PeseauRebuttal.pdf

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BARTON L. KLINE
Senior Attorney

August 5, 2002

Ms. Jean D. Jewell, Secretary
Idaho Public Utilities Commission
472 W. Washington Street
P.O. Box 83720
Boise, Idaho 83720-0074

Re: Case No. GNR-E-02-1
Direct Rebuttal Testimony of Witness
Dennis E. Peseau

Dear Ms. Jewell:

Please find enclosed for filing with the Commission nine (9) copies of the
Direct Rebuttal Testimony and Exhibits of Witness Dennis E. Peseau, with the original
designated as the Reporter’s Copy. Copies of these documents have been mailed or
hand-delivered to parties of record as indicated in the enclosed Certificate of Service.

Also enclosed is a computer disk containing the Direct Rebuttal Testimony of
the above-named witness for use by the court reporter.

I would appreciate it if you would return a stamped copy of this transmittal
letter for our files.

Very truly yours,

/s/
Barton L. Kline

BLK:jb
Enclosures

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE INVESTIGATION)
OF THE CONTINUED REASONABLENESS OF)
CURRENT SIZE LIMITATIONS FOR PURPA) CASE NO. GNR-E-02-1
QF PUBLISHED RATE ELIGIBILITY )
(i.e., 1 MW) AND RESTRICTIONS ON )
CONTRACT LENGTH (i.e., 5 YEARS ) )
)

IDAHO POWER COMPANY

DIRECT REBUTTAL TESTIMONY

OF

DENNIS E. PESEAU

PESEAU, DI-REB 1
Idaho Power Company

Q. Please state your name and business address. 1
A. My name is Dennis E. Peseau. My business 2
address is Suite 250, 1500 Liberty Street, S.E., Salem, 3
Oregon 97302. 4
Q. Are you the same Dennis E. Peseau who 5
submitted pre-filed direct testimony in these proceedings, 6
GNR-E-02-1? 7
A. Yes. 8
Q. What is the purpose of your rebuttal 9
testimony? 10
A. The Commission set this hearing to receive 11
evidence on the reasonableness of the variables in the 12
existing avoided cost rate methodology. 13
While the list of surrogate avoided resource 14
(“SAR”) variables is somewhat extensive, I contended in my 15
direct testimony (Peseau, page 4, Lines 9-23) that two of 16
the variables, the initial year 2002 natural gas price and 17
the natural gas price escalator were far and away the more 18
important. My review of all parties’ testimony in these 19
proceedings reinforces my conclusion. My Exhibit 107 20
summarizes all parties’ proposed values for the SAR 21
variables. 22
The purpose of my rebuttal testimony is to 23
PESEAU, DI-REB 2
Idaho Power Company

comment on the initial year natural gas prices and gas 1
price escalation rates recommended by other parties. I 2
also briefly discuss Staff’s, IEPI’s and Plummer 3
Forest/Potlatch’s (“PFP-PC”) proposal to assume away the 4
surplus period for purposes of computing avoided cost 5
rates. 6
In particular, I argue that: 7
1. The relevant initial natural gas price 8
is that which is most representative of current natural gas 9
prices, not an average of several past years. Both Staff’s 10
and IEPI’s use of five year and three year averages, 11
respectively, of historical gas prices are not 12
representative of current gas prices. PacifiCorp’s 13
forecast appears to simply be mistaken. 14
2. Staff’s use of a single forecast of 15
natural gas escalation is unnecessary and results in a very 16
high escalation rate compared with several other forecasts. 17
3. IEPI’s use of a “medium-high” forecast 18
of the natural gas escalation rate will assure that 19
ratepayers will have higher than necessary electric rates. 20
4. The proposals to ignore surpluses in 21
the utilities’ load/resource balance, while not 22
quantitatively significant for Idaho Power in this case, 23
PESEAU, DI-REB 3
Idaho Power Company

could in the future lead to excessive QF avoided cost 1
rates. 2
Q. Please list the various parties’ proposed 3
assumptions regarding initial gas prices and the gas price 4
escalator. 5
A. The following table summarizes the parties’ 6
positions with respect to these two variables: 7
Initial Gas Price ($MMBtu) Gas Price Escalator 8
(%) 9
Staff $3.19 4.4% 10
IPCo 2.79 2.52 11
Avista 2.80 n.a. 12
PacifiCorp 3.95 1.97 13
IEPI 3.84 3.10 14
PFP-PC 5.23 3.10 15
INITIAL YEAR NATURAL GAS PRICE 16
Q. What is the initial year’s gas price 17
supposed to represent? 18
A. This variable attempts to set a reasonable 19
first year natural gas price at Sumas, Washington with an 20
additional $.35 MMBtu Northwest Pipeline Company 21
transportation rate for delivery to the utility. 22
Q. What is today’s gas price at Sumas? 23
PESEAU, DI-REB 4
Idaho Power Company

