20030606_501.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:JUNE 2, 2003
RE:CASE NO. PAC-03-2 (PacifiCorp)
2003 ELECTRIC INTEGRATED RESOURCE PLAN (IRP)
On January 27, 2003, PacifiCorp dba Utah Power & Light Company (PacifiCorp;
Company) filed its 2003 Integrated Resource Plan (IRP) with the Idaho Public Utilities
Commission (Commission). The Company s filing is pursuant to a biennial requirement
established in Commission Order No. 22299, Case No. U-1500-165. PacifiCorp states that its
IRP provides a framework and plan for the prudent future actions required to ensure PacifiCorp
continues to provide reliable and least-cost electric service to its customers. The final IRP, it
states, culminates a year-long collaboration with considerable public involvement from customer
interest groups, regulatory staff, regulators and other stakeholders.
PacifiCorp serves approximately 1.5 million retail customers in service territories
comprising about 135 000 square miles in portions of six western states: Utah, Oregon
Wyoming, Washington, Idaho and California.This service territory has diverse regional
economIes ranging from rural, agricultural and mining areas to urban, manufacturing and
government service centers.
PacifiCorp forecasts average annual load on its system to grow by 2.2% in the east
and 2.0% in the west. Given uncertainties of economic growth and other factors, this growth in
PacifiCorp s load, the Company states, could vary by 1.4% and 3.4%. At the same time
PacifiCorp notes, the resources available to the Company to serve this demand will diminish
over time as supply contracts expire, hydroelectric generation facilities are subjected to
relicensing conditions and thermal plants comply with more stringent emissions requirements.
DECISION MEMORANDUM
The Company s IRP was developed against the backdrop of continuing market
regulatory and structural changes in the electric industry. These changes, the Company states
highlight the importance of understanding the risks and uncertainties inherent in resource
planning. The IRP reveals that PacifiCorp has substantial new resource needs and will require an
additional 000 MW of new resources (DSM, generation, and supply contracts) through 2013.
Load growth, load shape growth, asset retirement and contract expirations cause the gap between
demand and supply to grow over time.
Other key findings in the IRP include:
The strongest resource strategy relies on a diverse portfolio of options
including strong components of renewables and demand-side
management, but also natural gas- and coal-fired generating resources. A
resource procurement process to pursue this diversified approach is
described in the Action Plan.
Possible paradigm shifts in the electric industry driven by federal
regulatory requirements are significant uncertainties for PacifiCorp and
its customers to manage in the next several years. These issues include
(potentially favorable) changes in transmission operations, as well as the
potential increased cost associated with PacifiCorp s existing resource
assets, including complying with air emission standards and relicensing
hydro electric facilities.
Renewable resources are a good fit for PacifiCorp within the context of a
diversified portfolio. The IRP proposes procuring renewable resources
(primarily wind, and possibly geothermal) at a level shown to be cost
effective, given the assumptions used to evaluate the resource. The
amount of renewables is also a level that would meet or exceed
renewable portfolio standards that have been proposed in federal and
state legislation.
Demand-side management (DSM) will continue to be an important and
cost-effective program for PacifiCorp. A significant increase in
programmatic measures is proposed, including a load control program to
help mitigate growing capacity requirements.
In addition to renewable resources and DSM, the study concludes that
additional resources from thermal generation will also be required. The
least-cost option is a combination of three natural gas-fired units and one
coal unit to meet both growing energy and capacity requirements.
DECISION MEMORANDUM
The least-cost portfolio includes a coal base-load thermal unit in the east.
Coal-fired generation may be particularly advantageous when procuring
resources in the Rocky Mountains, the Company states, because coal is
an abundant indigenous resource there. However, the long-term impact
of atmospheric emissions is casting doubt on the viability of coal-fired
generation. The IRP least-cost portfolio is dependent upon the impact of
a number of these paradigm risks, including air emission standards and
possible global warming measures. PacifiCorp believes it has adequately
addressed these risks, based on its current understanding of them, and
coal plants remain a low-cost option. The IRP action plan includes
further work to develop and test the viability of a coal baseload thermal
unit, including an ongoing assessment of the risks.
