20030627Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 WEST WASHINGTON STREET
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
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472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER AUTHORIZING
INCLUSION OF POWER SUPPLY EXPENSES
ASSOCIATED WITH THE PURCHASE,
PROFIT CAPACITY AND ENERGY FROM PPL )
MONTANA, LLC IN THE POWER COST
ADJUSTMENT.
CASE NO. IPC-O3-
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
Application, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on
May 23 2003 , submits the following comments.
BACKGROUND
On May 13 , 2003, Idaho Power Company (Idaho Power; Company) filed an Application
with the Commission for an Order approving a Power Purchase Agreement (Agreement; PP
between Idaho Power and PPL Montana, LLC (PPL Montana). The Company requests
accounting treatment that will allow Idaho Power to include the expenses associated with the
STAFF COMMENTS JUNE 27, 2003
purchase of capacity and energy from PPL Montana, LLC in the Company s Power Cost
Adjustment (PCA).
Idaho Power in its Application recounts its failed attempt to secure from its affiliate the
seasonal energy deficiencies and peak hour transmission constrained deficiencies identified in its
2000 Integrated Resource Plan (IRP). Reference the proposed Ida West Garnet 250 MW
(Middleton) natural gas combustion turbine. In the Garnet Report provided to the Commission
on October 30 2002, the Company announced its plan to replace the Garnet Power Purchase
Agreement with a combination of alternatives, including firm wholesale purchases and
exchanges.
In conformance with the replacement strategy identified in the Gamet Report, Idaho
Power reports that it has successfully negotiated a firm wholesale Power Purchase Agreement
with PPL Montana, LLC. Contracting with PPL Montana is advantageous, the Company
contends, because existing transmission constraints on the west side ofIdaho Power s system
made power purchases on the east side of the Company s system preferable.
The principal provisions of the Power Purchase Agreement with PPL Montana call for a
firm power purchase for the heavy load hours, six days a week, 16 hours a day (6 x 16) in the
months of June, July and August. These are the time periods identified in the Company s 2002
IRP as the times of peak resource need on Idaho Power s system. The term of the Agreement is
June 1 through August 31 of each year beginning in 2004 and ending in 2009. The quantity of
energy purchased is 83 MW per hour, except for the month of August 2004, which shall be 26
MW per hour. The price to be paid for this energy is $44.50 per MWh. After adjusting for
losses, and with the exception of the August 2004 time period, Idaho Power will actually receive
approximately 80 MW per hour under the PP
ANALYSIS
Idaho Power s need for new resources was identified in its 2002 Integrated Resources
Plan (IRP). Staff concurred with the Company s assessment of its need for new resources as
identified in the IRP and supported the subsequent issuance of a Request for Proposals. To
satisfy the need identified in the IRP, the Company proposed to acquire the output from the
Garnet project during four months of the year, for an initial five-year term beginning in June
2004. However, because the Gamet project has been abandoned, Staff believes that the need for
STAFF COMMENTS JUNE 27, 2003
new resources still exists.
Idaho Power states that the proposed PPL Montana Agreement is part of the Company
strategy to replace the 250 MW of capacity that was lost when the Garnet project was abandoned.
In its October 30, 2002 "Report to the IPUC on Replacing the Gamet Power Purchase
Agreement" (Gamet Report), Idaho Power described a strategy consisting of acquiring firm
transmission rights, firm wholesale purchases and exchanges, adding or acquiring the output of
generation resources located within the Company s control area, and integration of demand-side
measures where cost effective. Staff believes that this proposed Agreement is consistent with the
Company s plans as identified in the Gamet Report.
The Company contends that the energy cost of $44.50 per MWh is competitive and
favorable when compared to alternative resource options. In the testimony of Greg Said filed
with the Company s Application, the proposed contract price was compared to current avoided
costs for energy purchases from small QFs, to market prices with added transmission costs, to
estimated power costs under the now defunct Gamet contract and to costs of Idaho Power
Mountain Home (Danskin) plant. Staff reviewed these comparisons and also completed its own
analysis to evaluate the reasonableness of the proposed contract price.
