20071026Clements rebuttal.pdf

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ZO01 OCT 26 ArllO: 52
IDAHO PUBLIC
UTILITIES COlv1MISSI0f\
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF ROCKY
MOUNTAIN POWER FOR APPROVAL
CHANGES TO ITS ELECTRIC SERVICE SCHEDULES
CASE NO. PAC-07-
Rebuttal Testimony
of Paul H. Clements
ROCKY MOUNTAIN POWER
CASE NO. PAC-07-
October 2007
Please state your name, business address and present position with the
Company (also referred to as Rocky Mountain Power).
My name is Paul H. Clements. My business address is 201 S. Main, Suite 2300
Salt Lake City, Utah 84111. My present position is Originator/Power Marketer
for PacifiCorp Energy. PacifiCorp Energy and Rocky Mountain Power are
divisions ofPacifiCorp (the Company).
How long have you been in your present position?
I have been in my present position since December 2004.
Please describe your education and business experience.
I have a B.S. in Business Management from Brigham Young University. I have
been employed with PacifiCorp for almost three years as an originator/power
marketer responsible for negotiating interruptible retail special contracts
negotiating qualifying facility contracts, and managing wholesale or market-
based energy and capacity contracts with other utilities and power marketers.
was the Company representative who negotiated the 2006 electric service
agreement with Monsanto. I have managed all Monsanto contract-related issues
since late 2004. I also worked in the merchant energy sector for 10 years in
pricing and structuring, origination, and trading roles for Duke Energy and
Illinova.
Purpose and Summary of Testimony
What is the purpose of your testimony?
The purpose of my testimony is to respond to issues raised in the pre-filed direct
testimony of the Commission Staff and Monsanto regarding the valuation of the
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interruptible products offered by Monsanto. First, I will first address the history
of Monsanto s firm and interruptible rates and put into perspective the amount
Monsanto is currently paid for its curtailment products. Next, I will address the
issues raised by Monsanto regarding the Company s valuation methodologies. I
will then address the Commission Staffs recommendation for valuing the
Monsanto interruptible products. I will also address the valuation methodologies
proposed by Monsanto. Finally, I will recommend an alternative interruptible
value to the existing contract amount reflected in the Company s filing, if the
Commission elects to establish the value based on the updated projected
future
value of the interruptible products over the remainder of the initial term of the
existing contract, or 2008 and 2009.
Are you adopting a portion of the Supplemental Direct Testimony and
Exhibits of Mr. Mark T. Widmer addressing these issues?
Yes. I am adopting the Supplemental Direct Testimony and Exhibits of Mr.
Widmer on issues relating to the value of Monsanto s interruptible product and
Monsanto s contract.
Please summarize your testimony.
My testimony demonstrates that:
. Monsanto s current net rate reflects a curtailment credit that has increased
significantly in value over the years, such that Monsanto s net rate today is
roughly equivalent to Monsanto s rate in 1982, even though the consumer price
index has increased 116 percent over this same time period.
Under Monsanto s current contract, the Company pays Monsanto approximately
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five times more for its curtailment products than Monsanto pays in its tariff rate.
Monsanto s current curtailment contract is significantly more generous than the
Company s most recent comparable contract.
The Company s front office model and GRID model used for the curtailment
valuation are robust models, used to set the current approved contract price for
Monsanto. In addition, the GRID model is used to set power costs in this case
which include an operating reserve component.
The parties have similar value ranges for the economic curtailment component of
the Monsanto curtailment contract, a value generally tied to market prices.
The operating reserve component of the Monsanto curtailment contract should be
set considering the Company s current resource portfolio, rather than
manipulating the model results as Monsanto suggests to artificially select specific
coal units.
Contrary to Staffs approach, operating reserves cannot be accurately valued
using a proxy derived from market price increases. This is because the value of
operating reserves is not necessarily tied solely to electric market prices. Using
Staffs approach for economic curtailment and system integrity, but the
Company s updated front office model value for operating reserves, produces a
value for the interruptible products in line with the Company s updated value.
Monsanto s peaker valuation approach incorrectly assumes both that Monsanto
curtailment product is similar to a simple cycle turbine unit and that the Company
needs such a unit in its resource portfolio. Adjustments to this valuation
approach are necessary to account for differences in the Monsanto product and a
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simple cycle turbine unit and to more accurately set the price for such a unit.
Based upon test year conventions, the Commission should use the current
contract price as an input to net power costs in this case.
Alternatively, the Company proposes a current value of$9.78 million for the
Monsanto curtailment product. As adjusted, Staffs and Monsanto s valuation
approaches fall within a range that supports this result.
General Comments on Valuation of Monsanto s Interruptible Products
On page 21, lines 1-22 of her direct testimony, Monsanto witness Ms.
Kathryn E. Iverson sets forth a few basic points regarding the valuation of
Monsanto s interruptible products. Are there any additional points that
should also be considered by the Commission?
Yes. Ms. Iverson fails to address the most important point to consider when
valuing these types of products. To ensure fairness to all customers, the
Commission s primary objective in valuing Monsanto s interruptible products
should be to determine the equivalent cost or price the Company would otherwise
incur to obtain those products from other resources. By doing so, Monsanto is
adequately compensated for providing the products, and other customers are
indifferent as to whether the products are provided by Monsanto or from other
resources. If the credit paid to Monsanto is below replacement costs, other
customers receive the benefit at Monsanto s expense. If the credit paid to
Monsanto is above the replacement cost, other customers are providing a subsidy
to Monsanto. The ideal result is to value the curtailment credit at the replacement
cost.
