20110527Clements Di.pdf

RECEIVED
20"HAY27 AHIl:09
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE )
APPLICATION OF ROCKY )
MOUNTAIN POWER FOR )
APPROVAL OF CHAGES TO ITS )
ELECTRIC SERVICE SCHEDULES )
AN A PRICE INCREASE OF $32.7 )
MILLION, OR APPROXIMATELY )15.0 PERCENT )
CASE NO. PAC-E-l1-12
Direct Testimony of Paul H. Clements
Redacted
ROCKY MOUNTAI POWER
CASE NO. PAC-E-l1-12
May 2011
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Please state your name, business address and. present position with Rocky
Mountain Power (the "Company"), a division ofPacifiCorp.
My name is Paul H. Clements. My business address is 201 S. Main, Suite 2300,
Salt Lake City, Utah 84111. My position is Originator/Power Marketer for
PacifiCorp Energy. PacifiCorp Energy, like Rocky Mountain Power, is a division
of PacifiCorp.
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 worked
in the merchant energy sector for approximately seven years in pricing and
strctuing, origination, and trading roles for Ilinova and Duke Energy. I have
been employed by the Company since 2004 as an originator/power marketer
responsible for negotiating interrptible retail special contracts, negotiating
qualifying facility contracts, and managing wholesale or market-based energy and
capacity contracts with other utilities and power marketers. I was the Company
representative who negotiated the 2006 and the 2007 through 2010 electrc
service agreements with Monsanto, as well as the interim electrc service
agreements in 2011. I have managed all Monsanto contract-related issues since
late 2004.
21 Purpose and Summary of Testimony
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23 A.
What is the purpose of your testimony?
The purose of my testimony is to provide the analysis and recommendation
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Clements, Di - 1
Rocky Mountain Power
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regarding the economic valuation of the interrptible products offered by
Monsanto to determine the interrptible credit amount for inclusion in a
Monsanto electrc service agreement. My testimony wil address the following
areas:
. provide a sumar of how the Company updated the valuation of the
Monsanto interrptible products consistent with the Commission findings
in Order No. 32196 when determining its recommended credit value in
this proceeding;
. provide a comparson of the Company's recommended credit value in this
proceeding to the value established by the Commission in Case No. PAC-
E-1O-07 (the "2010 General Rate Case"); and
. provide a recommendation on an interrptible credit value to be included
in a Monsanto contract.
Why is Rocky Mountain Power filing testimony on the value of the Monsanto
interruptible products in conjunction with this general rate case filing?
In its Order No. 32224 dated April 18, 2011, the Commission stated the following
regarding the value of the Monsanto interrptible credit:
" . . . we find that it is both reasonable and appropriate that the value
of the Monsanto interrptible credit remain subject to adjustment
commensurate with the Commission-approved adjustments of the
Company's firm power and energy charges over time."!
Since the Company is proposing a change to Monsanto's firm power and energy
charges as part of this general rate case fiing, the Company is also providing a
IOrder No. 32224 in Case No. P AC-E-l 0-07, page 7.
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Clements, Di - 2
Rocky Mountain Power
1 recommended value and supporting evidence regarding the Monsanto
2 interrptible credit.
3 Q.Has the Commission recently issued findings regarding the value of
4 Monsanto's interruptible products?
5 A.Yes. In Confidential Attchment C of Order No. 32196 in the 2010 General Rate
6 Case, the Commission established the interrptible product value for each of the
7 interrptible products provided by Monsanto. In its detailed fidings in that
8 Order, the Commission provided an explanation of how the recommended values
9 wère derived. In most instances, the Commission's recommended values were
10 established using selected results from the various models and methodologies
11 proposed by the different parties in the proceeding.
12 Valuation of Monsanto's Interruptible Products
13 Q.What approach did the Company utile for the valuation of Monsanto's
14 interruptible products when determining its recommended interruptible
15 credit for this proceeding?
16 A.The Company reviewed the detailed Commission fmdings addressing Monsanto
17 interrptible value in the 2010 General Rate Case. Based on those findings the
18 Company utilized the same models and methodologies with updated assumptions
19 to reflect curent market conditions to establish recommended interrptible
20 product values in this proceedig.
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Clements, Di - 3
Rocky Mountain Power
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Please explain how the Company utilized the models and methodologies
consistent with the Commission findings to determine a recommended value
for each Monsanto interruptible product.
In Order No. 32196, the Commission provided details regarding which models
and methodologies were used to derive the recommended values for the thee
Monsanto interrptible products: (l) non-spining operatig reserves; (2)
economic curilment; and (3) system integrity. I wil summarze the Commission
fmdings for each of these products and the analysis the Company performed for
this proceeding when calculating a recommended value that is consistent with
those fmdings.
