20070910Application.pdf

BARTON L. KLINE
Senior Attorney
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DAHO~POWER~
An IDACORP Company
September 10 , 2007
Jean D. Jewell , Secretary
Idaho Public Utilities Commission
472 West Washington Street
P. O. Box 83720
Boise , Idaho 83720-0074
Re:Case No. IPC-07- IS-
IN THE MATTER OF IDAHO POWER'S PETITION TO MODIFY THE
METHODOLOGY FOR DETERMINING FUEL COSTS USED TO
ESTABLISH PUBLISHED RATES FOR PURPA QUALIFYING
FACILITIES
Dear Ms. Jewell:
Please find enclosed for filing an origi-nal and seven (7) copies of Idaho
Power Company s Petition for the above-referenced matter.
I would appreciate it if you would return a stamped copy of this transmittal
letter in the enclosed self-addressed , stamped envelope.
(w
Barton L. Kline
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Enclosures
O. Box 70 (83707)
1221 W. Idaho St.
Boise, ID 83702
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BARTON KLINE , ISB # 1526
LISA D. NORDSTROM , ISB # 5733
Idaho Power Company
1221 West Idaho Street
O. Box 70
Boise, Idaho 83707
Telephone: [phone]
FAX Telephone: [phone]
Attorney for Idaho Power Company
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER'
PETITION TO MODIFY THE
METHODOLOGY FOR DETERMINING
FUEL COSTS USED TO ESTABLISH
PUBLISHED RATES FOR PURPA
QUALIFYING FACILITIES
) CASE NO. IPC-07-
PETITION
COMES NOW , Idaho Power Company ("Idaho Power" or the "Company ) and
hereby requests that the Commission issue its order modifying the methodology currently
used to determine the fuel costs that are used to compute published avoided cost rates.
The Company s request is based on the following:
BACKGROUND
History of the Current Methodoloqy for Determininq Fuel Costs Used to Set
Published QF Rates.
Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978
(PURPA) and pertinent regulations of the Federal Energy Regulatory Commission (FERC)
require regulated electric utilities to purchase power from qualifying generation facilities
PETITION - 1
(QFs) at avoided costs. Avoided costs are the costs the electric utility can avoid by
purchasing energy generated by a QF rather than generating the energy itself or
purchasing the energy in the wholesale market.
The Commission has historically set avoided cost rates by estimating the
fixed and variable costs of a hypothetical fossil fuel-fired generation facility and using those
estimated costs as a measure of the costs Idaho jurisdictional electric utilities could avoid
by purchasing QF energy. This methodology for estimating avoided costs is commonly
referred to as the surrogate avoided resource (SAR) methodology. The current SAR is a
natural gas-fired combined cycle combustion turbine. For QF projects generating less than
10 average MWh , the avoided cost rates determined by the SAR methodology are
commonly referred to as the published rates.
One of the critical components of the SAR methodology is the estimated cost
of the natural gas that will fuel the SAR. In Order No. 29124 , issued on September 26
2002 in Case No. GNR-02-, the Commission established the methodology currently
used to compute the fuel cost component of the SAR methodology.
The method the Commission adopted in Order No. 29124 to calculate the
fuel cost component starts with an arithmetic average of the nominal prices for natural gas
for the first three years of the Northwest Power Planning and Conservation Council'
(NWPCC) median 20 year forecast of natural gas prices. In Order No. 29124 , the first
three years of the twenty (20) year forecast were 2000 through 2002. These three years
consist of the current year s forecasted price , plus the previous two years forecasted
1 In 2002, Idaho Power filed a Motion to Stay Entitlement to Published Rates , which motion was the genesis of
Case No. GNR-02-1. In that case the Commission granted Idaho Power s request for a stay while it
considered whether the various components that make up the SAR methodology should be revised. In this
petition, Idaho Power is not requesting that the Commission stay the determination of new published rates
when the NWPCC establishes a final natural gas forecast.
PETITION - 2
prices. The average three year price set in 2002 was $3.75 The SAR methodology then
escalates that three year average natural gas price at a uniform percent per year over 20
years. The escalation rate is also calculated from the NWPCC 20 year natural gas
forecast. In 2002 the escalation rate was 2.6%.