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Please summarize the interruptible products offered by Monsanto and their
relative value in Monsanto s current contract.
The current Monsanto contract provides three products:
1. Operating Reserves. Monsanto provides 95 megawatts of operating
reserves available for 188 hours per calendar year. The Company holds operating
reserves to respond to unit outages and maintain reliability. In the current
contract, the operating reserve product accounts for about 55 percent of the total
value of the interruptible products.
2. Economic Curtailment. Monsanto provides 67 megawatts of economic
curtailment available for 800 hours per calendar year. This product allows the
Company to curtail Monsanto s load on a two hour notice for any reason. In the
current contract, the economic curtailment product accounts for about 40 percent
of the total value of the interruptible products.
3. System Integrity. Monsanto provides 162 megawatts of system
integrity available 12 hours per calendar year. The product allows the Company
to curtail Monsanto following a double contingency event, which is two or more
overlapping forced outages of large Company generating assets within 48 hours.
In the current contract, the system integrity product accounts for less than 5
percent of the total value of the interruptible products.
Please summarize the valuation methodologies proposed by the various
parties in this docket.
The Company has used the same methodologies in this case that it used to
determine the value set forth in the existing agreement with Monsanto, executed
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by the parties and approved by the Commission in 2006: 1) the front office
opportunity cost" model (front office model); and 2) the GRID rnodel.
The front office model is an Excel based model that utilizes the
Company s forward price curves, the operating characteristics and costs of the
Company s current portfolio of generating assets, and other inputs to determine
the marginal cost of obtaining curtailment products from Company resources
and/or market purchases instead of purchasing those same products from
Monsanto.
The GRID model is the deterministic hourly production dispatch model
used to set the Company s net variable power costs. The GRID model
incorporates in its analysis the Company s operating reserves requirements and
determines the "avoided cost" of the curtailment products.
Commission Staff uses a valuation approach based upon changes in the
forward market curves since the current contract was executed. This approach
derives a percentage increase for the economic curtailment and system integrity
products and applies this same percentage increase to the operating reserve
product, without separate analysis.
Monsanto proposes two valuation methods: 1) the Company s front office
model with several adjustments to the inputs and calculations; and 2) a
comparison to the value of a combustion turbine, referred to as a "peaker
valuation.
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Monsanto Contract History and Interruptible Credit Perspective
Ms. Iverson states that "Monsanto should rightfully expect certain benefits
as a result oftheir commitment to curtail loads" (page 37, lines 21-22) and
that "Monsanto s interruptible contract should offer a hedge against market
exposure" (page 27, lines 25-26). Does Monsanto s rate history demonstrate
that is has, in fact, enjoyed the benefit of stable and low cost power for many
years?
Yes. Exhibit No. 58 shows Monsanto s rate for the period from 1982 through
2007. Beginning in 2000, the rate is broken out into a "tariff rate" and a "net
rate , where the tariff rate represents the rate prior to any credit for interruptible
products and the net rate represents the rate to Monsanto after applying the credit
for interruptible products. Prior to 2000, the interruptible credit was not
specifically identified as a separate item and Monsanto had a single contract rate.
As demonstrated by the graph, Monsanto s net rate today is roughly
equivalent to Monsanto s rate in 1982. That means Monsanto is paying the same
net rate today that they did 25 years ago even though the consumer price index
has increased 116 percent over this same time period.
Has Monsanto s interruptible contract acted as a hedge against market
exposure?
Yes. As further demonstrated by the graph in Exhibit No. 58, Monsanto
interruptible credit has steadily increased since 2000 as the cost to provide electric
service has increased. In fact, Monsanto s interruptible credit in 2007 is
approximately 500 percent higher than it was in 2000, while Monsanto s tariff
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rate is only 51 percent higher. In other words, Monsanto s interruptible credit has
increased 10 times more, on a percentage basis, than Monsanto s tariff rate over
the same time period.
What factors have led to the larger increase in the interruptible credit when
compared to the increase in the tariff rate?
Monsanto s tariff rate and its interruptible credit do not move in lockstep fashion
relative to one another for several reasons. One factor is that new resource costs
are higher than the Company s embedded cost of energy supply. Monsanto
interruptible products have been valued based on the current market value of
energy supply, while Monsanto s tariff rates have been based on the Company
embedded cost of energy supply, which contains only a small fraction of the
higher costs of new energy supply.
Another significant factor is the method by which the interruptible value
and the tariff rates have been established in past Monsanto contracts. Tariff rates
have been established by using cost of service models based on a historical
normalized test period. The interruptible value, however, has been based on
market driven models that utilize forecasted energy values. For example, the cost
of service in the current Monsanto contract was based on Company cost data from
a historical test period of 12 months ending September 2005 , but the interruptible
value in that same contract was based on the projected energy value (market
curves) for the 2007 through 2009 time period. Because energy costs for 2007
and beyond are steadily increasing, use of a forecast approach resulted in a higher
credit for Monsanto reflecting future costs increases, even though Monsanto
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tariff rates did not reflect those same future cost increases.
