20101008Errata to Clements Supp.pdf

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"~ROCKY MOUNTAINPOERA DI 01 MCFtP ZOIDOCT -1 PH le: 49 201 Soth Ma, Suite 230
Sat Lake City, Ut 84111
October 7, 2010
VI HAND DEUVRY
Jea D. Jewell
Commssion Secreta
Idao Public Utilities Commssion
472 W. Washigton
Boise,ID 83702
Re: Case No. PAC-E-16-07
Errata Filng - Rocky Mountain Power Supplementa Testimony of Paul H.
Clements regarding the economic valuation of interrptible products offered by
Monsanto
Dear Ms. Jewell:
Rocky Mountain Power was recently made aware of an err in the supplemental testiony
of Paul H. Clements filed with the Idao Public Utilities Commssion Septembe 30,2010.
Consequently, please find enclosed for filing an origin an (9) nie copies of Rocky
Mountain Power's errta to the supplementa testiony of Paul H. Clements. Rocky
Mounta Power hereby requests tht the Commission replace 'the curt pages 26 an 27 of
the supplementa testiony of Paul H. Clements with the erta pages 26 and 27 filed
herewith. To the attention of the Cour Reprter is a pape copy of al documts along with
a CD containing the testimony in its originl format.
All formal correspondence regarding ths supplementa testiony should be addresse to:
Ted Weston
Rocky Mountain Power
201 South Main, Suite 2300
Salt Lake City, Uta 84111
Telephone: [phone]
Fax: [phone]
Emal: ted.weston(áacificoip.com
Dael E. Solaner
Rocky Mounta Power
201 South Mai Stret, Suite 2300
Salt Lake City, Utah 84111
Telephone: [phone]
Fax: [phone]
Emal: dae1.so1anderßacifcoip.com
Communcations regarding dicover matter, inludig data reuests issued to Rocky
Mountain Power, should be addressed to the following:
By E-mail (prefered):dataguest(áacificorp.com
By regular mail:Data Request Respons Center
PacifiCorp
825 NE Multnma St., Suite 2000
Portlan OR 97232
Ida Puic Utilities Comssio
Oc 7. 2010
Pa 2
Ii iD may be di to Ted Wes Id Repa Maer at (801) 220-
2963.
lë~aMl~
Vic Pr Reguaton
ee: Se List
Enclos
CERTCATJ oir SERVICE
I hey ce th on ths 7. day of Oc. 2010, I ca to be seed vi E-mL, atr an cone co of Roky MOU Poer's Err to th Suplem Tesy
of Pa H. Clem in PAC-£.1 0- to th follwi:
Er L. Olse
Ra. 01s Nye. Buge & Baley.Chaei
201 E. Cenic
P.O. Box 1391
Poclo. ID 83204-1391
E.Ma: el~inelaw.net
TimBuJuoHa
A¡um. In.3010 Coi Ro
So Spr. ID 83276
E.Mai: tbull~agum.com
JAHars~rium.com
BraPwy
CAPAI
2019 N. 17th St.
Boise. ID. 83702
E.ma: bmpuryØhotmail.com
Anny Yanel
29814 Lae Ro
Bay Vill. Ohi 44 140
E-ma: tony(gyanel.net
Jam R. Smith (E-mal ony)
Monsto Compy
P.O. Bo 116
So Sprp, Ida 83276
E.Mai: iim.r.smìtht!onsanto.com
Ron L. WiliamWilam Bra. P.C.
loU W. Hays St.
Boiscin, 83702
E-ma: ron(gwillamsbrbur.com
Ra C. Bude
Ra. 01s Nye. Bu & Bale.Ciw
201 E. Cete
P.O. Box 1391
Pollo. ID 832041391
E.Ma: rc~acineiaw.net
Pa J. Hickey
Hickey & Eva LLP
110 Car Ave. . Suite 700
PO Bo 467
Chen, WY 8200
E-Ma: phickey(ghickeyevans.com
Bejam J. OtIda Consaton Le
710 N. 6th St.
P.O. Box 84
Bo. Idao 8370
E.ma: botto(gidaoconsaton.org
Ka Iver (E-mal OIly)Brer .t Asia
17244 W. Corva Cou
Sun. Ar 8S317
E-Mal: kiversnigconsultbai.com
Melin J. Davi
Daso Van Cleve. P.C.
