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Docket No.

20000-___-ER-10
Witness: Gregory N. Duvall

BEFORE THE WYOMING PUBLIC SERVICE


COMMISSION

ROCKY MOUNTAIN POWER

____________________________________________

Direct Testimony of Gregory N. Duvall

November 2010
1 Q. Please state your name, business address and present position with

2 PacifiCorp dba Rocky Mountain Power Company (the “Company”).

3 A. My name is Gregory N. Duvall. My business address is 825 NE Multnomah, Suite

4 600, Portland, Oregon, 97232. My present position is Director, Long Range

5 Planning and Net Power Costs.

6 Qualifications

7 Q. Briefly describe your education and business experience.

8 A. I received a degree in Mathematics from University of Washington in 1976 and a

9 Masters of Business Administration from University of Portland in 1979. I was

10 first employed by PacifiCorp in 1976 and have held various positions in resource

11 and transmission planning, regulation, resource acquisitions and trading. From

12 1997 through 2000 I lived in Australia where I managed the Energy Trading

13 Department for Powercor, a PacifiCorp subsidiary at that time. After returning to

14 Portland, I was involved in direct access issues in Oregon and was responsible for

15 directing the analytical effort for the Multi-State Process (“MSP”). Currently, I

16 direct the work of the integrated resource planning group, the load forecasting

17 group, the net power cost group, and the renewable compliance area.

18 SUMMARY OF TESTIMONY

19 Q. Will you please summarize your testimony?

20 A. I present the Company’s proposed net power costs (“NPC”) for the test period of

21 12-month ending December 2011. Specifically, my testimony:

22 • Addresses the specific issues related to the GRID model described in

23 paragraph 176 of the Commission order (“2009 Rate Case Order”) in the

Page 1 – Direct Testimony of Gregory N. Duvall


1 Company’s 2009 general rate case, Docket No. 20000-352-ER-09 (“2009

2 GRC”) and 2009 PCAM Case, Docket No. 20000-363-EP-10 (“2009

3 PCAM”).

4 • Describes the major cost drivers in the 2011 NPC.

5 • Presents the Company’s updated wind integration charges and explains how

6 they are incorporated in the current filing.

7 Issues Identified in the Commission Order

8 Q. What issues involving the Company’s GRID model did the Commission

9 direct the Company to address in this filing in its 2009 Rate Case Order?

10 A. In its 2009 Rate Case Order, the Commission listed the following issues involving

11 the Company’s GRID model in Paragraph 176:

12 a. WIEC Exhibit 203, Item 1, “APS Supplemental Other.” The Company


13 should demonstrate that it is making these purchases or that the contract
14 should for other reasons be included in the model.
15 b. WIEC Exhibit 203, Item 2, “Mona Market Cap.” The Company should
16 submit detailed data to allow an evaluation of the proper level of the Mona
17 market cap. An identification of problems that the Company may have
18 with transmission from Mona to Gonder, including any contractual
19 impediments, would be particularly helpful.
20 c. WIEC Exhibit 203, Item 3, “GRID Major Market Caps.” RMP should
21 submit complete data supporting these caps.
22 d. WIEC Exhibit 203, Item 4, “Bear River Normalization.” Additional
23 information would be helpful, perhaps in the form of a statistical
24 demonstration supporting the use of actual and average costs as may be
25 proposed by the Company.
26 e. WIEC Exhibit 203, Item 5, “Condit Hydro.” Future filings should include
27 information demonstrating that there is, or has been, no over-recovery of
28 decommissioning costs. If there has been an over-recovery, RMP should
29 state the amount, including any interest that would lessen the burden on
30 rate payers.

Page 2 – Direct Testimony of Gregory N. Duvall


1 f. WIEC Exhibit 203, Items 6, 10 and 12, “STF Transmission Test Year
2 Synchronization, HLH LLH EFOR + Other EFOR Adjustments, Daily
3 Screen Adjustment.” The Company should include a showing that
4 avoided costs and net power costs are being treated consistently and that
5 there is a synchronization of those costs within the GRID model. With
6 respect to Item 10, a majority of the Commissioners determined that the
7 Company should demonstrate that heavy load hour and light load hour
8 forced outage adjustments are accurately split so that any
9 weekday/weekend differences are accounted for, i.e., those differences
10 which would not be shown if only a light and heavy load hour analysis
11 were presented.
12 g. WIEC Exhibit 203, Item 7, “2008 NF Transmission.” The Company
13 should demonstrate the impact of non-firm transmission on the revenue
14 requirement and show that it properly excludes non-firm transmission
15 from the GRID model.
16 h. WIEC Exhibit 203, Item 13, “Start-Up Fuel Energy Value.” The
17 Company should provide support for its contention that the value of start-
18 up energy is offset by other costs the Company has not included in the
19 model.
20 i. WIEC Exhibit 203, Items 14 and 15, “Black Hills Sales Shaping, SMUD
21 Shaping.” The Company should demonstrate that its choice of modeling a
22 worst case scenario rather than an actual operating scenario is appropriate.
23 j. WIEC Exhibit 203, Item 18, “Black Hills Power CT Contract.” The
24 Company should show how this agreement is utilized to benefit RMP
25 ratepayers and whether there are any extraordinary costs associated with
26 the agreement.
27 k. WIEC Exhibit 203, Item 21, “OATT Customer Wind Integration Costs.”
28 The Company should provide additional data, such as a cost/benefit
29 analysis, supporting its treatment of these items.
30 l. WIEC Exhibit 203, Item 30, “Cholla Capacity Upgrade.” The Company
31 should provide a full explanation of this model item.
32 m. WIEC Exhibit 203, Item 32, “Minimum Loading Deration + Heat Rate
33 Adj.” The Company should provide additional support for its position
34 regarding derating the plant maximum but not derating the plant
35 minimum.
36 n. WIEC Exhibit 203, Item 34, “Rolling Hills Capacity Factor.” The

Page 3 – Direct Testimony of Gregory N. Duvall


1 Company should include a demonstration that there is no unreasonable
2 bias toward a self-build option, including a discussion of the cost of
3 transmission access offered to third parties.

4 The Company notes for clarification that the reference to “WIEC Exhibit 203” in

5 Order paragraph 176 is a typographical error and that the correct reference should

6 have instead been to “WIEC Exhibit 209”. I will address all the issues above,

7 except e. and n. Mr. Brian S. Dickman will address paragraph e. and Mr. Stefan

8 A. Bird will address paragraph n. When necessary, the studies supporting the

9 Company’s explanation were performed based on information at the time of the

10 Company’s 2009 GRC proceeding.

11 Q. Please briefly summarize the positions that the Company takes in the current

12 filing regarding the issues listed above.

13 A. Among the issues listed above, the Company has accepted or revised its modeling

14 on the following:

15 • APS Supplement Other (a.)

16 • Mona Market Cap (b.)

17 • GRID Major Market Caps (c.)

18 • Condit Hydro (generation beyond the projected decommissioning date) (e.)

19 • Thermal outages with weekend/weekday split and EFORd for peaking units

20 (f.)

21 • Daily screens for commitment logic (f.)

22 • NF transmission (g.)

23 I’ll provide evidence supporting and explaining the positions listed above as well

24 as the additional issues on which the Company does not agree with WIEC.

Page 4 – Direct Testimony of Gregory N. Duvall


1 APS Supplemental Other (a.)

2 Q. Please describe the APS Supplemental Other contract.

3 A. The Company executed the Supplemental contract in 1990 with the Arizona

4 Public Service Company (“APS”) and has included it in NPC in Wyoming since

5 that time. Under the contract, APS makes available to the Company two

6 categories of firm energy, coal (“APS Coal”) and other (“APS Other”). At

7 present, per the terms of contract, APS is obligated to offer the Company 219,000

8 megawatt-hours of firm energy on an annual basis priced at its incremental costs

9 of coal generation, and 876,000 megawatt-hours of energy from other sources,

10 primarily natural gas. The two categories of firm energy cannot be offered at the

11 same time. APS is obligated to offer the energy, but the Company only takes the

12 energy when it is economical to do so.