Is it reasonable to expect that Monsanto s interruptible products will always
act as a perfect hedge and offset 100 percent of any changes to its tariff rate?
No. There is a significant difference in the volumes that Monsanto provides in
interruptible product compared to the volumes that Monsanto buys at the tariff
rate. Monsanto currently buys approximately 1 322 121 MWhs at the tariff rate
and provides approximately 73 404 MWhs ofinterruptibility. That is a ratio of
to I , meaning for every one MWh Monsanto provides or "sells" in the form of
interruptible product it buys 18 MWhs at the tariff rate. In order for changes in
the interruptible value to completely offset changes to the tariff rate, changes to
the interruptible value would have to occur at a magnitude 18 times greater than
changes to the tariff rate. That means if the tariff rate goes up by $5 per MWh
Monsanto s interruptible value would have to increase by $90 per MWh to
completely offset the increase to the tariff rate. For this reason, Monsanto s net
rate will increase when energy costs are increasing.
Please describe Monsanto s historical approach to contracting for its
interruptible products and the associated implications for the valuation of
these products.
Monsanto has always executed shorter term agreements with PacifiCorp,
historically five years or less, for its interruptible products. This contracting
approach results in the value of the interruptible products being driven largely by
both the current market value of those products and the Company s requirement
for products of that type at the point in time in which the value is determined. The
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market value of the interruptible products can be volatile as the electricity markets
go through cycles of over and under capacity utilization. In addition, the
Company s requirements for the capacity and energy products offered by
Monsanto are constantly changing as load forecasts change and the Company
acquires new resources. This shorter term contracting approach leads to
variability in Monsanto s interruptible product value, with the value sometimes
being higher than the long term cost of capacity and sometimes lower than the
long term value of capacity.
On a per MWh basis, can you put into perspective the value Monsanto
receives for its interruptible product versus the price Monsanto pays for its
retail electric service?
Under the terms of the current contract which went into effect on January 1 2007
Monsanto currently receives $168.1 per MWh in compensation for its
curtailment product and pays only $36.56 per MWh to the Company for its firm
retail electric service. That equates to a ratio of 4.6 to 1 , meaning Monsanto
receives almost five times as much for the MWhs it "sells" to the Company
compared to the MWhs it buys from the Company.
How do the interruptible values in Monsanto s current contract compare to
the interruptible values in the Company s contracts with other interruptible
industrial customers?
Monsanto s current contract has the most favorable terms for a customer of any of
the Company s curtailment contracts. The Company s most recent comparable
contract was executed in late 2006 with a large industrial customer in Rocky
1 Based on 73 404 MWhs of curtailment and a $12.4 million curtailment credit.
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Mountain Power s service territory. The specific details of the curtailment
products offered by this customer differ only slightly from those offered by
Monsanto. The price for this contract was based upon the same valuation models
the Company used in Monsanto s current contract and in this case.
The other customer s credit is based on a value of $4.16 per kilowatt
month for operating reserves and $61.71 per megawatt hour for economic
curtailment. Extrapolating these values to the number of megawatts and hours of
operating reserves and economic curtailment products Monsanto offers equates to
an equivalent value of$8.1 million per year, $4.3 million less than Monsanto
current contract price of $12.4 million.
The Company s Valuation Models
Do you agree with Monsanto s contention that the Company s models are not
the most appropriate method to determine the value of Monsanto
interruptible product?
No. The Company s front office model and GRID model are robust models,
which the Company has used for several years for a range of commercial and
regulatory purposes, including setting the value of Monsanto s current contract.
There seems to be general support for the result these models produce for the
economic curtailment component, with Monsanto acknowledging that the
economic curtailment component of the Company s models "could possibly
provide one reference point for valuation." (Iverson Direct Testimony, p. 36, Ins.
10). Monsanto s criticisms are limited to the operating reserve and system
integrity valuations produced by the Company s models.
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As explained below, because the front office model calculates the
incremental or lowest cost way for the customer to obtain reserves, and the GRID
model calculates the value of the highest cost reserves carried prior to the addition
of the Monsanto contract, these two models together provide the appropriate
range for valuation of Monsanto s operating reserves.
Please describe how the Company s front office model values Monsanto
operating reserves.
The Company s front office model determines the marginal or incremental cost of
providing operating reserves from the Company s existing resource portfolio.
This model determines, on an hourly basis, the most economic or least cost means
by which the Company can provide operating reserves. From a customer
perspective, this method determines the replacement cost or opportunity cost of
the operating reserve megawatt provided by Monsanto. It calculates what the
customer would be willing to pay for the next megawatt of operating reserves if it
needed to acquire additional reserves.
Please describe how the Company s GRID model values Monsanto
operating reserves.
The GRID model provides a system-wide view of both the need for operating
reserves and the system incremental benefit of providing those operating reserves
on an hour-by-hour basis. The GRID model includes the existing portfolio of
Company resources, which includes Company owned physical assets, power
purchase agreements, and contracts for interruptible products (such as operating
reserves) with other industrial customers. GRID determines the amount of
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operating reserves the system requires and then allocates resources to meet that
requirement. GRID allocates operating reserves on the plants that are highest cost
to lowest cost because it is less expensive to carry reserves on higher cost
resources.