333 S. W. Taylor. Suite 40
Po OR 97204
E-mal: mjdigdvclaw.com
Sc WooDe Att GcIda Puic Utiites Com
472 W. Wasn (83702)
POBox 83720
~
Bo. ID 137214
£.Ma: scott. woobur~uc.dao.gov
Dr. Do Re (E.ma Ony)Ida Coat Le
600 Hill Road
Bois ID 83703
£.ma: dreain~mindsnng.com
CamMeerCoo, Admve Seces
REC.Ef\/E:r.~l
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L; JiLl i ;¿:S C - 'If!:
BEFORE THE IDAHO PUBLIC UTILITIES COMMSSION
IN THE MATTER OF THE
APPLICATION OF ROCKY
MOUNAI POWER FOR
APPROVAL OF CHAGES TO ITS
ELECTRC SERVICE SCHEDULES
AN A PRICE INCREASE OF $27.7
MILION, OR APPROXITELY
13.7 PERCENT
)
) CASE NO. PAC-E-16-07
)
) Supplemental Testimony of
) Paul H. Clements
)
) ,
)
ROCKY MOUNTAI POWER
CASE NO. PAC-E-10-07
October 2010
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Please state your name, business address and present position with the
Company (also referred to as Rocky Mountain Power).
My nae is Paul H. Clements. My business adess is 201 S. Mai Suite 2300,
Salt Lae City, Uta 84111. My present position is Origintor/Power Maeter
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 Mangement from Brigha Young University. I have
been employed with PacifiCorp since 2004 as an origintor/power maketer
responsible for negotiatig interrptible retail specia contrts, negotiatig
qualifyg facilty contrcts, and maging wholesale or market-based energy and
capacity contrcts with other utilities and power marketers. I was the Company
representative who negotiated the 2006 and the 2007 though 2010 electrc
service agreements with Monsto. I have maged all Monsanto contract-
related issues since late 2004. I also worked in the merchant energy sector for
approxitely 12 years in pricing and strctug, origintion, and trg roles
19 for Duke Energy and Ilinova.
20 Purpose and Summary of Testimony
21 Q.
22 A.
What is the purpose of your testimony?
The purose of my testiony is to provide a recommendation and anysis
23 regarding the economic valuation of the interrptible products offere by
Clements, Supp - 1
Rocky Mountain Power
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Monsato to the Company to establish the contrt rates for Monsto stag
Janua 1,2011. My testiony wil address the followig aras:
. provide an explation as to why the Company is filig supplemental
testiony on Monsanto's economic evaluation and the Company's
recommendation;
. provide an overview of the key drvers to consider in valuing interrptible
products;
. identify the key factors that influence the value of the varous interptible
products Monsanto provides;
. provide an overview of the methodologies and the economic models the
Company utilizes for each interrptible product in order to ilustrte the
value the Company is recommendig to provide Monsnto which is
consistent with the cost of obtag the same interptible products frm
other sources; and
. sumare the results of the economic models and provide a
recommendation on the economic value consistent with the interptible
products being offered by Monsanto staing on Janua 1,2011.
Why is Rocky Mountain Power fiUng supplemental testimony on the value of
interruptible products offered by Monsanto at this time?
The Company has been in negotitions with Monsanto on the economic
evaluation and the value of the interrptible products since Mah of ths year.
Whle the Company and Monsnto ("te Pariesj have bee negotiatig in good
faith to reach agreement on the methodology and the economic evaluation to be
Clements, Supp - 2
Rocky Mountain Power
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used stag Janua 1, 2011, the Pares have not be able to reach agreeent
on the methodology or the value. In Cas No. PAC-E-06-09 Orer No. 30197
("te Order"), the Commssion requied Monsto's futue rates be subject to
taff adjustments after Janua 1, 2008, to facilitate futue rate adjustments an
better align Monsanto's rates with their cost of seice. Ths Order also
recogned tht the thee interrptible proucts un the curent contrt
termintig December 31, 2010 ("the Contrct") provide opetiona beefits to
the Company. The Commission recogned tht the value of these interptible
proucts provided by Monsto as well as Monsto's cost of serice would be
importt considertions in establishig the net rate to Monsto in any futue
contrct. That is why the Commssion ordered, "we expet the pares to addss
interptible product valuation in the context of a generl rate case whe
Monsanto's cost of service is deterd." (Order at p. 9). The Company is filing
its recommendation as a backstop in the event tht a settement is not reached
with Monsto and the Commssion is required to evaluate the evidene and
ascribe a value to the interrptible procts from Monsto in order to determe
a net rate for Monsanto starting Janua 1,2011. The Compay's
recommendation wil allow Monsto, Commssion Staff or other pares to
respond to the Company's inormation in their diect testimony an to have the
issue addressed as par of the case as it proeeds.
How are Monsanto's interrptible product treated in the Company's
application?
The Compay has included Monsato's interptible credt at the curent 2010
Clements, Supp - 3
Rocky Mounta Power
1 contrct amount based on the Order as a net power cost expense. The Company
2 sees two options to implement its recommendation; either ths expene could be
3 updted based on the Commission's determtion of the interptible value in the
4 curent proceeding or, since the new value would not be effective until Janua i,
5 2011, the 2010 value could be left as presented in the Company's fiing and the
6 difference would then be captued in the energy cost adjustment mechasm.
7 General Comments on Valuation of Interruptible Products
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What is the underlying principle behind the Company's approach to the
economic evaluation of interruptible products that are offered by industrial
customers?
