20150514Beach Rebuttal.pdf

Benjamin l. Otto (ID Bar # 8292)
710 N 6'h Street
Boise,ID 83701
Ph: [phone] x12
Fax [phone]
[e-mail]
Matt Vespa (CA Bar #222265)
Sierra Club
85 Second St., 2'd Floor
San Francisco, CA 94105
Ph: (415) 977-s753
Fax [phone]
[e-mail]
Attorneys for the ldaho Conservation League and Siena Club
IN THE MATTER OF IDAHO POWER
COMPANIY'S PETITION TO MODIFY TERMS
AND CONDITIONS OF PURPA PURCHASE
AGREEMENTS
IN THE MATTER OF AVISTA
CORPORATION'S PETITION TO MODIFY
TERMS AND CONDITIONS OF PURPA
PURCHASE AGREEMENTS
IN THE MATTER OF ROCKY MOUNTAIN
POWER COMPANY'S PETITION TO MODIFY
TERMS AND CONDITIONS OF PURPA
PURCHASEAGREEMENTS
Idaho Conservation League and the Sierra Club
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BEFORE THE IDAHO PUBLTC UTILITIES COMMISSION
CASENO. IPC.E-l5-OI
CASENO. AVU-E-l5-OI
CASENO. PAC.E.I5-03
Rebuttal Testimony of R. Thomas Beach
May 14,2015
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Q: Are you the same R. Thomas Beach who filed Direct Testimony on behalf of the Idaho
Conservation League and the Sierra Club on April23 2015?
A: Yes.
Q: Please summarize your rebuttal testimony.
A: I provide my opinion on three topics. First, I rebut StaffWitness Mr. Sterling's testimony
on pages 13 - 15 regarding the relative risk of long-term contracts. Second, I rebut Mr. Sterling's
position that long-term commitments to utility-owned resources are different than long-term
qualifring facility (QF) contracts, because of the scrutiny afforded to utility projects in the IRP
process. Third, I describe an example of an adjustable rate contract that complies with PURPA.
Q: Do you agree with Mr. Sterling that "a fixed price contract is more risky than one in
which prices are adjusted frequently"?t
A: No. The standard definition of "risk" is "the chance of loss."2 A contract whose price
adjusts frequently may produce the result that the ratepayer receives a price close to the
prevailing market price. In this respect, such a contract may reduce the risk that the ratepayer
will pay a price different than the market price. However, based on my experience in the utility
industry, this is not what the ratepayer desires, particularly if there is substantial volatility in the
market price, for example, as there is in the natural gas market, illustrated in Figure I reproduced
from my direct testimony. Consumers value rate stability and reasonably predictable rate
changes and monthly bills.
' Sterli[g Direct, at pg. 13, ln 9 - I0.
' Webster's New Twentieth Century Dictionary (2"d edition, 1983).
IPC-E-15-01
Beach, Rebuttal
Idaho Conservation League and Sierra Club
Figure 1: Henry Hub Market Prices
Monthly Average Market Prices
u.m
-Monthly
Averagcf
co
oCLrr) 6.m
EB6SqSE4S€€qFABBEB9iE !i t $E i i s"iE q t II t gs i t ao!PE
What the ratepayer seeks is a low price, not just a price that equals the market price. And if they
cannot always obtain a low price; they prefer a stable price that is predictable. Ratepayers can be
substantially harmed if their costs for energy at times are very high as a result of the volatility in
energy market prices. As a result, consumers generally are willing to pay a premium to expected
market prices in order to eliminate the future volatility in market prices. In essence, this
premium represents insurance that consumers are willing to buy against the high costs of
periodic spikes in market prices.
Q: Does the economic literature commonly ascribe a risk reduction benefit to fixed price
contracts?
A: Yes. There are numerous examples and studies that demonstrate that consumers are
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Beach, Rebuttal
Idaho Conservation League and Sierra Club
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willing to pay a premium to fix or to limit the price of a commodity, including energy
commodities.
' Perhaps the most familiar is the fixed-rate home mortgage, which typically carries a
higher interest rate than an adjustable rate mortgage as the premium required to
eliminate the risk of future periods of high interest rates.
' The natural gas forward market provides consumers with a means to buy future supplies
of natural gas at a price known today. Comparisons between forward gas market prices
and contemporaneous fundamentals-based forecasts of gas prices reveal a consistent
premium in the forward prices, perhaps associated with the "risk premium" that sellers in
the forward markets require, and that buyers are willing to pay, in order to fix future
prices.'