To determine the value of Monsanto s operating reserve product, a base
case GRID run without Monsanto s resource is performed. Then, Monsanto
operating reserve contract is added at "zero cost" and the model is rerun. The
difference between the two studies is the value of the operating reserve contract.
This value represents the value of the highest cost, or most expensive, operating
reserves that would no longer be required if Monsanto s operating reserve product
is available instead.
What other reasons support the use of the GRID model to establish the value
of the interruptible products?
The Company uses the GRID model to determine net power costs in this rate
case, including the cost of the Company s operating reserves. Since Monsanto
interruptible credit is included as a component of net power costs, it is logical to
use the same model to determine the value of the interruptible products provided
by Monsanto.
Do the Company s methods produce erratic swings in value?
No. The results of the Company s front office model and the GRID model are
within $1.6 million in year 2008 and within $1.7 million in year 2009. These
differences are acceptable when the total value produced by the models
approximately $10 million.
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Do you agree with Ms. Iverson s assessment on page 28, lines 3-10 of her
direct testimony that the Company s models do not adequately reflect
avoided capacity costs?
No. Both the front office model and the GRID model incorporate capacity values
based on the levels at which the market currently values capacity. Both models
utilize the Company s forward price curves, which include an implied capacity
component. Market prices include some consideration for capacity costs, because
in an efficient market, market prices drive the addition of new capacity or the
mothballing of excess capacity.
Is Monsanto a long-term "capacity-focused" resource that provides certain
long term benefits to customers as Ms. Iverson claims? (page 23 line 20 -
page 24 line 2).
No. The Company typically acquires long term resources through the acquisition
of Company owned power plants or through long term power purchase
agreements for output from power plants owned by other entities. In the case of
Company owned power plants, the customer can depend on the resource being
available for customer benefit for its 25 or more year asset life because the
Company owns and typically operates the asset. In the case of a long term power
purchase agreement for output from a unit owned by another entity, the Company
typically requires that the contract include liquidated damages and other
performance guarantees that provide adequate replacement power cost protection
to the customer in the event the other entity does not perform and deliver the
energy.
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With these requirements, the customer is protected over the long term of
the agreement even if the other entity does not perform. The customer also has
the benefit of a stable, fixed cost for the resource, avoiding cost fluctuations
associated with shorter-term arrangements.
In the case of the current Monsanto contract, the initial term of the
contract is only three years, far shorter than the Company s long-term purchased
power contracts. Additionally, there are no guarantees that the customer will be
protected if Monsanto fails to perform in the future and the Company must
acquire replacement energy.
Ms. Iverson argues that the Company s updated front office model utilized to
value operating reserves is not valid and instead the Company should simply
update its 2002 reserves valuation (page 31, line 7 - page 33, line 4). Does
this approach accurately reflect the current value of operating reserves?
No. Ms. Iverson s approach is seriously flawed in that it does not accurately
reflect the Company s current portfolio of resources. In 2002, the front office
model utilized the Cholla coal unit and the Gadsby gas units, among other
resources, to determine the opportunity cost of carrying reserves on Company
owned resources. This approach was correct at the time in that those units were
the most economic resources owned by the Company at that time from which the
Company could meet its operating reserve requirement.
Since 2002, the Company added the 540 MW (approximate) Currant
Creek unit and the 560 MW (approximate) Lakeside unit. These combined cycle
plants, along with the 120 MW (approximate) Gadsby combined cycle units
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provide 1 220 MWs of gas fired capacity that, depending on gas prices, are often
the most economic resources on which to hold operating reserves. To ignore these
new significant resource additions and force the models to artificially use Cholla
in the operating reserve valuation is inappropriate and produces inaccurate results.
Can you explain why the results of the Company s GRID model show that
the Chona unit and other units are at times the avoided operating reserve
resource when the Monsanto operating reserve resource is added to the
model, even with the gas fired capacity that has been added since 2002?
The Company s Cholla unit is in the reserve stack in both the front office and
GRID models. Because the models utilize a slightly different approach for valuing
reserves, the front office model does not select Cholla as a reserve unit, while the
GRID model occasionally does. The potential value that comes from Monsanto
avoiding the use of Cholla for operating reserves is thus captured accurately in the
models, albeit not at the artificially high level suggested by Monsanto.
As I described earlier, the GRID model meets the reserve requirement
from the available portfolio of resources, starting with the lowest cost reserves
and then working up to the highest cost reserves, until the requirement is met. At
times the Company s coal units, particularly the relatively high marginal cost coal
unit Cholla, may be needed and may be the most economic (lowest cost) resource
to meet a portion of the operating reserve requirement. This is likely often the
case during some off peak periods or shoulder months when the gas fired
resources are not as economic and thus not operating and available to provide
operating reserves.
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Do you agree with Ms. Iverson s contention on page 39, lines 9-18 of her
direct testimony that the Company has fundamentally changed its valuation
of system integrity in this case?
The Company has changed its valuation to comport with the new definition
included in the 2006 contract of the circumstances that will trigger a system
integrity interruption. This new definition is set forth in full in Exhibit No. 64.
Previously, uncertainty over what could trigger a system integrity interruption
made the valuation of the product difficult because it was not possible to predict
the value the product provided to customers.
