SATT.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE )
INVESTIGATION OF THE CONTINUED )
REASONABLENESS OF CURRENT SIZE ) CASE NO. GNR-E-02-01
LIMITATIONS FOR PURPA QF )
PUBLISHED RATE ELIGIBILITY )
(i.e., 1 MW) AND RESTRICTIONS )
ON CONTRACT LENGTH (i.e., )
5 YEARS).)
DIRECT TESTIMONY AND EXHIBITS OF
STUART A.T. TRIPPEL
ON BEHALF OF
INDEPENDENT ENERGY PRODUCERS OF IDAHO
TABLE OF CONTENTS1
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3 A.QUALIFICATIONS.......................................2
4 B.INTRODUCTION AND OVERVIEW OF TESTIMONY...............3
5 C.NATURAL GAS PRICES...................................4
6 D.FIRST DEFICIT YEAR..................................13
7 E.RATE IMPACTS........................................16
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F.SUMMARY AND CONCLUSIONS.............................18
Trippel,Di 1
Independent Energy
Producers of Idaho
1 Q.PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
2 A.My name is Stuart A.T.Trippel.My business
address is 506 Second Avenue,Suite 1001,Seattle,
Washington 98104-2328.
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5 Q.WHAT IS YOUR OCCUPATION?
6 A.I am a principal in Trippel/Mast Consulting LLC,
a management consulting and consulting engineering firm that
provides services to public and private clients in the
fields of public utilities and process industries.
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10 Q.ARE YOU SPONSORING ANY EXHIBITS WITH THIS
TESTIMONY?11
12 A.Yes.I am sponsoring Exhibit Nos.601 through
605.13
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A.QUALIFICATIONS15
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17 Q.PLEASE DESCRIBE YOUR QUALIFICATIONS TO TESTIFY
AS AN EXPERT IN THIS PROCEEDING.18
19 A.I have been a management consultant in the field
of public utility regulatory economics and related matters
for seventeen years.My qualifications,including my
educational background and employment history,are further
presented as Exhibit No.601.
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Q.ARE YOU FAMILIAR WITH THE IDAHO PUBLIC UTILITIES
COMMISSION AND ELECTRICITY ISSUES IN THE STATE OF IDAHO?
Trippel,Di 2
Independent Energy
Producers of Idaho
1 A.Yes.I have provided consulting services to
interested parties on numerous matters that have come before
the Idaho Public Utilities Commission (the “Commission”)
over the past eight years.I have also prepared analyses
and presented informational workshops to parties with
interest in the Idaho electric utility industry during that
time.
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8 Q.HAVE YOU PREVIOUSLY APPEARED AS AN EXPERT
WITNESS BEFORE THIS COMMISSION?9
10 A.Yes.I was admitted as an expert before this
Commission and was cross-examined in the recent PCA energy
cost bond case (Docket Nos.IPC-E-02-2 and –3).I have also
assisted in the preparation of testimony and exhibits
(sponsored by another witness)in other contested
proceedings,as well as comments in several notice-and-
comment (“modified procedure”)processes,since 1994.
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B.INTRODUCTION AND OVERVIEW OF TESTIMONY18
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20 Q.ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS
PROCEEDING?21
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A.I am testifying on behalf of the Independent
Energy Producers of Idaho (IEPI),a group of thirteen
producers or potential producers of qualifying facility (QF)
power subject to the jurisdiction of this Commission.
Trippel,Di 3
Independent Energy
Producers of Idaho
1 Q.WHAT IS THE PURPOSE OF YOUR TESTIMONY?
2 A.The purpose of my testimony is to recommend two
changes in the calculation of avoided costs for QFs in
Idaho.First,I recommend updating the natural gas price
used in the avoided cost model.Second,I recommend changes
to the treatment of the first deficit year.
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7 Q.ARE THESE THE ONLY TWO CHANGES THAT YOU CONSIDER
TO BE NECESSARY IN THE CALCULATION OF QF AVOIDED COSTS IN
IDAHO?