In 2004 , the NWPCC revised the 20 year natural gas price forecast the
Commission had utilized in setting the published rates in Order No. 29124. Based on this
revised NWPCC natural gas price forecast , in Order No. 29646 , the Commission revised
the fuel cost component for the SAR methodology utilizing the average of the NWPCC'
natural gas price forecast for the three year period 2004 through 2006. This change in the
three year average price revised the fuel cost component in the SAR methodology to
$5.10. The fuel escalation rate was changed to 2.30%. As a result of these two changes
in 2004 , the levelized published rate for a QF project estimated to come on line in 2007 (20
year term) went from 53.67 Mills/Kwh in 2002 to 62.40 Mills/Kwh in 2004.
THE CURRENT METHODOLOGY FOR SETTING THE FUEL COST COMPONENT
NEEDS TO BE CHANGED
Use of the Current Method to Set the Fuel Cost Component in the SAR
Methodoloqy Will Result in Published Avoided Cost Rates that are Not
Representative of the Costs Idaho Power is Likely to Avoid by Purchasinq Enerqy
From QFs.
On July 31 2007 the NWPCC released a draft of its next forecast of natural
gas prices. Attachment 1 is a graph prepared by Idaho Power showing the year-by-year 20
year forecast of natural gas prices in the 2007 NWPCC median case draft forecast.
2 Using the current method for determining the fuel cost escalation rate for the SAR Methodology, and the
assumptions in the NW PCC 2007 draft forecast, the calculated escalation rate will be 1.10% if the
NWPCC's draft forecast is adopted as the final forecast.
PETITION - 3
Attachment 2 graphically overlays the assumed cost of fuel for the SAR that
is calculated using the current SAR methodology onto the same NWPCC forecast shown
on Attachment 1.
Attachment 2 shows the extreme divergence between the NWPCC's forecast
of natural gas prices and the assumed cost of fuel for the SAR. This difference will result
in artificially high published rates unless the Commission revises the current methodology
for establishing fuel costs in the SAR methodology.
The principal reason for the divergence between the assumed cost of fuel for
the SAR under the current methodology and the NWPCC's 20-year forecast of natural gas
prices is the use of the three year average starting point and the linear escalation from that
starting point. By starting the fuel cost assumption at the high end of the range of prices
shown in the NWPCC forecast and escalating prices from that point in a linear profile, the
current methodology fails to recognize the expected downward trend in fuel prices
apparent in the NWPCC's 20 year forecast. Failing to recognize the non-linear shape of
the NWPCC's 2007 forecast will cause the published rates to be much higher than they
otherwise would be.
IDAHO POWER'S PROPOSAL
10.In this Petition, Idaho Power is not requesting that the Commission examine
or revise any of the non-fuel related components that make up the SAR methodology. The
Company recognizes that revisions to the fixed cost assumptions and other non-fuel
related components of the SAR methodology are likely to require considerable analysis
and could engender factual disagreements that are more likely to require resolution in a
technical proceeding before the Commission. Idaho Power does not desire to delay an
update of the published rates by injecting these non-fuel factors into this proceeding. Idaho
PETITION - 4
Power believes that a limited review of just the fuel cost component of the currently
approved methodology should be relatively straight-forward.
11.Idaho Power proposes that the Commission utilize the average of all 20 years
of the NWPCC's final 2007 median 20 year natural gas price forecast as the fuel cost
component in the SAR methodology. Because Idaho Power proposes to use the 20 year
average price , no escalation forecast is needed. Attachment 3, shows how this average
fuel cost assumption compares to the year-by-year NWPCC 2007 20 year natural gas
price forecast values and the fuel cost assumption calculated under the current SAR
methodology.
12.Attachment No.4 is a table that compares three sets of published avoided
cost rates.All three sets of rates use the currently approved SAR methodology
assumptions for all non-fuel components. In the first two sets , the assumed SAR fuel costs
are computed using the three year average starting point and the linear escalation profile.
The first set of rates are the current published avoided cost rates. The second set of rates
are the published avoided cost rates that will go into effect if the NWPCC accepts its 2007
draft natural gas price forecast as its final forecast and the 3 year average natural gas price
method remains unchanged. In the third set of rates, the fuel cost component is computed
using the average of the 20 years of natural gas prices from the NWPCC's draft 2007
median gas price forecast. Idaho Power urges the Commission to adopt the 20 year
average price as the SAR fuel cost component when the NWPCC issues its final 2007
median case natural gas price forecast.
13.As previously noted , Idaho Power does not propose to adjust any of the non-
fuel assumptions in the currently approved SAR methodology. Idaho Power believes its
proposed methodology is preferable to the current methodology because use of the 20
PETITION - 5
year average fuel cost recognizes the non-linear profile of the NWPCC's 2007 forecast.
Use of the 20 year average also reduces the significant front-end loading of assumed fuel
costs created by use of the current methodology.