Under the current contract, the Company may curtail 162 MW of
Monsanto load if the Company simultaneously incurs the forced outage of 500
MW of generation, deemed a "double contingency event." The probability of a
double contingency event occurring is equal for all hours of the year. However
the Company elected to value the system integrity product using the average on
peak price for the calendar year. This approach assigns more value to the product
than would occur using an average price for all hours of the year, but it better
reflects the value this product brings to customers because the Company would
most likely utilize this product during on peak hours.
Commission Staff's Proposed Interruptible Value
Can you summarize how Commission Staff has proposed a value for
Monsanto s interruptible product?
Commission Staff's proposal starts with the value in the existing contract and then
makes an adjustment to that value to account for changes in the market curves that
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have occurred since the time that the value in the existing contract was
established. This approach is applied to all three products: economic curtailment
operating reserves, and system integrity.
However, Staff witness Mr. Bryan Lanspery acknowledges that no
detailed analysis was done on the operating reserves product due to lack of
information:
I did not calculate the operating reserve component due to lack of
information. Because it was also tied to the increase in market prices, as
well as marginal operating costs, I conservatively escalated the operating
reserve value by 14% as well. (page 5, lines 12-16)
Staff witness Mr. Lanspery does not elaborate on or explain how the operating
reserve component is tied to the increase in market prices. He also does not
explain how marginal operating costs have increased.
Is Staff's approach reasonable and appropriate for all three products?
No. Staffs approach is reasonable for the economic curtailment and system
integrity products but not for the operating reserve product. The value of the
economic curtailment product and the system integrity product is directly related
to market prices for electricity since curtailing Monsanto allows the company to
avoid market purchases. The value of operating reserves, however, is not directly
correlated to only electricity market prices but is also heavily influenced by other
factors.
What other factors besides the market price for electricity influence the
value of operating reserves?
The cost or value of operating reserves is best described as an opportunity cost or
what if' proposition. In other words , an operating reserve megawatt is only as
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valuable as the value or profit that could be received for that same megawatt if it
were not set aside for operating reserves. It is typically most economic to hold
operating reserves on the Company s gas fired resources, namely Gadsby, West
Valley, Currant Creek, and Lakeside. The margin or profit on a gas plant is
primarily dependent on two things: the price of natural gas and the price of power
also known as the spark spread. Therefore since the value of operating reserves
held on gas plants is dependent on the spark spread of the gas plant, the value of
operating reserves is correlated not only to the market prices for electricity but
also to market prices for natural gas. Exhibit No. 61 illustrates how the value of
operating reserves is tied to the spark spread on a gas plant.
Since the margin of a gas plant is dependent on both gas and power prices,
it is quite possible to have a scenario in which the price of power increases and
the price of gas increases by the same amount, resulting in the margin or profit on
the gas plant to stay the same. If this is the case, the value of operating reserves
will stay the same because, even though power prices went up, the cost to produce
that power (the gas cost) went up as well.
Another scenario includes a situation where the market price for power
increases, but the market price for gas increases by a larger percentage. This is
known as a narrowing of the spark spread. If the spark spread narrows, the
margin on the gas plant actually decreases even though power costs are
increasing, and the value of operating reserves also decreases. Exhibit No. 62
illustrates such a scenario.
Another factor that impacts the value of operating reserves is the addition
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of new resources. If new resources are added, and those resources can carry
reserves more economically than the resources that carried reserves prior to the
addition of the new resource, operating reserves value may go down regardless of
any change in energy prices.
What conclusions can you draw from your analysis on the correlation of
operating reserve value to market prices for electricity?
Since the value of operating reserves is not solely tied to market prices for
electricity but is instead correlated to market prices for gas and electricity, or the
spark spread, and is also impacted by new resource additions, setting the
operating reserves value based entirely on the change in the market curves for
electricity is not appropriate and does not accurately reflect the value of the
operating reserves provided by Monsanto.
If Staff used their methodology for economic curtailment and system
integrity value but the Company s approach to operating reserve value, what
is the result?
If Staffs proposed value for economic curtailment and system integrity were
combined with the Company s updated front office model results for operating
reserves , the total interruptible value would be $10.2 million 3 a value in line
with the total interruptible value produced by the updated Company models.
2 Based on the updated average value of the Company s front office model for calendar years 2008 and
2009.
3 Based on starting or existing contract values of $5.43 million for economic curtailment and $0.1 for
system integrity. To arrive at the $10.2 million, the starting economic curtailment value was increased 14%
and the starting system integrity value was increased 17%, as Staff recommends. These values were added
to the $3.85 million average value for operating reserves calculated by the Company s updated front office
model for 2008 and 2009.
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Monsanto s Methodologies for Valuing the Interruptible Products
What models has Monsanto utilized to calculate a proposed interruptible
value?
Monsanto utilized a simple average of two model results to derive their proposed
curtailment credit. One of the models is the peaker valuation methodology. The
second Monsanto methodology utilized an average of the Company s front office
model and GRID model results to determine the economic curtailment value and
then utilized the Company s front office model with significant changes to the
assumptions and inputs to determine the operating reserves value. This second
model was discussed in the preceding section.