A. The July 30, 2002 gas price at Sumas was 1
$1.835 per MMBtu, or $2.19 per MMBtu delivered to Idaho 2
Power. 3
Q. Why are the initial gas prices proposed by 4
the parties so much higher than actual prices? 5
A. The PFP-PC price of $5.23 is simply the old 6
gas price, not updated. I was unable to determine how 7
Avista derived its price. I used the estimate for the 2002 8
gas price. Staff and the IEPI computed averages of several 9
years of historical prices. PacifiCorp used a forecasting 10
service. 11
Q. Do you agree with the Staff’s use of a five 12
year average of gas prices as an indicator of the 2002 13
price? 14
A. No. I do however, understand Staff witness 15
Mr. Sterling’s attempt to “ . . . establish a starting fuel 16
price so that the effect of extreme variations in prices 17
does not become permanently embedded in contracts. . .” 18
(Sterling direct, Page 4, Lines 13-16). And I also agree 19
with Mr. Sterling that “ . . . A single year of very high 20
or low gas prices should not drive the avoided cost rate 21
for a twenty-year contract. . .” (Sterling, Page 4, Lines 22
16-18). Mr. Sterling recognized that the spike in natural 23
PESEAU, DI-REB 5
Idaho Power Company

gas prices from the period May 2000 to June 2001 caused an 1
upward bias in his Exhibit 4 regression results and 2
rejected these results in favor of his five year rolling 3
average. 4
Q. Does Mr. Sterling’s five year rolling 5
average of natural gas prices completely do away with an 6
upward bias initial year gas price? 7
A. No, not entirely. Following the gas price 8
spike of May 2000 - June 2001, gas prices at Sumas have 9
returned to their historic trends. 10
Q. Please explain. 11
A. I refer to the graphs of historical prices 12
at Sumas as shown in both Mr. Sterling’s Exhibit No. 5 and 13
a more recent update in my Exhibit 108. The point I wish 14
to make is that this one time market price spike is being 15
given a 20% weight in the five year average when it clearly 16
had never happened before and, as yet, happened after this 17
period. Unless one predicts that this spike will occur 18
once every five years, the present estimate of initial year 19
gas price will be exaggerated. And, the extent of the 20
exaggeration is a function of the number of years chosen 21
for the average. For example, Mr. Sterling’s initial year 22
price of $3.19 per MMBtu is raised to $3.84 per MMBtu by 23
PESEAU, DI-REB 6
Idaho Power Company

IEPI witness Mr. Trippel simply by using a three year 1
rather than a five year average. 2
Q. Has this Commission recently recognized the 3
potential effects on ratepayers from overweighting the May 4
2000 - June 2001 gas price spike? 5
A. Yes. Order No. 29069 indicates on Pages 7-8 6
that: 7
. . . The Commission cannot expose 8
ratepayers to avoided cost rates that rely heavily 9
on gas price levels that existed during the recent 10
volatility in the market. To do so would condemn 11
ratepayers to the lingering effects of last year’s 12
energy crisis for another 20 years . . . 13
Q. What principles do you recommend be followed 14
to minimize the overweighting of either extraordinary price 15
spikes or dips for purposes of estimating avoided cost 16
rates? 17
A. The purpose of estimating the initial year’s 18
gas price is to predict the going-forward price. Unless 19
the present period appears to be one of very high or very 20
low prices, the principle ought to be to use current data 21
and price forecasts. I have attempted to do this in 22
reaching my recommended initial year price of $2.79 per 23
PESEAU, DI-REB 7
Idaho Power Company

