20150601Morehouse Direct.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-15-01 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 ) JODY MOREHOUSE
)
FOR AVISTA CORPORATION
(NATURAL GAS ONLY)

I. INTRODUCTION 1
Q. Please state your name, business address, and 2
present position with Avista Corp. 3
A. My name is Jody Morehouse and I am employed as 4
Director of Gas Supply for Avista Utilities (Avista or 5
Company). In my current role I am responsible for 6
Avista’s natural gas supply and upstream pipeline 7
transportation resources. My business address is 1411 8
East Mission Avenue, Spokane, Washington. 9
Q. Would you please describe your education and 10
business experience? 11
A. Yes. I graduated from Montana State University 12
with a Bachelor of Science Degree in Mechanical 13
Engineering and hold a professional engineering license in 14
the State of Washington. I joined the Company in 1989 and 15
have held staff and management positions in our natural 16
gas engineering, natural gas operations, natural gas 17
planning, and natural gas measurement departments. 18
Additionally, I held the position of Manager of Pipeline 19
Integrity and Compliance prior to my current role. 20
Q. What is the purpose of your testimony in this 21
proceeding? 22
A. The purpose of my testimony is to describe 23
Avista’s natural gas resource planning process, provide an 24
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overview of the Jackson Prairie storage facility, and 1
provide an update on the Company’s 2014 Natural Gas 2
Integrated Resource Plan. A table of contents for my 3
testimony is as follows: 4
Description Page 5
I. Introduction 1 6
II. Planning for Commodity Resource Procurement 3 7
III. Jackson Prairie Storage 11 8
IV. 2014 Natural Gas Integrated Resource Plan 13 9
10
Q. Are you sponsoring an exhibit in this 11
proceeding? 12
A. Yes. I am sponsoring Exhibit No. 7, Schedule 1, 13
which is a copy of the Company’s 2014 Natural Gas 14
Integrated Resource Plan acknowledged by this Commission 15
on December 22, 2014. 16
Q. Is the Company proposing any changes to the cost 17
of natural gas for its retail natural gas customers in 18
this case? 19
A. No, Avista is not proposing changes in this 20
filing related to the commodity cost of natural gas or 21
upstream pipeline transportation resource costs. Changes 22
in the commodity cost of natural gas, and the cost of 23
natural gas pipeline transportation included in customers’ 24
rates are addressed in the Company’s annual Purchased Gas 25
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Cost Adjustment (PGA) filing. The Company filed its 1
annual PGA on September 12, 2014, with new rates effective 2
November 1, 2014. 3
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II. PLANNING FOR COMMODITY RESOURCE PROCUREMENT 5
Q. Please describe Avista’s natural gas portfolio 6
as it relates to the procurement of the natural gas 7
commodity for its local distribution company (“LDC”) 8
customers? 9
A. Avista purchases natural gas for its 10
distribution customers in wholesale markets at multiple 11
supply basins in the western United States and western 12
Canada. Purchased natural gas can be transported through 13
six connected pipelines on which Avista holds firm 14
contractual transportation rights. These contracts 15
provide access to both US and Canadian-sourced supply. 16
The US-sourced gas represents 25% of the contractual 17
rights and provides transportation from the Rocky 18
Mountains. The remaining 75% provides access to Alberta 19
and British Columbia supply basins. This diverse 20
portfolio of natural gas resources allows the Company to 21
make natural gas procurement decisions based on the 22
reliability and economics that provide the most benefit to 23
our customers. As natural gas prices in the Pacific 24
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Northwest can be affected by global energy markets, as 1
well as supply and demand factors in other regions of the 2
United States and Canada, future prices and delivery 3
constraints may cause the source mix to vary. 4
Illustration No. 1 below is a map showing our service 5
territory, natural gas trading hubs, interstate pipelines, 6
and natural gas storage facilities: 7
Illustration No. 1 8
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Future natural gas prices cannot be accurately 21
predicted. Market conditions, analysis, and experience 22
shape our overall procurement approach. The Company’s 23
goal is to provide reliable supply at competitive prices, 24
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with some level of price certainty, in a volatile 1
commodity market. To that end, the Company utilizes a 2
Procurement Plan which includes hedging (on both a short-3
term and long-term basis), storage utilization, and index 4
purchases. This approach is diversified by transaction 5
time, term, counterparty, and supply basin. The 6
Procurement Plan is disciplined, yet flexible, and layers 7
in fixed-price purchases over time and term to provide a 8
level of price certainty to customers. A copy of the 9
Company’s Natural Gas Procurement Plan is included as 10
Company witness Mr. Kinney’s Exhibit No. 4, Confidential 11
Schedule 3C, Avista’s Energy Resources Risk Policy. 12
The Procurement Plan provides a process for the 13
upcoming or “prompt” year that fixes future gas prices for 14
a targeted portion of the portfolio through the use of 15