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10 A.My testimony does not mean to imply that other
changes to the calculation of avoided cost could not be
made.Due to the accelerated nature of this proceeding,
however,these are the two issues that IEPI is presenting at
this time.Further issues may be addressed on rebuttal
testimony in response to positions of the other intervenors
in this proceeding.
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C.NATURAL GAS PRICES18
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20 Q.HOW ARE NATURAL GAS PRICES CURRENTLY
INCORPORATED INTO THE AVOIDED COST MODEL?21
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A.When a new QF contract is signed,natural gas
prices are determined initially according to the average
natural gas price over the previous calendar year at Sumas,
Washington.An escalation rate of six percent per year is
Trippel,Di 4
Independent Energy
Producers of Idaho
1 applied to this initial price to arrive at prices in future
years of the contract,or a levelized price for the life of
the contract.
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4 Q.IS THERE A PROBLEM WITH THIS METHOD?
5 A.There are two problems with this method.First
and foremost,gas prices at Sumas,along with gas prices
elsewhere,have been fluctuating considerably over the past
few years.The initial-year natural gas price is “locked
in”and escalated at six percent over the term of the
contract.When gas prices fluctuate widely,as they have in
recent years,the result is a corresponding fluctuation in
avoided cost rates.This in turn makes it difficult for QF
developers to plan their resources.As a result of this
pricing mechanism,Idaho may not be getting all of the QF
resources that it would if a more predictable method of
dealing with gas prices were adopted.
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17 Q.WHAT IS THE OTHER PROBLEM WITH THE EXISTING
METHOD?18
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A.The other problem is related to the first;
namely,the six percent escalation rate itself.In some
years,a six percent escalation rate may be entirely
appropriate;for example,if the initial gas price is low.
The annual escalation rate is not independent of the initial
gas price,however.The escalation rate and initial gas
price need to be linked --an appropriate first-year gas
Trippel,Di 5
Independent Energy
Producers of Idaho
1 price with a corresponding annual escalation rate,which
together result in a reasonable and predictable forecast of
gas prices.
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4 Q.ARE NATURAL GAS PRICE FORECASTS AVAILABLE FROM
VARIOUS SOURCES?5
6 A.Yes.Natural gas price forecasts are available
from a variety of sources,from regional to international
levels.Some of these are publicly available,free of
charge,such as those published by the United States
Department of Energy and the Northwest Power Planning
Council.Others are privately produced,such as the one
published by DRI-WEFA (formerly known as the WEFA Group,
which had its genesis in a consultancy created by a
professor at the Wharton School of the University of
Pennsylvania).DRI-WEFA is a for-profit consulting and
forecasting firm,whose natural gas price forecast Idaho
Power Company uses as one input to its Integrated Resource
Plan.
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19 Q.WHICH FORECAST DO YOU RECOMMEND THAT THIS
COMMISSION ADOPT FOR IDAHO AVOIDED COST RATES?20
A.I recommend that the Commission adopt a forecast
prepared by the Northwest Power Planning Council (NPPC).
Specifically,I recommend adoption of the medium-high
forecast series from the Draft Fuel Price Forecasts for the
5th Northwest Conservation and Electric Power Plan,April
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Trippel,Di 6
Independent Energy
Producers of Idaho
1 25,2002 (Council Document 2002-07)(hereinafter the “NPPC
Forecast”).I recommend that the Commission use the
regional electricity generation,east-side delivered
forecast with initial-year price averaging and an average
annual growth rate through the year 2025.
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6 Q.WHY DO YOU RECOMMEND USING THE NPPC FORECAST?
7 A.The NPPC Forecast has several features to
recommend it.First,it is regional in scope and considers
specific regional basis differentials in gas pricing,as
well as regional transportation issues.Second,it is
prepared through a collaborative process of interested
parties,including electric and gas utilities,their
customers,and experts in the field.Third,the process
used to prepare it is public,with drafts,agendas,and
meeting minutes all available.Fourth,the document itself
is publicly available on the NPPC’s web site,and it is
supplied free of charge.Finally,because such a diverse
group of interested parties in the region has participated
in preparing it,it is less likely to be criticized,since
it would likely have to be criticized either by its own
preparers or by their associates.This should lead to a
less contentious process overall.