' Long-term contracts for natural gas, at publicly-known prices, are not common today.
However, such contracts typically show a premium to current price forecasts. For
example, in 2011 Public Service of Colorado (PSCo) signed a ten-year gas supply contract
with Anadarko Petroleum to support the replacement of a portion of PSCo's coal-fired
generation with gas generation, at a fixed price that was $1.38 per MMBtu higher than the
Energy Information Administration's contemporaneous forecast of prices in PSCo's
market.a
' Many utilities, including those in Idaho, conduct risk management programs that include
hedging that uses a variety of forward market instruments and that is designed primarily
to reduce the near-term volatility of their fuel and purchased power expenses. Generally,
r Mark Bolinger and Ryan Wiser, Comparison of AEO 2010 Natural Gas Price Forecast to NYMEX Futures Prices
(Lawrence Berkeley National Lab, |anuary 2010), esp. Figure 8, available at
http://enrp.lbl.gov/sites/all/files/UPDATEo/o20MEMO0/o20lbnlo/o2\-o/o2053587.pdf.r Lisa Htrber, tJtility-scale Wind and Natural Gas Volatility: Unlocking the Hedge Value of l\lind for rJtilities and Their
Customers (Rock7 Mountain Institute I RMI], Iuly 2012 ), at pg. I 3- 14. The executive summary is attached as Exhibit
304. The full report is available at http://www.rmi.org/Knorvledge-Center/Libraryl2012-
07_WindN aturalGasVolatility.
IPC-E-ls-01
Beach, Rebuttal
Idaho Conservation League and Sierra Club
I these programs focus on reducing volatility only in the next 1-3 years, as the forward
2 markets are most liquid in the near-term and there are substantial transaction costs
3 associated with long-term hedges in financial markets. Significantly, PacifiCorp's
4 discussion of its hedging program in its most recent IRP emphasizes how its long position
5 in the power market functions as a hedge against its short position in natural gas, and
6 concludes that "[t]his has the effect of reducing the amount of natural gas hedging that
7 the Company would otherwise pursue."t This is exactly the hedge represented by the
8 fixed-price solar contracts at issue in this case. In addition, other observers have noted
9 that long-term, fixed-price contracts for renewable generation provide utilities with a
l0 means not available in the financial markets to hedge their long-term exposure to gas and
I I power markets, and could thus replace a portion of their current budgets for risk
12 management.6
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14 Q: Can you provide examples of "investments made by private investors in which the rates
l 5 are fixed and the entire revenue is guaranteed for 20 year periods"?7
l6 A: Yes, a home mortgage with a fixed interest rate is an obvious example. Banks and other
l7 financial institutions invest in the housing market by lending money to homeowners at fixed
l8 rates of return for the interest and principal, for terms of 15 or 30 years. The reyenue stream
l9 from this investment is guaranteed by a lien on the underlying home property.
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2l Q: Is QF revenue guaranteed in Idaho for 20 years?
22 A: No. QFs must actually deliver energy within the performance bounds contained in the
i PacifiCorp 2015 IRP, atpg.246-247.t'Supranote4,L.Huber, IJtility-scaleWindandNaturalGasVolatility:Unlockingthe HedgeValueofWindJbr
Utilities and Their Customers. (The Executive Summary is attached as Exhibit 304).- Sterling Direct, at pg. 15, ln 9 - 12.
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Idaho Conservation League and Sierra Club
I contracts to receive any payments. They are not paid if the QF project is never built or fails to
2 operate correctly. They are not paid for over-delivery and they are penalized for under-delivery.
3 The only element of the contractual payment which is guaranteed is the rate. I note that this is
4 substantially riskier for the QF project than an investment in generation assets is for the utility.
5 Once a utility generation asset is approved for rate recovery through the utility's rate base, the
6 utility will recover its costs, including necessary fuel, and earn a return, even if the plant is out of
7 service or does not perform with the efficiency originally advertised. The only circumstance in
8 which this assured return will be reduced is the infrequent event that the Commission finds,
9 typically after a lengthy regulatory process, that the utility's operation of the plant was imprudent
l0 or unreasonable.t No such finding is required to deny payment to a QF project: if the QF fails to
I I deliver per the contract, it is not paid. Ratepayers benefit from the QF's assumption of this
12 appreciably greater level of operating risk, compared to utility-owned generation.
