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HomeMy WebLinkAbout20081203Said Rebuttal.pdfRECEIVED ZOOS DEC -3 PM 3: 45 IDAHO PUEt UTILITIES COM,i~ BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR AUTHORITY TO INCREASE ITS RATES AN CHAGES FOR ELECTRIC SERVICE. CASE NO. IPC-E-08-10 IDAHO POWER COMPANY DIRECT REBUTTAL TESTIMONY OF GREGORY W. SAID 1 Q.Please state your name. 2 A.My name is Gregory W.Said. 3 Q.Are you the same Gregory W.Said that 4 previously submitted direct testimony in this proceeding? 5 A.Yes, I am. 6 Q.What is the purpose of your rebuttal 7 testimony? 8 A.My rebuttal testimony will address what I 9 believe are fundamental flaws in the rationale supporting 10 the testimonies of Staff Witness Sterling and Micron 11 Witness Peseau with regard to power supply issues. i will 12 respond to Mr. Sterling's assertion that high gas prices 13 benefit Idaho Power's customers. I will also respond to 14 Mr. Sterling's testimony that focuses exclusively on 15 recommendations minimizing power supply expenses included 16 in base rates while making no effort to identify the 17 appropriate normalized level for power supply expenses. I 18 will address Micron Witness Peseau's apparent .lack of 19 understanding regarding the impact of natural gas prices on 20 modeled power supply expenses. 21 Q.Mr. Sterling states on page 4 of his 22 testimony that "High gas prices actually benefit Idaho 23 Power and its ratepayers in most years." Is he correct? SAID, DI REB 1 Idaho Power Company 1 A.No. High gas prices will not benefit Idaho 2 Power Company or its customers. Mr. Sterling relies on 3 test-year modeled power supply outcomes to arrive at 4 conclusions that are counter intuitive. Idaho Power's 5 current generating fleet includes 435 MW of simple cycle 6 gas-fired generating plants used primarily for provision of 7 power during peak load periods of time. In addition, the 8 Company is currently reviewing bids for up to 300 MW of 9 baseload gas-fired generation to be available in 2012. It 10 is misleading to suggest that the Company or its customers 11 will benefit from rising gas costs when gas-fired 12 generation will increasingly be required to serve growing 13 customer loads. The only way Mr. Sterling can come to the 14 conclusion that high natural gas prices are good for 15 customers is in the hypothetical world of power supply 16 modeling. In the real world, high natural gas prices will 17 cost customers more money as the Company burns more gas to 18 serve loads. 19 Q.What do you mean when you refer to the 20 hypothetical world of power supply modeling? 21 A.The Company, the Commission Staff, and many 22 other utilities in the Northwest use the AURORA model to 23 simulate power supply costs for ratemaking purposes. Gas 24 price assumptions included in AURORA power supply SAID, DI REB 2 Idaho Power Company 1 simulations are a primary driver of modeled market prices 2 for electricity. Over the full range of water conditions 3 the Company has traditionally used to present its power 4 supply expenses on a "normal" basis, the Company's modeling 5 shows it will often have surplus energy to sell. Stated 6 another way, the normalized level of annual surplus sales 7 is 2.4 million MWh while the normalized level of power 8 purchased from the market is 0.5 million MWh. In the 9 modeling world, with a net surplus position, higher 10 electricity market prices will benefit sellers of 11 electricity provided that the surplus is generated by 12 resources modeled at cost less than the gas-fired 13 generation driving the modeled market prices for 14 electricity. 15 In the real world, as the Company's loads grow, less 16 and less surplus will be available from hydro generation 17 and more expensive coal-fired and natural gas-fired 18 resources will be utilized to a greater extent to serve 19 system loads. Short-run modeled surplus sales benefits 20 that result from high gas price-influenced electricity 21 market price will ultimately disappear as loads grow and 22 only the higher cost of fuel used to serve the growing load 23 will remain. SAID, DI REB 3 Idaho Power Company 1 Q.Does the AURORA power supply modeling 2 adequately reflect the impacts that Northwest hydro 3. conditions can have on electricity market prices? 4 A.While the AURORA model does many things 5 well, one thing it does not do well is account for the 6 impact of regional hydro conditions when forecasting the 7 market prices Idaho Power will receive for its surplus 8 sales. The Company has repeatedly stated, and the 9 Commission has repeatedly recognized, that within the 10 Northwest, both gas prices and hydro conditions are primary 11 drivers of market prices for electricity. 