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Q.WHY DO YOU RECOMMEND USE OF THE REGIONAL
ELECTRICITY GENERATION EAST-SIDE DELIVERED SERIES OF PRICES?
Trippel,Di 7
Independent Energy
Producers of Idaho
1 A.This series represents the situation that would
most closely apply to a surrogate avoided resource (SAR)on
the east side of the Pacific Northwest region,where Idaho
lies.The delivered price includes basis differential from
the wellhead and trading hubs,as well as transportation
cost.
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7 Q.WHY DO YOU RECOMMEND USING THE MEDIUM-HIGH
FORECAST,RATHER THAN THE MEDIUM,MEDIUM-LOW,LOW,OR HIGH?8
9 A.The natural gas market has experienced
significant price fluctuations in recent years.In view of
such price volatility and the risk associated with it,it is
more appropriate to select a forecast on the high side than
on the low side or in the middle.This is because,while
the lower bound of possible price is zero,the upper bound
of possible prices is unlimited.Indeed,both natural gas
and electric markets have recently witnessed prices that
would have shocked most people until they became reality.
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18 Q.FOLLOWING THIS LINE OF REASONING,WHY NOT
RECOMMEND THAT THE COMMISSION ADOPT THE NPPC’S HIGH
FORECAST,RATHER THAN MEDIUM-HIGH?
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A.Actually,I believe it would be entirely
reasonable for the Commission to adopt the NPPC’s high
forecast series.My proposal to adopt the medium-high
forecast series represents a desire to adopt a conservative
approach from the outset.
Trippel,Di 8
Independent Energy
Producers of Idaho
1 Q.WHY WOULD THE HIGH FORECAST BE REASONABLE?
2 A.The NPPC Forecast itself describes two relevant
phenomena.First is the fluctuations in natural gas prices
over the past fifteen years:
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5 After the deregulation of wellhead natural gas
prices around 1986,natural gas prices fell
dramatically to the $2.00 per million Btu
range.Since then,until 2000,natural gas
prices varied between $1.60 and $2.40 in year
2000 prices.In 2000,natural gas prices shot
up,reaching a peak of nearly $8.00 in January
2001.Although the 2000 price spike created
expectations of significantly higher natural
gas prices in the future,prices fell rapidly
during 2001 and by February 2002 had returned
to near their post-deregulation average of
$2.15 in year 2000 prices.Many industry
participants believe that the lower prices
this past winter were due to extremely warm
temperatures and high natural gas storage
inventories and that there remains an
underlying shortage of natural gas supplies.
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23 (NPPC Forecast at 14-15;footnote omitted;emphasis
added;prices cited are in real,year-2000 dollars.)A
table from the NPPC Forecast,showing the fluctuations
described above,is included as Exhibit No.602.
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Second,virtually all electric generation that is
coming online in the Pacific Northwest is,and will be for
the next several years,fueled by natural gas.The NPPC
Forecast states that “[n]early all new proposed electricity
generation capacity is natural gas fired.Although natural
gas consumption only recently returned to the levels of the
early 1970s,substantial growth is now being projected due
Trippel,Di 9
Independent Energy
Producers of Idaho
1 to growing plans for electricity generation”(NPPC Forecast
at 9).This increased reliance on natural gas can be
expected to increase price volatility in the event of
extreme weather or market disruption.Regarding the recent
events of this nature,the NPPC Forecast summarizes as
follows:
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7 [T]he dramatic increase in the use of natural
gas in existing generation plants in 2000 and
2001 clearly had an exaggerated effect on
natural gas markets and prices.Due to the
sudden and severe shortage in electricity
supplies and the unprecedented electricity
prices,the natural gas delivery system in the
West was pushed far beyond normal operational
patterns.Thus,the impacts on natural gas
prices were more severe than should be
expected from an orderly development of
additional natural gas demands for electricity
generation.
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20 (NPPC Forecast at 9.)Although the NPPC Forecast
refers to “orderly development of additional natural gas
demands,”it is clear that the current energy environment,
in both electricity and natural gas,is far from orderly.
