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BEFORE THE IDAHO PUBLIC UTILITIES CO:MNlJ~$-t~1't 0 /,
j hi IS S :
IN THE MATTER OF THE
APPLICA nON OF ACIFICORP
FOR AVOIDED COST
METHODOLOGY FOR QUALIFYING
F ACILITES LARGER THAN 1 MW
Case No. IPC-95-
Direct Testimony
Rodger Weaver
On Behalf of PacifiCorp
June 14 , 1996
Please state your name, business address and present position with PacifiCorp (the
Company).
My name is Rodger Weaver. My business address is 825 N. E. Multnomah, Suite
485 , Portland, Oregon 97232, and my present position is Regulatory
Administration Manager.
Please briefly describe your education and business experience.
I received an undergraduate degree in Economics and a Ph.D in Economics from
the University of Utah. I worked for the Public Service Commission of Utah from
1984 - 1987 as a Senior Economist, and the Utah Division of Public Utilities from
1987 - 1992 as a Senior Economist. In 1992 I began working for PacifiCorp and
assumed my current title and duties in 1995.
Please describe your current duties.
I am responsible for the direction and coordination of net power cost and related
analyses. I coordinate the Company s interaction with the Bonneville Power
Administration and various inter-utility coordination agencies. In addition, I
represent the Company on power resource and various other issues before the
seven state regulatory commissions to whose regulatory jurisdiction we are
subject. I am also responsible for the Company s filings with the Federal Energy
Regulatory Commission.
What is the purpose of your testimon y?
My testimony is in response to the Settlement Stipulation in Case No. IPC-95-
and unresolved issues which could not be included in the settlement agreement.
My testimony addresses three issues on which the Company and the other parties
could not come to agreement. In the Company s opinion, these issues are
interrelated, dealing with contract structure and pricing: (1) the standard length of
Page 1
Rodger Weaver , DiPacifiCorp
contracts, (2) levelization of contract pricing and (3) market adjustments to
contracts.
Does PacifiCorp support the Settlement Stipulation as filed in this case?
Yes. The Company believes the methodology proposed in the Settlement
Stipulation meets the requirements of Commission Order Nos. 25882, 25883 and
25884 and is in the public interest, and supports the Settlement Stipulation.
However, the Company views the proposed methodology as a transitional step
towards market-based pricing. In a competitive market such as we have today, a
utility's true avoided cost is the price the utility would incur in the market, but for
the QF contract. If the prices paid to a QF are based on anything other than
market prices so as to overstate avoided costs, subsidies exist to the detriment of
customers and shareholders.Nevertheless, until a more market-based
methodology is adopted by the Commission (which may be at the request
PacifiCorp in another docket), the Company supports the proposed IRP-based
avoided cost methodology for large QF projects.
Why do you think the unresolved issues are important?
These issues are important because the wholesale market has become very
competitive. In early 1995 FERC introduced additional competition to the
wholesale generation side of the business with its transmission open access
requirements. Wholesale generation is, of course, the part of the business in which
the QF industry resides. Regulatory changes as well as technology changes, have
lead to the creation of over 170 power marketers, market indexes, unbundled
products, electricity futures and intense competition. This intense competition has
reduced wholesale market prices by over 50% since 1994 and has caused buyers
and sellers to rethink price risk associated with long-term contracts. The result is
Page 2
Rodger Weaver, DiPacifiCorp
firm wholesale contracts which are much shorter in duration.
Have other states recently taken action regarding the Company s avoided costs as
a result of market changes?
Yes. The California Commission recently rejected the Company s proposal
which requested revised avoided cost rates for a period of 15 years. They stated
the requested rates were not shown to be reflective of the Company s true avoided
cost, which should now reflect market prices. The Commission also suspended
the then approved avoided cost rates for the same reason. Therefore, at this time
the Company s avoided costs are in a state of suspension in California. A copy
the California decision is presented as Exhibit 301
(RW-301) .
Please describe the Commission s previously established methodology on the
term of future QF contracts, levelization and market adjustment clauses.