The Company follows a "customer indifference" approach when valuig
interptible products offered by industr customer. In other words, the
Company seeks to pay industral customers who can offer interrptible products
the sae price the Company would otherise pay if it were to acquir those sae
proucts frm other soures, such as the market or its own resoures.
Why is it important to price interruptible products that industral customers
provide consistent with the price the Company would pay to acquire the
same product from other sources?
All customers are allocated their proportonate shae of prudently incured costs
by the Company. The price paid to industral customer for interptible products
is included in net power costs which are allocated on a system basis to all
customer. Therefore, if the Compay pays industral customers more for the
interptible products th it would otherise incur acquing those same products
Clements, Supp - 4
Rocky Mountain Power
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frm another soure, all customers would not be payig the least cost for energy
and would be subsidizing the industral customers who provide these products. If
ths were to occur with Monsanto, other customers in Idao as well as customers
in other states would be allocated higher costs th if the Company were to
acqui those same internptible products from the lowest cost resource available.
Therefore, in order to matain faiess to all customers, the price paid to
industral customers, and in ths case to Monsanto, for internptible products
should be no greater th the amount the Company would incur if it were to
acquire those same proucts frm the next lowest cost available resoure. The
Company uses this indifference priciple in its approach to value internptible
products provided by industral customers.
Are industrial customers fairly compensated for their product under this
approach?
Yes. Industral customers are fairly compensated for providing these products,
and other customers are indifferent as to whether the products are provided by the
industral customer or frm other resources. If the credit paid to the industral
customer is below the cost of obtaing tht product elsewher, other customers
receive the benefit at the industral customer's expense. If the credit paid to the
industrl customer is above cost of obtag that product elsewhere, other
customers are providing a subsidy to the industral customer.
Clements, Supp - 5
Rocky Mountain Power
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Please describe Monsanto's historical approach to contracting for its
interruptible products and the associated implications for the valuation of
these products.
Monsanto ha always executed shorter term agreements with PacifiCorp,
historically five year or less, for its interrptible products. Ths contrctig
apprach results in the value of the interptible products being drven largely by
both the curent maket value of those products and the Company's requiement
for the interrptible products at a given point in tie in which the value is
determed. The maket value of the interrptible products can be volatile as the
energy markets go though cycles of over and under capacity utilization. In
addition, the Company's requiements for the interptible products offered by
Monsato are constatly chaging as load forecasts chage and the Company
acquires new resources to meet its obligation to serve. Monsanto's shorter term
contrctig approach leads to varabilty in Monsto's interrptible product
value, with the value sometimes being higher th the long term cost of simar
products and sometimes lower th the long term value of simlar products.
17 Overview of the Interruptible Products Provided by Monsanto
18 Q.Please summarize the interruptible products provided by Monsanto in
19 Monsanto's current contract.
20 A.The curent Monsanto contrct provides thee products:
21 1. Non-spinning Operating Reserves. Monsanto provides 95 megawatts
22 of non-sping operatig reserves available for 188 hour pe calenda year. The
Clements, Supp - 6
Rocky Mountain Power
1 Company holds operatig reseres to respond to unt outages and maintain
2 reliabilty.
3 2. Economic Curtailment. Monsto provides 67 megawatts of economic
4 curilment available for 850 hour pe calenda year for 2010. In previous years
5 Monsato ha tyically allowed for around 800 hours of economic curilent.
6 This product allows the Company to curil Monsto's load on a two-hour notice
7 for any reasn.
8 3. System Integrity. Monsto can provide up to 162 megawatts of
9 system integrty interption durg a voltage event an is available 12 hour per
10 calenda year. Ths product also allows the Company to curil Monsto up to
11 95 megawatts following a double contingency event, which is defied as two or
12 more overlapping forced outages of lare Company generatig assets with 48
13 hour.
14 Key Factors That Impact the Value of Monsanto's Interrptible Products
15 Q.What are the major factors that influence the value of the three products
16 offered by Monsanto?
17 A.Each of the thee products offered by Monsato has a unque set of factors tht
18 establish the value of providig tht product to the Company. I wil addrss each
, 19 product individually:
20 Non-Spinning Operating Reserves
21 Non-sping opertig reseres are defied as resures tht can be
22 brought online to sere load with 10 miutes. In addition to generting
23 resoures tht can meet ths requient by producing more enery when called
Clements, Supp - 7
Rocky Mountain Power
1 upon withi 10 minutes, non-sping operatig reserve requiements can also be
2 met by using customer load tht can be curiled with 10 miutes. Therefore,
3 the value of an operating reserve megawatt is equal to the value tht could be
4 received for that sae megawatt if it were not set aside for operatig reseres and
5 intead sold to the maket. Operating reserves are tyically held on the
6 Company's existig resoures, which could include gas units, hydr unts, or coal
7 unts. Gas unts are tyically the pri provider of operating reseres for the
8 Company, along with existing contrcts between the Company and large
9 industral customers.