In fact,in the instant proceeding this Commission recently
observed the following with regard to this issue:
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Utilities contend that what has developed is a
very robust and competitive regional wholesale
market.Open access transmission linking the
supply markets throughout the WSCC region,
PacifiCorp contends,has been implemented.
Thermal technologies,the utilities argue,
continue to improve.Natural gas prices,they
note,have returned to historical levels.The
price spikes that occurred in 2000 and 2001 we
are asked to ignore,as if it was merely an
Trippel,Di 10
Independent Energy
Producers of Idaho
1 anomaly.What has not changed,we find,is
the utilities’opposition to PURPA and the QF
industry.
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4 (Order No.29029 at 5.)
5 Q.HAVE YOU PREPARED A TABLE CONTAINING YOUR
RECOMMENDED FORECAST?6
7 A.Yes.My recommended natural gas price forecast,
developed from the medium-high series in the NPPC Forecast,
is included as Exhibit No.603.Exhibit No.604 includes,
for comparison or for consideration by the Commission,a
forecast developed from the high series in the NPPC
Forecast.
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13 Q.PLEASE EXPLAIN THE TABLES IN EXHIBIT NOS.603
AND 604.14
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A.In each table,Column 1 contains the real price,
in year-2000 dollars per million British thermal units
(MMBtu),of east-side delivered natural gas from the NPPC
Forecast.The annual escalation in real terms is provided
for informational purposes in Column 2.The real price in
Column 1 is converted to a nominal price in Column 3,using
a general inflation rate of 2.7 percent per year,which I
understand comports with the Commission Staff’s current
practice.Annual nominal escalation,and the average annual
growth rates from 2002,are presented in Columns 4 and 5,
respectively.All of these columns assume no initial-year
price averaging.
Trippel,Di 11
Independent Energy
Producers of Idaho
1 Q.WHAT DO YOU MEAN BY “INITIAL-YEAR PRICE
AVERAGING”?2
3 A.As can been seen from the nominal prices in
Column 3 for the years 2000 through 2002,there is
significant fluctuation in these early years.In order to
mitigate this,I took the simple average (arithmetic mean)
of these three nominal figures to arrive at an initial-year
(2002)medium-high forecast price of $3.84 per MMBtu and
presented this in Column 6.Prices in Column 6 for the year
2003 and beyond are the same as they are in Column 3.
Columns 7 and 8 recalculate the annual nominal escalation
and average annual growth rate from 2002,this time on the
basis of the initial-year averaged price of $3.84 per MMBtu.
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14 Q.PLEASE DESCRIBE YOUR RECOMMENDED ESCALATION
RATE.15
16 A.I recommend an annual escalation rate of 3.1
percent per year in the medium-high forecast,as shown at
the bottom of Column 8 in Exhibit No.603.The average
annual growth rate converges to 3.1 percent in the latter
years of the forecast.
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21 Q.DO YOU PROPOSE UPDATING THIS INFORMATION IN
FUTURE YEARS?22
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A.It would seem reasonable that the Commission
update natural gas prices when a new NPPC forecast becomes
available.Until now,the NPPC has prepared its fuel price
Trippel,Di 12
Independent Energy
Producers of Idaho
1 forecasts as inputs to its Power Plan.As such,the
forecasts were only updated when the Power Plan was updated.
It is my understanding that the NPPC now intends to engage
in more ongoing market monitoring and assessment activities
and,in support of this,intends to update its fuel price
forecasts more frequently.I would suggest that Commission
Staff be given the task of keeping the Commission informed
of future updates and making recommendations regarding
updates within the methodological parameters proposed here.
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10 Q.PLEASE SUMMARIZE YOUR RECOMMENDATION WITH REGARD
TO NATURAL GAS PRICE.11
12 A.I recommend that the Commission adopt a year-
2002 natural gas price of $3.84 per MMBtu and a nominal
escalation rate of 3.1 percent per year.