The Commission s previously established methodology required a standard 20
year contract term, levelization of the entire capacity and energy portions of the
rate and what I would consider to be a limited market update clause in the form of
an annual update to the variable cost component.
Do you believe these aspects of Commission s previously established avoided
cost methodology are still appropriate today?
No. The Commission s previously established methodology would protect QF
developers from competitive market forces with which all other wholesale market
participants have to contend and would lead to overstated avoided cost prices in
today s environment. Twenty year fixed term contracts either with or without
levelization and without market price adjustments simply do not represent a
legitimate avoidable resource for the Company. Today, resource needs are
Page 3
Rodger Weaver, DiPacifiCorp
usually being met with purchases of no more than 5 years in duration. The one
exception is contracts which have market adjusted pricing for contract periods
longer than 5 years, which protect both the seller and purchaser from price risk.
In the Company s opinion, twenty year fixed price contracts, without market
adjustment clauses place an unreasonable level of price risk on utilities
customers and in the emerging era of competitive generation markets, on its
shareholders.
Do you have any information to support your claim that the current market term
for wholesale contracts is 5 years or less?
Yes. Virtually all ofthe Company s new sales since 1994 have a duration of5
years or less, with one exception. The Company has one sale with terms greater
than five years , however, pricing beyond the initial 5 year period is tied to market
based indices which protect both parties from price risk. In 1994 the Company
was the largest player in the wholesale power market in the Western System
Coordinating Council (WSCC) reliability region with a 31 % market share.
Although the figures are not yet available for 1995 , the Company is still the leader
in terms of wholesale market share. The Company s 1995 wholesale energy sales
volume was 5% greater than it was during 1994. Through this participation the
Company has gained an intimate knowledge of the market. The Company
transactions are very similar to the overall market. As shown on Exhibit 302
(RW-302), prior to 1995 the Company s wholesale sales portfolio was more
heavily weighted with long term firm contracts. During 199465.2% of the
Company s wholesale sales were tied to wholesale contracts with terms greater
than 5 years in duration. During 1995 that percentage dropped to 60.7% and is
expected to drop to 39.4% in 1996. Although the Company s portfolio still has a
Page 4
Rodger Weaver, DiPacifiCorp
significant volume of fixed price long-term (longer than 5 years) sales contracts in
its portfolio, those contracts were entered into prior to the change in the wholesale
market and no new fixed price long term contracts are being added to the
portfolio. In the Company s opinion, these changes are significant and need to be
recognized in the determination of avoided costs.
Based on your market knowledge what should the contract structure and pricing
terms be for QF'
The contract structure and pricing terms should reflect those in the market, i.
what is avoided by a QF contract. The Company believes the optimal contract
structure the Commission should adopt includes a five year term and a developer
option for fulllevelization during that term. If the terms are kept to 5 years or less
the Company doesn t believe market adjustments would be necessary or
appropriate. Pricing in the subsequent periods would be based on subsequent
market conditions.
If the Commission decides to continue with contract terms which are greater in
length than 5 years, are there options available that can balance the risks between
developers, customers and shareholders?
Yes. The Commission should allow utilities to include provisions which would
allow the risk of longer term contracts to be shared.
Do you have any examples ofthe contract options you are referring to?
Yes, while there are many options, I will briefly describe two 20 year contracts.
The Commission could adopt contracts which have 5 years of initial pricing
followed by market adjustments at the beginning of the 6th, 11 th and 16th years.
The market adjustment would true-up prices to a published market index such as
the California Oregon Border (COB) or Palo Verde electricity indexes or other
Page 5
Rodger Weaver , DiPacifiCorp
indices which are a good measure of then current electricity prices. Prices
between adjustment years could be based on the prior year s price adjusted by an
inflation index. A second option could involve a plus or minus 10% deadband
being placed around a predetermined price stream. If the actual index-based price
of electricity (reflecting market) stays within the deadband, prices would remain
unchanged. On the other hand, if the actual price of electricity in the market were
outside the deadband, prices would automatically be reset to the published market
price with a new deadband and so forth. Many other options and combinations
could be suggested. It is the Company s opinion that the exact contract structure
which is adopted by the Commission is not so important as long as the overall
price risk is commensurate with the market. The market provides the best
evidence of what the costs truly are that a QF project will allow the Company to
avoid.
