20040715Duvall Supplemental.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
INVESTIGATION OF
INTER-JURISDICTIONAL
ISSUES AFFECTING P ACIFICORP )
DBA UTAH POWER & LIGHT CO. )
CASE NO. P AC-O2-
SUPPLEMENTAL DIRECT
TESTIMONY OF
GREGORY N. DUV ALL
JULY 2004
Analyses
Mr. Duvall, did you previously file testimony in this proceeding?
Yes. My Direct Testimony was part of the Company s original filing with the
Commission in September of 2003.
What is the purpose of your Supplemental Direct Testimony?
The purpose of my Supplemental Direct Testimony is to describe various analyses
done by the Company since the September, 2003 Protocol filing, with particular
emphasis on studies related to the issue of whether relatively faster growing States
inappropriately shift costs to relatively slower growing States. I also sponsor
Exhibit No. 20, which is Appendix F to the Revised Protocol. That Appendix
provides details on the calculation of the Mid-Columbia (MC) allocation factor.
Why did the Company continue to perform analyses of MSP issues
subsequent to the September, 2003 filing?
As indicated by Ms. Kelly in her Supplemental Direct Testimony, it was evident
that few parties supported the Company s original Protocol proposal for a hydro
endowment matched with a "coal endowment". It was also evident that the hydro
endowment included in the Modified Accord, known as the fuel adjustment, was
no longer acceptable. This is discussed further in Mr. Taylor s Supplemental
Direct Testimony. Therefore, we needed to design and test an alternate means of
implementing a hydro endowment. The first such substitute tested was the "load
decrement method". Mr. Taylor s Supplemental Direct Testimony describes this
approach and explains why the Company s analyses of the load decrement
method indicated that it was not likely to be workable. The Company s analysis of
Duvall, Sup -
PacifiCorp
the fuel adjustment approach and the load decrement approach led us to develop
and conduct analyses of the "embedded cost differential method". These analyses
did not identify any apparent flaws in the embedded cost differential method and
it was, therefore, incorporated into the Revised Protocol.
In your Direct Testimony, you concluded that the "MSP Solution
incorporated in the original Protocol, did not result in a "material" subsidy
flowing from slower-growing States to faster growing States. Why did you
continue to study the load growth issue after the September, 2003 Protocol
filing?
For two reasons. First, Oregon parties were not convinced that the analyses done
before the September filing were adequate to resolve the load growth issue.
Second, the concept of "materiality" is somewhat subjective. Oregon parties
pointed out that what appears to be an apparently "small" cost shift, when
expressed as a percentage of existing rates, can nonetheless translate into a
significant impact when expressed in dollars. Because our September filing did
not resolve the load growth issue, parties in Oregon and Utah submitted a number
of additional data requests which gave rise to a number of additional studies.
Please describe the nature of these studies.
Most of the studies assumed either a one-time increase in Utah loads or a
continuing pattern of higher Utah load growth which were matched with different
types of Resource additions. Additional similar studies were done assuming
higher Oregon load growth and corresponding Resource additions. Furthermore,
a study was done which attempted to quantify the cumulative impact of faster
Duvall, Sup - 2
Pacifi Corp
Utah load growth over a 14-year period. This study (made in response to DPU 7.
and OPUC 59 and 60), estimates and compares two different cost streams -- one
corresponding to low Utah load growth (equal to the average of the other States
projected load growth) and one corresponding to the higher rate of Utah load
growth that is currently forecasted. For purposes of this study, the difference
between these cost streams is predictive of the impact on other States of the costs
of Utah's additional relative load growth.
What quantitative assumptions underlie these studies?
Major assumptions are as follows:
All studies use the Company s 2003 load forecast.
Additional Resources are layered on top of underlying load growth and
planned IRP Resource additions.