The Company s IRP proposes a significant procurement of new resources. The
strategy outlined in the IRP includes the addition of about 000 MW of new capacity over the
first 10 years of the 20-year IRP. The least-cost, risk-adjusted approach proposed is a diverse
portfolio of resources, including renewables, DSM and thermal baseload and peaking units.
These additions include the following portfolio additions during the planning period:
1400 MW of renewable resources
450 MWa of DSM and 90 MW of direct load control
2100 MW of baseload capacity
1200 MW of peaking capacity
700 MW shaped resource contracts
The Action Plan details findings of resource need and specific implementation
actions. The plan also outlines step-by-step decision processes by which proposed resources will
be continually evaluated and procured. Going forward, PacifiCorp will implement the Action
Plan, while also maintaining the flexibility to adjust to future changes and opportunities. The
Action Plan will be revisited and refreshed no less frequently than annually.
For analytic purposes, the IRP assumes new resources are developed and owned by
PacifiCorp. However, no decision has been made to invest in specific resources. The decision
to own, build and invest in a new resource versus contracting with a third party would be made
as part of the procurement process for each new resource addition, and on a case-by-case basis.
multi-state process (MSP) (Case No. P AC-02-3) is expected to provide clarity on the
regulatory treatment on investment decisions and the degree of cost recovery risk held by
DECISION MEMORANDUM
PacifiCorp. The Company anticipates that the MSP will issue findings in the spring of 2003.
The MSP outcome will influence the activities and operations of PacifiCorp and may impact
action plan implementation. The Company states that a significant procurement program and
potential investment is required to maintain reliable electric service. It is critically important, the
Company contends, that state regulators support this IRP and issue their acknowledgement of the
Action Plan. This support coupled with a useful and durable MSP outcome, the Company states
is vital to PacifiCorp being able to resolve issues around recovery lag and achieve allowed rates
of return, and is critical in ensuring PacifiCorp can continue to provide least-cost, reliable
electric service to its customers.
On February 13 , 2003 , the Commission issued a Notice of Filing in Case
No. PAC-03-02 and established a comment deadline of March 26, 2003. Comments were
filed by the J.R. Simplot Company, Monsanto Company, The Renewable Northwest Project, The
Northwest Energy Coalition and Advocates for the West, and the Commission Staff. The
comments can be summarized as follows:
R. Simplot Company
Simplot in its comments raIses the following points and makes the following
recommendations:
The lack of a legitimate discussion of PURP A/avoided cost projects is distressing
and leaves the report incomplete. PacfiCorp has not been a supporter of QFs and continues to
develop regulated projects at costs exceeding its posted avoided cost rates.
Natural gas is a just-in-time commodity. Supply/demand and infrastructure
constraints will keep gas prices high significantly into the future. Northwest industrial end-users
(including Simplot) are telling electric utilities and state regulators that the next generation of
large power plants should be coal.
D A greater degree of public involvement from industrial end-users and customer
interest groups is needed in the IRP.
D PacifiCorp s acquisition of renewable resources, especially wind, seems to be
designed to curry the favor of specific individuals and agencies rather than meet the test of
economic reality and the best interests of all ratepayers.
DECISION MEMORANDUM
Historically, PacifiCorp has added generation with high cost (at the time) fuel
contracts (e., Hermiston) in the rate base while shepherding low cost projects (e., Klamath
Falls; West Valley Project) into its unregulated merchant side.
D It remains unclear whether the underlying demand forecast assumes the effects of
PacifiCorp s projected costs for hydro relicensing (and the attendant loss of hydro capability)
and emission improvements on PacifiCorp s existing coal facilities.
The IRP fails to identify key load forecasting assumptions such as price
electricity, price and availability of competing fuels and changes in the composition of economic
activity.
The IRP should include a thorough discussion of appropriate generating resources
for peaking capacity including an Idaho Power Company-type risk advisory program for market
access and relevant specific rate designs.
