HomeMy WebLinkAbout20040805Hale Direct.pdfBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
s. GEOTHERMAL, INC.,
An Idaho corporation,
Complainant
vs.
IDAHO POWER COMPANY
An Idaho corporation,
Res on dent.
BOB LEW ANDOWSKI and MARK
SCHROEDER
Complainants,
vs.
IDAHO POWER COMPANY
An Idaho corporation
Res ondent.
ACIFICORP
DIRECT TESTIMONY OF
LAREN J. HALE
August 2004
Case No. IPC-04-
Case No~ IPC-04-
", - ' ..
Please state your name, business address and present position with
PacifiCorp (the "Company
My name is Lareq Hale, my business address is 825 NE Multnomah, Suite 800
Portland, Oregon 97232, and my present position is Regulatory Analyst LdISr.
Qualifications
Briefly describe your education and business experience.
I received an undergraduate degree in Business Finance and a Masters of Business
AdmiJ;listration from the University of Utah. I began working for Utah Power &
Light Company in 1979. During my 25 years with the Company, I have held a
variety of positions including Senior Power Planner, Senior Cost of Service
Analyst, and Seni(~)f Pricing Analyst. I was promoted to my present position in
April 2001.
Please describe your current duties.
Among other duties, I am responsible for the preparation of the Company
avoided costs in each of the Company s six jurisdictions.
Have you been a witness before this Commission in the past?
Yes, I was a witness in Case IPC-95-9. In that case I supported the Company
calculation of IRP-based avoided costs.
Summary of Testimony
Will you please summarize your testimony?
Yes. My testimony addresses the fol1owing issues:
(1)US Geothermal is requesting that the 10 MW ceiling used to determine
eligibility for standard tariff prices should be defined as 10 aMW. Idaho Power is
Hale, Di -
PacifiCorp
promoting a capacity definition of "10 MW in any hour.We agree with Idaho
Power s approach with one addition. We proposed that there be an initial capacity
determination to verify that a QF is eligible for tariff prices and that this initial
capacity determination should be enforced with a contract provision limiting
payment to not more than 10 MW in any hour.
(2)Idaho Power s standard contract has provisions that al1ows a QF to commit
to monthly delivery schedules in order to receive firm pricing. We agree that
conditioning firm pricing on monthly delivery commitments is a reasonable
requirement.
(3)Idaho Power s standard contract has a provision that al1ows for termination
of the contract if retail deregulation results in unrecoverable stranded costs.
support Idaho Power s position that utilities need to act prudently to mitigate their
potential exposure if deregulation results in unrecovered stranded costs.
Appropriate Method for Calculating the 10 MW Ceiling for Standard A voided Cost
Price Application
What is the Company s position as to how the 10 MW ceiling for standard or
published price application should be determined?
The Company agrees with Idaho Power that the 10 MW ceiling should be
determined to be a measure of maximum capacity and not of average energy
delivery. Some measure of maximum capacity has historically been used both in
Idaho and the other jurisdictions where PacifiCorp operates. The application of
standard avoided cost prices to PacifiCorp s QF contracts and tariffs employs a
capacity ceiling or determination, and not an average energy concept. By
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PacifiCorp
definition, a "megawatt" is a measure of capacity, not average energy. Moreover
the PURP A regulations which provide the legal authority for standard pricing use
the term "design capacity" to differentiate as to which QFs are eligible for such
pricing. See 18 CFR ~ 292.304(c)(2) ("(t)here may be put into effect standard
tariff prices for purchases from qualifying facilities with a design capacity of
more than 100 kW.For these reasons, PacifiCorp s position is that the
Commission should continue to define the ceiling in terms of maximum capacity
and nQt average energy.
Does the Company have a specific proposal as to how the 10 MW capacity
ceiling should be administered?
Yes. The Company proposes a two-part approach whereby (1) there is an initial
capacity determination so standard tariff prices are limited to QFs that have a
maximum capacity of 10 MW or less and (2) thereafter, the QF may only receive
payment for up to 10 MW in any hour. Basically, this approach is the same as
Idaho Power s proposed "Metered Energy Test" except that it adds an initial
capacity determination. I wil1 explain below why each of these two components is
appropriate.