13 Q. Did the Company utilize the contract?

14 A. Yes. As an example, Exhibit 5 to Company witness Ms. Hui Shu’s direct

15 testimony in the Company’s 2009 PCAM filing, shows the Company purchased

16 70,519 megawatt-hours of energy from APS for the 12-month deferral period

17 ended November 2009. Of that amount, 40,626 megawatt-hours were from APS

18 Other (the Company’s response to WIEC 1.30), for the 12-month deferral period

19 ended November 2009.

20 Q. What issue did WIEC raise regarding the APS Supplemental Other

21 contract?

22 A. In the Company’s 2009 GRC, WIEC argued that the Company was not required

23 to purchase the energy offered under the contract and should not do so unless it

Page 5 – Direct Testimony of Gregory N. Duvall


1 provided a net benefit to customers when modeled in GRID. APS Other’s

2 volumes were modeled in GRID by the Company based on historical usage. The

3 Company’s approach to modeling this contract assumed that the historical usage

4 of this contract would repeat itself in the future. By making this assumption,

5 WIEC pointed out that NPC increased due to the normalized modeling in GRID.

6 Q. Has the Company modified the modeling of the APS Supplemental contract

7 in the current filing?

8 A. Yes. The new approach to modeling this contract eliminates the increases to NPC

9 when the contract is dispatched. The Company has aligned the timing and pricing

10 of the deliveries with historic experience, rather than aligning the volume of

11 deliveries with historic volumes. GRID now exercises the call option on the

12 available energy only when it is economical to do so.

13 GRID Major Market Caps (c.) and Mona Market Cap (b.)

14 Q. What were the issues around the market caps?

15 A. The Company has modeled, in general, unlimited market depth in GRID for

16 system balancing sales and purchases. The only exception is that the Company

17 limits the market depth to reflect the illiquidity of the wholesale sales markets

18 during graveyard hours and in all hours for the illiquid market hub of Mona. It is

19 these limited exceptions that have been challenged by WIEC.

20 Q. Has the Commission ruled on this issue in the past?

21 A. Yes. The Commission approved the Company’s application of market caps in the

22 Company’s 2003 rate case. In paragraph 45(b) of the Commission’s February 28,

23 2004, Order in Docket No. 20000-ER-03-198, the Commission found that the

Page 6 – Direct Testimony of Gregory N. Duvall


1 Company’s “adjusted market cap provides increased accuracy in modeling

2 results.” The Commission rejected WIEC’s market cap adjustment because “it

3 produces results far in excess of actual average experience.” The Commission’s

4 decision in its 2004 order was based on testimony provided by Mr. Mark T.

5 Widmer, who was employed by the Company at the time, arguing that the

6 Commission should compare annual coal generation levels in GRID to the four-

7 year actual historic coal generation. As a consultant to WIEC in Docket No.

8 20000-352-ER-09, Mr. Widmer presented no new evidence to support a change of

9 Commission policy or in his position on this issue, except to say that he no longer

10 believed his previous position.

11 Q. WIEC claimed that historical information indicated higher volumes of actual

12 wholesale sales than what were modeled in GRID. How do you explain the

13 differences?

14 A. GRID is a “static” model that only addresses a known net open position. In actual

15 operations, once a known net open position has been determined, significant

16 variations subsequently occur in the net open position through the actual period as

17 a result of the large, uncontrollable and unpredictable volatility in both loads and

18 resources that occur simultaneously with large, uncontrollable and unpredictable

19 volatility in prices of natural gas and electricity. As a result, in actual operations

20 the Company continuously balances and re-balances its system and will make

21 more sales and purchases than what would occur in the “static” GRID model.

22 The only value that WIEC’s comparison added was to confirm that GRID

23 volumes are less than actual volumes due to the “static” modeling approach used

Page 7 – Direct Testimony of Gregory N. Duvall


1 in GRID.

2 Q. In Docket No. 20000-ER-03-198, what standard did the Commission use to

3 measure the reasonableness of the coal generation produced by the GRID

4 model?

5 A. The Commission compared the four-year actual historical coal generation to the

6 annual coal generation produced by the GRID model and found that the level of

7 coal generation modeled in GRID exceeded the actual four-year historical

8 generation.

9 Q. Have you made this same comparison in this case?

10 A. Yes. Figure 1 below shows the level of actual coal generation through December

11 2009 based on 12-month and 48-month rolling annual summary basis.

12 Q. Please summarize your observation from Figure 1.

13 A. The Company’s modeled results in GRID as filed in the 2009 GRC already over-

14 optimized coal generation. As shown in Figure 1, WIEC’s proposed level of coal

15 generation was significantly higher than any four-year average since 2000, and

16 exceeded the average generation of the same 48-month period that the unit

17 availability was based upon. This demonstrates that the limits on market depth

18 are necessary to prevent artificial increases in coal generation and an

19 understatement of NPC.

Page 8 – Direct Testimony of Gregory N. Duvall


Figure 1 Historical Coal Generation

46.5

46.0

Rolling 12-month Coal Generation


Average of Rolling 12-month Coal Generation
45.5
Rolling 48-month Coal Generation
WIEC Coal Generation
Company Coal Generation
Generation
'000 GWh

45.0

44.5

44.0

43.5

Month

1 Q. Are there any other aspects of WIEC’s adjustments that would increase the

2 coal generation further?

3 A. Yes. Because WIEC chose to make financial adjustments outside of GRID for its

4 daily screens (part of item (f.) that I address later), the coal generation in its NPC

5 calculation was still the result of the Company’s monthly screens. If WIEC were

6 to apply their daily screens directly in GRID, the coal generation in its final

7 proposal would be higher than the level shown above since the daily screens

8 reduce generation from gas-fired units and offset the lost generation with

9 increased generation from coal units.

Page 9 – Direct Testimony of Gregory N. Duvall


1 Q. How do you explain what WIEC claimed as understated coal generation

2 during graveyard hours by GRID and what Figure 1 show as overstated coal

3 generation in GRID?

4 A. Figure 1 depicts the total coal generation, including coal generation in all hours.

5 If GRID understated coal generation during graveyard hours, it overstated coal

6 generation during other hours. The non-graveyard hours have relatively higher

7 market prices, and as the result, GRID has overstated the benefits of the coal

8 generation and understated NPC.

9 Q. Has the Company made changes to its modeling of the limits on market

10 depth for both major markets and Mona market in the current filing?

11 A. Yes. Instead of specifying market depth for graveyard hours only, the Company

12 now proposes to specify market depth during all hours, segregated by heavy-load-

13 hour (“HLH”) and light-load-hour (“LLH”) periods. The market depths are

14 determined based on the historical short term firm transactions during the same

15 48-month period that the availability of the thermal generation is based on. The

16 depths are then reduced by the quantity of short term firm transactions that the

17 Company has entered into and included in the normalized NPC study for the test

18 period in all sales markets.

19 Q. What is the impact of this assumption?

20 A. Due to relaxed constraints for the graveyard hours, the modeled sales and coal

21 generation have increased during that period, while the impact on other hours is

22 limited.

Page 10 – Direct Testimony of Gregory N. Duvall


1 Q. Have you compared the coal generation using such limits on market depth

2 against the historical coal generation?

3 A. Yes. GRID continues to over-optimize the coal generation, including graveyard

4 hours. Table 1 below shows the coal generation on a HLH and LLH basis during

5 the four-year historical period and as modeled by GRID, where the “Filed”

6 columns show the amount of coal generation in the Company’s direct filing in the

7 2009 GRC, and “Modified” show the results of the same study but with market

8 depth modified as discussed above.