hedge windows. The hedge windows are “open” for a 16
predetermined time period and have upper and lower pricing 17
levels which are determined by the market at the time the 18
window becomes effective. In a rising market, this 19
reduces exposure to extreme price spikes. In a declining 20
market, it can facilitate locking in lower prices. These 21
windows can be executed, or “closed” if certain pricing 22
levels are met, or upon time expiration if no pricing 23
events occur. The Company always maintains some level of 24
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discretion and may choose not to execute within a window 1
or to change some aspect of a window given market 2
conditions. 3
In addition, a portion of the portfolio that is 4
separate from the defined hedge windows is designated as 5
discretionary. This opportunistic portion of the 6
portfolio allows the Company to hedge additional volumes 7
in gas years beyond the prompt year at targeted pricing 8
levels. In the event those pricing levels are not 9
reached, the unexecuted volumes designated as 10
discretionary hedges will then become part of the prompt 11
year hedging program. 12
The Gas Supply Department continuously monitors the 13
results of the Procurement Plan, evolving market 14
conditions, variation in demand profiles, new supply 15
opportunities, and regulatory conditions. Although 16
various windows and targets are established in the initial 17
design phase of the portfolio, the plan provides 18
flexibility to exercise judgment to revise and/or adjust 19
the Procurement Plan in response to changing conditions. 20
Material changes to the Procurement Plan are communicated 21
to Avista’s Senior Management and periodically to 22
Commission Staff. 23
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Q. What delivery period does the natural gas 1
Procurement Plan include? 2
A. The Procurement Plan includes four complete 3
natural gas operating years (November through October) and 4
whole months remaining from the current month until the 5
next October 31 period (the current natural gas operating 6
year). The four complete upcoming natural gas operating 7
years are designated “Prompt”, “Second”, “Third”, and 8
“Fourth” years. 9
Q. Please describe the components of the natural 10
gas Procurement Plan. 11
A. Each year a review of the previous year’s plan 12
is performed. The review includes analysis of historical 13
and forecasted market trends, fundamental market analysis, 14
demand forecasting, and transportation, storage and other 15
resource considerations. The plan includes the following 16
components: 17
1. Previous Year(s) Hedges – longer-term fixed-18
price purchases executed as a part of a previous 19
year’s Procurement Plan. 20
2. Prompt Year Hedges – the portion of the 21
portfolio addressed through the utilization of 22
hedge windows. In each window, fixed price 23
purchases are made for various prompt year 24
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delivery periods (i.e., November to March winter 1
purchase, April to October summer purchase, or 2
individual months). Prior to the execution of 3
each window, market conditions, fundamental 4
market knowledge, and other information are 5
considered to determine if execution will occur. 6
3. Storage Withdrawals – utilizing the capacity and 7
deliverability from the Jackson Prairie natural 8
gas storage facility, Avista is able to, among 9
other transactions, inject natural gas during 10
the summer months and withdraw it to serve 11
customers during the higher demand winter 12
months. 13
4. Discretionary Long-term Hedges – opportunistic 14
purchases based on a set of price levels, or 15
targets, which trigger possible execution. At 16
the time the triggers are reached, evaluation of 17
market conditions, fundamental market knowledge, 18
and other information are considered. These 19
hedges will generally be executed when they can 20
be done at or below the established targets. 21
5. Index Purchases – physical index-based natural 22
gas purchases are procured prior to or 23
throughout the delivery month. These purchases 24
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are usually associated with daily pricing. The 1
amount of index purchases planned is the 2
difference between the forecasted demand less 3
the sum of the previous year hedges, prompt year 4
hedges, and storage withdrawals. 5
Q. Please describe how the Procurement Plan manages 6
supply to meet the volatility in customer demand, as well 7
as manages the impact to customers from volatility in 8
market prices. 9
A. The Procurement Plan focuses on managing the 10
costs associated with serving varying retail load from a 11
wholesale market with price volatility. For example, 12
system-wide average daily demand can fluctuate between 13
27,000 dekatherms (Dth) per day during a summer month and 14
180,000 Dth/day during a winter month. Further, 15
December’s system-wide daily demand volatility has ranged 16
from a low of 99,000 Dth/day to a high of 300,000 Dth/Day. 17
Finally, from Avista’s 2014 IRP, system-wide peak day 18
demand for the 2015-2016 heating season is forecasted to 19
be approximately 339,000 Dth per day. 20
In order to manage these seasonal, monthly and daily 21
volume swings, Avista shapes the components of the 22
Procurement Plan by month (i.e. more natural gas is hedged 23
for the winter months than for the summer). Illustration 24
