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HomeMy WebLinkAbout20100323Christie Di.pdfDAVID J. MEYER VICE PRESIDEN AN CHIEF COUNSEL OF REGULATORY & GOVERNAL AFFAIRS AVISTA CORPORATION P.O. BOX 3727 1411 EAST MISSION AVENUE SPOKA, WASHINGTON 99220 - 3 727 TELEPHONE: (509) 495-4316 FACSIMILE: (509) 495-8851 DAVID. MEYÈR~AVISTACORP. COM zurü Q 21 iI.lA '1.1 ("\ .v Hit a . .0 BEFORE TH XDAO PUBLXC UTXLXTXES COHHXSSXON IN THE MATTER OF THE APPLICATION OF AVISTA CORPORATION FOR THE AUTHORITY TO INCREASE ITS RATES AN CHAGES FOR ELECTRIC AN NATU GAS SERVICE TO ELECTRIC AN NATU GAS CUSTOMERS IN THE STATE OF IDAHO CASE NO. AVU-G-10-01 DIRECT TESTIMONY OF KEVIN J. CHRISTIE FOR AVISTA CORPORATION (NATU GAS) 1 2 X. XNTRODOCTXON Q.Please state your nae, business address, an 3 present position with Avista Corp. 4 A.My name is Kevin Christie and I am employed as 5 Director of Gas Supply of Avista Utilities (Avista or 6 Company), at 1411 East Mission Avenue, Spokane, washington. 7 Q.Would you please describe your education an 8 business experience? 9 A.Yes. I graduated from washington State university 10 with a Bachelors Degree in Business Administration with an 11 accounting emphasis. I have also attended the University of 12 Idaho Utility Executive Course. 13 I joined the Company in 2005 as the Manager of Natural 14 Gas Planning. In 2007, I was appointed the Director of Gas 15 Supply. Prior to joining Avista, I was employed by Gas 16 Transmission Northwest (GTN). I was employed by GTN from 17 2001 to 2005 and was the Director of Pipeline Marketing and 18 Development from 2003 to 2005 and the Director of Pricing 19 and Business Analysis from 2001 to 2003. From 2000 to 2001, 20 I was employed by PG&E Corporation (PG&E) as the Manager of 21 Finance and Assistant to the SVP, Treasurer and CFO. Before 22 joining PG&E, I was employed by pacific Gas Transmission 23 Company (PGT) from 1994 to 2000. While at PGT, I held 24 several positions including Manager, Pricing and Business 25 Analysis, Senior Business Analyst, Senior Pricing Planner, Christie, Di 1 Avista Corporation 1 Director of Regulatory Affairs, Project Manager - Rates and 2 Regulatory Affairs, Senior Regulatory Analyst, -Regulatory 3 Analyst, and Revenue Accountant. From 1990 to 1994, i was 4 employed by Chevron USA as a Lease Revenue Accountant. 5 Q.Hr. Christie, what is the purpose of your 6 testimony in this proceeding? 7 A.The purpose of my testimony is to describe 8 additional Jackson Prairie (JP) natural gas storage that 9 the utility will receive to serve customers beginning May 10 1, 2011.i will also describe the allocation of this 11 additional storage, and the associated costs, to the three 12 jurisdictions that the Company serves. 13 14 Q.Are you sponsoring exibits in this proceeding? A.Yes.I am sponsoring Exhibit No. 11, which 15 contains cost and pricing information relative to Jackson 16 Prairie Storage (Schedule 1) and a copy of the Company's 17 2009 Natural Gas Integrated Resource Plan (Schedule 2). 18 19 XX. HXSTORY OF JACKSON PRAXRXE STORAGE FACXLXTY 20 Q. Could you please describe Avista's involvemnt 21 with the Jackson Prairie gas storage facility? 22 A.Yes.Avista is one of the three original 23 developers of the underground storage facility at Jackson 24 Prairie, which is located near Chehalis, Washington. 25 Al though there have been corporate changes due to mergers, Christie, Di 2 Avista Corporation 1 acquisitions and name changes, Avista, Puget Sound Energy 2 (PSE) and Northwest Pipeline each hold a one-third share 3 (equal, undivided interest) of this underground gas storage 4 facility through a joint ownership agreement. Development 5 of the facility began in the 1960's and the project first 6 went into service in the early 1970's. 7 8 Wht type of storage facility is Jackson Prairie?Q. A.Jackson Prairie is an underground aquifer storage 9 facility. Storage and the associated withdrawal and 10 injection capability has been created by a combination of 11 wells, gathering pipelines, compression and dehydration 12 equipment, and the removal and disposal of aquifer water. 13 Please describe the present level of storage thatQ. 14 Avista ows at Jackson Prairie. 15 At the present time, the Company holds a totalA. 