetical coal-fired plant located in the Powder River Basin was established as the SAR. The Colstrip plant in southeast Montana was selected to serve as the basis for variable costs associated with the SAR. Avista owns 15 percent of Colstrip units 3 and 4, while PacifiCorp owns 10 percent of the same units. Idaho Power has no ownership interest in any Colstrip facilities.
The avoided cost rates consist of fixed and variable components. The fixed component is intended to represent the fixed or capital costs associated with building a new coal plant. The variable component is designed to capture variable costs associated with changing coal prices and variations in plant operation and maintenance costs. The variable costs are adjusted annually based on actual coal costs and variable O&M costs at Colstrip Units 3 and 4. The same calculated rate revision for the variable component under the avoided cost methodology is used by Avista Corporation dba Avista Utilities, PacifiCorp dba Utah Power and Light Company and Idaho Power Company.
Twenty-four power sales contracts were signed during the period of time that this method for computing variable costs was in use. PacifiCorp has 12 affected contracts, Idaho Power has 10 and Avista has two. Later, in 1995, the method was changed, adopting a gas-fired combined cycle combustion turbine as the SAR. Consequently, the Colstrip annual adjustment does not apply to contracts signed after 1995.
In the course of the 1999 annual Colstrip update (Case Nos. AVU-E-99-3, IPC-E-99-5 and UPL-E-99-2), two parties with affected contracts, Rupert Cogeneration Partners, Ltd. and Glenns Ferry Cogeneration Partners, Ltd. (collectively “Cogeneration Partners”), submitted comments requesting a modification of the methodology. Cogeneration Partners cited the following passage from Order No. 23357, the order adopting the Colstrip method, as support for changing the methodology:
Nonetheless, for the time being we will use Colstrip variable costs for periodically resetting the adjustable portion of avoided cost rates established under this order. We direct Staff to monitor the effects of using Colstrip costs as a guideline. If this methodology fails to reasonably track energy costs escalation rates, we will institute a future case to determine a more appropriate methodology for recomputing the adjustable portion of avoided cost rates established under this order.

Cogeneration Partners proposes in its comments that the Colstrip method be abandoned in favor of a method that relies on standard price indexes. Specifically, Cogeneration Partners recommends the Commission use the Producer Price Index (PPI) data as calculated by the U.S. Department of Labor, Bureau of Labor Statistics (BLS). Cogeneration Partners suggests the following two specific indexes would be most appropriate for use in escalating the variable O&M cost and coal components of the avoided cost adjustable rate:

For variable O&M costs: Total manufacturing industries (series code OMFG)
For coal costs: Bituminous coal—contract sales of prepared bituminous coal—steam electric utilities (commodity code 0512-0301)

The Commission, in part in response to Cogeneration Partner’s comments, established case docket GNR-E-99-1 as a vehicle for examining the continued reasonableness of using variable costs associated with the operation of Colstrip for the annual adjustable rate portion of avoided costs. Reference Commission Order Nos. 23349, 26080 and 23738.
In the course of this case, Avista reported that, although the Company still retained its ownership share in Colstrip, Montana Power had sold its majority share and is no longer the plant operator. The new owner, PP&L Montana, LLC, operates Colstrip Units 3 and 4 as a non-utility generator. The new owner does not utilize the same reporting criteria respecting costs as do regulated utilities. Many of the accounts relied on by Avista Corporation in its avoided cost rate calculation in the past are now combined into larger categories and cannot easily be extracted.
Consequently, Avista has requested that it be relieved of the obligation of determining the adjustable portion of the avoided cost rates applicable to a coal plant SAR. Avista recommends that consideration be given to utilizing another source of information for purposes of determining the adjustable portion, but offers no suggestions as to what an appropriate alternate source of information might be.
In response to Staff production requests, Avista approached PP&L, Montana seeking similar accounting data as had been used in the past to compute the Colstrip annual adjustment. PP&L, Montana did agree to provide similar account information that could be used to calculate total variable O&M costs per MWh (including taxes) and coal costs per MWh. The information could be provided by PP&L, Montana by the end of February of each year.
Despite the information being available in the future however, there is still an unresolved concern that the information may need to be kept confidential. Avista reports that the information could only be used if 1) approval to make the information public can be obtained from all of the owners of Colstrip Units 3 and 4, or 2) an agreement is reached that the information be kept confidential by the Commission Staff. Avista believes it is highly unlikely that approval can be obtained from all of the owners of Colstrip Units 3 and 4 to make the operating cost data available publicly.

STAFF ANALYSIS
Staff’s analysis will be presented in three separate parts. First, Staff will offer its opinion as to whether an acceptable procedure for annual updates can be devised while still honoring PP&L Montana’s request that Colstrip operating cost information be kept confidential. Next, Staff will discuss the proposal of Cogeneration Partners to utilize price indexes as an alternative method for making annual avoided cost adjustments. Finally, Staff will present an alternative adjustment method that it believes may be acceptable.