Do you agree with Ms. Iverson s assessment on pages 23 and 24 of her direct
testimony, where she compares the interruptible products offered by
Monsanto to a combustion turbine, implying they are essentially the same?
No. The products Monsanto provides are not equivalent to the products available
through ownership or lease of a combustion turbine. A combustion turbine is
different and more valuable to customers than the Monsanto interruptible products
for the following reasons:
1. A combustion turbine is available to customers for their benefit 8 410
hours per year, assuming a 96 percent availability factor. Monsanto is only
offering 1 000 hours of curtailment, which would make the Monsanto
interruptible product available only 12 percent of the equivalent time a
combustion turbine is available in any given year. In other words, a combustion
turbine is available for customer benefit over eight times more than Monsanto is
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available given the current amount of curtailment offered by Monsanto.
2. A combustion turbine can be used to provide load following services
while the Monsanto curtailment products cannot be synced to the electrical grid to
provide this service. Load following, or automatic generation control, is when a
power plant is directly synced to the grid and can automatically increase or
decrease output in response to instantaneous changes in voltage levels on the
GRID.
Is it appropriate in this case to use the cost of a combustion turbine as a
proxy for the value of Monsanto s interruptible products?
Arguably not. PacifiCorp s 2007 integrated resource plan (IRP) does not find a
need for the simple cycle combustion turbines used in the analysis. The IRP does
not call for the addition of these resource types because they are not the most
economic means by which the Company can meet the customers' resource needs
for the types of products Monsanto provides. Monsanto should not be
compensated for providing interruptible products based on the equivalent cost of
resources that have been deemed uneconomic and not in the customers' best
interest.
. In any case, it is critical to make several adjustments to account for the
differences between the products Monsanto offers and the products available
through ownership or lease of a combustion turbine before the results of this
methodology are considered.
Clements, Di-Reb - 22
Rocky Mountain Power
Please describe the specific adjustments that need to be made to Monsanto
peaker valuation method in order to make the results of the method more
appropriate for determining interruptible value.
To account for differences between Monsanto and a combustion turbine
adjustments need to be made to account for availability (the fact that Monsanto
provides only 1 000 hours of operation while a combustion turbine offers
approximately 8 410 hours of operation) and to account for times when Monsanto
does not provide a full 95 000 kW of operating reserves. While an adjustment
could be made to account for the fact Monsanto cannot provide load following
services, I have not proposed it because it is difficult to quantify. Finally, an
adjustment should be made to the capacity or capital cost ofthe combustion
turbine used in Monsanto s analysis to reflect current capacity costs.
Have you prepared an exhibit that demonstrates the necessary adjustments
to Monsanto s peaker valuation to account for differences between Monsanto
and a combustion turbine?
Yes. Exhibit No. 59 shows the results of Monsanto s peaker valuation method
when appropriate adjustments are made to account for availability and for the
correct number of megawatts of operating reserves provided by Monsanto. All
other inputs are left unchanged. As a result of these two adjustments, the total
value of the interruptible products is $8 210 766.
Have you proposed an adjustment to reflect the current cost for capacity, or
another option the Company has to obtain similar capacity?
Yes. The Company currently owns the option to extend the lease on the West
Clements, Di-Reb - 23
Rocky Mountain Power
Valley power plant through 2017 at a price of $6.24 per k W month. The West
Valley power plant is a set of five LM 6000 PC quick start simple cycle turbines
all of which can be brought online within 10 minutes and used to meet the
Company s operating reserves requirements. IfPacifiCorp were to exercise its
lease option, it would have full use of this simple cycle plant for the capacity cost
of $6.24 per kW month. PacifiCorp would then provide the gas and pay other
O&M costs as it would on a Company owned simple cycle plant. This price is
much lower than the $8.40 per kW month price utilized in Monsanto s Exhibit
No. 211 (KEI - 7) for the same type of capacity. If the analysis Monsanto
performed in Exhibit No. 211 (KEI-7) were run using $6.24 per kW month for the
operating reserve component of the valuation in addition to the adjustments I
describe in Exhibit No. 59, the value produced by Monsanto s valuation
methodology would be reduced further to $8,045,485. The full results of this
analysis are shown in Exhibit No. 60.
What does this analysis demonstrate?
This analysis demonstrates that the market for capacity and energy is not always
equal to the new build cost of simple cycle combustion turbines. If customers can
acquire this type of capacity through more economic sources than new
construction, such as this opportunity with the West Valley lease, Monsanto
interruptible products should be evaluated compared to these more economic
opportunities.
Clements, Di-Reb - 24
Rocky Mountain Power
Recommended Interruptible Value
What value does the Company recommend the Commission establish for
Monsanto s interruptibility in conjunction with this proceeding?
As explained in the Company s Supplemental Direct Testimony on this issue, this
case is filed under current Idaho test year conventions and relies upon a 2006
historical test year with known and measurable changes through the end of 2007.
The credit or payment to Monsanto for its interruptible product for calendar year
2007 is known and measurable in the existing contract and cannot change prior to
January 1,2008. Under these conventions, Monsanto s current interruptible
credit of $12.4 million should not be changed by this case. Accordingly, the
Company has reflected Monsanto s current credit of $12.4 million in its net power
costs.