MMBtu as described in my direct testimony, Pages 7-12. 1
Q. Since the time of the filing of your direct 2
testimony, have you calculated gas prices at Sumas, 3
delivered to Idaho Power? 4
A. Yes. My Exhibit 109 lists the most recent 5
twelve months of gas prices at Sumas. The annual average 6
price ending July 31, 2002 is $2.31 per MMBtu. The 7
delivered price to Idaho Power is $2.66 per MMBtu. This 8
information together with the price forecasts for 2002-2003 9
that I refer to in my direct testimony lead me to conclude 10
that my proposed initial year price of $2.79 MMBtu remains 11
reasonable. 12
Q. Have Sumas gas prices this past year been 13
low by historical standards? 14
A. No. The graph on Mr. Sterling’s Exhibit 15
No. 5 shows that the July 31, 2002 annual average Sumas 16
price of $2.31 per MMBtu is the highest annual average 17
since 1993, except for the May 2000 - June 2001 price 18
spike. 19
Q. What initial year gas price is PacifiCorp 20
proposing? 21
A. $3.95 per MMBtu. 22
Q. Do you consider this price to be reliable 23
PESEAU, DI-REB 8
Idaho Power Company

for purposes of an initial year gas price? 1
A. No. I have to conclude that this number is 2
in error. Page 14 of the direct testimony of PacifiCorp 3
witness Mr. Widmer explains that monthly Sumas gas prices 4
were forecast by a firm named PIRA. A table on Page 14 of 5
Mr. Widmer’s direct testimony provides PIRA’s monthly 6
forecast values for Sumas gas for June - December 2002, for 7
the first day of each month. 8
Q. What values did PIRA predict for June 1, 9
July 1 and August 1, 2002? 10
A. $3.13, $3.19 and $3.23 per MMBtu for June 1, 11
July 1 and August 1, respectively. 12
Q. What are the actual Sumas gas prices on 13
these same dates? 14
A. $2.23, $1.38 and $1.57 per MMBtu, 15
respectively. 16
I conclude that the PIRA forecast is either 17
very dated, or simply not reliable. Actual Sumas gas 18
prices are about half of PIRA’s forecast values. 19
Q. Would your recommendation to use recent 20
“normal” natural gas prices result in the need to annually 21
review whether gas prices are “normal”? 22
A. Yes, but this is simply a necessity 23
PESEAU, DI-REB 9
Idaho Power Company

associated with estimating accurate avoided costs. From 1
the graph in my Exhibit 108, I believe that there is little 2
opportunity for parties to have much of a difference of 3
opinion as to whether current gas prices are abnormally low 4
or abnormally high. 5
Q. Could a longer-term averaging of natural gas 6
prices such as recommended by Mr. Sterling be made more 7
workable and less prone to bias? 8
A. Yes, although my primary proposal is to stay 9
with current prices. The bias I previously described is 10
due in large part to the potential for including an 11
“outlier” or a period of unrepresentative gas price data. 12
An example of a five-year rolling average technique that 13
would lessen this potential bias would be to consider, say, 14
seven recent years of data and exclude the high and low 15
years. 16
ESCALATOR FOR NATURAL GAS PRICE 17
Q. Please address the issues associated with 18
the gas price escalator variable. 19
A. As I have discussed in my direct testimony, 20
the gas price escalator used to inflate gas prices for non-21
fueled facilities has a huge impact on longer-term 22
contracts due to the fuel cost levelizing feature of such 23
PESEAU, DI-REB 10
Idaho Power Company

contracts. 1
Staff witness Mr. Sterling proposes to use 2
an escalator of 4.4% and the IEPI witness Mr. Trippel 3
proposes to use a 3.10% escalator. I believe that each of 4
these escalators is too high. 5
Q. Why do you believe that the 4.4% escalator 6
proposed by Staff is too high? 7
A. As explained in Mr. Sterling’s direct 8
testimony, Pages 6-7, he recommends use of the DOE/EIA 9
Annual Energy Outlook gas price escalation forecast. The 10
DOE/EIA forecast predicts a 1.7% real increase in gas 11
prices over a twenty year period. This rate of increase in 12
real gas prices is extremely high. 13
First, as has been discussed in conjunction 14
with Mr. Sterling’s Exhibit No. 5 and my Exhibit 108, 15
natural gas prices at Sumas have decreased or remained 16
constant in real terms for more than a decade. 17
Second, my Exhibit 106, the draft Fuel Price 18
Forecast of the Northwest Power Planning Council, Table D, 19
Page F-1 shows no or very little real increase in east-side 20
delivered Northwest regional gas prices over a twenty year 21
period, depending on the reference year. Table 2, Page 16 22
of the same document shows natural gas prices falling in 23
PESEAU, DI-REB 11
Idaho Power Company