9 Table 1 Coal Generation (MWh)

2009 GRC 2009 GRC
HLH Actual Filed Modified LLH Actual Filed Modified
2005  25,527,104 2005  19,537,678
2006  25,147,950 2006  19,173,686
2007  25,845,119 2007  19,864,104
2008  26,018,756 2008  19,946,538
Average  25,634,732  26,150,951  26,033,566 Average  19,630,502  19,554,785  20,059,768

10 Q. Is the Company concerned with the over-optimized coal generation?

11 A. Yes. NPC and its components are volatile and inherently difficult to forecast.

12 Actual operation lacks the same certainty and perfect foresight as the optimization

13 model in regards to the variables and constraints, such as hourly load and market

14 prices, availability of generation and transmission facilities, and weather

15 conditions that impact the amount of hydro and wind generation. As a result, the

16 actual operation and dispatch of the Company’s resources may not necessarily

17 achieve what the optimization model projects. That said, given the inputs and the

18 assumptions, the Company believes that GRID reasonably simulates the operation

19 of the Company’s system and the overall NPC consistent with the optimization

20 logic that is built into GRID.

Page 11 – Direct Testimony of Gregory N. Duvall


1 Bear River Normalization (d.)

2 Q. What was the issue on the Bear River normalization?

3 A. The Company modeled the normalized generation from the Bear River system

4 based on history, excluding the flood control years. WIEC argued that the

5 Company should not have reduced hydro generation from the Bear River system

6 based on long-term drought conditions on the Bear River.

7 Q. Does the Company agree with WIEC’s argument?

8 A. No. The water available for generation at Bear River facilities is dependent on

9 contractually specified irrigation and flood control releases from Bear Lake.

10 Flood control on the Bear River is an operational constraint and releases of water

11 for flood control have not been available to the Company on the Bear River since

12 2001. The usual manner of normalizing hydro requires adjustments for operating

13 constraints.

14 Q. Please explain the contractual controls over discharges of water from Bear

15 Lake.

16 A. Those contractual controls include: (1) The 1958 Bear River Compact approved

17 by the United States Congress which prohibits the release of water from Bear

18 Lake solely for power generation below the irrigation reserve level of elevation

19 5,914.61 feet; (2) the 2000 “Operations Agreement for PacifiCorp's Bear River

20 System,” which requires that the Company operate Bear Lake primarily for

21 irrigation and flood control. This agreement was required by Idaho, Wyoming,

22 and Utah as a condition for approving MidAmerican Energy Holdings Company’s

23 acquisition of PacifiCorp; and (3) recently, the Company began modeling the

Page 12 – Direct Testimony of Gregory N. Duvall


1 impact of the new operating constraints required by the 2003 license for FERC

2 Project #20, including the Grace Plant on the Bear River system, which mandates

3 increased bypass flows below Grace dam for ameliorating fisheries and aquatic

4 issues and to provide recreation opportunities (for example, white water boating).

5 Water released into the river channel below the dam bypasses the turbine and

6 cannot be used for generation. This alone reduces total generation available from

7 the Bear River by an estimated 19,000 megawatt-hours.

8 Q. Please provide background on how the Company modeled Bear River

9 generation in the last case.

10 A. The dams on the Bear River have three potential sources of water for generation:

11 natural inflow, water withdrawn from Bear Lake to supply downstream irrigators,

12 and water withdrawn from Bear Lake for flood control purposes. The Company’s

13 operating agreements for the Bear River system referred to above prohibit the

14 Company from withdrawing water from Bear Lake for generation and flood

15 control purposes unless the lake elevation exceeds a certain level. For the past ten

16 years, and for the foreseeable future assuming median streamflow into Bear Lake,

17 this operational constraint has and will prevent the Company from operating the

18 Bear River system with flood control releases. The lake elevation was projected

19 to drop to about 5,908 feet during the time of the 2009 GRC proceeding, which

20 was 13 feet below the 5,921 feet elevation level that allows the Company to

21 release flood control storage. The lake elevation is projected to drop to about

22 5,910 feet at present, which is 11 feet below the 5,921 feet elevation level that

23 allows the Company to release flood control storage.

Page 13 – Direct Testimony of Gregory N. Duvall


1 The Company previously modeled the Bear River system using historical

2 normalized hydro generation for all three operational modes that included water

3 supply from natural run-off, irrigation deliveries, and flood control releases,

4 without considering the operational constraints around flood control operations.

5 After a careful review, the Company concluded that the flood control mode of

6 operation has now effectively become unavailable, and the Company has begun

7 accounting for this operational constraint in its rate filings and operations

8 planning by excluding the generation using the flood control water in its

9 normalized hydro generation.

10 Q. What has been the historical generation from the Bear River system?

11 A. Figure 2 below shows the actual generation from the Bear River system from

12 1979 to 2008 water year (October of the previous calendar year to September of

13 the current year), which was the base period applied in the 2009 GRC. The

14 unshaded bars identify the flood control years. It is clear that generation during

15 the flood control years is significantly higher than in non-flood control years. The

16 actual generation in 2009 and 2010 is also shown in Figure 2.

17 Q. How does the normalized hydro generation from the Bear River system

18 compare with actual generation?

19 A. Figure 3 below shows the comparison of historical generation that is unadjusted

20 for any known and measurable changes, such as rules and regulations, over the

21 years, normalized generation in the 2009 GRC as proposed by the Company and

22 by WIEC, and the most recent actual generation. It is clear that the normalized

23 generation in the Company’s 2009 GRC is more representative of the expected

Page 14 – Direct Testimony of Gregory N. Duvall


1 generation from the Bear River system.

2 Figure 2 Actual Generation from Bear River

3 Figure 3 Bear River Generation Comparison

350,000 

300,000 

250,000 

200,000 
MWh

150,000 

100,000 

50,000 


1979‐2008  1979‐2008  1979‐2008  2009  2009 WIEC  Water Year  Water Year 
Average Median Median, w/o  Wyoming  Adjusted 2009 Actual 2010 Actual
Flood  GRC
Control
September 2010 is preliminary.

Page 15 – Direct Testimony of Gregory N. Duvall


1 Q. What then is the consequence of adopting WIEC’s proposed adjustment for

2 Bear River normalization?

3 A. Adopting WIEC’s proposal would lead to overstating hydro generation and

4 understating NPC as a result of not incorporating this operational constraint in

5 normalizing historic generation.

6 Condit Hydro (e.)

7 Q. Besides the information that is requested by the Commission and is

8 addressed by Mr. Dickman, was there any other issue related to generation

9 from the Condit hydro facility?

10 A. WIEC proposed to include the Condit hydro facility in NPC for the entire test

11 year based on the belief that Condit was unlikely to be decommissioned in

12 October 2010, as reflected in the Company’s filed NPC in the 2009 GRC. To

13 minimize controversy, the Company has included Condit for the entire test year in

14 this filing. In the event that the Company received all the necessary permits for it

15 to begin the decommissioning process in time to decommission the plant by

16 October 2011, it will reflect this change in its rebuttal filing. This treatment would

17 ensure that customers are not charged for additional NPC when Condit is still

18 operating, and that the Company can recover the additional NPC incurred after

19 Condit is decommissioned.

20 STF Transmission Test Year Synchronization, HLH LLH EFOR + Other EFOR

21 Adjustments, Daily Screen Adjustment (f.)

22 Q. What are the issues in this paragraph of the Commission order?

23 A. There are three issues:

Page 16 – Direct Testimony of Gregory N. Duvall


1 • Consistency of modeling STF transmission between rate cases and avoided

2 costs;

3 • Modeling of thermal plant outages by time period; and

4 • Modeling of screens to address the commitment logic issue in GRID.

5 Q. Has the Company included STF transmission in its avoided costs filings the

6 same way as in the rate case proceedings?