All studies assume an underlying system peak Resource deficiency in the
early years and the addition of Resources that closely match the Diversified
Portfolio I from the Company s 2003 Integrated Resource Plan with two long-
term purchased power contracts removed from the west control area to reflect the
lower loads forecast for the west in the Company s 2003 load forecast.
Most of the studies assume that future wholesale gas and electricity prices
will follow the Company s forward price curves. Some of the studies were done
with a high natural gas/electricity price assumption.
Please summarize the results of these studies.
Under a rolled-in allocation method, a faster-growing State supports both its
allocated share of any new Resource additions and a larger share of the
Duvall, Sup - 3
Pacifi Corp
Company s existing costs. Correspondingly, slower growing States support their
allocated share of the cost of the New Resource addition, but a smaller share of
the Company s existing costs. In our studies, the sum of these two State revenue
requirement impacts is compared to the total revenue requirement impact of the
new Resource additions. If the total revenue requirement increase experienced by
a faster-growing State is equal to or greater than the total revenue requirement
impact of a new Resource, the faster growing State is deemed to be "supporting
the cost of its load growth" and not causing a cost shift to slower growing States.
When considered from this perspective, our studies suggest that under the
various approaches, a rolled-in allocation method, as embodied in the Revised
Protocol, results in the growth State supporting between 86 percent and 127
percent of the cost of its load growth.
Why do the percentages differ from study to study?
It appears that principal drivers of the study outcomes are:
The greater the rate of growth of one State compared to other States, the
greater is the potential for cost shifts to slower growing States.
The higher the cost of new Resource additions compared to existing
Resources, the greater is the potential for cost shifts to slower growing States.
The better New Resource additions are matched to load patterns through
an effective IRP process, the lower is the potential for cost shifts to slower
growing States.
Duvall, Sup - 4
Pacifi Corp
Do these study results suggest that parties should ignore the potential for
faster growing States shifting costs to slower growing States?
No. The studies indicate that there is a potential for some shifting of costs. As a
general proposition, MSP participants seem to favor eliminating any potential cost
shift, as long as that could be done in a relatively simple and understandable way
without giving rise to other, undesirable unintended consequences.
Are there other mitigating factors to consider?
Yes. When a State loses load unexpectedly, other states are automatically
allocated a greater share of the fixed and variable costs of all Resources. This
helps to mitigate the impact on the remaining customers in the State that loses
load who would otherwise bear a larger share of the fIXed and variable costs.
In addition, the impact of Utah load growth is mitigated by the expected
Resource loss in western States. One of the underlying tenets of the Revised
Protocol is that all States bear a rolled-in share of resources that are acquired to
replace existing Resources. Existing Resources that will require replacement over
the next several years include expiring long-term wholesale contracts (primarily
on the west side of the system), plant retirements and the lost generation from
Hydro-Electric Resources and Mid-Columbia Contracts as a result of relicensing
and contract renegotiation. For the States that are recipients of the Hydro
Endowment, this means that other States are paying a share of the costs of
replacing resources from which the Hydro Endowment states have benefited.
Duvall, Sup - 5
Pacifi Corp
Has an acceptable method of eliminating any potential for cost shifts been
identified?
No. However, as indicated by Ms. Kelly, the Company and other parties have
committed to further discussions and analysis of potential additional allocation
mechanisms or structural changes that would better address the issue.
Development of the MC Factor
What is contained in Exhibit No. 20?
Exhibit No. 20 is Appendix F to the Revised Protocol and contains a description
of the calculation of the MC factor as well as example calculations of the factor.
The MC factor is used in the Revised Protocol to allocate the Mid-Columbia
Adjustment among the States.
Why has the Company developed an MC factor?
The Company performed an extensive review of the Mid-Columbia Contracts at
the request of the MSP participants. There are four contracts that were entered
into in the 1950's and 1960's, and three contracts that were entered into in 2001.