real terms until the year 2005 and then escalating in real 1
terms from 2005-25 from 0.2% to 1.06% in the low and high 2
forecasts, respectively. 3
I conclude that Mr. Sterling’s nominal fuel 4
price escalator of 4.4% (2.7% + 1.7%) is too high. 5
Q. Do you agree with Mr. Sterling’s direct 6
testimony on pages 6-7 where he recommends using a single 7
forecast issued by DOE/EIA? 8
A. No, I do not. Mr. Sterling recommends use 9
of this forecast because it is updated annually and is 10
readily available without charge or subscription fee. 11
Forecasting prices of commodities is difficult and in the 12
interest of both QFs and ratepayers, we ought to rely on as 13
much information and as many quality institutions as 14
possible. The Power Planning Council Fuel Price Forecast 15
document refers to and relies upon several independent 16
forecasts, including the DOE/EIA. Mr. Sterling’s initial 17
objection to use of the Council’s consensus forecasts was 18
its untimely updates. However, as referenced by the IEPI 19
witness Mr. Trippel, the Council now intends to frequently 20
update these forecasts. 21
I recommend that the Commission rely on a 22
number of forecasts in establishing a fuel price escalator. 23
PESEAU, DI-REB 12
Idaho Power Company

Q. How did the IEPI witness Mr. Trippel reach 1
his recommended fuel escalation rate of 3.10%? 2
A. Mr. Trippel, on Pages 6-8 of his direct 3
testimony, requests that the Commission adopt a “medium-4
high” forecast developed by the Power Planning Council, and 5
as discussed in my Exhibit No. 106. 6
Q. What is meant by the term “medium-high” 7
forecast? 8
A. The Council typically produces five 9
different forecasts based upon five different levels of 10
statistical probabilities of occurring. The five forecasts 11
are termed low, medium-low, medium, medium-high and high. 12
The medium forecast has 50% chance of being too high and a 13
50% chance of being too low. The others do not. 14
Q. Do you agree with Mr. Trippel that this 15
Commission should adopt the Council’s medium-high fuel 16
price escalator of 3.10% per year? 17
A. No. In the PURPA compact regarding avoided 18
costs, both QFs and ratepayers assume the risks of being 19
wrong. I see no reason to skew this risk one way or the 20
other. We should adopt the best forecast available. The 21
best forecast is that which has the highest probability of 22
being right. This is, by definition, the medium or central 23
PESEAU, DI-REB 13
Idaho Power Company

tendency forecast. 1
FIRST YEAR DEFICIT 2
Q. What is the issue with respect to the first 3
year deficit variable? 4
A. Levelized avoided costs under the SAR method 5
are a combination of costs in the utility’s initial surplus 6
period, measured as surplus prices, and the annualized SAR 7
costs in all subsequent periods once the surplus period 8
ends. If prices in the surplus period are lower than the 9
full incremental cost of the SAR, the avoided cost rates 10
will always be lower, the longer the projected surplus 11
period. 12
Due to the effect on avoided cost rates and 13
the controversies usually associated with projecting a 14
surplus period, the Staff, the IEPI and the PFP-PC request 15
that the Commission, in effect, deem each of the three 16
utilities to be in load/resource balance today for purposes 17
of computing avoided cost rates. 18
Q. What arguments are made by these parties in 19
defense of assuming away any surplus period? 20
A. Staff witness Mr. Sterling provides a 21
comprehensive list of arguments on Pages 7-9 of his direct 22
testimony. 23
PESEAU, DI-REB 14
Idaho Power Company

Q. What is your opinion on this issue? 1
A. I do not take issue with any of the nine 2
points raised by Mr. Sterling. In the twenty years I have 3
conducted avoided cost studies, the points raised by Mr. 4
Sterling have frequently arisen. The problem I see in 5
dismissing these important issues is that, by definition, 6
the avoided cost estimates derived under the “no-surplus” 7
assumption will not comply with the “but for” or 8
“incremental costs” of the specific utility, as provided 9
for by PURPA, but will necessarily be higher. 10
Certainly, it would seem to me to be 11
necessary in each and every avoided cost determination to 12
determine how far using this assumption would take QF 13
purchase prices away from the utilities’ actual avoided 14
costs. In order for a simplifying assumption for any SAR 15
variable to comply with PURPA, the assumption should not 16
generate avoided cost rates that depart significantly from 17
avoided cost calculations that use more realistic 18
assumptions. 19
Q. How important is the first year deficit 20
issue in the present proceeding? 21
A. The issue is always important. However, as 22
I testified on Page 16, Lines 3-5, of my direct testimony, 23
PESEAU, DI-REB 15
Idaho Power Company