1 Low water 12 conditions, droughts, tend to drive electricity prices in 13 the Northwest up while abundant water tends to drive 14 electricity prices in the Northwest down. The Company 15 believes that AURORA modeling considers the gas price 16 influence on electricity market prices too heavily and the 17 water condition influence on electricity market price too 18 lightly. 19 Q.Wha t has the Company done wi thin power 20 supply modeling to account for the influence of water 21 conditions on electricity market prices? 22 A.In order to correct for the modeling 23 deficiency in AURORA that fails to adequately reflect the 1 Order No. 24806 issued in Case No. IPC-E-92-25 and Order No. 30047 issued in Case No. IPC-E-06-07 are two examples. SAID, DI REB 4 Idaho Power Company 1 hydro condition influence on electricity market prices, the 2 Company has segmented water condition scenarios into five 3 pentiles. Recognizing that the model primarily uses gas 4 prices to determine electricity prices, the Company adjusts 5 gas prices in each of the pentiles as a surrogate for water 6 condition influences on electricity prices. 7 Q.Mr. Sterling refers to Exhibit No. 102 that 8 he says demonstrates "there appears to be no correlation 9 whatsoever between Northwest hydro conditions and Sumas gas 10 prices on a monthly basis." Is this conclusion misleading? 11 A.Yes. Idaho Power has never contended there 12 is a correlation between Northwest hydro conditions and 13 Sumas gas prices. What Idaho Power has contended, and 14 still believes to be the case, is that Northwest hydro 15 conditions influence electricity market prices. Because 16 the AURORA model does not adequately quantify this 17 influence, Idaho Power has corrected for the modeling 18 deficiency by modifying the model driver, gas price. This 19 modification is not made to suggest a correlation between 20 water condition and gas price, but rather to reflect water 21 condition impacts on electricity market prices. The SAID, DI REB 5 Idaho Power Company 1 Company has been open and forthright in stating this 2 position.2 3 Q.Does Mr. Sterling suggest that Northwest 4 hydro conditions do not influence electricity market 5 prices? 6 A.No. To the contrary, Mr. Sterling states 7 that gas prices and hydro conditions "both greatly 8 influence market prices." However, even though he 9 recognizes the importance of hydro conditions, Mr. Sterling 10 provides no assessment of the AURORA model capability to 11 quantify the impacts of hydro conditions on electricity 12 market prices. Rather than addressing the issue, he 13 recommends the elimination of the Company's attempt to 14 correct for a modeling deficiency based upon a 15 mischaracterization of the intent of the correction. As a 16 result, he understates the proper level of net power supply 17 expenses. 18 Q.What level of power supply expenses should 19 the Commission approve for inclusion in base rates? 20 A.The Commission should approve power supply 21 expenses as included in the Company's Application and 22 testimony in this case. The customer "benefits" from high 23 gas prices as quantified by Mr. Sterling are, in my 2 See pages 6 and 7 of Greg Said's direct testimony in Case No. IPC-E-03-13. SAID, DI REB 6 Idaho Power Company 1 opinion, an unfair reduction of reasonably expected power 2 supply expenses arising from an AURORA modeling deficiency. 3 I am concerned that Staff may be looking solely for an 4 opportunity to reduce the Company's revenue requirement 5 rather than make the effort needed to address this 6 deficiency in the AURORA model and thereby properly 7 quantify normalized power supply expenses. 8 Q.Did the Commission Staff, in a production 9 request, ask whether the Company had included the cost of 10 integrating wind projects in its power supply expense 11 quantification? 12 A.Yes. The Commission Staff's Production 13 Request No. 9 asked if the Company had included any wind 14 integration costs in this test year. The Company replied 15 that it had not included any wind integration costs in the 16 test year. The Company also stated that including wind 17 integration costs would add nearly $3.5 Million to 18 normalized power supply expenses. While the Staff 19 discovered the additional power supply expense the Company 20 failed to include in its case, Mr. Sterling has not 21 proposed to add the wind integration expense into power 22 supply expenses. 