20060627Comments of Energy Vision.pdf

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VI'SION LLC Envisioning sustainable future
672 Blair Avenue
Piedmont, CA, USA 94611
[phone] :T
[phone] :F
glenni(g)pacbell.net :E
Glenn S. Ikemoto
Principal
VIA EMAIL
June 25, 2006
President Paul Kjellander
Commissioner Dennis Hansen
Commissioner Marsha Smith
Idaho Public Utilities Commission
472 West Washington Street
PO Box 83720
Boise, ID 83720-0074
Re: Comments on IPC-05-
Dear Commissioners:
1 wish to respectfully submit two short comments on the Petition for Declaratory Order filed
by Magic Wind LLC in the above-referenced matter. Before doing so, 1 would like to note
that I have substantial educational background and work experience directly related to the
issues 1 am addressing. This includes four years as a senior member of Pacific Gas and
Electric Company s Generation Planning Department, where I had primary responsibility
for evaluating avoided cost methodologies and for calculating and publishing avoided
costs within the company.
These avoided cost estimates served as the common basis for virtually all engineering
economy studies, cost effectiveness demonstrations and rate designs performed within
the company. Given these responsibilities, I was intimately familiar with the economic
theories underpinning various avoided cost methodologies and the models used
estimate those costs. This included production simulators, corporate financial models and
revenue requirements models.
I would first like to comment on the allocation of variable O&M in the PacifiCorp
Methodology, which was approved in Case No. PAC-05-09 (Schwendiman Wind LLC).
The issue here is whether to include a portion of variable O&M in capacity prices.
Energy Vision Comments
IPC-05-
Page 1 of 4
We should begin the analysis by looking at a simple short run case, where the generation
system is fixed. If a OF delivers energy to this system, what are the appropriate avoided
costs? Obviously, it is the savings from reducing generation at the most expensive plant.
That savings is primarily fuel and variable O&M. This is confirmed by prices in the market.
Utilities offering energy to the market set a price at least sufficient to recover their fuel and
variable O&M costs. There seems to be no disagreement that variable O&M is an
avoided enemy cost in the short run. The energy component of a proper long run
methodology should approximate this short run result. The PacifiCorp Methodology fails
this test.
In economic theory, the definition of long run is the point at which fixed costs become
variable. There is no economic theory based on variable costs becoming fixed in the long
run. It defies logic and economic theory to treat variable costs differently in the short and
long runs. I am not aware of any utility other than PacifiCorp which allocates any variable
O&M costs to capacity prices. It is simply wrong.
A final point on this issue is that the capacity factor of the SCCT should always be zero
under the PacifiCorp Methodology. The simplest resource plan meets demand growth
with an SCCT and delivers energy from the existing system or through purchases. The
avoided costs of this plan can be easily calculated using a production simulator. This is
known as the Peaker Method. However, utilities have reasonably argued that the costs of
a new base load plant are lower than projected system costs and should be used instead.
This is known as the Proxy Plant Method. The PacifiCorp Methodology falls into the latter
category. If the proxy resource is economic, avoided costs from the Proxy Plant Method
will be lower than from the Peaker Method.
The only reason to build something other than an SCCT is if the operating savings are
greater than the additional capital costs. This definition of cost effectiveness is a basic
tenant of resource expansion planning. Therefore , the sum of the SAR's fuel , variableO&M and additional capital costs serve as a proxy for the incremental cost of
system/market energy projected by other planning models.
In terms of the SCCT's capacity factor, this means that it would only be dispatched if the
SAR's proxy energy costs are greater than the operating cost of the SCCT. Since they
are not greater , the SCCT would never run in the proxy scenario. The point here is that
SCCT capacity factors based on production simulation , industry averages or anything else
should be irrelevant in the PacifiCorp Methodology since it already replaces system
modeling with proxy costs from a specific resource. Any SCCT capacity factors above
zero are inconsistent with proxy methodologies. If the SCCT capacity factor is zero, the
debate over the proper allocation of variable O&M is moot, since any allocation to capacity
prices is limited to the SCCT's capacity factor.
The second point I would like to address is whether Idaho Power s version of the 90/110
Band is superior to PacifiCorp s. I have attached a mathematical analysis of this issue. It
is based on the definition of a cost effective resource , as described above. The analysis
demonstrates that, from a long term planning perspective, ratepayers would receive more
benefits from PacifiCorp s approach.
Energy Vision Comments
IPC-05-
Page 2 of 4
Thank you for the opportunity to comment on these important issues.
Respectfully,
Glenn Ikemoto
Principal
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Attachment
Energy Vision Comments
IPC-05-
Page 3 of 4
THE LONG TERM RELATIONSHIP
BETWEEN
MID-C PRICES AND THE NON-CONFORMING ENERGY PRICES
The Basic Option for meeting future customer demand growth is to add the lowest capital
cost resource, such as a simple cycle combustion turbine (SCCT) to provide reliability,
and deliver additional energy from the existing system or by purchasing power from the
market. The cost of this incremental system/market energy is known as the Short Run
Avoided Cost (SRAC).
For any other generating resource to be cost effective, the present value of its total costs
(fixed and variable) MUST be less than the present value of the Basic Option. Since the
combined cycle SAR is considered a cost effective resource, it follows that:
SCCT Fixed + SRAC ::- CCCT Fixed + CCCT Variable
(note: for simplicity, we can ignore the present value notation and unitizing
calculations, which are common to both sides of the equation)
Subtracting the fixed costs of the SCCT from each side of the equation and combining
terms:
SRAC
;::.
(CCCT Fixed - SCCT Fixed) + CCCT Variable
The terms in brackets are known as Capitalized Energy in the PacifiCorp Methodology.
Therefore, through substitution:
SRAC::- (Capitalized Energy + CCCT Variable)
Currently, Idaho Power defines SRAC as 85% of Mid-C prices. Also, the terms now in the
brackets are known as the Non-Conforming Energy Price in the PacifiCorp Methodology.
Therefore, through substitution:
85% of Mid-C ::- Non-Conforming Energy Price
By applying a simple resource planning principle , we can demonstrate that an implicit
assumption underlying the SAR Methodology is that 85% of Mid-C prices will be higher
than the Non-Conforming Energy Price in the PacifiCorp Methodology over the long term.
Since the ratepayers receive greater benefits with lower prices, it follows that PacifiCorp
Methodology will deliver higher ratepayer benefits based on planning assumptions.
Energy Vision Comments
IPC-05-
Page 4 of 4