These latter three contracts are successor contracts to the two earlier contracts
with Grant County which provide the Company a share of the output of the Priest
Rapids and Wanapum dams. The Priest Rapids contract stated that the output was
for the benefit of Oregon customers and the Wanapum contract stated that the
output was for the benefit of Oregon and Washington customers. Based on this
language, the MC factor is developed as though the Priest Rapids energy is
assigned to Oregon and the Wanapum energy is assigned to Oregon and
Washington as described in Appendix F. The energy from the three successor
Duvall, Sup - 6
Pacifi Corp
contracts is assigned to Oregon during the time subsequent to the expiration of the
Priest Rapids contract and prior to the expiration of the Wanapum contract. After
both contracts have expired, the energy from the successor contracts is split
between Oregon and Washington as described in Appendix F. In the MC factor
the energy from the remaining two contracts, associated with the Rocky Reach
and Wells projects, is spread system-wide as these two contracts do not have
specific language identifying any particular State as the beneficiary of the output.
The MC factor is then calculated by dividing the energy assigned and allocated to
each State by the total energy from the Mid-Columbia Contracts. The Mid-
Columbia Adjustment is then made based on an allocated share of the costs of all
of the Mid-Columbia Contracts using the MC factor. This adjustment ensures
that no one State is burdened if the costs under one of the Mid-Columbia
Contracts diverge from the other contracts. This method ensures that all States
are afforded a share of the costs and benefits of the Mid-Columbia Contracts, with
Oregon and Washington receiving a larger share than would be the case of they
were treated as System Resources.
Does that conclude your Supplemental Direct Testimony?
Yes.
Duvall, Sup - 7
PacifiCorp
Case No. PAC-02-
ExhibitNo. 2D
Witness: Gregory N. Duvall
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ACIFICORP
Exhibit Accompanying Supplemental Direct Testimony of Greg N. Duvall
Appendix F - Methodology for Determining Mid-C (~C) Factor
July 2004
PacifiCorp
Exhibit No. 20 Page 1 of2
Case No. PAC-02-
Witness: Gregory N. Duvall
Protocol Appendix F
Methodology for Determining Mid-C (MC) Factor
Energy for each Mid-C contract is allocated as follows to determine the MC factor.
Priest Rapids energy is assigned 100% to Oregon.
Rocky Reach energy is allocated on the SG factor.
Wanapum energy is assigned to Oregon and Washington based upon each state s respective share
of the SG factor.
Wanapum energy assigned to Oregon = Oregon SG (total Oregon and Washington SG).
Wanapum energy assigned to Washington = Washington SG (total Oregon and
Washington SG).
Wells energy is allocated on the SG factor.
The Grant replacement contracts begin at the time the Priest Rapids contract terminates. The
energy from these contracts is assigned to Oregon through October 31, 2009.
Effective November 1,2009, the date the Wanapum contract expires, the Grant replacement
contract energy is divided into two pieces based on PacifiCorp s share of the nameplate of Priest
Rapids and Wanapum as shown in the following calculation:
Priest Ra ids
Wana urn
NameplateCa acit
789
831
620
PacifiCorp
Share of
Nameplate -
110
155
265
PacifiCorp
% share of
name late
41 .350/0
58.650/0
100.000
PacifiCorp
Share - %
13.
18.70/0
The Priest Rapids portion of the Grant County replacement contracts is 41.35%. The energy
associated with the Grant County replacement contracts for Priest Rapids is assigned 100% to
Oregon.
The Wanapum portion of the Grant County replacement contracts is 58.65%. The energy
associated with the Grant County replacement contracts for Wanapum is assigned to Washington
based on the ratio of the Washington SG factor to the sum of the Oregon and Washington SG
factors. The remaining energy from the Wanapum portion is assigned to Oregon.
After all of the energy from the Mid-Columbia Contracts has been assigned or allocated to each State,
then the MC factor is created by dividing each State s energy by the total energy associated with the Mid-
Columbia Contracts. The MC factor is used to allocate the Mid-Columbia Contract embedded cost
differential to each State.
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