10 The cost or value of operating reserves is best desribed as an opportty
11 cost or "what if' proposition. Since the megawatt is use for operatig reserves
12 intead of the energy being'sold, the priar drver of value is the lost
13 opportty cost of using that megawatt for operating reserves. The key factors
14 tht impact that opprtty cost for gas, hydro and coal plants ar: 1) the value at
15 which the megawatt could have been sold to maket; and 2) the cost incured to
l6 generate that megawatt. Ths difference is the profit or margin on the generatig
17 resource. For a gas plant, the margin or profit is prily dependent on two
18 thgs: the price of natul gas and the price of energy in the maket, also known
19 as the spar spread, less varable operatig costs. Therefore, since the value of
20 operting reserves held on gas plants is dependent on the spark spread of the gas
21 plant, the value of operting reseres is correlated not only to the maket prices
22 for energy but also to market prices for natul gas. The followig cha
Clements, Supp - 8
Rocky Mountain Power
1 ilustrtes how the value of operatig reserves is tied to the spark spread on a gas
2 plant.
Impact of Spark Spread on Operating Reserve Valu
r- Market price is $59/MWh L
Using the unit for
operating resrves .
instead of sellng
at market .costs'
$15/MWh
The total cost to
run the unit is
$44/MWh
Running the unit and
selHng at market prices
creates $15/MWh in value
to the customer
The variable operating cost of
the unit is $4MWh
8,000 Heat Rate Gas Plant
The unit consumes $4/MWh in
gas at an 8.00 btu heat rate
and $5.00/MMbtu gas price
3 Since the margi of a gas plant is dependent on both gas and energy
4 prices, it is quite possible to have a sceno in which the price of energy increases
5 and the price of gas increaes by the same amount, resulting in the main or
6 profit on the gas plant to stay the same. If ths is the case, the value of operatig
7 reserves wil stay the sae because even though power prices went up, the cost to
8 produce tht energy (the gas cost) went up as well.
9 Another scenao includes a sitution where the market price for energy
10 increases, but the maket price for gas increases by a larer percentage. Ths is
11 known ¡as a narrwing of the spark spread. If the spark spread naws, the
12 magin on the gas plant actully decreases even though power costs are
13 increasing, and the value of operatig reseres also decreases. The following
Clements, Supp - 9
Rocky Mountain Power
1 cha ilustrtes such a scenaro.
Impa to Rese v. from Chan in Spa Sprea
Prof or Cos of"....GoDo
1$70/MWh I
1$59/MWh I
IøJ øefØet~NI\P~~,~~~
\1Ot"'"
5øJ \((.. \P~~~~\\.'~
\1r:~
8,000 Heat Rate Gas Plant 8,00 Heat Rate Gas Plant
2 Another factor tht impacts the value of opetig reseres is the addition
3 of new genertig resoures. If new genertig resources ar added, and those
4 genertig resources can car operatig reseres more economically th the
5 genertig resources tht cared opetig reserves prior to the addition of the
6 new genertig resoure, operting reseres value may go down regardless of any
7 chage in energy prices.
8 Since 2002, the Company added the 540 megawatt ( approxite) Curt
9 Creek unt and the 560 megawatt ( approximate) Laeside unt. These combined
10 cycle plants, along with the 355 megawatt (approximate) Gadsby combustion
11 tubines and steam boiler unts, provide 1,455 megawatt of gas fied capacity.
12 Depding on gas prices, these unts are often the most economic generting
13 resoures on which to hold operating reseres.
Clements, Supp - i 0
Rocky Mounta Power
1 Economic Curtailment
2 The economic curilment prouct offered by Monsanto allows the
3 Company to curil Monsanto on a 2-hour notice for any reason. The value of the
4 economic curilent product is directly related to market prices for energy since
5 curling Monsanto allows the company to avoid maket purchases. Based on the
6 number of hour of curilent Monsto provides, the Company is able to avoid
7 maket purchase durg ties of peak usage in multiple month thoughout the
8 year. The value of the economic curilment product Monsato provides is equa
9 to the maket value of energy durg those hour in which the Company
10 anticipates curtlment of Monsto's load. Therfore, the value of the economic
11 curilment product is most heavily inuenced by the underlyig maket price for
12 energy.
13 System Integrty
14 Under the ters in the curt contrct, the Company may curil 95
15 megawatts of Monsanto load if the Company simultaeously incur the forced
16 outage of 500 megawatts of genertion, deemed a "double contigency event", or
17 162 megawatt of load for a voltage related event. Ths product is known as the
18 system integrty product. The probability of a double contigency event
19 occurng is equal for all hour of the year. However, the Company values the
20 system integrty product using the averge on-peak price for the calenda year.