Non-Spinning Operating Reserves
For the non-spining operating reserves product, the Company
recommends using the average of the Front Office and GRID model results.
Exhibit No. 39 provides an explanation of each of these models and how they are
used to calculate the value of the various Monsanto interrptible products. This
approach is consistent with the Commission fmdings regarding operating
reserves:
"The Commission believes that the energy value is most accurately
established using the average of the GRID and Front Offce Model
rus as proposed by the Company and supported by Staff.,,2
To determine a recommended value for the non-spining operating reserves
product, the Company updated the Front Offce and GRID models with curent
assumptions and then averaged the results.
20rder No. 32196 in Case No. PAC-E-lO-07, page 56.
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Clements, Di - 4
Rocky Mountain Power
1 Next, the Company addressed the issue of additional capacity value for the
2 non-spining operating reserves product. In Order No. 32196, the Commission
3 found the additional capacity value of the non-spinning operating reserves product
4 to be $. milion per year. This value was established by taking the average of
5 the capacity costs of Curant Creek and the Aero-derivative unit proposed by
6 Monsanto.3 The Commission offered the following additional explanation as to
7 the applicability of this. incremental capacity value:
8 "The Commission fmds that this value properly blends the curent
9 condition with the longer term capacity view that corresponds with
10 Monsanto's demonstrated long-term interrptible commitment....
11 This approach is also consistent with our desire and expectation
12 that the parties will execute a five-year contract as opposed to the
13 three contracts that have been the norm for the paries in the recent
14 past. In addition to promoting greater price certinty and stabilty
15 for Monsanto, a large industral customer and employer in
16 southeast Idaho, it would also allow the Company to plan more
17 effectively into the futue. Therefore, the Commission fmds that an
18 extended contract period would serve the public interest.,,4
19 Therefore, the Company recommends an additional capacity value of $.
20 milion in this proceeding.
21 Economic Curtailment
22 For the economic curilment product, the Company recommends using
23 the average of the Front Office and GRID model results. This approach is
24 consistent with the Commission findings regarding economic curailment value:
25 "The Commission fmds that the value proposed by RM...and
26 accepted by Staff is fair, just and reasonable... The differences in
27 GRID and FO Model rus, with and without Monsanto Economic
28 Curailment, fairly estimate this value."s
30rder No. 32196 in Case No. P AC-E-1 0-07, pages 56-57.
40rderNo. 32196 in Case No. PAC-E-lO-07, page 57.
50rder No. 32196 in Case No. PAC-E-lO-07, page 57.
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Clements, Di - 5
Rocky Mountain Power
1 To determine a recommended value for the economic curtailment product, the
2 Company updated the Front Offce and GRID models with curent assumptions
3 and then averaged the results.
4 System Integrity
5 In Order No. 32196, the Commission set the value of the system integrty
6 product at $. milion as a compromise between the partes' recommended
7 values. The Commission provided the following justification for this compromise:
8 ".. . all customers are subject to interrption to preserve system integrity,
9 without reimbursement, with an understading that interrption of a single
1 0 large load customer like Monsanto in an emergency brings benefit to RMP11 and other customers.,,6
12 For the system integrty product, the Company recommends usmg the $.
13 milion value established by the Commission in Order No. 32196.
14 Summary of Results and Recommendation
15 Q.Please summarie the Company's recommendation for the value of
16 Monsanto's interruptible products in this proceeding.
17 A.The Company performed an updated analysis using models and methodologies
18 consistent with the Commission findings in Order No. 32196. The individual
19 model results for the GRID and Front Office models for calendar year 2012 are
20 summarized in the following table: 7
60rder No. 32196 in Case No. PAC-E-IO-07, page 57.
7For the System Integrity product, the Company used the Commission's recommended value in Order No.
32196 instead of the actual model results. The GRI and Front Offce models were not used to calculate
the additional capacity value amount of $l millon. Instead, that value was derived from the Commission
findings in Order No. 32196. The GRI model used a March 31, 2011 forward price cure and the Front
Offce model used a May 18, 2011 forward price cure.
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Clements, Di - 6
Rocky Mountain Power
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Please summarize the Company's recommendation for the value of
Monsanto's interruptible products in this proceeding.
The Company recommends taking the average results of the Front Office and
GRID models for the energy portion of the non-spining operating reserves
product and the economic curailment product. Consistent with the Commission
findings in Order No. 32196, the Company recommends applying $. milion in
additional capacity value to the non-spinning operating reserves product. The
Company recommends using the Commission's recommended value from Order
No. 32196 for the system integrity product.