7 A. Yes. The Company has included the STF transmission in its avoided costs studies

8 since 2009 in response to pricing requests from potential qualifying facilities, as

9 well as to update the Schedule 37 tariff rate for qualifying cogeneration and small

10 power production facilities.

11 Q. Were there any other issues related to the STF transmission modeling in the

12 Company’s 2009 GRC?

13 A. Yes. WIEC proposed to synchronize the availability and expenses of the STF

14 transmission by using the most recent one-year historical information.

15 Q. Why does the Company use the four-year average for availability and the

16 most recent year of data for costs?

17 A. The volume of STF transmission varies from year to year. The Company uses

18 four-year average availability to smooth such variation and to estimate the amount

19 of transmission that would reasonably be available in the test period, and uses the

20 most recent year of expense to capture the most recent costs associated with

21 acquiring transmission services from third-party transmission providers whose

22 tariff rates could update periodically.

Page 17 – Direct Testimony of Gregory N. Duvall


1 Q. What issues were raised related to modeling thermal plants’ forced outage

2 rates?

3 A. The Company modeled outage rates for its thermal generating units on an annual

4 basis based on four-year historical information. WIEC proposed that the

5 Company model forced outage rates with a HLH/LLH split. WIEC claimed that

6 this split matched the timing of outages in the 48-month historical period that the

7 Company used as the basis of the normalization in the 2009 GRC.

8 Q. Does the Company agree with such a proposal?

9 A. No. The outages that the Company models include forced outages/derates,

10 maintenance outages/derates, and planned derates. The forced outage/derates are

11 random events that could happen at any time. The maintenance outages/derates

12 and planned derates may be delayed to a later time.

13 Q. Has the Company made any changes to the modeling of outages in the

14 current filing?

15 A. Yes. In the current filing, the Company continues to model the outages on an

16 annual basis but with a weekday/weekend split. This is the method employed by

17 the Company in its other jurisdiction. It has explicitly been accepted by both the

18 Oregon and Utah commissions. Mr. Randall J. Falkenberg has agreed to the

19 Company’s modeling of outages using a weekday/weekend split in other

20 jurisdictions.

21 Q. What other problems does WIEC’s proposal of HLH/LLH split pose for

22 modeling outages?

23 A. WIEC’s proposal made an implicit and unlikely assumption that the Company

Page 18 – Direct Testimony of Gregory N. Duvall


1 would be able to resolve the outage problems during the eight-hour LLH period

2 each day, which could include ramping down the unit, cooling the components

3 and ramping the unit back up.

4 Q. Is there any other issue on the subject of modeling outages?

5 A. Yes. WIEC proposed that reserve shutdown hours should be added to the

6 denominator of the Equivalent Forced Outage Rate (“EFOR”) equation. This has

7 the effect of stating that the units would be available 100 percent of the time if

8 they were to be called upon to run during the hours when they were on reserve

9 shutdown for economic reasons. This assumption is unrealistic and has the effect

10 of artificially lowering the EFOR and lowering NPC. Mr. Falkenberg has agreed

11 to the Company’s modeling of reserve shutdown hours in other jurisdictions.

12 Q. What was WIEC’s support for their proposal?

13 A. WIEC’s support was based on a misleading citation of the Company’s testimony

14 in a docket in another jurisdiction. That testimony expressly addressed only the

15 modeling of peaking units. However, WIEC advocated a change in reserve

16 shutdown modeling for non-peaking units.

17 Q. Is the Company modeling the outages of the peaking units differently in the

18 current filing?

19 A. Yes. The Company uses EFORd for peaking units that considers the impact of

20 reserve shutdown by considering the time when the unit was on reserve

21 shutdowns.

22 Q. What were the issues related to daily screens?

23 A. In the 2009 GRC, the Company used the same monthly screening methodology

Page 19 – Direct Testimony of Gregory N. Duvall


1 that it used in the 2009 PCAM, based on the logic that WIEC proposed

2 previously. In their testimony in the 2009 GRC, WIEC proposed to switch to

3 daily screens.

4 Q. Does the Company agree to use daily screens?

5 A. Yes. However, the Company has modeled the daily screens in GRID as opposed

6 to WIEC’s adjustment that was done outside the GRID model.

7 Q. How does the Company model the daily screens in the current filing?

8 A. The Company models all the gas units to run starting at the beginning of the test

9 period, and then uses daily screen to turn them off if it’s not economical to run.

10 Once all other inputs have been set, final net power costs are determined after a

11 series of GRID runs to screen out the uneconomic commitment of gas-fired

12 plants. The screens are set in a manner that prevents the gas-fired plants from

13 being committed to run if they displace less expensive resources taking into

14 consideration of start-up costs and other operational constraints of starting up and

15 shutting down gas units.

16 2008 NF Transmission (g.)

17 Q. What was the non-firm (“NF”) transmission issue that the Commission

18 requested the Company to address?

19 A. The Commission requested the Company to demonstrate that the NF transmission

20 was appropriately excluded from the GRID model.

21 Q. How did the Company model the NF transmission in GRID in the past?

22 A. The Company excluded the NF transmission based on the understanding that the

23 amount of NF transmission, by its nature and definition, was difficult to

Page 20 – Direct Testimony of Gregory N. Duvall


1 accurately predict and model, and modeling such transmission as fully available

2 was contrary to normalization principles.

3 Q. Has the Company made any changes to its modeling of NF transmission in

4 the current filing and why?

5 A. Yes. The Company has included the NF transmission in the current filing in the

6 same way as for the STF transmission, both the capability and expenses.

7 Q. Please explain why the Company now treats the NF transmission the same as

8 the STF transmission.

9 A. In the process of reviewing how the Company has utilized NF transmission, it is

10 clear that the Company purchases and uses STF and NF transmission in the same

11 way. The transmission providers offer certain amounts of transmission capacity

12 as firm products, and the rest as non-firm. The only difference between the two

13 products is that NF transmission will be cut for reliability purposes first. The

14 Company purchases NF transmission in the same way as the STF transmission, so

15 the expenses are incurred whether the amount of transmission capacity purchased

16 is fully utilized or not. As the result, the Company has combined the STF and NF

17 transmission, and modeled all the short term transmission capability based on

18 four-year average of the historical purchases of transmission, and the expenses in

19 the base period of the current filing.

20 Start-Up Fuel Energy Value (h.)

21 Q. Please explain WIEC’s proposal for the value of start-up energy.

22 A. WIEC proposed that the Company include the energy associated with starting up

23 Currant Creek, Lake Side, and Chehalis in NPC because the fuel costs of start-ups

Page 21 – Direct Testimony of Gregory N. Duvall


1 are included in NPC.

2 Q. What other costs are incurred when starting up the gas-fired plants?

3 A. Start-up costs are not limited to fuel. In order to accommodate the start-ups of a

4 500 to 600-megawatt gas unit, the Company must re-dispatch the system. In

5 doing so, the Company incurs costs beyond what it would have incurred had the

6 start-ups not occurred. These costs could result from ramping down the lower-

7 cost hydro and thermal units to lower efficiency levels, and increasing generation

8 from higher-cost units prior to when they are needed. None of these costs are

9 included in GRID.

10 Q. Did WIEC’s proposal contain technical errors?

11 A. Yes. In calculating the value for the start-up energy, WIEC violated the

12 requirement of the minimum down time required for units to stay offline before

13 returning to service. This is due to the fact that GRID allows units to start

14 instantaneously. However, if startup energy is to be considered, the multi-hour

15 startup sequence must also be considered. The end result is that the units would

16 need to stay offline and be unavailable for a longer time in order for WIEC’s

17 adjustment to be even applicable. The prolonged downtime would lead to

18 increases in NPC by approximately $5.2 million from what the Company included

19 in the 2009 GRC on a total Company basis, which offsets the $2.6 million

20 assumed by WIEC as the value of the startup energy.