21 This approach assign more value th would be assigned using an average price
22 for all hour of the year, but the value better reflects the product Monsto is
23 providing to customers because the Company would most likely utiize ths
Clements, Supp - 11
Rocky Mounta Power
1 product on peak hour. Therefore, simlar to the economic curlment product,
2 the underlyig maet price for energy is the most inuential factor in the value of
3 the system integrty product.
4 Overvew ofthe Models Used by the Company to Value Monsanto's Interruptible
5 Products
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How did the Company approach the valuation of the interrptible products
Monsanto provides as it relates to a new contract for Monsanto?
The Company began by evaluating which models would yield a result that is
consistent with the indifference priciple outlined earlier in my testiony in
which the intenuptible products provided by Monsanto equal the cost the
Company would otherise occur if simla products were to be obtained frm
other soures. The Company utilized two models to calculate the cost of
obtaing frm other sources the same interrptible products tht Monsanto
offer. These two models ar the following: 1) the Front Offce model and 2) The
Generation and Reguation Intiative Decision (GRID) modeL. The economic
anlysis pedormed by these two models produces a result tht ensures the
Company is indifferent.
Why did the Company utie more than one model to set the value instead of
relying on the result of a single model?
There are many different factors and inputs tht inuence the forward value of
intenuptible products. Each parcular model utilized by the Company captues a
reasonable majonty of these factors and inputs in its anysis an, even if used
alone, each model could be considered a fair assessor of value for the prouct it is
Clements, Supp - 12
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pricing. However, each model has certin factors and inputs tht it meaures and
analyzes with some level of precision and other factors and inputs tht are not
measur as well as they are in the other modeL. For example, one model used to
value operatig reseres may do a thorough job of anlyzing the cost of holdig
reserves on the Company's existig resoure portolio, but tht sae model may
not incorporate the Company's overal need for opertig reserves in any given
hour in its anlysis. A second model may thoroughly incorporate the Company's
need in any given hour but may not meaure the value or cost with as much
precision as the fit modeL. Therefore, the Company believes a more balanced
approach is to utilize both models in order to mae sure all factors and inputs are
appropriately considered when deterg the value of each interrptible
product. The Company then can determe a proposed value for each
interrptible product after evaluating the results of the varous models.
Have any of the models and methodologies used by the Company in its recent
analysis been used to determine the value in previous Monsanto contracts
and in contracts with other industrial customers?
Yes. The Company used the same methodologies it used in its recent anlysis to
establish value in previous Monsanto contrcts and in contrcts with other
industral customers who offer simar products to those offered by Monsanto.
What was the date of the price curve used by the Company in its Front
Offce and GRI model analyses?
The Company used the June 30, 2010, offcial forward price cure.
Clements, Supp - 13
Rocky Mountain Power
1 Q.Please briefly describe the Front Ofce model and the GRI model and
2 identify which of the three interrptible products were priced using the
3 partcular model or methodology.
4 A.Front Ofce Model
5 The Front Ofce model is an Excel based model tht utilizes the
6 Company's fOlWard price cures, the opetig charcterstics and costs of the
7 Company's curnt portfolio of genertig assets, and other inputs to detere
8 the marginal cost of obtaing curilment products from Company generatig
9 resoures and/or market purhases intead of purhaing those same products
10 from Monsato. The Front Offce moel can be used to value operatig reserves,
11 economic curilment and system integty.
12 The GRID Model
13 The Genertion and Reguation Intiative Decision (GRID) model is the
14 deterstic hourly production dispatch model usd to set the Compay's net
15 varable power costs. The GRID model incorprates in its analysis the
16 Company's opertig reserves requiements and determes the "avoided cost" of
17 the curilment products. The GRI Model can be used to value opetig
18 reseres and economic curailment.
19 Operating Resrve Product Valuation
20 Q.Please summarie the results of the models use to value the operating
21 resrve product.
22 A.The table below sumarzes the results of the Front Offce and GRID models for
23 thee year and includes the averge value of the model results.
Clements, Supp - 14
Rocky Mounta Power
Model ($ mjljous)mi iJ m.
Front Offce $2.4 $3.2 $3.7
GRID $2.4 $2.7 $2.8
Average $2.4 $3.0 $3.3
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Please provide a detailed explanation of the model methodologies for each
model used to value the operating reserve product.
Front Ofce Model
The Company's Front Offce model determes the maginl or
incremental cost of providing operatig reserves from the Company's existig
generatig resoure portolio. This model deteres, on an hourly basis, the
most economic or least cost mea by which the Company can provide opertig
reseres. From a customer's perpective, ths method determnes the replacement
cost or opportty cost of the operating reserve megawatt provided by Monsanto.
The spread between the maket price for energy and the highest cost, in-the-
money resource from the reserve stack determines the opportty cost of holding
operating reseres. Ths represents what the Company would be willing to pay on
behalf of customers for the next megawatt of operting reserves if it needed to
acquie additional operatig reserves.