16 5,497,112 dekatherms (Dth) of seasonal capacity. This 17 seasonal capacity comes with a withdrawal capability of 18 19 20 21 22 294,667 Dth per day (deliverability) .As described below, on May 1,2011,the utility will receive an additional 3,030,887 Dth of seasonal capacity and an additional 104,000 Dth of daily deliverability. Q.Could you please describe what is meant by 23 "capacity" aDd "deliverability"? 24 Capacity is the total amount of gas thatA.Yes. 25 the facility holds and represents the volume of gas that Christie, Di 3 Avista Corporation 1 can be made available for injection and withdrawal by the 2 owner. This capacity is typically referred to as "working" 3 gas. Working gas is different from "cushion" gas which is 4 also stored in the facility.Cushion gas must physically 5 remain in the facility at all times to ensure the 6 deliverability of the working gas and, therefore, canot be 7 withdrawn on a seasonal basis.Cushion gas provides the 8 field pressure necessary to allow the withdrawal of working 9 gas.Capacity, as used herein, refers to the working gas 10 portion of Jackson Prairie.Deliverability, as used 11 herein, is the maximum amount of gas that can be withdrawn 12 from the facility on a daily basis. 13 14 Q.Can cushion gas be withdrawn from the facility? A.As stated above, cushion gas must remain in the 15 facility in order to withdraw working gas.However, when 16 the field is abandoned, there will be residual cushion gas 17 in the field that will not be recoverable due to economics 18 and physical constraints. Therefore, a portion of cushion 19 gas is estimated to be non-recoverable from the facility 20 and that portion is depreciated over the estimated life of 21 the facility (account 352. 3-Nonrecoverable natural gas). 22 The recoverable portion of cushion gas remains at its 23 original cost over the life of the facility (account 117.1- 24 Gas stored-base gas).Both accounts are included in the 25 Company's rate base (Company witness Ms. Andrews discusses Christie, Di 4 Avista Corporation 1 the proposed accounting treatment) . 2 Q.Could yo please describe Avista's share of the 3 exansions that have occurred at the facility since 1999? 4 A.Yes.In 1999, the owners agreed to both a 5 capacity and deliverability exansion of the facility (FERC 6 Certificate in CP98-250-000).Avista's allocated annual 7 share of the expansion capacity was 1,066,667 Dth and 8 104,000 Dth per day of deliverability.Based on the 9 Company's integrated Resource Plan (IRP) at the time, 10 Avista's share of the expansion capacity would have 11 provided storage capacity in excess of what was needed to 12 serve Avista's near-term customer requirements. While 13 additional storage capacity was not called for in the IRP 14 in the near-term, it was determined that the exansion 15 capacity would be needed to meet future growth in later 16 years.In order to better align the exansion costs and 17 the future need for this resource, the increased capacity 18 and deliverability were temporarily assigned to Avista 19 Energy.One alternative was to allow PSE or Northwest 20 Pipeline to pay for the expansion, which would have reduced 21 Avista's one-third ownership share in the facility. 22 However, the Company believed that it was very important to 23 preserve its one-third ownership share, in order to have 24 equal voting rights in all matters related to the facility. 25 Assigning the expansion to Avista Energy allowed the Christie, Di 5 Avista Corporation 1 Company to preserve its ownership share long-term, but 2 avoid the cost of the exansion for a numer of years. 3 Avista Energy provided the capital necessary to develop the 4 expansion in exchange for the rights to utilize the 5 expanded portion of the storage facility for a minimum 6 period of ten years. 7 Beginning in 2002, another capacity expansion was 8 initiated at the facility (FERC Certificate in CP02-384- 9 000) . This capacity expansion was a multi-year expansion 10 that was completed in phases with the last phase placed 11 into service during 2008. Similar to the 1999 expansion, 12 this expansion was temporarily assigned to Avista Energy; 13 Avista Energy paid the capital required for this expansion 14 in exchange for the rights to utilize that portion of the 15 facility for a period of time. The temporary assignent to 16 Avista Energy from this expansion was for 1,964,220 Dth of 17 seasonal capacity. 18 Effective July 1, 2007, Avista Energy's business and 19 contracts were sold to Shell Energy North America (Shell). 