Page 22 – Direct Testimony of Gregory N. Duvall


1 Black Hills Sales Shaping, SMUD Shaping (i.)

2 Q. What were the adjustments that WIEC proposed to the modeling of Black

3 Hills sales and SMUD sales contracts?

4 A. WIEC proposed to substitute actual data for normalized data for the sales

5 contracts with Black Hills Power (“Black Hills”) and the Sacramento Municipal

6 Utility District (“SMUD”).

7 Q. Do you have any general comments about WIEC’s proposal?

8 A. Yes. For normalized purposes, the GRID assumes that the counterparties – who

9 control the call options on these two contracts - will maximize the value of the

10 contracts and take power at the most economical time. WIEC’s proposal

11 embodied an approach of optimizing flexible resources when it lowers NPC, and

12 not optimizing flexible resources when it raises NPC. It was based on the

13 assumption that the Company acts rationally and other companies act irrationally.

14 WIEC’s proposal violated any reasonable principles of consistency and fairness.

15 If NPC are to be set using an optimization model, then all resources and contracts

16 that are subject to being optimized should be optimized. This is the same

17 argument used by WIEC in their proposed treatment of the APS Supplemental

18 Other contract where they said that actual historic performance should be rejected

19 in favor of optimizing the contract in GRID.

20 Q. Please explain.

21 A. The proposed adjustment departs from modeling power costs on a normalized

22 basis. If this type of modeling adjustments were adopted, then consistency and

23 fairness require its application to all other flexible purchase or sale contracts that

Page 23 – Direct Testimony of Gregory N. Duvall


1 are modeled in a similar fashion to the SMUD and Black Hills contracts. For that

2 matter, it should also be applied to flexible generating resources. Optimization of

3 the Company’s system operations decreases NPC on a net basis. WIEC had not

4 proposed “de-optimization” across the board, which would increase NPC and

5 potentially undermine WIEC’s arguments on GRID commitment logic. Nor had

6 WIEC provided any justification for selective “de-optimization” of only two call

7 option sales contracts, rather than all purchase and sale contracts and flexible

8 generating units.

9 Q. Why is it important to treat third party contracts the same whether the

10 Company is selling or purchasing energy?

11 A. Use of any delivery patterns other than the optimized delivery patterns will

12 always lower net power costs for wholesale sales contracts with flexibility such as

13 the Black Hills and SMUD contracts. The opposite is true for purchased power

14 contracts that give the Company flexibility in how the power is taken. It is not

15 fair or consistent to normalize different contracts using different rules.

16 Q. How do you respond to WIEC’s argument that flexible wholesale sales

17 contracts should not be optimized because the Company has not modeled any

18 of the loads, constraints, or forward price curves used by the counterparties?

19 A. It is correct that the Company does not model the counterparties’ systems due to

20 the impossibility of obtaining the data that are proprietary to those counterparties.

21 However, given that the Company is only one of the many participants in the

22 market, the only assumption is to assume that all the participants in the same

23 market are rational and will exercise their rights to the flexible contract to lower

Page 24 – Direct Testimony of Gregory N. Duvall


1 their costs. This is confirmed by Black Hills Power, Inc. as presented on page 2

2 of Exhibit WIEC___(RJF-4) in the Company’s 2009 GRC proceeding, where it

3 states: “BHP will capture the maximum contract value by taking delivery of the

4 contract energy to serve load or facilitate market sales.” This is exactly what the

5 Company’s method of normalization captures, and what is demonstrated in

6 Exhibits RMP___(GND-1) through RMP___(GND-3). Exhibit RMP___(GND-1)

7 shows the actual delivery taken as a whole, and that the pattern of this energy

8 delivery may appear to be flat. However, looking at the same data, but by HLH

9 and LLH and by location where the energy was delivered in Exhibits

10 RMP___(GND-2) and RMP___(GND-3), it is clear that BHP exercised their

11 rights based on price signals from the market: taking more energy when and

12 where market prices were relatively higher.

13 Q. How is the SMUD contract structured?

14 A. In addition to the firm energy component that is modeled in GRID explicitly,

15 SMUD also has the right to take provisional power under the terms of the same

16 contract, which will be returned in full to the Company next year. For the

17 normalized calculation, the Company assumes the take and return of the

18 provisional power are equal and matching in the test period.

19 Q. Does the historical data display SMUD’s preference on when to take energy

20 under the contract?

21 A. Yes. When both of these are taken together, it is clear that SMUD intends to take

22 energy with preferences by season. Figure 4 below shows the monthly pattern of

23 the total firm and provisional sales in a four-year period.

Page 25 – Direct Testimony of Gregory N. Duvall


1 Based on the historical pattern, it would be reasonable to assume that

2 without the flexibility of the provisional portion of the contract, SMUD would

3 shape their take of the firm portion with a similar seasonal pattern. WIEC’s

4 proposal only considered the firm portion of the contract, and suggested that

5 SMUD would take more energy in spring than in fall as if SMUD would not have

6 considered their rights to the provisional energy.

7 Figure 4 Historical Shape of Energy Take by SMUD

80,000

70,000

60,000

50,000

40,000
MWh

30,000

20,000

10,000

Firm Sale Provisional Sale


8

9 Q. Does the Company model any contracts based on actual historical data?

10 A. Yes. The Company models non-flexible contracts, such as the ones with GP

11 Camas, Biomass, and small purchases, based on historical information because

12 none of these contracts provide the Company the kind of flexibilities that are

13 provided for under the terms of the call option sales contracts. Based on the

Page 26 – Direct Testimony of Gregory N. Duvall


1 principal of known and measurable information, the only information known to

2 the Company is the history of those contracts.

3 Black Hills Power CT Contract (j.)

4 Q. What issue did the Commission request the Company address about this

5 contract?

6 A. The Commission requested the Company explain how this contract was utilized.

7 Q. Is this contract used to serve the reserve requirements placed on the

8 Company?

9 A. Yes. Per the terms of the contract, the Company may use Black Hills’

10 combustion turbines to serve 100 megawatt of reserves. For such services, the

11 Company pays a monthly capacity charge plus a portion of the operation and

12 maintenance costs of the turbines.

13 Q. How did the Company model the payments in the GRID model, and has the

14 Company made any changes to the calculation?

15 A. In addition to the monthly capacity payment, the Company included the actual

16 payments for operation and maintenance in the last 12 months. Due to additional

17 maintenance work performed during 2008, the operation and maintenance for the

18 2009 GRC test period was relatively high. To smooth this lumpiness, the

19 Company has switched to using normalized operation and maintenance costs

20 based on the most recent 48-month average.

21 OATT Customer Wind Integration Costs (k.)

22 Q. What are the issues related to the OATT customers on wind integration?

23 A. WIEC argued that the Company should not include the wind integration costs

Page 27 – Direct Testimony of Gregory N. Duvall


1 incurred by providing wind integration services to the non-owned wind projects

2 because the Company does not have a transmission tariff to recover the costs from

3 those customers.

4 Q. Why doesn’t the Company charge generators for wind integration resources

5 such as the Stateline and Long Hollow wind facilities?

6 A. The Company could not charge wholesale transmission customers for this type of

7 service without FERC approval of a Company rate application proposing a new

8 wind integration charge. The Company is required by federal law to interconnect

9 with new facilities under the terms of its Open Access Transmission Tariff

10 (“OATT”). Once the Company interconnects a new facility to its transmission

11 system, it is responsible for integrating it into the system.

12 Q. Are there barriers to charging non-owned wind facilities for wind integration

13 costs?