Does this conclude your direct testimony?
Yes.
Page 6
Rodger Weaver, DiPacifiCorp
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
Case No. IPC-95-
EXHIBIT NO. 301
ACIFICORP CALIFORNIA JURISDICTION A VOIDED COST ORDER
WITNESS: RODGER WEAVER
cm1/PGC*
Decision 96-02-070
Mot~
FEB 2 7 19i6February 23, 1996
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In the Matter of the Application
PacifiCorp, dba Pacific Power &
Light Company (U-901E) for
Approval to Modify its Published
Avni c1Pc1 ('n~t ~
of
Application 95 - 07 - 005(Filed July 10, 1995)
Summary
pacifiCorp, doing business as Pacific Power & Light
Company (Applicant) seeks an ex parte order modifying the avoided
cost rates that it will pay to qualifying facilities in
California.
Procedural Background
Applicant filed its application on July 10, 1995.
Notice was published in our Daily Calendar on July 24, 1995. No
protests were filed. The Division of Ratepayer Advocates (DRA)
filed a response on August 24 , 1995 , recommending that the
Commission approve the application.
Background
Applicant is an electric utility subj ect to ourjurisdiction in California. We have previously approved
Applicant.' s Schedule No. CG- 5 , which reflects the price of power
that Applicant must pay for deliveries from qualifying
facilities. We are authorized to establish such prices pursuant
to Section 2821 of the Public Utilities (PU) Code and Section 210
of the Public Utility Regulatory policies Act of 1978. (16 USC
824a-
Applicant wishes to change the methodology by which it
determines such prices. It currently relies upon Bonneville
Power Administration (BPA) forecasts of new resource rates to
determine short-run capacity costs and long-run capacity and
energy costs, and bases short-run energy costs on the marginal
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95-07-005 COM/PGC*
production cost of existing resources. Applicant formerly
intended to meet its future resource requirements with purchases
from BPA , but now plans to do so through combustion turbines.
Accordingly, Applicant wishes to base short - run
capacity costs on the fixed costs of a simple cycle combustion
turbine and the long-run capacity and energy costs on the fixed
and variable costs of a combined cycle combustion turbine. It
would continue to calculate short-run energy costs using its
existing production cost model. Applicant represents that it
purchases power from six existing qualifying facilities, totaling
less than 9 MW, and is not now engaged in active negotiations
with any other qualifying facility for future proj ects.
Applicant represents that the proposed changes will not affect
any existing qualifying facility because the requested rates
would only be applicable to new proj ects . Applicant also
proposes to update its avoided cost rates by an advice letter
filing by October 15 of each year , beginning in 1996.
Discussion
While we commend Applicant for taking a step in the
right direction by modifying its avoided cost calculations to
result in lower prices being paid to future qualifying
facilities, we are concerned that Applicant's actual avoided
costs on the term proposed may be even lower than they have
calculated.
Our general approach to avoided costs is that they
should reflect the costs that utilities would otherwise incur for
energy purchased from qualifying facilities. (See 18 C.R.
292.101.When a utility changes the source of energy it would
otherwise rely upon, it is appropriate that it change the basis
on which it calculates avoided costs. While we will suspend the
current schedule, as it no longer reflects the relevant energy
market, we will deny the application, without prej udice, because
1 This was an outcome of an agreement with the Commission I s former PublicStaff Division in a 1986 rate case. (See In re PacifiCorp dba Pacific Power
and Light Company (D.86-12-097) 23 CPUC2d 295, 311.
- 2
95-07-005 COM/I.=-~_
Applicant has not shown that its proposed reliance on combustion
turbine technology accurately reflects its resource options or
the regional power market.
We do this in part because of the uncertainty that
exists in how best to calculate a utility I s avoided costs. This
was an exceedingly contentious issue in our recent Biennial
Resource plan Update. Additionally, the Federal Energy
Regulatory Commission (FERC) has recently given an advisory
opinion that all sources of power, including purchases from other
utilities in a regional power market, should be considered in
calculated avoided cost payments. Although FERC' s opinion is
only advisory in nature, it nonetheless highlights the
uncertainty in how best to calculate avoided costs.