If the Commission disagrees with this analysis and instead elects to
establish the value based on the updated projected future value of the interruptible
products over the remainder of the initial term of the existing contract, or 2008
and 2009, the Company recommends an interruptible value of$9.78 million per
year.
How did the Company derive the value of $9.78 million for the interruptible
products?
This amount represents the average model results of the Company s front office
and GRID models for calendar years 2008 and 2009. It is a result that is validated
by other relevant data, notably the Company s most recent comparable
curtailment contract and the methodologies proposed by other parties in this rate
Clements, Di-Reb - 25
Rocky Mountain Power
case when adjusted to reflect accurate inputs and assumptions.
Can you provide any additional evidence to support this value?
I have discussed in my direct and rebuttal testimony the results produced by
various valuation models. These models include the Company s front office and
GRID models, Monsanto s proposed models with corrected inputs and
assumptions, and Staffs proposed model with corrected inputs and assumptions.
Corrections to Monsanto s and the Staffs models were previously outlined in my
rebuttal testimony and are necessary to ensure these models are relevant, accurate
and appropriately reflect the value the interruptible products provide to customers.
As the chart included in Exhibit No. 63 and shown below demonstrates
the range of results of these models is $8.1 million to $10.2 million.
Clements, Di-Reb - 26
Rocky Mountain Power
Summary of Model Results
$12,000,000
$10 000,000
$8,000,000
$6,000,000
$4,000,000
000,000
Comparison to Monsanto Peaker Monsanto Peaker Company Front Company Company GRID Staff Method with
Recenijy Valuation Valuation Office Model Recommended (Average of 2008 Company
Executed Adjusted for Adjusted for (Average of 2008 Value and 2009) Operating
Interruptible Availability and Altemate and 2009) Reserve Value
Contract Volume Capacity Cost
The Company s recommended value of$9.78 million is within this range
and should be adopted by the Commission as the value of Monsanto
interruptible product if the Commission elects to establish the value based on the
updated projected future value of the interruptible products over the remainder of
the initial term of the existing contract, or 2008 and 2009.
What are the primary reasons for the drop in interruptible value from the
$12.4 million in the existing contract to the Company s proposed updated
value of $9.78 million?
The primary reasons for the decrease in value are the addition of new resources
that can be used to meet the operating reserves requirement, the narrowing of the
Clements, Di-Reb - 27
Rocky Mountain Power
spark spread making the holding of operating reserves on the gas plants less
expensive, and the updating of the operating costs of the resources available to
meet the operating reserves requirement.
Does this conclude your testimony?
Yes.
Clements, Di-Reb - 28
Rocky Mountain Power
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Exhibit No. 58
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UTILITIES COMMISSIOf\ ltness: au.. ements
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ROCKY MOUNTAIN POWER
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Exhibit No. 59 page 2 of 4
CASE No. PAC-O7-
Wibless: Paul H. Clements
Explanation of Company Adjustments to Monsanto s Peaker Valuation
Adjustment for Availability
Reason Adjustment is Required
The adjustment for availability is based on the fact that Monsanto only offers 188
hours per year of operating reserves interruptions and 800 hours per year
economic curtailment interruptions but the lntercooled Aero SCCT or SCCT Aero
used in the operating reserve comparison and the SCCT Frame 2 Frame "F" used
in the economic curtailment comparison are available for ratepayer benefit
approximately 96%, or 8 410 hours per year. Given these measurable differences
in hours of availability for Monsanto compared to the combustion turbines, an
adjustment for availability differences is required.
How Adjustment is Calculated
An adjustment equal to the exact full difference in the actual hours of availability
each year is justifiable. In other words, if Monsanto only provides 188 hours of
operating reserves but a simple cycle is available 8,410 hours per year, the
capacity value assigned to the Monsanto product should be 97.8% (1 - 188/8 410)
lower than the value assigned to a proxy simple cycle.
However, for purposes of this valuation, it is reasonable to assume that
while available 8 410 hours per year, a simple cycle combustion turbine will not
be economic to run as a baseload resource but instead will be used during peak
times and other periods when capacity is needed.Therefore, for a more
conservative analysis, the availability adjustment is based on a comparison of the
number of hours Monsanto is available to the number of hours a Company owned
Rocky Mountain Power
Exhibit No. 59 page 3 of 4
CASE No. PAC-O7-
Witness: Paul H. Clements
simple cycle plant is reasonably expected to operate or produce energy each year.
To determine this number, I used actual data from the recent operating history of
the Company owned Gadsby simple cycle plants for years 2005 and 2006. The
Gadsby units are three Company owned LM 6000 PC quick start simple cycle
plants located in Salt Lake City, Utah. Based on historical data for 2005 and
2006, the number of hours a simple cycle unit of this type will operate each year
is 2 525 hours.
Therefore, based on the operating information of the Company s own
plants, the capacity portion of Monsanto s operating reserves evaluation needs to
be adjusted downward by 92.6% (1 - 188/2525) to account for the lower
availability of Monsanto when compared to a Company owned simply cycle.
Similarly, the capacity portion of Monsanto s economic curtailment evaluation
needs to be adjusted downward by 68.3% (1 - 800/2525) to account for the lower
availability.