Monsanto Company
Monsanto in its comments raises the following points and makes the following
recommendations:
D The Commission should not follow PacifiCorp s request for endorsement of the
IRP conclusions and specific action plan. Monsanto recommends that the Commission
acknowledge , not "approve" or "disapprove" the PacifiCorp IRP filing.
Frequent review.
PacifiCorp is commended for its commitment to revisit and refresh the Action Plan
no less frequently than annually and file new IRP plans at two year intervals. This recognizes
the need to remain flexible to adjust for future changes, uncertainties and opportunities. Greater
regulatory scrutiny is required as PacifiCorp in its Action Plan proposes to add 000 MW over
the next ten years at a cost projected to exceed $2 billion.
Demand Side Management (DSM)
The IRP does not succeed in adequately placing DSM resources or customer
generation resources on a consistent and comparable basis with supply side resources for
purposes of evaluation or pricing to ensure that all efficient and effective alternatives to
traditional utility-built resources will be pursued.
DECISION MEMORANDUM
Conservative Assumptions
The IRP makes a number of conservative assumptions that dramatically increase the
projection of required new resources, e., 15% planning reserve margin, a 5% limit on expected
short-term market exposure, modeling of firm transmission rights only, assumed carbon taxes
renewable assumptions and restrictions on market products and purchases. Collectively, these
assumptions lead to extreme projections for necessary resource additions.
D Base Case
An IRP "base case" should represent the utilities best reasonable projections of future
conditions, rather than assuming speculative changes or charges or incorporating risk mitigation
measures (such as increased planning margin requirements, carbon taxes, unavailability of non-
firm transmission, etc.) PacifiCorp should be instructed in future IRPs to utilize a "base case
for analysis purposes that includes PacifiCorp s best reasonable predictions as to reasonably
known and measurable conditions and expectations. A base case run should not assume
speculative or unknown events such as possible new taxes or reserve requirements.
D Open Bidding
A fair, open and competitive bidding process should be mandatory for any significant
future resource additions. The process should include independent analysis and oversight in the
formulation and evaluation of RFPs and in awarding contracts. It should also include a process
for Commission resolution of disputes that may arise in the RFP, bidding and contracting
processes.
As a regulated utility, PacifiCorp is permitted to earn a return for its shareholders
only on rate-based assets. This reality creates an inherent bias in favor of utility construction of
resources over acquisition of resources from others.
Ratepayer Impact
The IRP does not attempt to identify impacts on different classes of ratepayers.
Additionally, this and future IRPs should consider elasticity of demand by various rate classes in
response to projected rate increases resulting from anticipated resource acquisitions and rate
design options.
Renewable Northwest Project (RNP), a non-profit organization promoting solar, wind and
geothermal resources.
DECISION MEMORANDUM
RNP in its comments raises the following points and makes the following
recommendations:
The Commission should acknowledge PacifiCorp s 2003 IRP.
The IRP results demonstrate that renewables are a least cost resource.
The Company s analysis of renewable resources still contain some flaws, the most
notable of which is the lack of capacity value assigned to new wind resources.
PacifiCorp is the single-largest coal-power producer in the western energy market.
The Company is correct to anticipate future regulatory constraints on CO2 emissions. The only
way to limit green house gas emissions is to be actually reducing those emissions. It is short-
sighted and risky for PacifiCorp to add another coal plant to its resource mix.
Northwest Energy Coalition and Advocates for the West
The Coalition and the Advocates raise the following points and make the following
recommendations:
The Commission should acknowledge PacifiCorp s 2003 IRP.
PacifiCorp made several errors which undervalued renewables:
1. The IRP underestimates the value of green tags.
2. PacifiCorp gives no capacity value to wind resources.
3. PacifiCorp undervalues the ability of renew abies to mitigate fuel volatility.
4. PacifiCorp assumes no emissions for purchased power.
The total effect of these errors is conservatively estimated at $700 million.
errors should make the Renewables' portfolio the least cost option.