The Company recommends a total interrptible credit to Monsanto for the
three products of $" milion. The table below summaries the value by
product tye:
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Clements, Di - 7
Rocky Mountain Power
1 Q.Please provide a comparison of the Company's recommended interruptible
2 product value in this proceeding to that ordered by the Commission in Case
3 No. PAC-E-10-07.
4 A.The table below compares the Company's recommended Monsanto interrptible
5 product value for this proceeding to the values found in Confidential Attchment
6 C of Order No. 32196.
7 Q.How should the credit value of s. milion be reflected in the Monsanto
8 contract?
9 A.The credit value of $" milion should be reflected as a per unit credit of $"
10 per kW month applicable to the first 162 MW of measured demand in each
11 month.
12 Q.Should other interruptible product terms of the contract change at this time?
13 A.No. The values recommended by the Company apply only if Monsanto provides
14 the same interrptible products under the same terms and conditions as those
15 found in the existing contract, with the assumption of 800 hours of economic
16 curailment per calendar year.
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Clements, Di - 8
Rocky Mountain Power
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Does the Company's recommended value of s. milion impact the
Company's general rate case filing?
No. The Monsanto interrptible credit value for the test period in question in the
general rate case was set by the Commission in the 2010 General Rate Case. The
$" milion annual value set in that case wil be in effect through calendar year
2011. The Company and Monsanto have agreed8 to a new contract with a June 1,
2011, through December 31, 2011 term. The new contract includes an
interrptible credit rate that equates to ~ millon per year. The Company
recommends a rate effective date of January 1, 2012, for the interrptible credit
amount of $" milion recommended in this case.
Does this conclude your direct testimony?
Yes.
8 At the time of preparation of this fiing, the Company and Monsanto had verbally agreed to a new contract
under the terms described and were in the process of aranging for execution of the new agreement.
Execution of a new agreement is expected prior to the expiration date of the interim agreement which
terminates May 31, 2011.
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Clements, Di - 9
Rocky Mountain Power
2DIIHAY 27 AM l1: 09 Case No. PAC-E-11-12
Exhibit No. 39
i~3;3¡ON Witness: Paul H. Clements
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of Paul H. Clements
Overview of Monsanto's Curilment Products
May 2011
Rocky Mountain Power
Exhibit No. 39 Page 1 of 5
Case No. PAC-E-11-12
Witness: Paul H. Clements
Exhibit No. 39
Overvew of the Models Used by the Company to
Value Monsanto's Interruptible Products
1 The Company primarly utilzes two models to calculate the cost of
2 obtaining from other sources the same interrptible products that Monsanto
3 offers. These two models are: 1) the Front Office model and 2) The Generation
4 and Regulation Initiative Decision (GRID) modeL.
5 There are many different factors and inputs that influence the forward
6 value of interrptible products. Each particular model utilized by the Company
7 captues a reasonable majority of these factors and inputs in its analysis and, even
8 if used alone, each model could be considered a fair assessor of value for the
9 product it is pricing. However, each model has certin factors and inputs that it
10 measures and analyzes with some level of precision and other factors and inputs
11 that are not measured as well as they are in the other modeL. For example, one
12 model used to value operating reserves may do a thorough job of analyzing the
13 cost of holding reserves on the Company's existing resource portfolio, but that
14 same model may not incorporate the Company's overall need for operating
15 reserves in any given hour in its analysis. A second model may thoroughly
16 incorporate the Company's need in any given hour but may not measure the value
17 or cost with as much precision as the fist modeL. Therefore, the Company
18 believes a more balanced approach is to utilize both models in order to make sure
19 all factors and inputs are appropriately considered when determining the value of
Clements, Exhibit 39 - 1
Rocky Mountain Power
Rocky Mountain Power
Exhibit No. 39 Page 2 of 5
Case No. PAC-E-11-12
Witness: Paul H. Clements
1 each interrptible product. Below is a summary of the models used by the
2 Company:
3 Front Offce Model
4 The Front Office model is an Excel based model that utilizes the
5 Company's forward price cures, the operating characteristics and costs of the
6 Company's curent portfolio of generating assets, and other inputs to determine
7 the marginal cost of obtaining curilment products from Company generating
8 resources and/or market purchases instead of purchasing those same products
9 from Monsanto. The Front Office model can be used to value operating reserves,
10 economic curailment and system integrty.
11 The GRID Model
12 The Generation and Reguation Initiative Decision (GRID) model is the
13 deterministic hourly production dispatch model used to set the Company's net
14 variable power costs. The GRID model incorporates in its analysis the Company's
15 operating reserves requirements and determines the "avoided cdst" of the
16 curailment products. The GRID Model can be used to value operating reserves
17 and economic curilment.
18 Below is a summary of how the models are used to calculate a value for
19 each of the various interrptible products.
