20121011Harper DI.pdf

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
[e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-G-12-07
OF AVISTA CORPORATION FOR THE )
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) DIRECT TESTIMONY
AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) STEPHEN A. HARPER
)

FOR AVISTA CORPORATION

(NATURAL GAS ONLY)

Harper, Di 1
Avista Corporation
Q. Please state your name, business address, and 1
present position with Avista Corp. 2
A. My name is Stephen Harper and I am employed as 3
Director of Gas Supply for Avista Utilities (Avista or 4
Company). My business address is at 1411 East Mission 5
Avenue, Spokane, Washington. 6
Q. Would you please describe your education and 7
business experience? 8
A. Yes. I graduated from the University of 9
Washington with a Bachelor of Science Degree in Mathematics. 10
I joined the Company in 2008 as the Senior Manager of 11
Natural Gas Acquisition. In 2012, I was appointed the 12
Director of Gas Supply. Prior to joining Avista, I was a 13
Principle with Evergreen Energy Company, LLC, a Spokane 14
based commodity hedge fund, from 2006 to 2008. From 1999 to 15
2006 I was employed as Manager of Asset Optimization with 16
Avista Energy. From 1991 to 1999, I was Manager of Gas 17
Supply with Puget Sound Energy (formally Washington Natural 18
Gas Company). From 1990 to 1991 I was employed by Williams 19
Energy Company as a Regional Marketing Representative in 20
their Western Region. From 1981 to 1990 I held several 21
positions with Washington Natural Gas. 22
Q. Mr. Harper, what is the purpose of your testimony 23
in this proceeding? 24
Harper, Di 2
Avista Corporation
A. The purpose of my testimony is to describe 1
Avista’s natural gas resource planning process, and provide 2
an update on the Company’s 2012 Natural Gas Integrated 3
Resource Plan. 4
Q. Are you sponsoring exhibits in this proceeding? 5
A. Yes. I am sponsoring Exhibit 7, Schedule 1 which 6
is a copy of the Company’s 2012 Natural Gas Integrated 7
Resource Plan. 8
Q. Is the Company proposing any changes to the cost 9
of natural gas for its retail natural gas customers in this 10
case? 11
A. No, Avista is not proposing changes in this filing 12
related to the cost of natural gas included in current rates 13
for natural gas customers, as changes in natural gas costs 14
are addressed in the annual PGA filings. My testimony is 15
primarily for informational purposes, related to our natural 16
gas resource planning activity. 17
Procurement Planning 18
Q. Please describe Avista’s natural gas portfolio as 19
it relates to the procurement of natural gas for LDC 20
customers? 21
A. Avista purchases natural gas for its distribution 22
customers in wholesale markets at multiple supply basins in 23
the western United States and western Canada. Purchased 24
Harper, Di 3
Avista Corporation
natural gas can be transported through six connected 1
pipelines on which Avista holds firm contractual 2
transportation rights. These contracts provide access to 3
both US and Canadian sourced supply. The US-sourced gas 4
represents 20% of the contractual rights and provides 5
transportation from the Rocky Mountains. The remaining 80% 6
provides access to Alberta and British Columbia supply 7
basins. This diverse portfolio of natural gas resources 8
allows the Company to make natural gas procurement decisions 9
based on the reliability and economics that provide the most 10
benefit to our customers. As natural gas prices in the 11
Pacific Northwest can be affected by global energy markets, 12
as well as supply and demand factors in other regions of the 13
United States and Canada, future prices and delivery 14
constraints may cause the source mix to vary. Below is a 15
map showing our service territory, natural gas trading hubs, 16
interstate pipelines, and natural gas storage facilities: 17