20 The sale to Shell included the temporary contractual 21 assignent of both expansions for a total of 3,030,887 Dth 22 of seasonal storage expansion capacity and 104,000 Dth of 23 daily deliverability through April 30, 2011. On May 1, 24 2011, the expansion capacity and deliverability will revert 25 to Avista Utilities at net book value. The net book value Christie, Di 6 Avista Corporation 1 of this storage is $11,628,8921 (system), as shown on Page 2 2, line 3 in Schedule No.1 of Exhibit No. 11.Company 3 witness Ms. Andrews discusses further the adjustment 4 included in the Company's filing. 5 Avista Utilities covered the costs associated with the 6 remaining phases (after July 1, 2007 through October 31, 7 2008), of the 2002 capacity expansion, i.e., the utility 8 funded the remining capital requirements necessary to 9 complete the remaining phases.Upon completion of the 10 expansion, all costs associated with these remaining phases 11 were assigned to the Company's Oregon customers.As a 12 result, Oregon customers received 262,446 Dth of seasonal 13 storage capacity (no daily deliverability) . 14 In 2007,under FERC Docket CP06-412-000,a 15 deliverability expansion (no additional capacity) was 16 initiated at the facility and, by late 2008, that expansion 17 was completed.Related to the assignent of capacity to 18 Oregon customers described above, Oregon was allocated 25% 19 of the volumes and costs associated with this 20 deliverability expansion. This proportion was based on 21 forecasted jurisdictional sales volumes for the Nov. 2008 - 22 Oct. 2009 period.The Company's washington and Idaho 23 customers were allocated the remaining 75% of the volumes 24 and costs associated with this expansion, and this 1 The net book value of the storage transferred from Avista Energy to Avista Utilties is comprised of cushion gas of approximately $5.9 millon and fixed assets/plant of approximately $5.7 milion. Christie, Di 7 Avista Corporation 1 Commission approved recovery of those (Idaho allocated) 2 costs in Order No. 30856 in Case No. AVU-G-09-01. 3 4 XXX. COST ALLOATXON AN RECOVERY OF JACKSON PRAXRXE 5 Q. How is the Comany proposing to allocate the 6 costs, by jurisdiction, associated with the additional (JP) 7 capacity and deliverability that it will have available on 8 May 1, 2011? 9 A.The allocation of this capacity and 10 deliverability is proposed to be such that, when all JP 11 expansion volumes and costs (added since 1999) described 12 above are totaled, Washington/Idaho customers will receive 13 75% of the total and Oregon will receive 25% of the total, 14 based on forecasted jurisdictional sales volumes for the 15 Nov. 2008 - Oct. 2009 period.The allocation of these 16 volumes and costs are shown in Page 2, Schedule 1 of 17 Exhibi t No. 11. 18 Q.Has the Comany previously discussed this JP 19 expansion allocation plan with representatives of the three 20 Comssion staffs? 21 A.Yes. This allocation plan was first discussed in 22 person with washington, Idaho and Oregon Commission staffs 23 in early 2007, as well as in subsequent meetings. All 24 three staffs indicated support of the allocation plan. 25 Q.Does the proposed allocation of the exansion Christie, Di 8 Avista Corporation 1 costs described abve affect the allocation of JP volums 2 aD costs the utility held prior to these exansions? 3 A.No. All JP volumes held by the Company prior to 4 these expansions are dedicated to serve Washington and 5 Idaho customers. 6 Q.Wht are the benefits of storage to Avista's 7 customers? 8 A.Access to regionally located storage provides 9 several benefits to Avista customers.It enables the 10 Company to capture seasonal price spread,improves 11 reliability of supply, increases operational flexibility, 12 mitigates peak demand price spikes and provides numerous 13 other economic benefits. The transfer of the storage back 14 to the Company is reflected in Avista's 2009 Natural Gas 15 Integrated Resource Plan (IRP) attached as Schedule 2 in 16 Exhibit No. 11. 17 Q.Has the value of these benefits increased since 18 the expansion capacity described abve was first assigned 19 to Avista Energy in 1999? 