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14 Q: Do you agree with Mr. Sterling that it would be "fair" for utilities to receive long-term
l5 commitments to build utility-owned resources, while QFs are limited to contracts no longer
l6 than five years, because of the "intense scrutiny" of the Integrated Resource Plan (IRP) and
l7 other approval processes for utility-owned resources?'
l8 A: Based on my understanding, PURPA projects in ldaho undergo an equivalently "intense"
19 levelof scrutiny. First, the Commission approves an avoided cost methodology developed
20 through a fully litigated Commission docket with multiple parties. Second, the utility's
2l comprehensive IRP process establishes a future resource plan, including the timing of the utility's
22 firture need for generation, and models the utility's avoided energy and capacity costs associated
23 with that plan. This extensive process, combining both the IRP and the Commission's approved
n Sce Order No. 33140 at p 5, AVU-E- 14-06 (September 30, 2014) (allowing recovery of replacement power costs,
and declining to review recovery of fixed costs, due to unforced outage of Colstrip Unit 4).
'Sterling Direct, at pg. 21, ln 22 through pg.22,|n7.
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Idaho Conservation League and Sierra Club
I avoided cost methodology, establishes the level and timing of both the capacity and energy
2 payments unique to each proposed QF, and has regular annual updates to ensure accurate
3 information as time moves forward. Importantly, the assumptions and computer model used to
4 develop these avoided cost prices are the same ones used to assess utility-proposed new
5 generation or transmission resources.
6 Finally, once a QF and utility negotiate a contract, the Commission must approve the
7 contract to ensure adherence to Idaho rules and practices. These contracts include performance
8 guarantees by the QF that are more stringent than those which apply to a utility-owned plant.
9 Idaho's method for calculating avoided costs also relies on the utilities' IRPs and thus provides
l0 the same assumptions, uses the same tools, and is subject to the same robust scrutiny as utility
I I proposals to build owned resources.
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l3 Q: In your experience can a state establish long-term PURPA contracts with an adjustable
l4 component to rates?
l5 A: Yes. For example, in the 1980s, California adopted a standard QF contract for renewable
l6 generators ("small power producers" under PURPA) that included ten years of fixed energy and
l7 capacity prices, followed by an additional 5 to 20 years of fixed capacity prices but variable energy
l8 prices indexed to natural gas prices and the incremental heat rates of the California utilities.r0
l9 The CPUC found that this contract structure was necessary to allow renewable QF generation to
20 be financed in the state. The result of this contract was the successful development of many of
2l the first large-scale wind, solar, biomass, and geothermal projects in the U.S. Many of the
22 renewable projects brought on-line in this initial tranche of QF development in California
23 continue to operate today under successor contracts in the state's Renewable Portfolio Standard
'(' See CPUC Decision No. 83-09-054 ( 12 CPUC 2d 604), at 8-9.
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Idaho Conservation League and Sierra Club
I (RPS) program, and, as I noted in my direct testimony, these projects supply the lowest-cost
2 renewable generation now available to the RPS.
3 Q: Could such a structure be adapted to how QF generation is priced in Idaho?
4 A: Yes. Idaho currently calculates the rates for capacity and energy separately. Capacity
5 payments are based on the capital costs of a combined cycle combustion turbine and begin in the
6 first year the utility has an identified resource deficiency. Capacity payments continue through
7 the life of the contract and for subsequent contracts based on the premise that, once a QF has
8 resolved a capacity deficit, it continues to avoid other capacity needs for the life of the project. I
9 do not recommend any adjustments to this portion of the avoided costs rates or to power
l0 purchaseagreements.
I I The Commission could adopt a variable component to the energy rate. For the energy
12 component, the first ten years of prices in the contract would be fixed at the level indicated by the
l3 current application of the IRP method. Beginning in Year I l, the portion of the Year 11
l4 indicative energy price that represents the forecast of Mid-Columbia (Mid-C) prices in Year 11
l5 would not be fixed, but would be variable based on actual Mid-C prices beginning in Year I l.
16 The remainder of the indicative energy price for Years l1-20 would continue to be fixed. This
17 would allow, in essence, for the energy portion of the contract to be re-priced after the first ten
l8 years. For example, assume that the contract price in Year 11 under the IRP Method at the time
l9 of contract formation was $75 per MWh, and that at that time the forecast of Mid-C prices in
20 Year I 1 was $45 per MWh. Under this option, in Year I l, the contract would include a fixed
2l component of $30 per MWh ($75 - $45 = $30), and the remainder of the contract price would be
IPC-E-1s-01
Beach, Rebuttal
Idaho Conservation League and Sierra Club
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based on actual Mid-C prices in Year 11, which could be higher or lower than the originally
forecasted $45 per MWh.rr
Does this conclude your rebuftal testimony as of May l4,20l5?