23 Q.Does the Company believe these wind 24 integration costs should be included in base rates? SAID, DI REB 7 Idaho Power Company 1 A.Yes. The Company is currently bearing the 2 costs of integrating these proj ects into the system. The 3 costs of integrating wind proj ects into the system include 4 hourly operational impacts that are not easily captured in 5 AURORA modeling, such as the need for standby generation 6 from Company resources, increased purchased power expenses, 7 and reduced surplus sales. These costs should 8 appropriately be included in base rates. 9 Q.In addition to mischaracterizing the 10 Company's correction of a modeling deficiency and not 11 adjusting results to include additional power supply 12 expenses identified in discovery, is there anything else in 13 Mr. Sterling's testimony that suggests a goal of 14 understating the appropriate level of power supply expenses 15 to be included in base rates? 16 A.Yes. On page 15 of his testimony, Mr. 17 Sterling was asked "What happens if Idaho Power's actual 18 net power supply costs turn out to be different than those 19 adopted in this general rate case?" In his response, he 20 states "Idaho Power will never be at risk for more than 10 21 percent of the difference between projected power supply 22 costs and the base power supply costs." This response 23 concerns me because Mr. Sterling's statement suggests that 24 it does not matter if the Commission adopts base power SAID, DI REB 8 Idaho Power Company 1 supply expenses that are $10 million too low because the 2 Company will get $9 million back through the PCA. Such a 3 position would be inconsistent with the intent of the PCA. 4 The PCA was intended to be symmetrical, with the Company 5 giving back to customers during times of low power supply 6 expenses and recovering additional amounts during times of 7 high power supply expenses. If base power supply expenses 8 are purposely set too low, the symmetry and fundamental 9 fairness of the process is lost. During the last eight 10 years, the Company has had power supply expenses exceed the 11 levels included in base rates seven times. While this is 12 largely a result of prolonged drought, the Commission 13 should be concerned about the integrity of PCA adj ustments 14 over time. 15 Q.On page 15, line 7 of Dr. Peseau's 16 testimony, he states "At the time Idaho Power prepared its 17 testimony in this case, it used a March 2008 NYMEX natural 18 gas price forecast averaging about $lO/mmbtu." Is this 19 statement accurate? 20 A.No. The Company did develop its natural gas 21 price forecast in March 2008 ¡however, the methodology was 22 based on the inclusion of multiple natural gas price 23 indices, including NYMEX. The average natural gas price SAID, DI REB 9 Idaho Power Company 1 used by the Company in the 2008 rate case is $7. 74/mmbtu, 2 not the $lO/mmbtu implied by Dr. Peseau. 3 Q.What average natural gas price did Mr. 4 Sterling propose? 5 A.Although Mr. Sterling was critical of the 6 Company approach in arriving at $7. 74/mmbtu, he proposes 7 using $7. 75/mmbtu. Dr. Peseau suggests that current 8 forecasts are for gas prices under $7. OO/mmbtu. 9 Q.Dr. Peseau states that a 30 percent 10 reduction in gas prices will "of course, have a significant 11 effect on regional electricity prices and Idaho Power's net 12 power supply expenses for the test year." He goes on to 13 say that "I am sure, however, the use of the current 14 natural gas prices in the net power expense model would 15 eliminate all or a very substantial portion of the 16 forecasted increase in net power supply expenses."(P. 15, 17 ll. 14-17.) Has Dr. Peseau accurately characterized the 18 affect of reduced natural gas prices modeled net power 19 supply expenses? 20 A.No. Dr. Peseau apparently does not 21 understand the current relationship between gas prices and 22 modeled net power expenses that both Mr. Sterling and I 23 discussed in our respective testimonies. Lower gas prices 24 mean lower market prices. In the power supply model, lower SAID, DI REB 10 Idaho Power Company 1 market prices increase Idaho Power's net power supply 2 expense on a normalized basis. Higher natural gas price 3 assumptions input to the AURORA model result in higher 4 market surplus .sales prices and thereby decrease Idaho 5 Power's net power supply expense on a normalized basis. 