20151210Comments.pdf

BRAND.N KARPEN 1i'tlc[t\iLi)DEPUTYATTORNEYGENERAL . ^ I I
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IDAHO BAR NO. 7956
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF AVISTA )
CORPORATION'S APPLICATION TO ) CASE NO. AVU.G.15.O3
RESUME NATURAL GAS EFFICIENCY )
PR6GRAMS AND INCREASE THE RIDER ) COMMENTS OF THE
SURCHARGE IN SCHEDULES 190 AND l9t. ) COMMISSION STAFF
)
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Brandon Karpen, Deputy Attorney General, and in response to the Notice of
Application and Notice of Modified Procedure issued in Order No.33422 on November 20,
2015, in Case No. AVU-G-I5-03, submits the following comments.
BACKGROUND
On October 28,2015, Avista Corporation dba Avista Utilities filed an Application to
resume its gas demand-side management (DSM) programs. This includes authority to: (1)
resume natural gas energy efficiency programs and projects to residential (including low-
income), commercial and industrial natural gas customers under Schedule 190 (Natural Gas
Efficiency Programs); and (2) fund these programs by increasing its "Energy Efficiency Rider"
surcharge rates in tariff Schedule 191. Application at 1. Avista proposes that the DSM programs
"be offered through prescriptive rebates to customer segments for eligible weatherization and
high efficiency equipment measures as well as custom incentives for 27 non-residential
STAFF COMMENTS DECEMBER IO,2OI5
projects." Id. Avista asks that the case be processed by Modified Procedure, and that new
Schedule 191 Rider rates take effect on January 1,2016.
ln2012, Avista filed and the Commission approved, an application to suspend Avista's
natural gas DSM programs. In that application, Avista advised the Commission that new natural gas
costs were about 50olo lower than existing avoided costs and that these lower gas costs render the
"natural gas energy efficiency portfolio cost-ineffective going forward." Order No. 32650 at 1.
After evaluating a number of cost-effectiveness tests, Avista now seeks to re-establish those
programs. Application at 2.
Avista claims that its historic method of measuring cost-effectiveness, the Total Resource
Cost test (TRC) metric, has a potential for bias against conservation programs. 1d In its
Application, the Company instead utilizes the Utility Cost Test (UCT) metric as a measurement
of cost-effectiveness.l Avista explains that it prefers to emphasizethe UCT over the TRC test
when evaluating its DSM programs because the TRC "typically includes the full costs, but not
the full benefits to customers because the risk reduction value of conservation and many non-
energy benefits are difficult to quantiff." .Id
Avista has proposed three changes to its historic avoided cost methodology for natural
gas:
1. Total Cost of Delivery: Avista claims that "the demand portion of Schedule
150 is a more accurate representation of the total costs to deliver natural gas
from the wellhead to the customer meter, and therefore, that should be a
component of the natural gas avoided cost calculation." Id. at 4-5.
Future Carbon Cost Assumptions: Avista states it is unable to come up with
an accurate future carbon cost assumption and there are a range of legitimate
projections from $0/metric ton to over $240lmetric ton. Facing this
uncertainty, the Company proposes using an estimate of $ 10/metric ton
starting in2020 with a 3Y, awrtal escalation.
Discount Rate: Avista argues that the most appropriate method of measuring
the cost-effectiveness of its conservation programs is its Weighted Average
Cost of Capital (WACC). However, the Company also claims that the tax
benefits of debt financing and inflation adjustment should be included in any
I The Company uses analytical tests such as the TRC and UCT to measure the cost-effectiveness of its various DSM
programs. The TRC compares program administrator costs and customer costs to utility resource savings, and
assesses whether the total resource cost of energy in a utility's service territory will decrease. The UCT compares
program administrator costs to supply-side resource costs, and assesses whether utility bills will increase. Under
these tests, a program or measure is deemed to be cost-effective if it has a benefiVcost ratio above 1.0.
2.
3.