In addition to this uncertainty, the entire concept of
long-term avoided cost calculations is also being called into
question by our efforts to restructure California I s electric
service industry. The entire concept of using administratively-
determined benchmarks of avoided costs may change as we may
increasingly choose in the future to rely on readily available
market prices from the operation of the power exchange and direct
access markets.
Suspending Applicant's current schedule for avoided
cost payments should have no effect on Applicant's operations.
Suspension of this schedule does not affect Applicant I s existing
contracts, and Applicant has stated that it has no active
negotiations to enter into new contracts. Should Applicant'
situation change, it is free to refile its application and prove
that its proposed methodology accurately reflects costs not in
excess of its resource options or the regional power market over
the term of avoided costs proposed.
Find~ngs of Fact
Applicant is an electric utility subj ect to our
jurisdiction in California.
- 3
COM/PGC*
2. Applicant seeks an ex parte order modifying the avoided
cost rates to be paid by it to qualifying facilities.
No protests have been filed.
ORA recommends that the Commission approve Applicant'
proposed methodology as reasonable.
Applicant I S current methodology is outdated.6. Applicant has not shown that its proposed reliance on
combustion turbine technology accurately reflects its resource
options or the regional power market.
Conclusions of Law
Applicant's existing Schedule No. CG-5 should be
suspended.
2. Applicant's Schedule No. CG-5, in the form attached as
Exhibi t 1 to its application, should not be approved, without
prej udice to Applicant's ability to justify its proposed
methodology in future proceedings.
THEREFORE IT IS ORDERED that the application of
PacifiCorp pursuant to Section 2821 of the Public Utilities Code
to modify its Schedule No. CG-, in the form attached as Exhibit
1 to its application, is not approved , and it may not update
avoided cost rates consistent with the methodology described in
the application, beginning in 1996 through advice letter filings,
which may be made in October of each year. It shall also suspend
its existing Schedule No. CG-5.
This order is effective immediately.
I abstain.
Dated February 23, 1996, at San Francisco, California.
DANIEL Wm. FESSLER
President
P. GREGORY CONLON
JESSIE J. KNIGHT , Jr.
HENR Y M. DUQUE
Commissioners
/s/JOS IAH L. NEEPERCommissioner
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
Case No. IPC-95-
EXHIBIT NO. 302
WHOLESALE SALES DATA
WITNESS: RODGER WEAVER
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CERTIFICATE OF SERVICE
I hereby certify that on the !3'P'd ay of June, 1996, a true and correct copy of the
foregoing Direct Testimony of Rodger Weaver was sent via Federal Express to the following:
Larry D. Ripley
Idaho Power Company
O. Box 70
Boise, Idaho 83707-0070
Barton L. Kline
Idaho Power Company
O. Box 70
Boise, Idaho 83707-0070
Brad Purdy
Deputy Attorney General
Idaho Public Utilities Commission
O. Box 83720
Boise, Idaho 83720-0074
Thomas Dukich, Manager
Washington Water Power Co.
O. Box 3727
Spokane, Washington 99220
R. Blair Strong
Paine, Hamblen, et al.
717 W. Sprague Avenue, #1200
Spokane, Washington 99204
Gregory N. Duvall
PacifiCorp
825 NE Multnomah, Suite 485
Portland, Oregon 97202
Peter 1. Richardson
Davis Wright Tremain
999 Main Street, Suite 911
Boise, Idaho 83702
Carl Myers
Myers Engineering, P.
750 Warm Springs Avenue
Boise, Idaho 83712
Ronald C. Barr
Earth Power Resources, Inc.
2534 East 53rd Street
Tulsa, Oklahoma 74105
Richard B. Burleigh
Don Olowinski
Stephanie Walter Gillette
Hawley Troxell Ennis & Hawley
O. Box 1617
Boise, Idaho 83701-1617
Owen H. Orndorff
Orndorff Peterson & Hawley
1087 West River Street, Suite 230
Boise, Idaho 83702-7035
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