6 Q.Did the Company provide NYMEX future natural 7 gas prices to Dr. Peseau in its responses to Micron's 8 Production Requests Nos. 21-23? 9 A Yes. 10 Q.Were these natural gas prices higher or 11 lower than the Company's original natural gas price 12 forecast used in its test year? 13 A.The NYMEX natural gas prices provided to Dr. 14 Peseau based upon his specifications averaged $10. 80/mmbtu 15 and $10. 41/mmbtu, both higher than the $7. 74/mmbtu used by 16 the Company and both higher than the below $7. OO/mmbtu 17 stated in Dr. Peseau's testimony. 18 Q.Dr. Peseau states that he requested power 19 supply model runs that would" reflect the approximate 25-30 20 percent reduction in natural gas price forecasts. Did 21 Micron request power supply model runs with gas prices 25 22 to 30 percent lower than in the Company's filed case? 23 A.No. Micron requested runs using the NYMEX 24 gas prices provided by Idaho Power in response to Micron SAID, DI REB 11 Idaho Power Company 1 production requests that I previously stated were 2 $10. 80/mmbtu and $10. 41/mmbtu. These runs are contained in 3 Micron's Exhibit No. 704. 4 Q.Dr. Peseau testifies that his Exhibit No. 5 704 supports his argument that the Company's net power 6 supply expenses should be reduced by approximately $25 7 million as shown in his Exhibit No. 704. Is he accurately 8 characterizing what Exhibit No. 704 shows? 9 A.No. Exhibit No. 704 shows the opposite 10 affect I just described. By increasing the natural gas 11 prices to the $10 per mmbtu level as requested by Dr. 12 Peseau, the Company's net power supply expenses went down 13 just as Mr. Sterling and I have testified. 14 Q.Have you prepared an exhibit to quantify a 15 10 percent reduction from the $7. 75/mmbtu gas price 16 assumption included in the Company's filing? 17 A.Yes. Exhibit No. 87 is AURORA output based 18 upon a reduction in gas price assumption from $7. 75/mmbtu 19 to $6. 98/mmbtu. Normalized net power supply expenses rise 20 from $88.4 million to $97.2 million. 21 Q.Dr. Peseau supports his argument for a 22 reduction in the Company's net power supply expenses by 23 comparing the PURPA avoided cost model to the model used to SAID, DI REB 12 Idaho Power Company 1 determine the Company's net power supply expense. Is that 2 a valid comparison? 3 A.No. The PURPA model predicts the fully 4 distributed cost of a hypothetical combined cycle 5 combustion turbine. It is intended to model the marginal 6 resource on the Company's system, i. e., the cost it can 7 "avoid." It does not model the Company's net power supply 8 expenses. The 30 percent reduction in natural gas prices 9 cited by Dr. Peseau will reduce the cost of the PURPA 10 surrogate avoided resource. Lower gas prices have the 11 opposite affect on modeled net power supply expenses. 12 Q.Does the Company agree with Mr. Sterling's 13 natural gas price forecast of $7. 75/mmbtu, or the natural 14 gas price forecast over $lO/mmbtu contained in Dr. Peseau's 15 Exhibit No. 704, but characterized by Dr. Peseau as under 16 $7/mmbtu? 17 A.Dr. Peseau is correct when he states that 18 gas prices have fallen. Both Mr. Sterling's and the 19 Company's natural gas price assumptions may be too high. 20 However, as I have stated earlier in my rebuttal testimony, 21 reducing the natural gas price assumptions would increase 22 the level of net power supply expenses. Dr. Peseau's 23 conclusions regarding the changes in power supply expenses SAID, DI REB 13 Idaho Power Company 1 that result from changes in gas prices are incorrect and 2 should be ignored. 3 Q.Does this conclude your rebuttal testimony? 4 A.Yes, it does. SAID, DI REB 14 Idaho Power Company Hy d r o e l e c t r i c G e n e r a t i o n ( M V V ) Br i d g e r En e r g y ( M V V ) Co s t ( $ x 1 0 0 0 ) Bo a r d m a n En e r g y ( M V V ) Co s t ( $ x 1 0 0 0 ) Va l m y En e r g y ( M V V ) Co s t ( $ x 1 0 0 0 ) Da n s k i n En e r g y ( M V V ) Co s t ( $ x . 1 0 0 0 ) Fix e d C a p a c i t y C h a r g e - G a s T r a n s p o r t a t i o n ( $ x 1 0 0 0 ) To t a l C o s t Be n n e t t M o u n t a i n En e r g y ( M V V ) Co s t ( $ x 1 0 0 0 ) Fi x e d C a p a c i t y C h a r g e - G a s T r a n s p o r t t i o n ( $ x 1 0 0 0 ) To t a l C o s t Pu r c h a s e d P o w e r ( E x c l u d i n g C S P P ) Ma r k e t E n e r g y ( M V V ) Co n t r a c t E n e r g y ( M V V ) To t a l E n e r g y E x c l . C S P P ( M V V ) Ma r k e t C o s t ( $ x 1 0 0 0 ) Co n t r c t C o s t ( $ x 1 0 0 0 ) To t a l C o s t E x c l . 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