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D.FIRST DEFICIT YEAR16
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18 Q.WHAT IS THE SIGNIFICANCE OF THE FIRST DEFICIT
YEAR?19
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A.The first deficit year,which until now has been
determined individually for each of the three utilities
subject to the Commission’s jurisdiction in this proceeding,
determines the point at which the avoided cost rates convert
from a surplus energy cost to a rate that reflects the
energy and capacity costs of the SAR.Other things being
Trippel,Di 13
Independent Energy
Producers of Idaho
1 equal,the earlier the first deficit year,the higher the
levelized avoided cost rates.2
3 Q.HOW IS THE FIRST DEFICIT YEAR DETERMINED?
4 A.The first deficit year was determined initially
by the Commission on the basis of each utility’s load-
resource balance and forecast.To my knowledge these first
deficit years have been updated infrequently or not at all
since the original determination.The burden of updating
appears to be on the utilities,without any specific
Commission mandate.
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11 Q.DO UTILITIES HAVE AN INCENTIVE WITH REGARD TO
THE FIRST DEFICIT YEAR DETERMINATION?12
13 A.To the extent that the utilities do not wish to
encourage development of non-utility power,they have an
incentive to determine first deficit years that are far in
the future.In the current proceeding,the Commission has
already observed the utilities’opposition to QF power:
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Despite a QF history of industry reliability
and an opportunity presented to utilities to
diversify their resource base by adding
renewables,utilities continue to regard PURPA
QFs as interlopers.Although we are reminded
by PacifiCorp that there is legislation
presently before Congress that would repeal
the mandatory purchase obligation under
Section 210 of PURPA,we remind PacifiCorp
that utilities have been actively lobbying for
its repeal since it was enacted and that as of
today it continues to be the law.
Trippel,Di 14
Independent Energy
Producers of Idaho
1 (Order No.29029 at 5.)The utilities’opposition to
QFs has frustrated non-utility power development by keeping
avoided cost rates artificially low.
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4 Q.WHAT IS WRONG WITH THE BURDEN BEING ON THE
UTILITIES TO DETERMINE FIRST DEFICIT YEAR?5
6 A.First,there is an asymmetry of information.
The utilities have the data and information necessary to
make this determination;in particular,their load forecasts
and specific,detailed knowledge of both load and resource
trends on their systems.Second,this is coupled with the
utilities’incentive,or desire,to delay the first deficit
year.Together these factors make it difficult for
independent power producers to build projects at costs
comparable to the SAR.
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15 Q.IF THESE FACTORS WERE NOT PRESENT,WOULD IT THEN
BE EASY TO DETERMINE THE FIRST DEFICIT YEAR?16
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A.Probably not.Even in the absence of these
factors,determination of the first deficit year invites
contention over various technical issues.For example,what
is meant by deficit,capacity or energy?Under what water
conditions?Over what time period --hour,day,week,
month,season,or year?Which resources are counted;for
example,all contracts,contracts over one year,or some
other period?Is the load forecast accurate,and how was it
prepared?
Trippel,Di 15
Independent Energy
Producers of Idaho
1 I am not suggesting that these are insurmountable
issues,only that for small projects,the cost of addressing
them is likely to outweigh the benefits.This,by analogy,
is one of the reasons for having published avoided cost
rates for projects under a certain size.In addition,
having published avoided cost rates militates against
arbitrariness,promotes uniformity,and saves the expense of
rate proceedings that would further make QF resource
development economically unattractive.These benefits of
published rates apply equally well to a Commission-
determined threshold size on the first deficit year issue.
It also makes sense that the threshold of 10 megawatts be
used for both purposes.
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14 Q.WHAT DO YOU PROPOSE AS A SOLUTION TO THIS ISSUE?
15 A.We propose that the Commission deem that,for
any resource less than 10 megawatts,the purchasing utility
is in deficit;that is,the first deficit year has already
occurred.