Comparison to Avoided Cost Rates
As reflected in the Company s prefiled testimony,
Idaho Power s current avoided costs for small QFs are determined by the
IPUC in Order No. 29124 are based upon a Surrogate Avoided Resource
of a 230 MW combined cycle combustion turbine and were set
September 26 2002. The levelized rate for a non-fueled project smaller
than 10 MW, coming on line in the year 2004 for a contract length of five
years is 43.78 millslkWh ($43.78 per MWh). The levelized rate for a 20-
year contract (a more likely scenario for a QF contract) is $49.83/MWh.
The PP A rate of $44.50/MWh for a peak hour summer peak power
product compares favorably to non-seasonalized QF contract rates. All of
Idaho Power s existing QF contracts use "seasonalized" rates which
provide significantly higher purchase prices in the summer months.
Staff agrees with Idaho Power s comparison to avoided cost rates, but notes
that avoided cost rates are based on estimated costs for a base load plant. Power
during heavy load hours (i., 6 x 16) is always worth more than a flat product (i., 7
x 24) such as would be provided by the SAR upon which avoided cost rates are
STAFF COMMENTS JUNE 27, 2003
based. An avoided cost rate for hours equivalent to those in the proposed Agreement
would certainly exceed the $43.78 per MWh stated above.
In addition, the avoided cost rates referred to above by Idaho Power were
computed using gas prices that are substantially lower than gas prices today and lower
than what gas prices are expected to be in the next few years. In order to provide a
more valid comparison, Staff computed avoided cost rates using June 2, 2003
NYMEX futures prices for the term of the proposed Agreement. The resulting rate
for a six-year levelized contract beginning in 2004 is $49.84 per MWh (49.84 mills
per kWh).
Comparison to Garnet Contract
Staff believes Idaho Power s comparison to the cost of the now defunct
Garnet contract has some validity, particularly because the Garnet contract was
generally intended to satisfy load during similar summertime heavy load hour
conditions as power under the Agreement. Staff estimated the price of power under
the Gamet contract to be nearly $77 per MWH over a ten-year period of time
assuming gas prices of$3.75 per MMBtu. Higher gas prices would obviously cause
power under the Gamet contract to be even more expensive. A direct comparison
between Garnet and the PPL Montana Agreement, however, cannot be made because
the Garnet contract would have exceeded the length of the PPL Montana Agreement
and because the Gamet contract included delivery of power in months different from
the PPL Montana Agreement. Furthermore, gas prices are different now than were
forecast when the Garnet contract was being considered. Nevertheless, the fact that
the price under the PPL Montana Agreement is so much less than the expected cost of
power under the Gamet contract does provide some redundant assurance that the
price of the PPL Montana Agreement is reasonable.
Comparison to Mountain Home
Idaho Power also compared the cost of this proposed Agreement to the cost of
power from its Mountain Home (Danskin) project. For the coming summer, with gas
purchases made for June and July at $4.55 and $4.71 respectively, the operating cost
STAFF COMMENTS JUNE 27, 2003
of the Mountain Home plant is projected to be $57.85 per MWh for June and $59.
per MWh for July. Although it will most likely be necessary for the Company to need
power from the Mountain Home plant and from the PPL Montana contract at the
same time, at $44.50 per MWh, power under the PPL Montana Agreement is much
cheaper and would displace power from Mountain Home whenever possible. Note
also that the prices cited for the Mountain Home plant are comprised only of fuel
start-up costs and variable O&M and do not include any capital recovery or fixed
O&M costs.
Comparison to Forward Prices
In testimony accompanying its Application, Idaho Power compared the cost under the
PPL Montana Agreement to current forward market prices. The Company stated:
On May 8 , 2003 , forward market bid/offer quotes at Mid-Columbia for Q-
, 2003 , heavy load hours, were $45.50/MWh and $46.50/MWh
respectively. Bid/offer quotes for the same quotes at Palo Verde were
$62/MWh and $64.25/MWh, respectively. With an energy purchase at
either of these hubs, additional costs would be incurred for transmission
to the Idaho Power system. It should be noted that transmission from
Mid-Columbia, if available, would need to be routed through the northern
part of the regional inter-connected transmission grid since the Idaho
Power transmission system is constrained from the west.