Adjustment for Volume Differences
Reason Adjustment is Required
Another adjustment is required to account for the fact that Monsanto does not
always provide a full 95 000 kW of operating reserves. In Monsanto s valuation
detailed in Exhibit 211 (KEI-ll), Monsanto has applied the full capacity value of
an Intercooled Aero SCCT or an SCCT Aero to 95 000 kW of operating reserves.
The number of megawatts of operating reserves used in the analysis needs to be
adjusted to reflect the fact that Monsanto does not constantly provide 95 000 kW
of operating reserves.Section 2.2.3 of Exhibit A of the Electric Service
Rocky Mountain Power
Exhibit No. 59 page 4 of 4
CASE No. PAC-07-
Witness: Paul H. Clements
Agreement between PacifiCorp and Monsanto Company dated as of May 18
2006 reads as follows:
If two furnaces are operating and the third is unavailable due to Economic
Curtailment, Monsanto will curtail one furnace. The furnace so curtailed
will be the largest operating furnace.
If Monsanto s 67 MW furnace is curtailed for economic curtailment, only one of
the remaining two furnaces, assumed to be 47 MW and 48 MW, is available for
operating reserves during that time period.
How Adjustment is Calculated
With 800 hours of economic curtailment available to the Company, Monsanto
67 MW furnace is often curtailed for economic curtailment during the peak
periods of the summer months. Therefore, during the valuable peak summer
periods when capacity it tight due to high loads and operating reserves are most
valuable Monsanto only offers approximately 48 MW of operating reserves
instead of the 95 MW that is assumed to be offered constantly in Monsanto
valuation. However, since the "peaker valuation" model does not differentiate
between on peak and off peak periods, I made no attempt to account for the fact
that most of the reduced operating reserve volumes occur during on peak periods.
Instead, I simply calculated the weighted average volume of operating
reserves Monsanto provides over the course of a year as follows:
(800 hours * 48.000 kw) + ((8760 hours - 800 p.ours) * 95.000 kWl
8760 hours
This results in a weighted average volume of 90 708 kW of available operating
reserves.
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Case No. P AC-07-
Exhibit No. 60
Witness: Paul H. Clements
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Rebuttal Testimony of Paul H. Clements
Peaker Valuation - Revised for Capacity Costs, Availability, and Volume
October 2007
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Exhibit No. 63
IDA!-JO PUBLIC Witness: Paul H. Clements
UTILITIES COMMISSIOii
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Exhibit No. 63 page 2 of 2
CASE No. PAC-O7-
Witness: Paul H. Clements
Model Model Result
Comparison to Recently Executed Interruptible Contract 100 000
Monsanto Peaker Valuation Adjusted for Availability and Volume 210 766
Monsanto Peaker Valuation Adjusted for Alternate Capacity Cost 072 121
Company Front Office Model (Average of 2008 and 2009)750 000
Company Recommended Value 775,000
Company GRID (Average of 2008 and 2009)800 000
Staff Method with Company Operating Reserve Value $10 161 000
~'._-....,."",...-. .... . '.... ...
20ll10CT 26 AN IO:G.q~e No. PAC-07-
hibit No. 64
IDAHO PUBLIC Witness: Paul H. Clements
UTiLITIES COMMISSIOh
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Rebuttal Testimony of Paul H. Clements
Existing Contract System Integrity Definition
October 2007
Rocky Mountain Power
Exhibit No. 64
CASE No. PAC-O7-
Witness: Paul H. Clements
System Integrity Definition in the Existing Monsanto Contract
The system integrity terms and conditions found in Exhibit A of the
Monsanto contract put in place in 2006 (effective January 1 , 2007) read as
follows:
System Integrity Interruptions
PacifiCorp may request System Integrity Interruptions of up to 162
MW if the System Integrity Interruption is voltage related and up to 95
MW if the System Integrity Interruption is caused by a Double
Contingency Event. A Double Contingency Event shall mean the forced
outage of two or more PacifiCorp generating units totaling 500 MW or
more of capacity. To qualify as a Double Contingency Event, two or more
forced outages totaling 500 MW or more of capacity must occur within 48
hours of each other and must overlap for at least one hour. Once a Double
Contingency Event begins, PacifiCorp may request System Integrity
Interruptions at any time during the next 48 hours. After 48 hours after a
Double Contingency Event begins, PacifiCorp may no longer request
System Integrity Interruptions in response to that specific Double
Contingency Event. Monsanto will interrupt its available furnace load
accordingly upon telephone notification. Under emergency conditions
such interruption may occur without advance notice to Monsanto.
Otherwise, PacifiCorp shall give Monsanto not less than two (2) hours
notice of the potential for interruption for System Integrity purposes and
advance notice when such interruption will end.
System Integrity Interruptions shall be available to
PacifiCorp all hours of every day, and have priority over any other
interruption or curtailment option implemented at that time.
The interrupted service shall be restored when no longer
needed to maintain System Integrity.
3.3 A System Integrity Interruption shall not relieve Monsanto
of any hours under any other interruption or curtailment option. (For
example, if a two-hour System Integrity Interruption occurs during a five-
hour Economic Curtailment, Monsanto will be considered to have been
economically curtailed for only three hours, but the Economic Curtailment
shall end at the time stated in the Curtailment Notice.
3.4 A System Integrity Interruption in response to a Double
Contingency Event shall last no longer than two consecutive hours in any
48 hour period.