D Demand-Side Management Resources
PacifiCorp should consider the economic value of avoided or deferred transmission
Correction of the
and distribution upgrades flowing from DSM acquisition.
DSM resources provide additional value as a hedge against fuel price volatility.
PacifiCorp does not have the regulatory tools in place to seek all cost-effective DSM
investments-e., no DSM tariff rider or other DSM program funding mechanism. As with
Idaho Power and A vista, the establishment of a continuously replenishing DSM fund ensures that
program costs are recovered, and streamlines the creation of a portfolio of DSM resources.
DECISION MEMORANDUM
Commission Staff
The Commission Staff in its Reply Comments raises the following points and makes
the following recommendations:
Staff believes the IRP analysis conducted by PacifiCorp is the most extensive ever
by a utility regulated by the Commission.
The preferred resource portfolio selected in the IRP consists of a blend of thermal
plants, gas-fired plants, renewables, load control programs and DSM. This blend of resource
types was the natural result of the analysis, not due to a preconceived belief by PacifiCorp that a
diverse mix of resource types would be preferable.
PacifiCorp has indicated to Staff its intent to release a series of four RFPs in the
immediate future. The first, expected to be released in approximately 60 days (Staff comment
file date March 26), will be seeking bids for east side capacity resources. The second RFP, to be
issued in approximately 90 days, will be seeking wind or other renewable resources, both on the
east and the west side. A third RFP will be issued in about 120 days for west side capacity
resources. Finally, in early 2004, an RFP will be issued seeking a base load unit in the east.
Staff does not believe it is appropriate to seek new resources through RFPs any
sooner than necessary. There is value in being able to defer decisions. The costs and viabilities
of various resource alternatives are likely to change over time.
PacifiCorp has stated its intent to revise and update its Action Plan at least
annually; it should try to maintain as much flexibility in its resource acquisition efforts.
Staff recommends that PacifiCorp enlist the aid of an independent third party to
ensure that new resource evaluations are fair and complete, and that any Company self-build
options are compared on a non-discriminatory basis.
PacifiCorp intends to keep the Commission and Staff apprised of key resource
activities, by providing procurement program status reports approximately every six months.
Staff recommends that PacifiCorp also keep the Commission and Staff informed as to its
activities and programs on any Requests For Proposals (RFPs).
Staff is satisfied with the preferred portfolio selected in the IRP, but has some
concern as to whether the aggressive level of wind resource acquisitions spelled out in the IRP
can be sustained.
DECISION MEMORANDUM
The Company has designed its Action Plan based on a planning margin of 15%.
Further study of an appropriate planning margin for PacifiCorp will continue and is an
appropriate element of the Action Plan.
Staff is encouraged by PacifiCorp s commitment to more closely align its
resource planning and its business planning. A resource planning function has been created and
organized in the Company s Commercial and Trading Department to ensure integration with
PacifiCorp s resource procurement, trading and risk management functions.
Staff advises that if any other party in this case objects to some portion of the
Company s IRP, that party should participate in the IRP process and seek to express its concerns
and influence the next IRP to be filed in 2005.
Staff has always viewed "acknowledgement" as being closely related to the
process of integrated resource planning, rather than the result. By acknowledging a utility's IRP
Staff believes the Commission is endorsing the process the utility followed in developing the
plan, but not necessarily any actions called for in the plan. The results will be scrutinized in due
course when the utility seeks rate recovery. Presumably, if the utility has followed a fair and
thorough planning process, it will lead to a prudent, least cost, least risk result that can be
supported by the Commission.
Commission Decision
PacifiCorp has submitted its 2003 IRP pursuant to prior Commission direction.
Commenting parties have offered a critique of the IRP and suggested changes and
recommendations. The Commission standard practice with IRP filings is to simply
acknowledge" the filing as complying with prior Commission Orders. How does the
Commission wish to treat PacifiCorp s present filing? How does the Commission wish to treat
the filed comments and recommendations?
Scott Woodbury
Vld/M:P ACEO302 _sw2
DECISION MEMORANDUM