For a better comparison, Staff compared the proposed price under this
Agreement to forward market prices over more than just a single day. Idaho Power
constructs forward curves on a frequent basis using information gathered by its
traders from a variety of brokers. These forward curves indicate the price at which
Idaho Power believes various products can be purchased from the market. Staff
obtained from Idaho Power its forward curves constructed on one day in February,
March and April, and for two different days in May for a heavy load hour product for
delivery June through August in 2004 - 2009. The forward curve information was
submitted as confidential, therefore, the information is not included with these
comments. As expected, forward curve prices have varied over the past several
months, but not substantially. The Company s commitment on May 9, 2003 to a
price of $44., was not the lowest or the highest price during the period, but was
within a reasonable range.
STAFF COMMENTS JUNE 27, 2003
Comparison to AURORA Prices
Staff used the AURORA model to generate estimated prices for the period of the
proposed Agreement to use as an additional point of comparison. AURORA is an hourly
production cost model that dispatches resources to a given set of market conditions and also
develops a set of market prices responsive to varying levels of regional load, natural gas prices
and hydroelectric conditions. Area prices are computed on an hourly basis by comparing loads to
the dispatch costs of available resources, considering transmission constraints. AURORA
computes prices based strictly on fundamentals, and cannot predict price excursions that
sometimes occur for other reasons. The entire Western Electricity Coordinating Council
(WECC) area was considered in computing prices.
For the analysis, Staff used average natural gas futures prices through 2009 as published
by NYMEX on June 2, 2003, the day before the analysis was done. These prices reflect the
current high natural gas prices that are expected to persist for several more years. Prices are
expected to continue to be high in 2003 and 2004 due to currently drawn down storage
inventories and lack of development of new supplies. The need to fill storage reservoirs
combined with summer gas demands from new electricity generating plants, is expected to strain
gas supplies during the rest of 2003 and possibly into 2004. By 2005 prices are expected to have
moderated but remain well above price levels of the 1990s. The June 2 2003 NYMEX gas
prices used in the analysis are fairly representative of prices that have persisted for the remainder
ofthe current month of June. These NYMEX prices slightly exceed the Northwest Power
Planning Council's "high" price forecast contained in the April 22, 2003 revised draft of their
fuel price forecasts for the Fifth Power Plan.
The results of Staffs AURORA modeling are shown in Attachment 1. The jagged line
represents projected hourly heavy load hour prices for southern Idaho from June 1 , 2004 through
August 31 , 2009, the term of the proposed Agreement. The shaded bands identify the months
during which energy will be provided under the Agreement. The average heavy load hour price
for only the months of June - August during the period of 2004 - 2009 is $50.20 per MWh. The
levelized price for the same hours during the same period is $46.85 per MWh. Staff believes this
levelized price is the fairest comparison to the proposed price of $44.50 in the Agreement. The
difference between the proposed contract price and the AURORA price is approximately five
percent.
STAFF COMMENTS JUNE 27 , 2003
The AURORA prices are heavily dependent on the gas price assumptions used in the
analysis. Staff believes that the gas prices it used are realistic, and represent prices at which gas
is currently being bought and sold for the period. Actual gas prices during the period could
obviously turn out to be higher or lower than the prices used for the analysis.
Conclusions on the Proposed Price
By all comparisons avoided cost rates, Gamet contract prices, costs of operating
Mountain Home, forward market prices, and AURORA analysis the proposed price in the
Agreement appears to be reasonable. The proposed price is significantly less than the
Commission s avoided cost rates and below costs that would have been incurred under the
Gamet contract. The proposed contract rate is also in the range of Idaho Power s forward market
prices and slightly below AURORA's predicted market prices.
PCA Treatment
Idaho Power proposes that costs associated with acquiring firm monthly transmission
service from Northwestern Energy s transmission system be booked in FERC Account 565
Transmission of Electricity by Others. These monthly transmission costs currently do not flow
through the Company s Power Cost Adjustment (PCA). Idaho Power proposes that the cost for
power acquired through the Montana PPL Agreement be booked in FERC Account 555
Purchased Power, and that the costs upon contract approval flow through the Company s PCA.