Existing Method Using Confidential Data
Staff has reviewed the information provided by Avista which it, in turn, obtained from PP&L Montana listing those accounts which it believes replicate the accounts used previously to compute the Colstrip adjustment. Staff believes these accounts do, in fact, accurately mimic previously used accounts. Staff is confident that these accounts, if used, would fairly reflect the variable costs associated with Colstrip Units 3 and 4.
If approval could be obtained from all of the owners of Colstrip Units 3 and 4 to publicly disclose all variable operating cost information used in the avoided cost calculations, then it would appear that future avoided cost adjustments could be made in the same manner as in the past. Staff would support continued use of the data in this case, since it sees no compelling reason to change the method. Staff believes Colstrip fuel and variable O&M costs continue to fairly and accurately reflect the variable costs of operation of a coal plant surrogate. Although a coal plant may not represent a likely surrogate today, it was reasonable at one time.
However, if concerns about confidentiality of the information prevent approval to disclose it publicly, then Staff advises against its use. Owners of affected QF projects may, of course, be skeptical of avoided cost rates computed using information, which they will not have permission to review. The annual adjustment mechanism will have the appearance of a black box to which only the utilities and Staff have the privilege of viewing the contents. Staff believes this arrangement would be unacceptable.

Price Indexes
In addition to reviewing the possibility of continuing to use a similar method as in the past, Staff also reviewed the possible use of Producer Price Indexes as suggested by Cogeneration Partners. Staff agrees that the use of indexes would offer several advantages. The indexes are published at regular intervals by the U.S. Bureau of Labor Statistics. As a result, they are readily available and easily accessible. The Internet is one fast and easy means of obtaining the indexes. If the indexes were to be used, then both the calculation method and the input data would be fully disclosed and available for public scrutiny.
Staff believes the primary difficulty in the proposal to use indexes is in choosing which specific indexes to use. There are thousands of indexes published, none of which are specifically intended to reflect the variable costs of operating a coal plant in the Powder River Basin. However, Staff investigated whether there are indexes that might satisfactorily reflect the various elements that constitute these variable costs.
One likely index to use would be one that reflects the changes in coal costs. The Bureau of Labor Statistics publishes the following series of indexes related to coal costs for steam electric utilities:
Producer Price Index – Commodities, Contract sales of prepared bituminous coal

Series ID Group Item
WPU05120301 Fuels and related products and power Steam electric utilities

Producer Price Index Revision – Current Series

Series ID Industry Product
PCU1211#214 Bituminous coal and lignite West
PCU1211#2149 Bituminous coal and lignite Contract
PCU1211#21491 Bituminous coal and lignite Underground Mine
PCU1211#21492 Bituminous coal and lignite Surface Mine
Staff analyzed these indexes by comparing them to the actual changes in coal prices for Colstrip Units 3 and 4 from 1990-1999. Each of these indexes, along with the Gross Domestic Product Index, were plotted together with the change in coal cost at Colstrip during the same period. This comparison is shown in Attachment 1. It does not appear from the graph that there is any correlation between any of these indexes and Colstrip coal costs. Staff confirmed the lack of correlation by performing a regression analysis between each index and Colstrip coal costs. None of the regressions produced a correlation coefficient higher than 0.13.
The Bureau of Labor Statistics also publishes various indexes that could possibly be used to indicate changes in variable O&M at Colstrip. The following indexes were examined by Staff:
Producer Price Index Revision – Current Series
Series ID Industry Product
PCUOMFG# Total manufacturing industries Total manufacturing industries
PCU4981#11831 Electric power and natural gas utilities Investor owned utilities,
Residential Mountain
PCU4981#11931 Electric power and natural gas utilities Investor owned utilities,
Residential Pacific
PCU4981#12831 Electric power and natural gas utilities Investor owned utilities,
Commercial Mountain
PCU4981#12931 Electric power and natural gas utilities Investor owned utilities,
Commercial Pacific
PCU4981#13831 Electric power and natural gas utilities Investor owned utilities,
Industrial Mountain
PCU4981#13931 Electric power and natural gas utilities Investor owned utilities,
Industrial Pacific
PCU4981#3 Electric power and natural gas utilities Utility products and service other than distribution and transportation
PCU4981#M Electric power and natural gas utilities Miscellaneous receipts
PCU4981#3 Electric power and natural gas utilities Primary products

Again, Staff plotted these indexes along with the Gross Domestic Product Index against the historical variable O&M costs from Colstrip and performed regression analyses to determine whether there was a correlation. As with coal costs, there is no apparent correlation between any of these indexes and Colstrip variable costs. These indexes are shown in Attachment 2.
Staff’s analysis demonstrates that use of producer price indexes would not have accurately tracked either coal costs or variable O&M costs at Colstrip in the past. Logically then, it is probably unreasonable to expect that any of these indexes would accurately reflect Colstrip cost changes in the future. Consequently, Staff recommends against using any indexes to calculate Colstrip variable costs.