Harper, Di 4
Avista Corporation
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While Avista believes it cannot accurately predict 14
future natural gas prices; market conditions, information, 15
analysis, and experience shape our overall procurement 16
approach. The Company’s goal is to provide reliable supply 17
at competitive prices in volatile commodity markets. To 18
that end, the Company utilizes a Procurement Plan which 19
includes hedging (on both a short term and long term basis), 20
storage utilization, and index purchases. This approach is 21
diversified by time, component, counterparty, and supply 22
basin. The Procurement Plan is disciplined, yet flexible, 23
and layers in fixed-price purchases to reduce price 24
Harper, Di 5
Avista Corporation
volatility to customers. A copy of the Company’s Natural 1
Gas Procurement Plan is included as an exhibit in Avista’s 2
Energy Resources Risk Policy (see Exhibit No. 4, 3
Confidential Schedule 3C, sponsored by Company Witness Mr. 4
Lafferty). 5
The Procurement Plan provides a process that fixes 6
prices for a designated portion of the portfolio through the 7
use of hedge windows. The hedge windows are “open” for a 8
predetermined time period and have upper and lower pricing 9
levels which are set by the market at the time the window 10
becomes effective. In a rising market, this reduces 11
exposure to extreme price spikes. In a declining market, it 12
can facilitate locking in lower prices. These windows can 13
be executed, or “closed” if certain pricing levels are met, 14
or upon time expiration if no pricing events occur. The 15
Company always maintains some level of discretion and may 16
choose not to execute within a window or to change some 17
aspect of a window given market conditions. 18
In addition, a portion of the portfolio that is 19
separate from the defined hedge windows is designated as 20
discretionary. This opportunistic portion of the portfolio 21
allows the Company to hedge additional volumes in gas years 22
beyond the prompt year at potentially favorable pricing 23
levels. In the event those pricing levels are not reached, 24
Harper, Di 6
Avista Corporation
the unexecuted volumes designated as discretionary hedges 1
will become a part of the prompt year hedging program. 2
Gas Supply continuously monitors the results of the 3
Procurement Plan, evolving market conditions, variation in 4
demand profiles, new supply opportunities, and regulatory 5
conditions. Although various windows and targets are 6
established in the initial design phase of the portfolio, 7
the plan provides flexibility to exercise judgment to revise 8
and/or adjust the plan in response to changing conditions. 9
Material changes to the Procurement Plan are communicated to 10
Senior Management and Commission Staff. 11
Q. What delivery period does the natural gas 12
Procurement Plan include? 13
A. The natural gas Procurement Plan includes four 14
complete natural gas operating years (November through 15
October) and whole months remaining from the current month 16
until the next October 31 (the Current natural gas operating 17
year). The four complete upcoming natural gas operating 18
years are designated “Prompt”, “Second”, “Third”, and 19
“Fourth” years. 20
Q. Please describe the components of the natural gas 21
Procurement Plan. 22
A. Each year a comprehensive review of the previous 23
year’s plan is performed. The review includes analysis of 24
Harper, Di 7
Avista Corporation
historical and forecasted market trends, fundamental market 1
analysis, demand forecasting, and transportation, storage 2
and other resource considerations. The plan includes the 3
following components: 4
1. Previous Year(s) Hedges – longer-term fixed-price 5
purchases executed as a part of a previous year’s 6
Procurement Plan. 7
2. Prompt Year Hedges – the portion of the portfolio 8
addressed through the utilization of hedge 9
windows. In each window fixed price purchases are 10
made for various prompt year delivery periods. 11
Prior to the execution of each window, market 12
conditions, fundamental market knowledge, and 13
other information are considered to determine if 14
execution will occur. 15
3. Storage Withdrawals – utilizing the capacity and 16
deliverability from the Jackson Prairie storage 17
facility, Avista is able to inject natural gas 18
during the summer months and withdraw it to serve 19
customers during the higher demand winter months. 20
4. Discretionary Long-term Hedges – opportunistic 21
purchases based on a set of price levels, or 22
targets, that trigger possible execution. At the 23
time the triggers are reached, evaluation of 24
Harper, Di 8
Avista Corporation
market conditions, fundamental market knowledge, 1
and other information are considered. These 2
hedges will generally be executed when they can be 3
done at or below the established targets. 4
5. Index Purchases – physical index-based natural gas 5
purchases are procured prior to or throughout the 6
delivery month. These purchases are usually 7
associated with daily pricing. The amount of 8
index purchases planned is the difference between 9
the forecasted demand less the sum of the previous 10
year hedges, prompt year hedges, and storage 11
withdrawals. 12
Q. Please describe the long term components of the 13
natural gas Procurement Plan. 14
A. As part of the development of the prompt year 15
Procurement Plan, future years are also considered (referred 16
to as “Second”, “Third”, and “Fourth” years). For a portion 17
of the forecasted demand of the three years following the 18
prompt year, a discretionary long term hedging program is 19
developed. This program has a series of pricing targets 20
that, when reached, trigger possible execution. At the time 21
the triggers are reached, evaluation of market conditions, 22
fundamental market knowledge, and other information are 23
considered in order to determine if execution will occur. 24
Harper, Di 9
Avista Corporation
Q. Please describe how the Procurement Plan manages 1
volatility. 2
A. The Procurement Plan focuses on managing demand 3
and price volatility. Natural gas demand is volatile and 4
will vary day to day. For example, system-wide average 5
daily demand can fluctuate between 26,000 dekatherms (Dth) 6
per day during a summer month and 190,000 Dth/day during a 7
winter month. Further, December’s system-wide daily demand 8
volatility has ranged from a low of 112,000 Dth/day to a 9
high of 300,000 Dth/Day. For 2011, the observed system-wide 10
peak demand was 212,050 Dth/Day. Finally, from Avista’s 11
2012 IRP, system-wide peak day demand for 2012-2013 heating 12
season is forecasted to be approximately 320,000 Dth per 13
day. 14
In order to manage these seasonal, monthly and daily 15
volume swings, Avista shapes the components of the 16
Procurement Plan by month (i.e. more natural gas is hedged 17
for the winter months than for the summer). Below is a 18
chart that shows the demand volatility: 19

