Loading...
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 Hale, Di - 2 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 Hale, Di - 3 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." Hale, Di - 6 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 Hale, Di - 8 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 Hale, Di - 9 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 Hale, Di - 10 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 Es t i m a t e o f O F V a l u e g i v e n va r i o u s t y p e s o f O F r e s o u r c e Q F Ty p e En e r g y T y p e Av e r a g e E n e r g y P r i c e An n u a l V a l u e - 20 Y e a r N P V NP V d i f f e r e n c e 10 M W - 10 a M W Fi r m F l a t $3 9 . $3 , 4 6 5 , 15 8 $5 5 , 80 8 , 58 1 30 M W - 1 0 a M W I n t e r m i t t e n t No n - Fi r m F l a t $3 5 . $3 , 08 4 , 4 5 5 $4 9 , 67 7 , 11 8 $6 , 13 1 , 46 2 30 M W - 1 0 a M W o f f - pe a k No n - Fi r m L L H $3 2 . $2 , 85 1 , 56 6 $4 5 , 92 6 , 28 8 $9 , 88 2 , 29 3 M . -- - - - Qp e r a t i n a f o r Ye a r s An n u a l G e n e r a t i o n 60 0 MW H Di s c o u n t r a t e 16 0 / 0 Av e r a g e E n e r g y P r i c e s a r e b a s e d o n D o w J o n e s M i d - Co l u m b i a r e p o r t e d p r i c e s f o r t h e p e r i o d J u l y 3 0 , 20 0 3 t h r o u g h J u l y 2 9 , 2 0 0 4 . Th e 2 . 16 0 / 0 Di s c o u n t r a t e i s a r e a l l e v e l i z e d d i s c o u n t r a t e b a s e d o n U S T r e a s u r y ye i l d c u r v e d a t e d 8 . 20 0 4 . :E ~ t'1 ' 1 " ' 0 ;: : ; : n ~ & ~ ~t 1 ; ( 1 ) CT 5 ~ 6 Z : : : : ; : n ,. ~ ~ Z I: ~ ; " " ~ "'1 O " ' O g n o .. . . . t 1 ; .. . . . Eo f " (1 )