FERC Form 1 Data
As an alternative to the current method and to the use of price indexes, Staff investigated whether FERC Form 1 data could be used. Because both Avista and PacifiCorp still own portions of Colstrip Units 3 and 4, they are required to report to FERC operating cost data for their respective shares of the plant. Although the information is not reported at a level of detail comparable to what has been used in the annual Colstrip adjustment, Staff was interested in determining whether the information could still be useful.
In the FERC Form 1 report, utilities are required to report, among other things, total fuel costs and total generation at each plant in which the utility has an ownership interest. A simple division of total fuel costs by total generation gives fuel costs in dollars per megawatt-hour (or mills/kWh). Staff calculated fuel costs in this manner for the years 1989-1999 and compared them to the unit fuel costs that have been used in the annual Colstrip adjustment. Although not exact, unit fuel costs computed using FERC Form 1 data are extremely close to data historically used in the annual Colstrip adjustment.
Next, Staff examined the composition of the annual Colstrip adjustment. The individual components and their relative contributions to the Colstrip variable costs are shown in Attachment 3. As shown by the graph, coal costs compose the majority of the variable costs. Generation taxes are fixed at $0.20 per MWh each year. The remainder of the variable costs is variable O&M. Variable O&M has varied between $1.26/MWh and $2.02/MWh during the past 10 years. While this variation is significant, it is minimal in terms of the total variable costs at Colstrip.
Staff suggests that it is possible to match Colstrip variable costs quite closely using only unit fuel costs from FERC Form 1 and an equation to approximate Colstrip variable O&M. Staff performed a regression analysis using Avista’s FERC Form 1 coal costs and actual Colstrip variable costs during the period 1989 and 1999. The following equation was derived:

Total Colstrip Variable O&M in $/MWh = 1.1789(Avista FERC Form 1 unit coal cost in $/MWh) + 0.5222

The correlation coefficient (R squared) of this equation is 0.965, indicating an excellent fit.
A simpler, but slightly less precise method is to simply use the Avista FERC Form 1 coal cost plus $2/MWh. The average variable O&M cost of Colstrip plus $0.20/MWh for generation taxes equals approximately $2/MWh.
The predicted results using each of these alternate methods are depicted in Attachment 4, along with the actual Colstrip variable costs since 1989. As shown by Attachment 4, either method would have given results very close to the figures actually used. While there would have been some slight variations in individual years, the difference would have never been more than $0.43/MWh in any one year. Averaged over several years, the difference would have been zero, or at least very close to it if the simpler method were used.
Using FERC Form 1 as the source for Colstrip coal costs avoids the problem of confidentiality because FERC Form 1 reports are publicly available documents. In addition, similar data regarding Colstrip coal costs are reported by both Avista and PacifiCorp. Having two different utilities report the information enables the reports to be checked against each other. In addition, it provides a second source of information should either utility choose to someday sell its ownership interest in Colstrip.
Staff acknowledges that some utilities have resisted continuing to report FERC plant operating data that the utilities consider competitively sensitive. However, as long as utilities continue to be required to report plant operating data in FERC Form 1 reports, Staff believes it should be utilized. If at some future date the necessary information is no longer reported, then Staff would propose an alternate method be devised.
The Colstrip adjustment has historically been computed in May or June of each year in order to become effective on July 1. The annual FERC Form 1 data is due in Idaho on April 15th of each year. If Avista or PacifiCorp request an extension to file their FERC Form 1, they should be required to file at least the Colstrip unit coal costs, thus permitting adherence to the same update schedule as has been used in the past. Staff does not believe it would be critical if the FERC Form 1 report was not publicly available until slightly after the annual adjustment becomes effective. What is critical is that the FERC Form 1 data be publicly available.
STAFF RECOMMENDATIONS
Staff recommends that future Colstrip variable cost adjustments be determined by computing Colstrip coal costs per MWh and adding $2/MWh. Colstrip coal costs should be determined using data reported in Avista’s FERC Form 1 report. Avista, if it requests an extension to file its annual FERC From 1 report to the Commission, should be directed to at least report total Colstrip coal costs and total generation for the previous year for its share of Colstrip Units 3 and 4.
If the Commission prefers a more precise method, Staff recommends that the following equation be used for the annual Colstrip adjustment:

Total Colstrip Variable O&M in $/MWh = 1.1789(Avista FERC Form 1 unit coal cost in $/MWh) + 0.5222

Dated at Boise, Idaho, this day of December 2000.

_______________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Rick Sterling

RPS:SW:gdk:i/umisc/comments/gnre991.swr

STAFF COMMENTS 9 DECEMBER 18, 2000