14 A. Yes. Modifying the Company’s OATT to impose wind integration charges on

15 only non-owned wind facilities would violate the federal statutory mandate that

16 the Company treat all transmission customers, affiliated and non-affiliated, on a

17 not unduly discriminatory basis. In addition, there is little regulatory guidance

18 from FERC in this area with respect to what FERC will ultimately consider to be

19 an adequate proposal for a wind integration charge. Although FERC

20 conditionally accepted a proposal by Westar to add a new Schedule 3A charge,

21 whereby all variable generators located within Westar’s balancing area pay a

22 regulatory service fee for power exported outside of the balancing area, recently,

23 FERC rejected Puget Sound Energy’s proposed revision to its OATT to add a new

Page 28 – Direct Testimony of Gregory N. Duvall


1 charge applicable to all wind generators for wind integration within-hour

2 generation following service. In each case, wind industry advocates vigorously

3 protested the proposed tariff revisions because, among other protests, the

4 proposed charges constituted significantly higher regulatory service fees to

5 intermittent resources than for dispatchable resources.

6 Q. Does the Company plan to raise this issue in its next FERC rate case?

7 A. Yes. The Company plans to file a rate case with FERC no later than June 1, 2011,

8 in which the Company will include a proposed wind integration charge in its

9 transmission tariff rates pending any FERC guidance on the issue. The Company

10 completed a wind integration study in conjunction with its 2010 Integrated

11 Resource Plan and is in the process of reviewing comments from parties regarding

12 the study. It is hoped that the study can be used in the development of a wind

13 integration charge to be proposed to be added to the OATT, however, no

14 determination has yet been made. The Company is closely tracking all

15 developments at FERC related to wind integration and is bound to follow any

16 guidance FERC may issue in this regard.

17 Q. Are the costs associated with wind integration a prudent expense?

18 A. Yes. As a balancing area authority, the Company must operate its balancing area

19 by matching system resources to actual load and generation fluctuations on a

20 moment-to-moment basis through automatic generation control. Maintaining

21 system balance is one of the key functions of a balancing area authority and is

22 required to maintain system reliability, including maintaining system frequency.

23 Load fluctuations, outages, and generation output fluctuations all contribute to the

Page 29 – Direct Testimony of Gregory N. Duvall


1 need for balancing resources. The addition of renewable resources such as wind

2 has the tendency to increase the need for balancing resources.

3 Q. What are the benefits to the Company’s customers of providing such services

4 to the non-owned generation?

5 A. As a balancing area authority, the Company owns and operates an extensive

6 transmission network that it is required to operate safely and reliably for all of its

7 customers, keeping all resources and loads in balance on a moment-to-moment

8 basis. In addition, the Company is mandated to make its transmission network

9 available to all generators in an open access and non discriminatory fashion. By

10 providing wind integration services in addition to other transmission related

11 services as a balancing area authority, the Company ensures that its customers are

12 served by a reliable system, with diverse resources. Moreover, any transmission

13 revenues received from non-owned generation, which pays wheeling to the

14 Company, are credited against retail rates and therefore have the effect of

15 lowering retail rates.

16 Cholla Capacity Upgrade (l.)

17 Q. What was the issue around the capacity of Cholla Unit 4?

18 A. The Company upgraded the capacity of Cholla Unit 4 as the result of a major

19 overhaul in 2008. Due to transmission constraints, the generation from the Cholla

20 Unit 4 to the Company’s system has remained at the previous level. WIEC

21 argued that the upgrade should be reflected in GRID.

22 Q. Do you agree with WIEC’s argument?

23 A. No. First, the argument ignored the physical transmission constraints on delivery

Page 30 – Direct Testimony of Gregory N. Duvall


1 of power from Cholla. WIEC’s expected value mathematics incorporating the

2 modeling convention of derating for forced outages assumed that deliveries from

3 Cholla could exceed the physical transmission available at the point of

4 interconnection of Cholla with the transmission system. Second, WIEC has

5 increased transmission capacity to accommodate the increased generation from

6 Cholla Unit 4 without increasing any other costs related to that capacity. Third,

7 the purpose of derating the units for forced outages is to capture the lost

8 generation due to such outages, while WIEC’s proposal would suggest the lost

9 generation due to outages could be supplemented by the possible generation from

10 the unit that cannot be delivered to the system.

11 Minimum Loading Deration + Heat Rate Adjustment (m.)

12 Q. How does the Company apply the deration method?

13 A. The Company’s approach derates the maximum capacity of the unit in every hour

14 of the year by an equal percent based on historic forced outage rates, which

15 constitutes a “hair cut” in unit availability.

16 Q. How would WIEC’s proposal change this method?

17 A. WIEC’s approach would alter thermal units’ heat rate curves to artificially

18 increase their efficiency as compared with the heat rate curves that are developed

19 from actual plant operating data. In addition, WIEC proposed to reduce thermal

20 plant minimum generation levels so GRID can run thermal units at levels they are

21 physically incapable of reaching.

22 Q. Would WIEC’s proposed method significantly understate the heat rates?

23 A. Yes. The only time when the derate adjustment to the heat rate may be applicable

Page 31 – Direct Testimony of Gregory N. Duvall


1 is when the unit is dispatched at one particular level of generation – its derated

2 maximum capacity, with the assumption that the unit may be dispatched at its

3 stated maximum capacity in GRID if there were not the availability “haircut.”

4 When the unit is dispatched at any level below its derated maximum capacity,

5 GRID has made the optimal decision to dispatch that unit at a lower and less

6 efficient generation level, whether it has been derated or not. Therefore, derating

7 the entire heat rate curve overstates the efficiency of the unit and understates the

8 heat inputs.

9 Figure 5 and Figure 6 below show the heat rate curves under the methods

10 modeled by the Company and proposed by WIEC for a coal-fired unit and gas-

11 fired unit, from minimum to maximum generation level, with the assumed

12 generation levels superimposed on the heat rate curves that would be dispatched

13 under the Company’s methods. In both cases, there are many hours of dispatch

14 below the derated maximum capacity, which are the generating levels at which

15 WIEC’s proposal would understate the heat rate, and subsequently understate

16 NPC.

17 Q. Does this suggest that the Company should adjust the heat rates at least to

18 the derated maximum capacities of the units?

19 A. No. The Company uses the “haircut” to adjust down a unit’s capacity that is still

20 at a relatively efficient level. In actual operations, a unit can be derated to any

21 level between its minimum and maximum capacities.

Page 32 – Direct Testimony of Gregory N. Duvall


1 Figure 5 Heat Rate Curve (Coal Unit)
11,000

10,990

10,980
Minimum Capacity
10,970

10,960

10,950

10,940

10,930

10,920
Heat Rate Curve Maximum Capacity
10,910

10,900

10,890

10,880
Heat Input

10,870

10,860

10,850
Derated Capacity
10,840

10,830

10,820

10,810

10,800
WIEC Adjusted Heat Rate Curve
10,790

10,780

10,770

10,760

10,750
280 300 320 340 360 380 400

Generation Level

2 Q. Does it logically follow that the minimum generation level should be derated

3 because the maximum generating level is derated?

4 A. No. The purpose of the “haircut” to the maximum generating capability is to

5 reflect the amount of generation no longer available due to outages. That is fully

6 accomplished through the “haircut” to the maximum generating capacity.

Page 33 – Direct Testimony of Gregory N. Duvall


Figure 6 Heat Rate Curve (Gas Unit)
7,600

7,550 Heat Rate Curve


7,500

7,450 Maximum Capacity


7,400

7,350
Derated Capacity
7,300

7,250
Heat Input

7,200

7,150

7,100

WIEC Adjusted Heat Rate


7,050

7,000

6,950

6,900
Minimum Capacity
6,850

6,800
320 340 360 380 400 420 440 460

Generation Level

1 Q. Is it realistic to derate the minimum generation level of a unit for forced

2 outages?

3 A. No. The minimum generation level of a unit is based on its technical

4 specification below which it cannot operate. Reducing the minimum generation

5 level of units below their technical capability artificially increases the operating

6 range of each unit, thereby incorrectly reducing NPC. Because the Company has

7 over 30 thermal units, this can amount to a significant reduction to NPC that the

8 Company is simply not capable of achieving. The only statistical justification of

9 derating the minimum generation level may be when all outages are full outages

10 and there are no partial outages (derates), which is not true for the Company’s

11 fleet of resources.