GRID Model
The GRID model provides a system-wide view of both the need for
operating reseres and the system incremental benefit of providing those
operating reseres on an hour-by-hour basis. The GRID model includes the
existing genertig portolio of Company resoures, which includes Company
owned physical assets, power purhae agrements, and contrcts for interptible
Clements, Supp -15
Rocky Mounta Power
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products (such as operating reserves) with other inustral customer. GRID
determes the amount of opertig reserves the system requires and then
allocates resources to meet tht requirement. GRID allocates operatig reseres
on the plants tht are highest cost to lowest cost because it is less expenive to
car reserves on higher cost resoures.
To determine the value of Monsanto's operatig reserve product, a base
case GRID ru without Monsanto's resource is performed. Then Monsanto's
operatig reserve contrct is added at "zero cost" and the model is reru. The
difference between the two studies is the value of the operatig reserve contrct.
This value reresents the value of the highest cost, or most expenive, operating
reserves that would no longer be requied if Monsanto's operatig reserve product
is available intead. The Company uses the GRI model to determe net
power costs in ths rate case, including the cost of the Company's operatig
reserves. Since Monsanto's interrptible credit is included as a component of net
power costs, it is logical to use the same model to determe the value of the
interrptible products provided by Monsanto.
Did the Company consider any additional models or methodologies for use in
determining a value for the operatig reserve product?
Yes. The Company considered the use of a comparble sales model in which
contrct prices from recently executed contrcts with other large customer who
offer non-spinng operating reserves under term and conditions sim to those
in the Monsto contrt are used to set the value of the Monsto operatig
reserve product. The Company determed tht it was more appropriate to us
. Clements, Supp - 16
Rocky Mountain Power
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ths model as a verification of reasonableness of the Front Offce and GRI
model results as opposed to a model tht is used to set the value. This is due to
the fact tht the comparble contrcts were executed at ties in which the maket
prices and Company system genertig resoures were different th what they
are today. The Company also considered using a peaer resoure to value the
interrptible products being provided by Monsanto but determed the application
of a peaker resoure in valuig operatig reseres was not appropriate due to the
differnces in the products, terms and conditions tht Monsato is capable of
providig the Company as compar to the products, ter and conditions tht a
peaker resource is able to provide the Company.
Please provide an overvew of the comparable sales model methodology and
results and why they can be used as a reference point in evaluatig the Front
Offce and GRI model results.
Since 2006, the Company ha entered into two contrcts with large industral
customers for non-spinng operatig reserves. The fit contrct was executed in
late 2006 and has a term of seven (7) year stang in 2007. The second contrct
was executed in late 2009 and has a contrct term of five (5) year. In both
contrcts, the industral customer offers a non-sping operatig reserve product
tht is similar to tht offered by Monsto. The prices in those contrcts could be
used as a reference point for pricing Monsto's non-sping operating resere
product because they represent the price at which industral customers simlar to
Monsato are wiling to enter into operatig reserve agreements for the 2011
though 2013 tie period. However, those contrcts were executed at times when
Clements, Supp - 17
Rocky Mounta Power
1 the market curves, the spark spreads and the Company's system genertig
2 resoures were not the sae as they are today. The detals of ths comparble
3 sales anysis ar as follows:
Contract Terms Customer #1 Customer #2
Contrct Signed late 2006 late 2009
Contrct Ter 2007-2013 2010-2014
Megawatts Available 85MW 100MW
for Curailment
Hour of Curailment 70 hour per year of 100 hour per yea of
curlment (contrct curilment
allows 130 hour but
only 70 hour are set
aside for resees)
Notice of a curlment 7 miute notice 10 miute notice
for an operatig reserve
interøtion
Qulified as a non-Yes Yes
sping opertig
resere
Value of Opratig Intially set at $4.01/kW month
Reserve Credit $4. 16/kW month.
Credit for 2007-2010
has averaged $4.25/kW
month
Is credt fixed or Credit adjusts over the Credit is fixed for the
varable ter each year by the entie 5 year ter
sae percentage
chage as Utah general ..
rates in the previous
year
Monsanto Value using Prcing Equal to these Contracts
Opting Reserve
Credit ($/kW month)$4.25 $4.01
MonstoMW
95.00 95.00
Total $$4.845.00 $4.571.400
Avera2e 4.70800
Clements, Supp - 18
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1 Q.How do the results of the comparable sales model compare to the results of
2 the Front Offce and GRI models?
3 A.The table below compares the results of the Front Offce, GRID and comparable
4 sales models:
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Model ($ milions)
Front Offce
GRID
Comparble Sales
iJ
$2.4
$2.4
$4.7
iw
$3.2
$2.7
$4.7
ii
$3.7
$2.8
$4.7
The comparble sales model results are close to and support the Front Office and
GRID model results but are higher prily due to the fact tht maet prices
were higher and spark spreads where wider at the time those contrcts were
executed. Since the energy market, spark spreads and system generatig resoure
conditions have chaged, the results of the comparble sales model approach are
best used as a reference point to check the more up-to-date Front Offce and
GRID models.