STAFF COMMENTS DECEMBER 10, 2015
discount rate. Accordingly, Avista has proposed to move from a nominal
WACC to a real WACC.
Regarding funding, Avista requests a revision to Schedule 190 to "provide customers
with a levelized incentive of $3.00 per first year therm savings for any project with a simple
payback less than 15 years and capped at70Yo ofthe project cost." Id. at8.
Avista further requests authority to resume collecting an Energy Efficiency Rider
surcharge (Schedule 191). Avista says this will generate approximately $1.25 million in
revenue, resulting in an increase in overall billed natural gas rates by 1.7%. Id. at l-2. lf
approved, the proposed Rider increase will increase the monthly bill of the average residential
natural gas customer'using 61 therms by about $l.1 1 per month.
Avista says for 2016, its natural gas energy efficiency portfolio is estimated to result in
first year savings of 233,000 therms in Idaho. 1d.
STAFF REVIEW
Staff has thoroughly reviewed the Company's Application, workpapers, and discovery
responses and found an improved cost-effectiveness methodology has made the programs and
overall portfolio cost-effective going forward. Staff also considered public comments that were
filed in this matter. Although Staff has recommendations that it believes will strengthen the
Company's cost-effectiveness calculations, Staff recommends the Commission approve the
Company's request with or without those changes.
Avoided Cost Calculation
In2012, a 50 percent decrease in avoided costs was revealed during Avista's 2012 IRP
process. Staff and the Company explored several cost-effectiveness calculation refinements, but
none were sufficient to justiff continuation of the program. Accordingly, Avista requested and
was granted, approval to suspend its natural gas DSM programs.
In this Application, the Company now includes the demand portion of Schedule 150
(Purchase Gas Cost Adjustment) in its avoided cost to reflect the costs of transporting natural gas
on interstate pipelines to the Company's local distribution system. Staff believes this is a
reasonable input because these costs can be offset by the sale ofexcess transportation capacity.
Furthermore, this is consistent with the deferred transmission value included by Avista and many
other utilities in electric avoided cost calculations, although deferred distribution is usually
STAFF COMMENTS DECEMBER 10,2OI5
included as well. Staff also believes that location-specific natural gas efficiency efforts could
provide additional capacity benefits, and supports Avista's intent to analyze the value efficiency
could provide in deferring future projects.
Avista also includes a carbon adder of $ I 0/metric ton beginning in 2020 with a 3 percent
annual escalation to account for the uncertainty of future carbon regulation. Avista maintains
$10/metric ton is a conservative estimate since carbon cost assumptions range from $0/metric ton
to $22\lmetric ton. For comparison purposes, the Northwest Power Planning and Conservation
Council's 7th Plan includes a$4Tlmetric ton carbon cost. Staff believes an estimate of direct
costs to utilities from future carbon regulation is currently too speculative to be included in cost-
effectiveness calculations. Consequently, Staff asked the Company to analyze cost-effectiveness
without the carbon adder and found the affect was minimal-it did not significantly change the
cost-effectiveness for any program or the portfolio.
Table 1 shows the effect on TRC and UCT cost-effectiveness when the carbon adder is
removed:
Table 1. Carbon Adder Effects on Cost-Effectiveness2
Program TRC TRC w/o
carbon UCT UCT w/o
carbon
Low Income r.49 1.40 0.82 0.76
Web Thermostat 0.46 0.43 1.40 L30
Prescriptive Residential 0.87 0.81 2.24 2.08
Simple Steps Smart Savings 1.02 0.95 3.82 3.55
Total Residential Portfolio 0.86 0.80 2.24 2.08
Non Residential HVAC 2.r2 t.97 3.36 3.12
Non Residential Shell 1.02 0.95 t.54 r.43
Food Service Equipment r.72 1.61 t.94 r .81
Site Specific 0.74 0.69 1.55 t.44
Small Medium Business 2.32 2.t7 2.03 r.89
Total C&I Portfolio 0.88 0.82 1.69 1.58
Total Portfolio 0.87 0.81 1.98 1.84
Total Portfolio w/ Low Income 0.90 0.83 1.84 t.7r
2 The UCT excludes the l0 percent Northwest Power Planning and Conservation adder.
STAFF COMMENTS DECEMBER IO,2OI5
Another development since 2012 that enables Staff to recommend resuming natural gas
DSM is an increase in avoided costs3 over the long term. The Washington/Idaho expected case
for winter avoided costs in the 2012IRP was $2.83/dekatherm in the first year and increased to
$5.22ldekatherm in the last year of the planning period. See Avista response to Staff PR #7,
AVU-G-12-03. The current Washington/ldaho winter avoided costs produced by the Company
begin at $3.70ldekatherm and increaseto $5.72ldekatherm over the planning period, an increase
of approximately 3 I percent in the first year and l0 percent in the last year. Staff believes these
adjustments are reasonable and supports the Company's position.
Cost-Effectiveness Tests and Assumptions
Avista has historically relied almost exclusively on the TRC as the threshold for natural
gas cost-effectiveness. This Application proposes to shift that emphasis to the UCT. The
Company believes that the TRC has a "disconnect in that the benefits are primarily based off the
utilities' avoided costs, which do benefit customers, but the costs are primarily driven by the cost
the customers pay for the individual conservation measure." Application at 6. Staff agrees that
the most accurate analysis of system cost-effectiveness compares utility benefits to utility costs,
rather than comparing utility benefits to a combination of utility and customer costs.
The Company continues using the Weighted Average Cost of Capital (WACC) as the
discount rate for its cost-effectiveness tests, but replaces the nominal value with the real WACC.
Avista believes applying the real WACC more accurately account for tax benefits and effects of
inflation in the Net Present Value calculation. While this is broadly consistent with the
discounting method used by other utilities, Staff recommends that Avista apply the discount rate
to the mid-year estimate of benefits rather than the beginning of the year to more closely reflect
the timing of benefits reahzed each year.
The Company's workpapers also show it is using gross rather than net savings estimates
in its cost-effectiveness calculations. Staff acknowledges a range of opinions on the best
application of net savings and believes it is important as a program management tool for
modifying or discontinuing incented measures with high freeridership.
This approach is consistent with the approach accepted by Staff and adopted by Idaho
Power in its 2014 DSM Annual Report:
3 Avista's forecasted IRP avoided costs consist almost entirely of the commodify price.
STAFF COMMENTS DECEMBER IO,2015
Capturing the effects of Idaho Power's energy efficiency efforts on free-ridership
and spillover is difficult. Due to the uncertainty surrounding NTG percentages,
Idaho Power used the NTG of 100 percent for all the measure cost-effectiveness
analysis. For the program cost-effectiveness analysis, the B/C ratios shown are
based on a 100 percent NTG. A sensitivity analysis was conducted to show what
the minimum NTG percentage needs to be for the program to remain (or become)
cost-effective.
Idaho Power 2014 Annual DSM Report, page 5
In order to assure that a net-savings approach would not unduly affect cost-effectiveness,
Staff analyzed the effect of freeriders on portfolio cost-effectiveness. This sensitivity analysis
found that the portfolio remained UCT cost-effective even when a 60 percent NTG ratio was
applied (i.e. 40 percent freeridership). Staff believes these changes are reasonable and supports
the Company's position.
Allocation of Portfolio Administration Costs
Discussions with Avista revealed changes in the allocation of overhead expenses between
the electric and gas DSM portfolios that could significantly impact cost-effectiveness.
Historically, the Company assigned those costs on a Btu basis. However, the Company believes
a kWh is more costly to produce on a Btu basis. Thus, Avista now bases the cost allocation on
the ratio of present value benefits between the two portfolios rather than assuming an avoided
electric Btu is equivalent to an avoided gas Btu. Shifting to this methodology reduces the
portion of overhead costs assigned to the gas portfolio from 24 percent to 8 percent. The
expansion of Avista's electric-to-gas fuel conversion since the suspension of the natural gas
DSM portfolio has also helped absorb overhead costs. Staff believes this new allocation of
overhead expenses are reasonable and supports the Company's position.