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No. 2 below includes a chart that shows the demand 1
volatility: 2
Illustration No. 2 3
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Price volatility can also vary widely by season, 16
month and day. Illustration No. 3 below includes a chart 17
depicting the natural gas price volatility over time. 18
Avista cannot predict with accuracy what natural gas 19
prices may be. Our experience related to market 20
fundamentals guide our procurement decisions. By layering 21
in fixed-price purchases over time, setting upper and 22
lower pricing levels on the hedge windows, 23
opportunistically hedging at pricing levels through the 24
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50,000
100,000
150,000
200,000
250,000
300,000
350,000
Dt
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/
D
a
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Total System Average Daily Load(Average, Min, Max)
Average Load Minimum Load Maximum Load Peak Day

discretionary hedge program, and actively managing storage 1
resources, Avista is able to meet our goal of providing a 2
meaningful measure of price stability and certainty, and 3
competitive prices for our customers. 4
Illustration No. 3 5
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III. JACKSON PRAIRIE STORAGE 19
Q. Please describe Avista’s involvement with the 20
Jackson Prairie natural gas storage facility. 21
A. Avista is one of the three original developers 22
of the underground storage facility at Jackson Prairie, 23
which is located near Chehalis, Washington. Although 24
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there have been corporate changes due to mergers, 1
acquisitions and name changes, Avista, Puget Sound Energy 2
and Williams Northwest Pipeline each hold a one-third 3
share (equal, undivided interest) of this underground gas 4
storage facility through a joint ownership agreement. 5
Puget Sound Energy is the operator of the facility. 6
Q. What type of storage facility is Jackson 7
Prairie? 8
A. Jackson Prairie is an underground aquifer 9
storage facility. Storage and the associated withdrawal 10
and injection capability has been created by a combination 11
of wells, gathering pipelines, compression and dehydration 12
equipment, and the removal and disposal of aquifer water. 13
Q. Please describe the present level of storage 14
that Avista owns at Jackson Prairie. 15
A. At the present time, Avista Utilities owns a 16
total of 8,528,013 dekatherms (Dth) of capacity. This 17
capacity comes with a withdrawal capability of 398,667 Dth 18
per day (deliverability). Washington/Idaho’s current 19
share of that capacity is 7,704,676 Dth and 346,667 Dth 20
per day of deliverability. The remaining amount is 21
allocated to our customers in the Oregon jurisdiction. 22
Q. What are the benefits of storage to Avista’s 23
customers? 24
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A. Access to regionally located storage provides 1
several benefits to Avista’s customers. It enables the 2
Company to capture seasonal price spreads (differentials) 3
between summer and winter, improves reliability of supply, 4
increases operational flexibility, mitigates peak demand 5
price spikes, and provides numerous other economic 6
benefits. 7
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IV. 2014 NATURAL GAS INTEGRATED RESOURCE PLAN 9
Q. Please provide an overview of the Company’s 10
development of its 2014 Natural Gas Integrated Resource 11
Plan. 12
A. The 2014 Integrated Resource Plan (“IRP”) was 13
filed with the Commission on August 29, 2014. The IRP 14
includes forecasts of natural gas demand and any supply-15
side transportation resources and demand-side measures 16
needed for the coming 20 years, which will help Avista 17
continue to reliably provide natural gas to our customers. 18
A copy of the Company’s 2014 Natural Gas Integrated 19
Resource Plan is included as Exhibit No. 7, Schedule 1. 20
Q. What are the summary highlights from the 2014 21
IRP? 22
A. Highlights from the 2014 IRP are as follows: 23
• The Company has sufficient natural gas 24
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transportation resources well into the future 1 with resource needs not occurring during the 20 2
year planning horizon in Idaho, Washington, or 3 Oregon; 4 5
• Natural Gas commodity prices continue to be 6 relatively stable due to robust North American 7
supplies led by shale gas development; and 8 9
• As forecasted demand is relatively flat, the 10
Company will monitor actual demand for signs of 11 increased growth which could accelerate resource 12 requirements. 13
Q. Has the Company’s 2014 Natural Gas IRP been 14
acknowledged by this Commission? 15
A. Yes, on December 22, 2014 the Commission 16
acknowledged the 2014 Natural Gas IRP (Case No. AVU-G-14-17
03, Order No. 33196), finding that the IRP complies with 18
requirements of Order Nos. 25342, 27024, 27098, and 32698. 19
Q. When will the Company file its next IRP? 20
A. The Company will file its next IRP on or before 21
August 31, 2016. A courtesy work plan will be filed on 22
August 31, 2015 detailing Avista’s IRP planning process as 23
well as tentative dates and content for meetings with the 24
Technical Advisory Group (TAC). TAC meetings will begin 25
in the first quarter of 2016. 26
Q. Does this complete your pre-filed direct 27
testimony? 28
A. Yes, it does. 29
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