20 Operating Reserve Product Valuation
21 Front Offce Model
22 The Company's Front Offce model determines the marginal or
23 incremental cost of providing operatig reserves from the Company's existing
Clements, Exhibit 39 - 2
Rocky Mountain Power
Rocky Mountain Power
Exhibit No. 39 Page 3 of 5
Case No. PAC-E-11-12
Witness: Paul H. Clements
1 generating resource portfolio. This model determines, on an hourly basis, the most
2 economic or least cost means by which the Company can provide operating
3 reserves. From a customer's perspective, this method determines the replacement
4 cost or opportity cost of the operating reserve megawatt provided by Monsanto.
5 The spread between the market price for energy and the highest cost, in-the-
6 money resource from the reserve stack determines the opportity cost of holding
7 operating reserves. This represents what the Company would be wiling to pay on
8 behalf of customers for the next megawatt of operating reserves if it needed to
9 acquire additional operating reserves.
10 GRID Model
11 The GRID model provides a system-wide view of both the need for
12 operating reserves and the system incremental benefit of providing those
13 operating reserves on an hour-by-hour basis. The GRID model includes the
14 existing generating portfolio of Company resources, which includes Company
15 owned physical assets, power purchase agreements, and contracts for interrptible
16 products (such as operating reserves) with other industral customers. GRID
17 determines the amount of operating reserves the system requires and then
18 allocates resources to meet that requirement. GRID allocates operating reserves
19 on the plants that are highest cost to lowest cost because it is less expensive to
20 carr reserves on higher cost resources.
21 To determine the value of Monsanto's operatig reserve product, a base
22 case GRI ru without Monsanto's resource is performed. Then, Monsanto's
23 operating reserve contract is added at "zero cost" and the model is reru. The
Clements, Exhibit 39 - 3
Rocky Mountain Power
Rocky Mountain Power
Exhibit No. 39 Page 4 of 5
Case No. PAC-E-11-12
Witness: Paul H. Clements
1 difference between the two studies is the value of the operating reserve contract.
2 This value represents the value of the highest cost, or most expensive, operatig
3 reserves that would no longer be required if Monsanto's operating reserve product
4 is available instead. The Company uses the GRID model to determne net
5 power costs in this rate case, including the cost of the Company's operating
6 reserves. Since Monsanto's interrptible credit is included as a component of net
7 power costs, it is logical to use the same model to determine the value of the
8 interrptible products provided by Monsanto.
9 Economic Curtailment Product Valuation
10 Front Offce Model
11 In the Front Office model, the economic curilment product is priced off
12 of the market value of energy over those hours in which curilment is anticipated.
13 Curilment is expected to occur in the highest priced hours, which is determined
14 by the curent forward price cure and the Company's curent hourly scalars.
15 Monsanto is compensated with 100% of the market value of the energy during the
16 hours . in which curilment is anticipated to occur. The model assumes the
17 Company wil be able to optimize the curailment hours and always curil durng
18 the highest priced hours.
19 GRID Model
20 The GRID model provides a system-wide view of the benefit of providing
21 the economic curailment product on an hour-by-hour basis. The GRID model
22 includes the existing portfolio of Company resources, which includes Company
23 owned physical assets, power purchase agreements, and contracts. To determine
Clements, Exhibit 39 - 4
Rocky Mountain Power
Rocky Mountain Power
Exhibit No. 39 Page 5 of 5
Case No. PAC-E-11-12
Witness: Paul H. Clements
1 the value of Monsanto's economic curilment product, a base case GRID ru
2 without Monsanto's resource is performed. Then, Monsanto's economic
3 curailment contract is added at "zero cost" and the model is reru. The difference
4 between the two studies is the value of the economic curilment contract. The
5 Company uses the GRID model to determine net power costs in this rate case.
6 Since Monsanto's interrptible credit is included as a component of net power
7 costs, it is logical to use the same model to determine the value of the interrptible
8 products provided by Monsanto.
9 System Integrity Product Valuation
10 Front Offce Model
11 The system integrty product gives PacifiCorp the right to curail
12 Monsanto when a double contingency or voltage event occurs. The double
13 contingency event is defmed as two or more forced outages totaling 500
14 megawatts or more of capacity within 48 hours of each other and must overlap for
15 at least an hour. As with the economic curailment product, the customers benefit
16 when PacifiCorp avoids market purchases to meet Monsanto's load durng a
17 system integrity event. The product is priced using an average annual heavy load
18 hour (6xI6) market price for energy, with the assumption that the probabilty of a
19 system integrity event is constant throughout the year. The annual average market
20 price is applied to capacity available for the product and for the full limit of hours
21 for which the product is available. The GRID model is not capable of pricing this
22 product.
Clements, Exhibit 39 - 5
Rocky Mountain Power