20 A.Yes.As further described below, wi th the 21 increased volatility of natural gas prices and a more 22 complex gas market, the market value of storage has 23 increased markedly since that time. 24 Q.Wht is the estimated value of the seasonal price 25 spread? Christie, Di 9 Avista Corporation 1 A.The seasonal price spread, in its simplest terms, 2 is the difference in the price per Dth between what one 3 could purchase gas for in the non-winter months versus what 4 those same volumes would cost if purchased in the winter 5 season. Storage allows for the capture of the potentially 6 lower priced non-winter gas and the ability to use it 7 during the potentially higher priced winter months. Sumas 8 is the market hub that is the likely pricing point for 9 natural gas injections and withdrawals into Northwest area 10 storage. Page 1, Schedule 1 of Exhibit No. 11 shows the 11 present monthly forward prices at Sumas over the next three 12 years.These forward prices reflect the purchase price 13 today for gas delivered during that future month. As 14 shown, the average seasonal price spread over the next 15 three years is $1.79 per Dth. 16 Q.Have you comared this estimted market value of 17 $1.79 to an estimated annual revenue requirement (cost) 18 associated with this incremental storage capacity? 19 A.Yes. The estimated revenue requirement cost is 20 $0.54 per Dth, as shown on Page 2, (Line 7) Schedule 1 of 21 Exhibit No. 11.without even considering the other 22 benefits associated with this incremental storage, this 23 anual cost is well below the estimated market value of 24 $1.79 per Dth. 25 Q.You also metioned improved reliability of 26 supply. Please explain. Christie, Di 10 Avista Corporation 1 A.The Company relies on monthly and longer-term 2 seasonal, annual and multi-year contracts for supply to 3 satisfy its projected average daily demand.For daily 4 swings in demand, above and below average, the Company 5 relies on a combination of storage and daily purchases and 6 sales.In today's market, virtually all physical short- 7 term purchases are done at market hubs like 8 Sumas /Huntingdon.While these purchases are generally 9 reliable, there is a risk of delivery failure either in 10 supply availability or counterparty risk.There are a 11 numer of reasons why delivery risk can be problematic. 12 First, using the Sumas/Huntingdon Hub as an example, gas 13 may change hands (trade) numerous times between parties. 14 The failure of one party in the chain relying on 15 interruptible transportation or a less than secure supply 16 source can result in supply loss on any given day. A 17 second reason is that it takes just one scheduling error in 18 the supply chain to result in a supply loss. And third, 19 actual physical problems such as well freeze-offs or 20 pipeline force maj eure situations along the transportation 21 path can also result in supply loss. 22 As an owner of the facility, Avista controls the 23 Company's nominations both at the facility and on the 24 pipeline. This ensures scheduling transactions without the 25 inclusion of a third party, thus eliminating intermediate Christie, Di 11Avis ta Corporation 1 steps and the potential for error. This results in a more 2 reliable process during pipeline entitlements. Access to 3 storage provides the Company with more control and, 4 therefore, more reliability of supply during these events. 5 6 Q.Wht operational benefits does storage provide? A.Operationally, storage provides the flexibility 7 to adjust supply either up or down during the actual day. 8 Normal ly gas is scheduled one day in advance.Jackson 9 Prairie storage allows Avista the flexibility to increase 10 or decrease the supply several times during the actual gas 11 day. This flexibility is critical to maintaining mandated 12 tolerances on pipelines and allows for active supply 13 management during pipeline entitlements and operational 14 flow orders.This level of management reduces the 15 likelihood of incurring pipeline penalties. 16 Q.please explain what you mean by mitigation of 17 peak demnd price spikes. 18 A.As with most local distribution companies in the 19 Northwest, Avista's demand is very temperature-sensitive. 20 The result is that Avista is a "winter-peaking" utility. 21 During severe cold weather events in its service territory 22 or cold events in large market centers outside of the 23 Northwest, natural gas prices may increase dramatically. 