Please describe your proposal concerning initial capacity determinations.
PacifiCorp proposes that any QF seeking to obtain standard tariff prices must
contractual1y represent that the maximum capacity of the QF at any time, when
operated consistent with the manufacturer specifications, prudent utility
practices and actual operating conditions, does not exceed 10 MW.This
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PacifiCorp
definition is tonsistent with the FERC's "design capacity" standard in that it
focuses on how the QF will be designed and operated.
Why is an initial capacity determination appropriate?
An initial capacity determination is appropriate to ensure that standard tariff prices
are limited to QFs that have an aggregate capacity of 10 MW or less. While Idaho
Power s Metered Energy Test wil1 ensure that deliveries do not exceed the 10
MW ceiling in any hour, it wil1 not serve to adequately limit the overall size of
QFs eligible for standard tariff prices. PacifiCorp' s position is that the 10 MW
capacity ceiling should apply to the actual capacity of the QF, not just the hourly
delivery limitation. As discussed by Idaho Power witness Rick Gale on page 25
of his Direct Testimony, the rationale in PURPA for standard tariff prices was to
minimize transaction costs for small QFs associated with individually-negotiated
QF pricing and contracts. In most of PacifiCorp s other jurisdictions, the ceiling
for standard tariff prices is 1 MW. In Idaho, this Commission has determined that
10 MW should be the ceiling for standard tariff price application. Adopting Idaho
Power s Metered Energy Test, without an initial capacity determination, would
al1ow QFs of any size to get standard tariff prices by agreeing to limit deliveries to
10 MW in any hour. Alternately, adopting U.S. Geothermal's average energy
approach, without an initial capacity determination, would allow a QF of any size
to receive standard tariff prices provided annual deliveries are limited to 10 aMW.
Al1owing QFs of unlimited size to obtain the standard tariff prices is inconsistent
with the "transaction cost" justification.An initial capacity determination is
necessary to preserve the integrity of the 10 MW capacity ceiling.
Hale, Di - 4
Pacifi Corp
Are there other consequences associated with allowing QFs over 10 MW to
obtain standard tariff prices?
Yes. Both Idaho Power and U.S. Geothermal seem to contemplate in their
testimony that a QF developer may: (1) build a QF in excess of 10 MW, (2) sell
up to 10 MW to an Idaho utility at standard tariff prices, and (3) market the
remaining output to other utilities or purchasers. This scenario is inappropriate
for several reasons. First, as noted above, al1owing developers of larger QFs to
obtain standard tariff prices violates the integrity of the 10 MW ceiling and the
transaction cost" justification on which it was based. Second, it potentially
allows QF developers to require multiple utilities in Idaho to purchase up to 10
MW each from tpe same QF at standard tariff prices. This would effectively
render the 10 MW ceiling meaningless. Third, allowing QFs under standard tariff'
price contracts to sell to multiple purchasers gives them an economic incentive to
(1) sel1 to other purchasers at market rates during the most valuable delivery hours
and (2) put the remaining power to the purchasing utility at the standard tariff
prices during the least valuable delivery hours. Particularly if the Commission
were to adopt U.S. Geothermal's 10 aMW proposal, a scenario could be
envisioned where a QF sold all of its output during peak delivery hours to a power
marketer at market rates, deliver up to 10 aMW of off-peak energy to Idaho Power
at standard tariff prices, and deliver any additional excess power to PacifiCorp
also at standard tariff prices.This outcome is inconsistent with PURP A.
Accordingly, PacifiCorp requests that the Commission require an initial capacity
determination to verify whether a QF is eligible to be paid standard tariff prices.
Hale, Di - 5
PacifiCorp
Alternately, th~' Commission should clarify that QFs are limited to one standard
rate contract and may not simultaneously sell to other purchasers.