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E.RATE IMPACTS20
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22 Q.HAVE YOU CALCULATED THE IMPACT OF YOUR
RECOMMENDATIONS ON AVOIDED COST RATES?23
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A.Yes.Exhibit No.605 includes an abbreviated
form of the spreadsheet model used to calculate avoided cost
Trippel,Di 16
Independent Energy
Producers of Idaho
1 non-fueled rates for the three utilities.In each case,the
only changes made were to the initial natural gas price,the
escalation rate,and the first deficit year.Other
variables remain the same as they are currently in the
model.
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6 Q.PLEASE DESCRIBE YOUR MODIFICATIONS TO THIS
MODEL.7
8 A.In addition to changing the three assumptions
noted above,I modified the model slightly in two respects.
First,I added a heat rate figure to facilitate conversion
of natural gas prices in dollars per MMBtu to mills per
kilowatt-hour (kWh).I used the heat rate for the SAR
defined in Order No.25882 from the 1995 avoided cost case;
namely,the General Electric Frame 7FA 230-megawatt natural
gas combined-cycle combustion turbine,as identified by the
NPPC in the 1995 Northwest Conservation and Electric Power
Plan.This heat rate,as reported in the plan,is 7,350
Btu/kWh.
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Second,I modified the model to report the 20-year
levelized contract rates on the first page of the printout.
The column headed “20-year K Levelized”reports these rates
for contract years beginning in 2002 (at the top)to 2007
(at the bottom).This was done simply for the purpose of
fitting the relevant data and sample results on one page,
without disrupting the workings of the spreadsheet model.
Trippel,Di 17
Independent Energy
Producers of Idaho
1 Q.PLEASE SUMMARIZE THE RATES RESULTING FROM YOUR
RECOMMENDATIONS.2
3 A.For all three utilities,the resulting rates
range from 51 mills/kWh (for a 2002 online date)to 60
mills/kWh (for a 2007 online date).For comparison
purposes,the current rates would be 71-93 mills/kWh for
Idaho Power,representing a decrease of 28-35 percent.
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8 Q.ARE YOU SUGGESTING THAT THESE ARE THE ONLY
CHANGES TO BE MADE TO THE AVOIDED COST RATE CALCULATION,AND
THAT THESE RESULTING RATES SHOULD BE USED?
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11 A.No.As I said at the outset,due to the limited
time for this proceeding,the IEPI is only offering
testimony on the issues of natural gas price and first
deficit year in direct testimony.Other intervenors,
including Commission Staff,will undoubtedly address other
issues that should be considered in setting avoided cost
rates.We anticipate that we will in turn make further
recommendations,and recalculate rate impacts,as part of
rebuttal testimony.
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F.SUMMARY AND CONCLUSIONS21
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23 Q.PLEASE SUMMARIZE YOUR TESTIMONY AND CONCLUSIONS.
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A.In view of the testimony presented above,I
recommend that in setting avoided cost rates the Commission
Trippel,Di 18
Independent Energy
Producers of Idaho
1 adopt a natural gas price of $3.84 for 2002,with a nominal
escalation rate of 3.1 percent per year.I further
recommend that the Commission deem that,with respect to any
QF of less than 10 megawatts,the purchasing utility will be
considered to be in resource deficit,and pay the full
avoided cost under that assumption.
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7 Q.DOES THIS CONCLUDE YOUR TESTIMONY?
8 A.Yes.
Trippel,Di 19
Independent Energy
Producers of Idaho
EXHIBIT NO. 601
PROFESSIONAL EXPERIENCE AND BACKGROUND OF
STUART A.T. TRIPPEL
WITNESS FOR INDEPENDENT ENERGY PRODUCERS OF IDAHO

EXHIBIT NO. 602
HISTORY OF NATURAL GAS PRICES

Source:Draft Fuel Price Forecasts for the 5th Northwest
Conservation and Electric Power Plan,April 25,2002 (Council
Document 2002-07),at 15.

EXHIBIT NO. 603
RECOMMENDED NATURAL GAS PRICE FORECAST
(NPPC MEDIUM-HIGH)

EXHIBIT NO. 604
ALTERNATE NATURAL GAS PRICE FORECAST
(NPPC HIGH)

EXHIBIT NO. 605
AVOIDED COST RATES UNDER RECOMMENDATIONS