Please provide an overvew of the peaker resource evaluation methodology
and why it is not appropriate to use in determining the value of operatig
reserves.
It is not appropriate to compare the Monsanto curilment contrct to a
combustion tuine peaker because the products, terms and conditions tht
Monsato offer are materially different frm the products, terms and conditions
available thugh ownership or lease of a combustion tubine. The table below
provides a simple comparson.
Clements, Supp - 19
Rocky Mountain Power
Operatig reserve anual availability
Operatig reserve anua available hour
Monsanto
Interruptible
Contract
2.1%
188
Combustion
Turbine
96.0%
8,410
Economic dispatch anual availabilty
Economic dispatch anual available hour
9.1%
800
96.0%
8,410
Load following reseres anual availabilty 0.0%
Load following anual available hour 0
96.0%
8,410
Sping reserves anual availabilty
Spinng reserves anual available hour
0.0%
o
96.0%
8,410
1 The peaker resource methodology utilizes the capital and energy costs of a new
2 combustion tuine (a simple cycle gas tuine peakg plant) as a basis for
3 determing the value of the non-spinng operating reserves product. This model
4 is not appropriate to use to value the non-spinng opertig reserves product
5 offered by Monsato because the products, terms and conditions Monsto offer
6 are not equivalent to the products, terms and conditions available though
7 ownership or lease of a combustion tubine. A combustion tuine provides
8 materially different products that are more valuable to customers th the
9 Monsanto interptible products because a combustion tubine is avaiable to
10 customers for their benefit 8,410 hour per year, assumg a 96 perent
1 1 avaìlability factor, while Monsanto only offers 188 hour of interrption under the
12 operating reserves contrct and 800 hour of interrption under the economic
13 curilment contrct. Furermore, Monsanto is unble to provide load following
14 serices, sping reserves, and other products tht a combustion tubine
Clements, Supp - 20
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1 provides. The differenes between the products, terms and conditions Monsanto
2 offer and the products, terms and conditions available to the Company though
3 ownerhip or lease of a combustion tubine ar too signficant in strctue and in
4 value to wart a comparson for use in determg value for the Monsto
5 interrptible products.
6 Economic Curtailment Product Valuation
7 Q.Please summarie the results of the models used to value the economic
8 curtailment product.
9 A.The table below sumares the results of the individual models an includes the
10 average value of all the model results.
Mode ($ mjlionsl
Front Offce
GRID
mi
$3.9
$3.2
iJ
$4.2
$3.8
iw
$4.3
$4.1
Average 53.6 $4.0 $4.2
11 Q.Please provide a detaied explanation of the model methodologies for each
12 model used to value the economic curtent product.
13 A.Front Offce Model
14 In the Front Office model, the economic curent product is priced off
15 of the market value of energy over thse hours in which curilment is anticipated.
16 Curilment is expected to occur in the highest priced hour, which is detered
17 by the curent forwar price cure and th Company's curt hourly scalar.
18 Monsanto is compensated with 100 peent of the market value of the energy
19 durg the hours in which curailment is anticipated to occur. The model assumes
Clements, Supp - 21
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the Compay will be able to optize the curilent hour and always curil
durg the highest priced hour.
GRID Mode/
The GRI model provides a system-wide vtew of the benefit of providig
the economic curilment product on an hour-by-hour basis. The GRID model
includes the existig portfolio of Company resoures, which includes Company
owned physical assets, power purhase agreeents, and contrts. To determe
the value ofMonsto's economic curlment product, a base case GRID ru
without Monsato' s resoure is pedormed. Then Monsto's economic
curlment contrct is added at "zer cost" and the model is reru. The
difference between the two studies is the value of the economic curilment
contrct. The Company uses the GRID model to detere net power costs in
ths rate case. Since Monsanto's interptible credit is included as a component of
net power costs, it is logical to use the same model to determe the value of the
interrptible products provided by Monsanto.
Did the Company consider any additional models or methodologies for use in
determining a value for the ecoDomie curtailment product?
Yes. Simlar to the operating resere prouct considertion, the Company
considerd using the value from a peaker resoure comparson but again
determined the application in establishing value for economic curilment was not
appropriate due to the differences in the proucts, ters and conditions that
Monsanto is capable of providing and the products, ter and conditions tht a
peaker resoure is capable of providing, as described earlier in my testiony.
Clements, Supp - 22
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1 System Integrity Product Valuation
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Please summarie the results of the model used to value the system integrity
product.
The table below sumzes the results of the Front Offce model for system
integrty.
Model ($ mjlljons)
Front Offce
20
$0.1
2O
$0.1
20
$0.1
Please provide a detailed explanation of the model methodology used to value
the system integrity product.