Is an initial capacity determination, without additional contract provisions,
adequate to preserve the integrity of the 10 MW ceiling?
No. As testified by Idaho Power s witness Rick Gale on pages 27-28 and U.
Geothermal's witness Kevin Kitz on pages 9-10, typical capacity definitions such
as "nameplate capacity or "design capacity" may be subject to differing
interpretations. These differences may arise because manufacturers use different
assumptions concerning power factor and operating conditions in describing the
capacity of their generating units.The result is that QFs with a nameplate
capacity of 10 MW or less may in fact be able to generate substantial1y in excess
of 10 MW. PacifiCorp has had experiences with QFs that generate or are capable
of generating substantially in excess of their stated nameplate capacity. Thus, an
initial capacity determination is a necessary but not sufficient means of preserving
the integrity of the 10 MW capacity ceiling.
What additional measures does the Company propose to preserve the
integrity of the 10 MW ceiling?
Contracts applying standard tariff prices should specify that the utility is not
required to pay for any energy delivered in excess of 10 MW in any hour. This
wil1 effectively ensure that a QF which claims to have a maximum capacity of 10
MW or less is in fact subject to a 10 MW limit on deliveries. Idaho Power makes
a similar recommendation, which they describe as the "Metered Energy Test."
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PacifiCorp
Can you describe the economic consequences of a decision to set the ceiling
for standard tariff prices at 10 aMW?
Yes. Under the 10 aMW proposal endorsed by U.S. Geothermal, a QF regardless
of size would be entitled to standard tariff prices for all deliveries up to 10 aMW
in any year. There would be no limitations as to the time of day, month or year
when these MWh could be delivered. There is a significant economic cost
associated with this type of delivery optionality, as power has different value
depending upon the timing and extent to which the purchaser has notice or control
over delivery.To il1ustrate this point consider the following three delivery
scenarios, each of which is possible under the approach adopted by U.
Geothermal:
(1)a 10 MW thermal-type resource, delivering 10 aMW on a flat basis during
all delivery hours. This resource would have a 20-year net present value
of $55.8 mil1ion, which corresponds to a firm base load resource;
(2)a 30 MW resource (such as wind or solar), making intermittent deliveries
up to 30 MW in any hour for a total of 10 aMW per year. This resource
would have a 20-year net present value of $49.million, which
corresponds to a non-firm resource; and
(3)a 30 MW thermal-type resource, delivering power to third-parties during
peak hours and delivering 10 aMW to the purchasing utility only in off-
peak hours. This resource would have the lowest 20-year net present value
of $45.9 mil1ion, which corresponds to a non-firm, off peak resource.
Hale, Di - 7
PacifiCorp
As these exaIriples indicate, moving to a 10 aMW ceiling on standard tariff prices
without an hourly or aggregate capacity limit can result in a variety of delivery
scenarios with widely differing values. The standard tariff prices assume a proxy
natural gas-fired, combined-cycle combustion turbine resource that is dispatchable
by the purchasing utility. However, because of the "one-size-fits-all" approach,
no adjustment is made when the actual value of the power to the utility is less than
that associated with the proxy resource. Therefore, QFs receiving standard tariff
prices are effectively being overpaid to the extent their power is less valuable than
the power associated with the proxy resource. The less control or notice the utility
has over the timing and extent of deliveries, the greater the overpayment, as
shown in the examples above. Effectively, this cost is a subsidy from ratepayers
to the QF. Exhibit 301 shows the calculation of the QF values outlined above.
Of the three scenarios you outlined above, which QF should be entitled to
standard tariff prices?
The first QF should be entitled to standard tariff prices. In this case, the QF
provides a capacity benefit to the Company that can be relied upon for both
planning and system operation. The last two QFs provide the Company far fewer
capacity benefits and therefore should not receive standard tariff prices. They
require the utility to accommodate a much larger amount of generation, with more
variation from hour-to-hour and less notice or control as to the timing of
deliveries. Under PacifiCorp s proposal, the first QF would be entitled to standard
tariff prices, and the second two QFs would not receive standard tariff prices but
would be eligible for prices calculated using an IRP based method. By contrast
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PacifiCorp
under U.S. Geothermal's approach, all three QFs would be entitled to standard
pnclng.