the quantitative effect on Idaho Power’s estimated avoided 1
cost rates under my assumptions is not great in this case 2
due to the higher assumed price for surplus energy. I do 3
not know how great a departure from actual avoided costs 4
the “no-surplus” assumption causes for Avista and 5
PacifiCorp. 6
Q. What is your recommendation to the 7
Commission on this issue? 8
A. In my direct testimony, I recommended that 9
the Commission in these proceedings adjust the two 10
overwhelmingly significant variables – the initial natural 11
gas price and the natural gas price escalator and more 12
fully investigate the remaining variables in a subsequent 13
forum. Given the proposal on assuming no surplus period 14
made by some parties, and the potential significance that 15
this simplifying assumption has on the level of computed 16
avoided cost rates, I reiterate this recommendation. 17
A second recommendation I have is made by 18
reference to some historical perspective on this issue. 19
While the nine points raised by Mr. Sterling are indeed 20
issues to consider, they are by no means beyond solving. 21
In the early 1980s in Idaho, more rigorous modeling was 22
used to attempt to answer the deficit period and associated 23
PESEAU, DI-REB 16
Idaho Power Company

issues. The issues raised by Mr. Sterling are technical by 1
nature because resource planning and utility operations are 2
technical by nature. Just as the transition from resource 3
surpluses to resource deficits has placed heightened 4
attention to resource planning, the Commission may want to 5
revisit certain elements of the SAR method as well. 6
Q. Does this conclude your rebuttal testimony? 7
A. Yes. 8
CERTIFICATE OF SERVICE, Page 1
CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on the 5th day of August, 2002, I served a true
and correct copy of the Direct Rebuttal Testimony and Exhibits of Dennis E. Peseau in
Case No. GNR-E-02-1 upon the following named parties by the method indicated
below, and addressed to the following:

Scott Woodbury
Deputy Attorney General
Idaho Public Utilities Commission
472 W. Washington Street
P.O. Box 83720
Boise, ID 83720-0074

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Conley E. Ward
Givens Pursley LLP
277 North 6th Street
Suite 200
P.O. Box 2720
Boise, ID 83701

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Peter J. Richardson
Richardson & O’Leary PLLC
99 East State Street, Suite 200
P.O. Box 1849
Eagle, ID 83616

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William J. Nicholson
Corporate Energy & Environmental Services
Potlatch Corporation
244 California Street, Suite 610
San Francisco, CA 94111

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Robert J. Lafferty
Avista Corporation
P.O. Box 3727
Spokane, WA 99220

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Mark Widmer
PacifiCorp
825 N.E. Multnomah, Suite 800
Portland, OR 97204

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CERTIFICATE OF SERVICE, Page 2
R. Blair Strong
Tom DeBoer
Paine, Hamblen, Coffin, Brooke & Miller
717 W. Sprague Avenue, Suite 1200
Spokane, WA 99201-3505

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John M. Eriksson
Justin R. Boose
Stoel Rives LLP
201 S. Main Street
Suite 1100
Salt Lake City, UT 84111

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Dean J. Miller
McDevitt & Miller LLP
420 West Bannock Street
P.O. Box 2564
Boise, ID 83701

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Stuart Trippel
Tripple Mast Consulting
506 - 2nd Avenue, Suite 1001
Seattle, WA 98104-2328

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Owen H. Orndorff
Orndorff Law Offices
1087 W. River Street, Suite 230
Boise, ID 83702
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Scott Pasley
David Hawk
J.R. Simplot Company
P.O. Box 27
Boise, ID 83707-0027

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Ronald C. Barr
Earth Power Resources, Inc.
3203 S. Owasso Avenue
Tulsa, OK 74105
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Jane A. Gorsuch
Intermountain Forest Association
350 N. 9th Street, Suite 304E
Boise, ID 83702
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CERTIFICATE OF SERVICE, Page 3
Eric L. Olsen
Racine, Olson, Nye, Budge & Bailey
201 E. Center
P.O. Box 1391
Pocatello, ID 83204-1391

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Anthony Yankel
29814 Lake road
Bay Village, OH 44140

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Rick S. Koebbe, President
WindWorks, Inc.
5356 N. Cattail Way
Boise, ID 83703
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/s/

BARTON L. KLINE