Yes.
rr This simplified example uses annual prices. It is my understanding that the IRP method uses much more
granular prices disaggregated by month and High Load/Low Load hours, so the calculation proposed here would be
performed on that more granular basis.IPC-E-15-0I 8
Beach, Rebuttal
Idaho Conservation League and Sierra Club
Q:
A:
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASENO. IPC-E-Is-OI
CASE NO. AW-E-Is.OI
CASENO. PAC-E.I5-03
Idaho Conservation League and the Sierra Club
Rebuttal Testimony of R. Thomas Beach
Exhibit 304
Lisa Huber, Utility-scale Wind and Natural Gss Volatility: unlocking the Hedge Value of Wind
for Utilities and Their Customers (Rocky Mountain Institute, July 2012) (Executive Summary)
Utility-Scale Wind and Natural Gas Volatility
Uncovering the Hedge Value of Wind For Utilities and Their
Customers
Lisa Huber I July 2012
RocKy
MouNrnr'n*t
INSTITUTE"
ROCKY MOUNTATN TNSTTTUTE I RM!.ORG
I Zltl Snowmass Creek Rd. Snowmass, CO 81654
Acknowledgements
Special thanks to Amory Lovins, Dan Seif and fon Creyts of Rocky Mountain Institute,
and the following individuals for their valuable insight:
Will Babler, First Capitol
Tom Beach and Patrick McGuire, Crossborder Energy
Mark Bolinger, Lawrence Berkeley National Lab
Tim Carter, Xcel Energy
Gary Demasi, Google
Michel DiCapua, Charles Blanchard, and Stefan Linder, Bloomberg New Energy Finance
fenny Heeter, NREL
Dr. Taku lde, Koveva
Buck Martinez and David Bates, Florida Power & Light
Edward May, US Renewables Group
Duncan Mclntyre, Altenex
Will Shikani, Macquarie
Steven Taub, GE Capital
Kevin Walsh, GE Energy Financial Services
Also, considerable appreciation is extended to the Stanback Internship Program at Duke
University's Nicholas School of the Environment for making this research project
possible.
Utility-Scale Wind and Natural Gas Volatility I Rocky Mountain lnstitute I RMl.org 2
Table of Contents
ACKNOWLEDGEMENTS
EXECUTIVE SUMMARY.
...........2
,.............................4
.............................. 5
WHAT IS VOLATTLTTY?............. ...........................6
RISK DISTRIBUTION........................................ 8
VOLATILITY PRICING.
SOLUTIONS...
t7
UTILITY: PUBLIC SERVICE COMPANY OF COLOMDO .................,,.17
INDUSTRIAL AND LARGE COMMERCIAL CUSTOIUTRS: ALTENEx BUSINESS MoDEL 1.9
COMMERCIAL AND RESIDENTIAL CUSTOMERS: AUSTIN ENERGY GREENCHOICE ..............,......19
coNcLUsIoN .................................20
APPENDIX
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Utility-Scale Wind and Natural Gas Volatility I Rocky Mountain lnstitute I RMl.org
EXECUTIVE SUMMARY
Prudent investors do not solely invest in junk bonds over treasury bonds; they do not
purely chase yield without regard to risk. A portfolio approach applies not only to
personal finances, but also to energy investments. While natural gas spot prices are low
today, they remain volatile and present a number of risksl:
Unreliable natural gas and electricity market forecasts
Uncertain power generation costs for IPPs, utilities and regulators
Unpredictable costs for large customers, especially publicly traded companies
that must report to shareholders and industrial consumers who buy directly
from the market
. Unexpected Fuel Cost Adjustments (FCA) for residential customers
This paper explores methods of quanti$zing natural gas volatility by examining
theoretical models as well as case studies of utility hedging strategies. Including these
volatility risk premiums in the price of natural gas establishes a basis for even
comparison with utility-scale wind contracts, which enables smarter decision analysis
by regulatory agencies, utilities, and ratepayers. This analysis shows that even without
the Federal Production Tax Credit (PTC) and Renewable Portfolio Standards (RPS)
power pricing support, wind becomes competitive with natural gas years sooner than is
commonly believed, and in many cases is the economic choice for new build generation2.
Wind competitiveness can be realized without increasing utility hedging budgets by
redirecting current hedging cash flows from short-term option strategies into long-term
wind Power Purchase Agreements [PPA). Using this methodolory, hedging benefits can
also be realized at the customer level by large organizations signing direct PPAs and
residential customers participating in effective green power programs (GPP). This
paper will demonstrate the hedging benefits of utility-scale wind and present practical
solutions for utilities and ratepayers alike to decrease risk and encourage further
domestic wind development.