Until the costs of the contract are included in a general revenue proceeding, any contract costs
associated with the Agreement will be considered deviation from the base and, therefore, only
90% of the Idaho jurisdictional costs will be borne by customers.
Staff believes the proposed PCA treatment is proper. The addition of the PPL Montana
resource will automatically cause changes in the accounts used to calculate monthly PCA
deferrals. The resource addition will cause a decrease in other purchased power costs, a decrease
in fuel costs and an increase in secondary sales revenue. These differences all benefit ratepayers.
It is unfair to pass the PCA benefits to ratepayers without also passing on the costs. Until Idaho
Power s next general revenue requirement proceeding, 90 percent of contract costs and 90
percent of PCA benefits will flow through the PCA to Idaho customers.
STAFF COMMENTS JUNE 27, 2003
Transmission
In order for power to be delivered, Idaho Power will need to acquire firm monthly
transmission capacity from NorthWestern Energy. Staff is aware of industry and media
speculation that NorthWestern Energy s parent, North Western Corp., could potentially file for
bankruptcy. In the event a bankruptcy filing is made, the likelihood is that NorthWestern Energy
would retain its assets and continue to operate the company. Staff believes NorthWestern Energy
would continue to be required to honor its transmission contracts at FERC-approved rates. Staff
also believes that a bankruptcy filing would not cause any delays in NorthWestern s ability to
sign new transmission contracts or perform under them.
Other Alternatives
Staff is convinced that the proposed Agreement represents the least cost supply-side
option for meeting peak hour summertime load requirements. The proposed Agreement may, in
fact, be the least cost of any options, either supply-side or demand-side. However, Idaho Power
need to acquire power during only heavy load hours during only three months of the year
underscores the rather limited nature of the Company s deficit. Staff strongly believes that a
variety of demand-side programs should seriously be investigated to potentially reduce peak
summertime loads. Traditional demand-side management, voluntary curtailment programs
interruptible rates and time-of-use rates are just some of the possible mechanisms that might be
employed to reduce or eliminate the Company s need to acquire additional supply-side resources
in the future. In addition, these types of mechanisms could reduce the need to operate the
Company s Mountain Home (Danskin) plant, a plant whose fuel and variable O&M costs alone
far exceed the costs of the proposed PPL Montana contract.
Idaho Power admits that air conditioning and irrigation loads are the major contributors to
its peak summertime load. Staff believes it would make sense to design demand-side
management programs to specifically target these sectors. To its credit, Idaho Power is
implementing a pilot air conditioner cycling program intended to reduce summertime peak loads.
The Company also has a small time-of-use pilot program for its irrigation customers, although it
appears the Company has no plans to continue or expand the program. Staff believes Idaho
Power should make a more sincere effort to consider demand-side options when cost effective
and to give proper credit to the ability of demand-side programs to avoid or defer the need to
STAFF COMMENTS JUNE 27, 2003
acquire new generation. Staff is concerned that the Company fails to acknowledge and quantify
the value of avoiding future peaking generation as a result of peak hour load reduction in its
irrigation time-of-use pilot, despite repeated Staff requests to do so.
RECOMMENDATIONS
Staff recommends approval of the Agreement as filed. Staff also agrees with Idaho
Power s proposed PCA treatment.
Respectfully submitted this
c:??
day of June 2003.
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Scott oodbury
Deputy Attorney General
Technical Staff: Rick Sterling
i :urnisc :cornrnen ts/ipceO 3. 8swrps
STAFF COMMENTS JUNE 27, 2003
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Attachment 1
Case No. IPC-03-
Staff Comments
6/27/03
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS
th DAY OF JUNE 2003
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NO. IPC-03-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
BARTON L KLINE
SENIOR ATTORNEY
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
JOHN P PRESCOTT
VICE PRESIDENT - POWER SUPPLY
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
~~.
SECRETARY
CERTIFICATE OF SERVICE