14.Idaho Power believes that this Petition presents a limited policy question to
the Commission. The Company does not believe that its proposal presents a factual
dispute requiring a technical proceeding to effectuate a resolution. The Company
proposes to retain the fundamental SAR methodology.The assumptions for all
components of the SAR methodology remain the same except for the fuel cost assumption.
All of the data required to analyze Idaho Power s proposal to change the fuel cost
assumption are contained in the NWPCC's 2007 natural gas price forecast and the current
SAR methodology model. The Company is not requesting a stay of the implementation
new published rates while this case is pending. As a result, the Company believes that the
Commission could expeditiously process this Petition under modified procedure.
15.Communications regarding this Petition should be addressed to:
Barton L. Kline , Senior Attorney
Lisa D. Nordstrom, Attorney II
Idaho Power Company
O. Box 70
Boise , Idaho 83707
blkine (fg idahopower.com
Inordstrom (fg idahopower.com
Ric Gale, Vice President
Regulatory Affairs
Idaho Power Company
O. Box 70
Boise , Idaho 83707
male (fg idahopower.com
Based on the foregoing, Idaho Power respectfully requests that the Commission
issue its Order:
Changing the method for determining the fuel cost component of the SAR
methodology to utilize the average of all 20 years set out in the NWPCC's 2007 final
median forecast of natural gas prices rather than the escalated average of the first three
years of the same forecast; and
PETITION - 6
Processing this Application under modified procedure , that is by written
comments or briefs rather than by means of a technical hearing.
Respectfully submitted this IUf/L./day of September 2007.
BART
~/
Attorney for Idaho Power Company
PETITION - 7
BEFORE THE IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-O7- IS-
IDAHO POWER COMPANY
ATTACHMENT
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BEFORE THE IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-O7- IS-
IDAHO POWER COMPANY
ATTACHMENT 2
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BEFORE THE IDAHO PUBLIC UTiliTIES COMMISSION
CASE NO. IPC-O7- IS-
IDAHO POWER COMPANY
ATTACHMENT 3
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IDAHO POWER COMPANY
ATTACHMENT 4
PUBLISHED RATE CALCULATION MODE
DATA
TYPE
FIRST DEFICIT YEAR:
SURPLUS ENERGY COST (mil/kWh):
SURPLUS COST BASE YEAR:
SAR" PLANT LIFE (YEARS):
SAR" PLANT COST ($/kW):
BASE YEAR OF "SAR" COST:
SAR" CAPACITY FACTOR (%):
HEAT RATE (BTU/KWH):
UTL TY WT'D COST OF CAPITAL (%):
RATEPAYER DISCOUNT RATE (%):
SAR" FIXED O&M ($/kW):
SAR" VARIABLE O&M (mil/kWh):
CURRENT YEAR GAS PRICE ($/MMBTU):
CURRENT YEAR FUEL COST (mil/kWh):
BASE YEAR, O&M EXPENSES:
ESCALATION RATE; "SAR" (%):
ESCALATION RATE; SURPLUS (%):
ESCALATION RATE; O&M (%):
ESCALATION RATE; FUEL (%):
ADJUSTABLE PORTION (mil/kWh):
CAPITAL CARRYING CHARGE (%):
LEVEL CARRYING COST (mil/kWh):
TILTING" RATE (%):
TYPE OF RATES:
Current YEAR:
20-vr Levelized rate. on-line date:
2007
2008
2009
Using NWPCC Gas Forecast
Update Fuel Only
Current Pricing using established Update Fuel Onlymethodusing a 20yr avg
NWPCC 2004 fuel NWPCC 2007 Fuel NWPCC 2007 fuel
3 yr avg 3 yr avg 20yr avg
2002-2004 2005-2007 2008-2027
IPCO IPCO IPCO
DATA DATA DATA
2002 2002 2002
N/A N/A N/A
1994 1994 1994
$679 $679 $679
2000 2000 2000
92%92%92%
100 100 100
852%852%852%
852%852%852%
$10.$10.$10.
$5.$7.$7.
36.51.48 51.
2000 2000 2000
10%10%10%
N/A N/A N/A
70%70%70%
30%10%00%
11.517%11.517%11.517%
10%10%10%
NON-FUELED NON-FUELED NON-FUELED
2004 2007 2007
62.72.67.
63.73.68.
65.74.68.
NWPCC Natural Gas Forecast
Year
2000
2001
2002
2003
2004
2004 Draft 2007
Avg 5.
7.48
Avg 7.
7.49
6.43
6.40
2008 - 2027 Average
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027