Page 34 – Direct Testimony of Gregory N. Duvall


1 Q. Are the other problems with WIEC’s proposal?

2 A. Yes. WIEC proposed to treat the portion of the units that would not be available

3 due to outages as if they were owned by others. However, such a concept would

4 require the modeling of all aspects of the units in the same manner, including the

5 reserve capabilities of the units. In addition, in the case of outages, it is not

6 correct to assume that another entity owns the portion of the units that are forced

7 out. When GRID determines certain amount of generation from a unit, it does not

8 make the decision based on whether or how much the unit has been derated. That

9 is, for a unit with a capacity of 100 megawatts, when GRID dispatches the unit at

10 70 megawatts, it does not matter whether the unit has been derated by 20 percent

11 or not.

12 Q. WIEC compared actual heat rates to modeled heat rates. Is this a useful

13 comparison?

14 A. It is not an unreasonable comparison for coal plants that run at very high capacity

15 factors. However, for units that are flexible and can and do operate at various

16 operating levels and heat rates, the comparison becomes relatively meaningless.

17 The “normal” conditions under which the units operate can be quite different from

18 actual conditions, such as ambient temperature, quality of coal, and level of

19 dispatch due to availability or economics at the time of the actual operation.

20 Summary of Issues Identified in the Commission Order

21 Q. What conclusion do you draw from the discussion above?

22 A. I believe that the Company has provided sufficient explanations and additional

23 studies to address the issues identified by the Commission in Paragraph 176 of its

Page 35 – Direct Testimony of Gregory N. Duvall


1 order from the Company’s 2009 GRC. Out of all those issues that I discussed

2 above, the Company has agreed to or modified its modeling of:

3 • APS Supplement Other (a.)

4 • Mona Market Cap (b.)

5 • GRID Major Market Caps (c.)

6 • Condit Hydro (generation beyond the projected decommissioning date) (e.)

7 • Thermal outages with weekend/weekday split and EFORd for peaking units

8 (f.)

9 • Daily screens for commitment logic (f.)

10 • NF transmission (g.)

11 As an optimization model, GRID optimizes the dispatch of the Company’s

12 resources to meet its load requirements with given inputs, which are

13 approximation of actual operations based on various assumptions. Due to the

14 complexity of the actual operations of the Company system, the individual

15 components of the NPC may not match precisely what are in actual operations. It

16 is not appropriate to isolate those components and seek for further optimization

17 and ignore the interaction of the other components. A production cost model can

18 reasonably simulate NPC for a given net open position, but cannot reasonably

19 account for the significant variations that subsequently occur in the net open

20 position through the actual period as a result of the large, uncontrollable and

21 unpredictable volatility in both loads and resources that occur simultaneously with

22 large, uncontrollable and unpredictable volatility in prices of natural gas and

23 electricity. This is clearly demonstrated in the Company’s filings in the PCAM

Page 36 – Direct Testimony of Gregory N. Duvall


1 since its inception, where the Company’s actual NPC have been consistently

2 higher than what have been in rates, and such differences have exceeded the $40

3 million deadband and the first sharing band. As the result, the Commission

4 should consider whether the Company’s normalized NPC are reasonable by

5 focusing on the overall results from the GRID model and compared to actual

6 NPC.

7 Summary of Net Power Costs in the Current Filing

8 Q. What are the forecasted normalized system-wide NPC for calendar year

9 2011?

10 A. The Company’s total forecasted normalized system-wide NPC for the test period

11 of 12-months ending December 31, 2011, are approximately $1.377 billion on a

12 total Company basis, and $241.4 million on Wyoming allocated basis.

13 Determination of NPC and Model Inputs and Outputs

14 Q. Please explain NPC.

15 A. NPC are defined as the sum of fuel expenses, wholesale purchase power expenses

16 and wheeling expenses, less wholesale sales revenue.

17 Q. Please explain how the Company calculates NPC.

18 A. NPC are calculated for a future test period based on projected data using the

19 Generation and Regulation Initiative Decision model (“GRID”). GRID is a

20 production cost model that simulates the operation of the Company’s power

21 system on an hourly basis.

Page 37 – Direct Testimony of Gregory N. Duvall


1 Q. Is the Company’s general approach to the calculation of NPC using the

2 GRID model the same in this case as in previous cases?

3 A. Yes. The Company has used the GRID model to determine NPC in its Wyoming

4 filings for several years.

5 Q. Is the Company using the same version of the GRID model as used in its 2009

6 GRC?

7 A. Yes.

8 Q. What inputs were updated for this filing?

9 A. All input data have been updated since the 2009 GRC, which include system load,

10 wholesale sales and purchase contracts for electricity, natural gas and wheeling,

11 market prices for electricity and natural gas, fuel expenses, characteristics and

12 availability of the Company’s generation facilities.

13 Q. Was the transmission topology also updated for this filing?

14 A. Yes. I have discussed some of these changes in detail earlier in my testimony and

15 will further address changes to the transmission topology later in my testimony.

16 Q. What reports does the GRID model produce?

17 A. The major output from the GRID model is the NPC report. This is attached to my

18 testimony as Exhibit RMP___(GND-4). Additional data with more detailed

19 analyses are also available in hourly, daily, monthly and annual formats by heavy-

20 load hours and light-load hours.

Page 38 – Direct Testimony of Gregory N. Duvall


1 Changes in Net Power Costs

2 Q. Please describe the changes in net power costs forecasted in this case as

3 compared to net power costs in rates.

4 A. Based upon the Stipulation in Docket No. 20000-352-ER-09, system net power

5 costs in rates are approximately $1.003 billion. The Company’s forecast net

6 power costs in this case are higher by approximately $373 million on a total

7 Company basis, of which approximately $24 million is due to the stipulated

8 adjustments in Docket No. 20000-352-ER-09 that are not applicable to the current

9 filing.

10 Q. Please generally describe the drivers of the Company’s 2011 NPC in this

11 filing.

12 A. Besides the settlement adjustment of $24 million, the increase of $373 million

13 from what is currently in rates is driven by a range of factors, including increased

14 load, changes in the Company’s portfolio of wholesale purchase and sales

15 contracts, expiration of the long-term gas supply contracts for the Hermiston gas-

16 fired generating plant, and increases in coal costs. The offsetting factors that

17 drive NPC downward in 2011 include the addition of new transmission and

18 generation resources. Each of these factors is described below.

19 Major Cost Drivers in the Forecast 2011 NPC

20 Q. On a net basis, does the expiration and addition of power purchase and sale

21 contracts contribute to the NPC increase in this case?

22 A. Yes.

Page 39 – Direct Testimony of Gregory N. Duvall


1 Q. What are the major changes to power contracts in the calendar year 2011

2 test period?

3 A. The contracts that have expired or will expire, change or are new in the test period

4 include:

5 • On June 30, 2011, the exchange contract between the Company and the Alcoa

6 Power Generating Inc. (“APGI”) for approximately 100 megawatts of

7 capacity from the Rocky Reach project expires. Under this contract, the

8 Company receives energy during peak periods and returns energy during off-

9 peak periods.

10 • On October 31, 2011, the contract between the Company and the Chelan

11 Public Utility District (“Chelan PUD”) for generation from the Rocky Reach

12 project expires. Power purchased by the Company under this contract is

13 priced at the embedded cost of the project.

14 • On August 31, 2011, the contract between the Company and the Bonneville

15 Power Administration (“BPA”) for 575 megawatts of capacity expires. Under

16 this contract, the Company receives energy during peak periods and returns

17 energy during off-peak periods. In addition, power received under this

18 contract is delivered directly to a variety of the Company’s load pockets in the

19 western area at the Company’s discretion.