Is there another reason that increasing the ceiling to 10 aMW might have an
adverse impact to the Company and its ratepayers?
Yes. Increasing the ceiling to 10 aMW might make Idaho a magnet for out-of-
state QFs. Idaho has the highest avoided cost prices of any of PacifiCorp
jurisdictions. With a ceiling of 10 MW, let alone 10 aMW, Idaho also has the
highest ceiling for standard tariff price application of any state in the Northwest.
This provides an incentive for out-of-state QFs to wheel their power to Idaho for
sale to an Idaho utility. In the past few years since the threshold was raised from
MW to 10 MW io Idaho, PacifiCorp has been approached by developers of out-
of-state QFs seeking to make sales to PacifiCorp in Idaho. Increasing the ceiling
to 10 aMW would increase the magnet effect.
Whether QFs Should be Required to Commit to Monthly Delivery Schedules in
Order to Receive Firm Pricing
Do you support Idaho Power s position that QFs under standard tariff price
contracts should be required to commit to monthly delivery schedules in
order to obtain firm energy prices?
Yes. PacifiCorp agrees that a QF should be required to make some type of
enforceable delivery commitment in order to obtain firm pricing. As explained
above, standard tariff prices assume a proxy resource that is dispatchable by the
utility. The less control or notice that a purchasing utility has with respect to the
extent and timing of QF deliveries, the greater the effective subsidy to the
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Pacifi Corp
, '
developer. Idaho Power s approach, which requires monthly (as opposed to daily
or hourly) generation commitments, is a reasonable requirement in exchange for
the QF being entitled to firm prices. Idaho Power s contract provision benefits
QF owners, particularly those of intermittent resources like wind, by allowing
them to obtain firm pricing for that portion of their generation they commit in a
given month. The proposal benefits the purchasing utility by giving it greater
operation certainty as to the extent and timing of QF deliveries. In the event the
Commission approves Idaho Power s proposed section 6.2 of its standard
contract, PacifiCorp requests that it be allowed to fashion a similar provision
applicable to its standard purchases in Idaho.
Whether Utilities Should Be Able to Terminate QF Contracts If Retail Deregulation
Results in Unrecoverable Stranded Costs
Does PacifiCorp support Idaho Power s position that utilities should be
permitted to terminate QF contracts in the event that retail deregulation
results in unrecoverable stranded costs?
Yes. The arguments advanced by Idaho Power with respect to this provision
apply equally to other Idaho electric utilities. Power purchase costs incurred
through QF contracts represent a potential category of stranded costs to the extent
that retail deregulation occurs in Idaho. Utilities need to act prudently to mitigate
their potential exposure to such costs. One such method is to pursue a contract
provision al1owing for termination in the event that such costs are deemed
unrecoverable.Pursuit of such a provision wil1 help reduce the utilities
vulnerability to arguments that they waived the right to recover these costs by
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Pacifi Corp
failing to take prudent efforts to avoid them. In the event the Commission
approves Idaho Power s proposed section 23.2 of its standard contract, PacifiCorp
requests that it be ,allowed to fashion a similar provision applicable to its standard
tariff price contracts in Idaho. PacifiCorp has similar concerns regarding potential
stranded costs in the event other jurisdictions disallow recovery of its Idaho QF
costs. However, these concerns are being addressed in the context of PacifiCorp
proposed MSP allocation methodology, and are not the subject of this testimony.
Does this conclude your testimony?
Yes.
Hale, Di -
PacifiCorp
Case Nos. IPC-04-8 &
IPC- B-04-1 0
Exhibit No. 301
Witness: Laren J. Hale
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ACIFICORP
Exhibit Accompanying Direct Testimony of Laren J. Hale
Estimate of QF Value Given Various Types of QF Resource
, August 2004
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