1 Roesser, Randy. "Natural Gas Price Volatility." Electricity Supply and Analysis Division, California
Energy Commision, 2009.
zThis paper underscores the importance of hedging against gas price volatility risk; however, short-term
variability in wind must be acknowledged as an additional risk. PPA pricing models used in this analysis
include an average $6/MWh cost to utilities for intermittency integration. A future analysis incorporating
more specific costs and wind hedging instruments would be beneficial, as risks associated with wind
variability and intermittency range widely by region.
Utility-Scale Wind and Natural Gas Volatility I Rocky Mountain lnstitute I RMl.org
CERTIFICATE OF SERVICE
I hereby certifr that on this 14th day of May 2015,I delivered true and correct copies of
the REBUTTAL TESTIMONY OF ADAM WENNER, REBUTTAL TESTIMONY OF R.
THOMAS BEACH, and EXHIBITS 304 on behalf of the Idaho Conservation League and the
Sierra Club the following persons via the method of service noted:
:-- =Hand Deliverv: -,-.,,
=rj;-.: l--(
Jean Jewel ';. ;Commission Secretary ",',
Idaho Public Utilities Commission i: ;
42TW.Washington St. ;,.I ;Boise,ID 83702-5983 -r:'
(Original and nine copies provided) : (rr
Electronic Mail: [e-mail]
Idaho Power
Donovan E. Walker J.R. Simplot Corp & Clearwater Paper
Regulatory Dockets Peter J. Richardson
Idaho Power Company Gregory M. Adams
1221 West Idaho Street Richardson Adams, PLLC
P.O. Box 70 515 N. 27th Street
Boise, ID 83707 Boise, lD [e-mail] [e-mail]@idahopower.com [e-mail]
Avista Dr. Don Reading
Michael G. Andrea, Senior Counsel 6070 Hill Road
Clint Kalich Boise,ID 83703
Avista Corporation [e-mail]
1411 E. Mission Ave, MSC-23
Spokane, WA99202 Carol Haugen, Clearwater [e-mail] [e-mail]
Clint.kalish@avi stacorp. com
Twin Falls Canal, Northside Conal,
Roclcy Mountain Power American Falls Reservoir District No 2.
Daniel Solander C. Tom Arkoosh
Ted Weston Arkoosh Law Offrces
Rocky Mountain Power 802 W. Bannock St Ste. 900
201 S. Main Street, Ste 2400 P.O. Box 2900
Salt Lake city, uT 84111 Boise, ID [e-mail] [e-mail]@pacificorp.com [e-mail]
IPC-E-15-01 May 14,2015
Certificate of Service - Rebuttal Testimony of Wenner and Beach
Intermountain Ener gt P artner s
Dean J. Miller
McDevitt & Miller LLP
420W. Bannock Street
PO Box 2564-83701
Boise,lD 83702
j oe@mcdevitt-miller. com
Leif Elgethun, PE, LLE AP
Intermountain Energy Partners
PO Box 7354
Boise,lD 83707
leif@sitebasedenergy. com
Idaho lrrigation Pumpers Association
Eric L. Olsen
Racine, Olson, Nye, Budge & Bailey,
Chartered
P.O. Box 1391
201E. Center
Pocatello,lD 83204
[e-mail]
Anthony Yankel
29814 Lake Road
Bay Village, OH 44140
[e-mail]
Micron Technologlr
Richard Malmgren
Assistant General Counsel
Micron Technology Inc.
800 South Federal Way
Boise,ID 83716
remalm [e-mail]
Frederick I Schmidt
Pamela S Howland
Holland & Hart LLP
377 S. Nevada St.
Carson City, NV 89703
fschmidt@hollandhart. com
[e-mail]
IPC-E-1s-01
Certificate of Service - Rebuttal Testimony of Wenner and Beach
Amalgamated Sugar
Scott Dale Blickenstaff
Amalgamated Sugar Co
165l S. Saturn Way, STE 100
Boise, Idaho 83702
sblickenstaff@amalsugar. com
Renew able En ergy C o aliti o n
Ronald L. Williams
Williams Bradbury, P.C.
1015 W. Hays St.
Boise,Idaho 83702
ron@williamsbradbury. com
Irion Sanger
Sanger law, P.C.
lllT SW 53'd Avenue
Portland, OR972l5
irion@sinager-law. com
,/4 ,7:
Benjamin I. Otto
May 14,2015