Front Offce Model
The system integrty product gives PacifiCorp the right to curil
Monsanto when a double contingency or voltage event occurs. The double
contigency event is defined as two or more forced outages totaling 500
megawatts or more of capacity with 48 hour of each other and must overlap for
at least an hour. As with the economic curlment product, the customers benefit
when PacifiCorp avoids maret purhases to meet Monsato's load durg a
system integrty event. The product is priced using an average anual heavy load
hour (6x 16) maket price for energy, with the assumption tht the probabilty of a
system integrty event is constat thughout the year. The anual average
market price is applied to capacity available for the product and for the full limit
of hour for which the product is available. The GRID model is not capable of
pricing ths product.
Clements, Supp - 23
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1 Summary of Results and Recommendation
2 Q.Please summarize the results of the Company's analysis of the value of
3 Monsanto's interruptible products.
4 A.The Company employed two models in order to evaluate the price at which
5 customers are indifferent as to whether the intemiptible product is provided by
6 Monsanto or provided from another soure. The models properly account for the
7 prima factors tht inuence the value of the varous interptible products. The
8 model results are sumed in the following table:
Summary of Average Model Results
Prduct ZD mi iw
Operatig Reserves $2.4 $3.0 $3.3 ,
Economic Curlment $3.6 $4.0 $4.2
System Integrty $0.1 $0.1 $0.1
Total $6.1 $7.1 $7.6
9 Q.Please summarize the Company's recommendation for the interruptible
10 credit to be included in the Monsanto contract for service commencing
11 January 1, 2011.
12 A.The Company recommends tag the average results of the Front Offce and
13 GRID models tht were used tö price the opertig reseres and economic
14 curilment products as the basis for a credit for those two products. The
15 Company recommends using the result of the Front Offce model as a basis for
16 the credit for the system integrty product. The Company recommends a total
17 credit to Monsanto for the the products of $6.1 millon in 201 1. If the term of
Clements, Supp - 24
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1 the agreement covers 2012 or 2013, then the Company recommends values of
2 $7.1 millon and $7.6 millon, respectively as shown in the table below:
3 Q.
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Product mi iw iJ
Opratig Reseres $2.4 $3.0 $3.3
Economic Curilment $3.6 $4.0 $4.2
System Integrty $0.1 $0.1 $0.1
Total $6.1 57.1 57.6
How long should the pricing you are recommending be in effec?
Absent an agreeent between the Company and Monsanto on a contrct lengt,
the Commssion ordered pricing should be in effect until rates chage in the
context of the next generl rate case or other appropriate docket properly before
the Commssion.
Should other terms of the contract change at this time?
No. Thevalues recommended by the Company apply only if Monsanto provides
the sae interrptible products under the sae ter and conditions as those
found in the Contrct, with the assumption of 800 hour of economic curilment.
Can you provide any additional evidence to support this value?
In Case No. PAC-E-07-05, Commssion Staff proposed a valuation method for
Monsato's interptible products in which the value or credit included in the
existig contract is used as a staing point and then an adjustment is made to tht
value to account for changes in the market cures tht have occured since the
time tht the value in the existing contrct was established. Staff recommended
ths approach be applied to all thee products: economic curlment, opetig
reseres, and system integrty. The Compay does not believe ths method
accurtely values the interrptible proucts since other factors beides maket
Clements, Supp - 25
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prices influence the value of the interptible products. However, ths approach
recommended by Commssion Staff can be used as a point of reference in
evaluatig the direction tht interptible product value has moved since the last
contrct was executed. Therefore, the Company perormed an anysis using ths
approach suggested by the Commssion Staff. In June 2007 when the curent
thee-year Monsanto contrct was negotiated, the average price of on-peak energy
at Palo Verde for 2008 thugh 2010 (the term of the negotiated contrct) was
$73.08 per megawatt hour. In June 2010, the average price of on-pea energy at
Palo Vere for the thee year term 2011 thugh 2013 is $50.27 per megawatt
hour. Ths is a declie of 31 percent. In other words, the value of a thee-year
strp of energy has decreased by 31 percent since the last Monsanto contrt was
negotiated. This reference point support the fact that interrptible product value
has decreased since the last Monsto contrct was executed.
If the Commission does not issue a ruling on the value of Monsanto's
curtaiment products by January 1, 2011, what should happen?
The Contrct between the Company and Monsanto ends December 31, 2010.
Absent a Commission decision or stipulation between the two pares resolving
the matter, there wil be no contrct in place governg curilment or obligatig
the pares to any contrct ters. Therefore, the Company would have no right to
curil Monsanto and Monsanto would have no claim to value or compensation
for interptible products it curently provides the Company. Beginng Janua
1, 2011, Monsanto wil receive a bil at the Commission determned cost of
service rate for their energy usage with no offset for the interrptible products,
Clements, Supp - 26
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1 and the impact to power costs would be tred up though the energy cost
2 adjustment mechasm actu expenses in 2011.
3 Q.Does this conclude your testimony?
4 A.Yes.
Clements, Supp - 27
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