Harper, Di 10
Avista Corporation
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Average Load Minimum Load Maximum Load Peak Day
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Price volatility can also vary widely by season, month 14
and day. Below is a chart depicting the natural gas price 15
volatility over time. Avista cannot predict with accuracy 16
where natural gas prices may go, however, our experience and 17
market intelligence guide our procurement decisions. By 18
layering in purchases over time (both hedges and index), 19
setting upper and lower pricing levels on the hedge windows, 20
opportunistically hedging at favorable pricing levels 21
through the discretionary hedge program, and actively 22
managing storage resources, Avista is able to meet our goal 23
Harper, Di 11
Avista Corporation
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Historic AECO Cash Prices
1999 through Current
of providing a meaningful measure of price stability, 1
together with competitive prices, for our customers. 2
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2012 Natural Gas Integrated Resource Plan 15
Q. Can you please provide an overview of the 16
Company’s development of its 2012 Natural Gas Integrated 17
Resource Plan? 18
A. Yes I can. On August 31, 2012, Avista filed with 19
the Commission its Natural Gas Integrated Resource Plan. 20
The IRP forecasts natural gas demand and any supply-side and 21
demand-side resources projected for the coming 20 years, 22
which will help Avista continue to reliably provide natural 23
gas to our customers. A copy of the Company’s 2012 Natural 24
Harper, Di 12
Avista Corporation
Gas Integrated Resource Plan is included as Exhibit 7, 1
Schedule No. 1. 2
Q. Does this conclude your pre-filed, direct 3
testimony? 4
A. Yes it does. 5

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
[e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-G-12-07
OF AVISTA CORPORATION FOR THE )
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) Exhibit No. 7
AND NATURAL GAS CUSTOMERS IN THE )
STATE OF IDAHO ) STEPHEN A. HARPER
)

FOR AVISTA CORPORATION

(NATURAL GAS ONLY)

Exhibit No. 7
Case No. AVU-G-12-07
S. Harper, Avista
Schedule 1, P. 1 of 1

2012 Natural Gas Integrated Resource Plan (IRP)

Compact Disc Exhibit

Also Available At

http://www.avistautilities.com/inside/resources/irp/Pages/default.aspx