Customer Classes Equity
Staff is concerned that residential customers will provide the majority of the tariff rider
funds while the commercial and industrial classes will receive most of the direct benefits in the
form of incentive payments and offset costs. This issue could be more pronounced for natural
gas than electric DSM programs because electric efficiency programs defer generation
investment and dispatch resources through a resource stack as costs increase, whereas gas does
not. However, Staff notes that Avista's proposed commercial and industrial natural gas
STAFF COMMENTS DECEMBER 10,2015
measures almost exclusively reduce space heating requirements, which reduces future
investments for all customer classes.
The Commission has addressed the disparity between tariff rider funding and benefits in
previous orders. Order No. 32113 reads, "An exact matching of costs and benefits for an
individual DSM program is a worthy, albeit unrealistic goal. There will always be some level of
cross-subsidization of DSM program occurring amongst and between a utility's various customer
classes." Order No. 29065 directs the Company to "implement a balanced portfolio of DSM
programs for all customer classes over the long term. . .. The energy savings generated by such
an approach will indirectly benefit all ratepayers as more class-specific DSM programs are
implemented over time." While Staff believes that incenting space heat measures lowers future
costs for all customers, Staff also urges Avista to manage inter-class and intra-class inequity by
continuing to explore and expand residential natural gas DSM programs.
CONCLUSION AND RECOMMENDATIONS
Staff believes that resuming cost-effective natural gas DSM programs will lower costs.
Likewise, Staff recommends approval of the Application. However, Staff s support of the
Company's Application does not constitute an advance recommendation of prudency. Rather,
Staff will carefully review program implementation, actual expenses and savings used in cost-
effectiveness calculations, and third party evaluations when the Company files for cost-recovery
of expenses incurred in its natural gas DSM programs.
, Staff recommends that the Commission allow Avista to revise Schedule 190 to provide
customers with a levelized incentive of $3.00 per first year therm savings for any project with a
simple payback less than 15 years and capped at70o/o of the project cost. Staff also recommends
that the Commission allow Avista to resume collecting an Energy Efficiency Rider surcharge
(Schedule 191) to generate approximately $1.25 million in revenue by applying $0.01818 per
Therm to Schedule 101, $0.00978 per Therm to Schedule 111 and ll2, and $0.00978 per Therm
to Schedule l3l and 132.
Staff also recommends that the Commission direct Avista to:
1. analyze the benefits of natural gas DSM programs deferring distribution costs;
2. apply a mid-year discount rate to program benefits; and
3. strike "from a Total Resource Cost perspective" under "5. Budget & Reporting" in
Schedule 190, which Staff has conhrmed is acceptable with the Company.
STAFF COMMENTS DECEMBER IO, 2OI5
Respectfully submitted this tff *rof December 2015.
Technical Staff: Stacey Donohue
Donn English
Kevin Keyt
i:umisc/comments/avugl 5.3btsddoksk comments
STAFF COMMENTS DECEMBER 10,2015
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS IOTH DAY OF DECEMBER 2015,
SERVED THE FOREGOING COMMENTS OF' THE COMMISSION STAFF, IN
CASE NO. AVU.G-15-03, BY E-MAILING AND MAILING A COPY THEREOF,
POSTAGE PREPAID, TO THE FOLLOWING:
LINDA GERVAIS
MANAGER, REGULATORY POLICY
AVISTA CORPORATION
PO BO){ 3727
SPOKANE W A 99220-3727
E-MAIL: [e-mail]
DAVID J MEYER
VP & CHIEF COUNSEL
AVISTA CORPORATION
PO BOX3727
SPoKANE WA99220-3727
E-MAIL: [e-mail]
CERTIFICATE OF SERVICE