24 To the extent that the Company can rely on storage 25 withdrawals, the purchase of potentially higher-priced spot Christie, Di 12 Avista Corporation 1 gas may be avoided during these events.As previously 2 mentioned, storage also provides the ability to adjust 3 volumes, even after the original nomination schedule. This 4 eliminates the need to purchase peaking contracts from 5 suppliers.Peaking supply is one of the most expensive 6 resources to acquire.The greater the operational 7 flexibility in a supply contract, the more expensive the 8 product. The avoided cost of procuring a peaking resource 9 with the flexibility characteristics of storage is a 10 significant cost savings/avoidance. This benefit is in 11 addition to the typical seasonal price spread explained 12 earlier.The addition of storage deliverability further 13 increases Avista's ability to manage these price spikes and 14 avoid supplier costs. 15 16 Q.Are there other economc benefits related to JP? A.As previously mentioned, Sumas is the most likely 17 pricing point to Jackson Prairie.Sumas pricing is very 18 volatile during winter weather events. Storage provides an 19 avoided cost of contracting for supply at Sumas, which can 20 be the most expensive supply point available to Northwest 21 utilities. Given the geographical weather diversity across 22 the Northwest, JP storage provides opportunities to benefit 23 from Sumas price spikes during cold events west of the 24 Cascades by selling natural gas into that market when 25 Avista customers may not otherwise be experiencing high Christie, Di 13 Avista Corporation 1 supply requirements. 2 Q.Does Avista have pipeline transportation capacity 3 available to provide delivery of these incremntal storage 4 volumes? 5 A.Yes.Existing transportation contracts from 6 Sumas can be used to redeliver storage volumes. The Company 7 will avoid a portion of winter purchases at Sumas and 8 utilize storage as a substitute for this supply. 9 Therefore, the same transportation contracts that are 10 utilized now for physical supply purchases can be used for 11 the delivery of storage gas. 12 Q.How much of Avista's anual average dem an 13 average winter dem for its Xdah customers can be served 14 by storage after Hay 1, 2011? 15 A.Approximately 30% of Avista's average annual 16 demand and 44% of average winter demand can be served by JP 17 storage after May 1, 2011. 18 Q.Coman witness Andrews mentions an adjustmt in 19 her testimony associated with JP working gas inventory. 20 Can you describe ho that adjustmnt was determned? 21 A.Yes. The adjustment reflects the estimated cost 22 of the average JP working gas inventory during the calendar 23 year ending Septemer 2011, less the actual average 24 inventory cost during the test year (2009).This working 25 gas inventory is considered rate base as there will be an Christie, Di 14 Avista Corporation 1 average level of working gas that will exist in the 2 facility for the life of the project, and the revenue 3 requirement reflects the authorized rate of return on that 4 rate base.The average level (working gas volumes) of JP 5 inventory will increase with the additional capacity the 6 Company will receive May 1, 2011. Therefore, the inventory 7 level will reflect an adjustment related to this additional 8 capacity as well as year-over-year changes in the cost of 9 gas injected into storage. 10 The Company uses a "synthetic"or forecasted 11 inj ection/wi thdrawal schedule to determine the average 12 inventory level during the year.This synthetic schedule 13 is based on monthly forecasted injection and withdrawal 14 volumes during the year, resulting in an estimated monthly 15 inventory level. Inj ections into storage are priced at the 16 "forward" gas price for that month, i. e., the price at 17 which gas can be purchased at today for delivery in a 18 future month.In estimating the cost of inj ections during 19 the pro forma period, the Company used a 60-day average of 20 forward prices from Novemer 5, 2009 to February 1, 2010. 21 An average cost of inventory is calculated at the beginning 22 of each month and withdrawal volumes are priced at the 23 average cost of inventory for that month.Based on the 24 estimated average inventory balance during the pro forma 25 period compared to the actual average balance during 2009, Christie, Di 15 Avista Corporation Christie, Di 16 Avista Corporation DAVID J. MEYER VICE PRESIDENT AND CHIEF COUNSEL OF REGULATORY & GOVERNMENTAL AFFAIRS AVISTA CORPORATION P.O. BOX 3727 1411 EAST MISSION AVENUE SPOKAE, WASHINGTON 99220-3727 TELEPHONE: (509) 495-4316 FACSIMILE: (509) 495-8851 DAVID .MEYER~AVISTACORP. 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Christie, A vista Schedule 2, P. 1 of 1