20 • On September 30, 2011, the contract between the Company and the Grant

21 Public Utility District (“Grant PUD”) for displacement generation expires,

22 which is priced at BPA’s Priority Firm Power (“PF”) rate.

23 • On December 1, 2010, the purchase contract between the Company and the

Page 40 – Direct Testimony of Gregory N. Duvall


1 Top of the World Wind Energy, LLC will take effect. This contract and the

2 procurement process are described in the direct testimony of Company

3 witness Mr. Bird.

4 • On January 1, 2011, the amount of sales to the Public Service Company of

5 Colorado (“PSCol”) reduces per the contract terms, which is a legacy sales

6 contract at relatively high contract prices.

7 Q. Has the Company made assumptions about the power rates and transmission

8 rates proposed in the current rate cases of the Bonneville Power

9 Administration (“BPA”)?

10 A. Yes. The current BPA rate cases are to determine the new rates for the fiscal

11 period beginning in October 2011. The transmission rates are estimated to

12 increase by approximately eight percent beginning in October 2011, and the

13 percentage change of the power rates are estimated to be in double digits. In the

14 current filing, the Company assumes that the wheeling expenses of the

15 transmission contracts that the Company has with BPA would increase by five

16 percent beginning in October 2011, and there would not be changes to BPA

17 power rates and wind integration charges because the impact is assumed to be

18 small due to limited number of contracts that between the Company and BPA.

19 Q. Does the Company expect to update the expenses related to all contracts with

20 BPA?

21 A. Yes. The Company will update its NPC on rebuttal with the final decision of the

22 BPA rate cases, or when better information becomes available.

Page 41 – Direct Testimony of Gregory N. Duvall


1 Q. Has the Company included in the current filing a contract that expires in the

2 test period?

3 A. Yes. The current contract between the Company and Monsanto for operating

4 reserve purchases expires at the end of 2010. Due to the nature of the contract, it

5 is likely that parties will enter into new contract for periods after the end of the

6 current contract. In this filing, the current terms of the contract are assumed to

7 continue. The Company will update to the terms of the contract when available.

8 The Company expects the Idaho Public Utilities Commission to rule on this issue

9 in February 2011.

10 Q. Have the Company’s coal costs impacted the NPC in the current proceeding?

11 A. Yes. NPC are higher due to increases in the costs of third-party coal supply and

12 transportation agreements, and cost increases at the Company’s captive mines.

13 Details on coal costs are provided in the direct testimony of Company witness Ms.

14 Cindy A. Crane.

15 Q. How does the retail load forecast impact the Company’s NPC?

16 A. This filing reflects an increase of approximately 5.7 percent in the total Company

17 load forecast compared to loads reflected in the 2009 GRC. All else held

18 constant, increased load increases NPC, which in this case increased NPC by

19 approximately $91 million. For further details on the load forecast, please refer to

20 the testimony of Company witness Dr. Peter C. Eelkema.

21 Q. How does the expiration of the long-term contracts to supply natural gas for

22 the Hermiston plant impact NPC?

23 A. The expiration of the long-term natural gas contracts for Hermiston increases

Page 42 – Direct Testimony of Gregory N. Duvall


1 NPC. The long-term contracts supplying natural gas for the Hermiston plant were

2 entered into in 1996, when the prices for natural gas were low.

3 Q. Has the Company changed its topology modeled in GRID?

4 A. Yes. To assure the reliability of the transmission network in the area governed by

5 the Western Electricity Coordinating Council (“WECC”), the constraint in the cut

6 plane named Tot 4A in Wyoming has been redefined by PacifiCorp Transmission

7 and approved by WECC. As a result, the previously modeled transmission areas

8 of “Wyoming NE” and “Wyoming SW” in GRID have been redefined. In

9 addition, because of constraints that are present in the previous “Wyoming SW”

10 transmission area, a “Trona” transmission area has been added to the topology to

11 reflect such constraints.

12 Q. Does the Company model the impact of the Populus to Terminal

13 transmission addition?

14 A. Yes. As discussed in Mr. John A. Cupparo’s testimony, the Populus to Ben

15 Lomond transmission line is a section of the Company’s comprehensive

16 transmission expansion plan known as “Energy Gateway.” The initial benefit of

17 the section to customers is to enhance reliability and improve transfer capability

18 within the existing system. In addition, the Populus to Ben Lomond transmission

19 line increases Company’s rights to the transmission capacity across Path C from

20 southeast Idaho to northern Utah by approximately 650 megawatts, which makes

21 it possible to better utilize the market price differentials between the east and west

22 sides of the Company’s system. For further details, please refer to the testimony

23 of Company witnesses Mr. Cupparo and Mr. Darrell T. Gerrard.

Page 43 – Direct Testimony of Gregory N. Duvall


1 Q. Are NPC increases also partially offset by the inclusion of additional wind

2 resource during calendar year 2011?

3 A. Yes. The generation from the 111-megawatt Dunlap I wind resource located in

4 Wyoming is included in the 2011 NPC. For further details on these resources,

5 please refer to the testimony of Company witness Mr. Bird.

6 Q. Does the Company have a new wind integration study?

7 A. Yes. As part of the 2010 Integrated Resource Plan (“IRP”), the Company

8 performed an extensive study on the impact of integrating wind generation into its

9 resource portfolio. The study was constructed after reviewing the issues and

10 concerns raised by various parties, such as whether the wind integration costs

11 should be studies independent of load, amount of additional reserves needed to

12 integrate the wind generation and what resources should be utilized to serve the

13 additional reserve requirements.

14 Q. Could you briefly describe the Company’s new wind integration study?

15 A. Yes. The purpose of the 2010 wind integration study (“Wind Study”) is twofold.

16 First, the Wind Study quantifies how wind generation affects the amount of

17 additional reserves needed to maintain reliability. Second, the Wind Study

18 determines the costs of integrating wind generation by measuring how system

19 costs change with changes in operating reserve demand, and by measuring how

20 system costs are affected by daily system balancing practices.

21 Q. What are the additional reserve requirements?

22 A. The Wind Study identified additional reserve requirements in two categories:

23 regulating services that deal with load and wind variability in 10-minute interval,

Page 44 – Direct Testimony of Gregory N. Duvall


1 and load following services that deal with load and wind variability over hourly

2 time intervals. Both services should respond to the up variations and down

3 variations. That is, the additional reserve requirements to integrate wind

4 generation into the Company’s resource portfolio take on the forms of regulation

5 up, regulation down, load following up and load following down. The Wind

6 Study performed analyses of additional reserve requirements for load only

7 (excluding wind generation) and for wind net of load (including wind generation),

8 based on historical 10-minute data for the Company’s system.

9 Q. Besides providing regulating services and load following services, what other

10 costs are incurred to integrate the wind generation?

11 A. Given the size of the wind portfolio, and the possibility of rapid variations in wind

12 generation from the forecast displayed in the historical actual operation, the

13 Company expects that it will need to continue committing its gas units

14 uneconomically to be able to quickly respond to the magnitude of changes. In

15 addition, the Wind Study has also estimated the system balancing costs that are

16 driven by day-ahead forecast errors for wind and load.

17 Q. What are the costs identified by the Wind Study?

18 A. The Wind Study shows that the costs of integrating wind generation into the

19 Company’s resource portfolio (regulation and load following services, system

20 balancing and the requirement of must-run) for the three-year period from 2011 to

21 2013 are $9.70 per megawatt-hour at the wind generation penetration level of

22 1,833 megawatt which is the level of wind currently in the Company’s balancing

23 areas.

Page 45 – Direct Testimony of Gregory N. Duvall


1 Q. How did the Company apply the results from the Wind Study?

2 A. Instead of applying the dollar per megawatt-hour charge to the wind generation,

3 the Company updated the amount of load following requirement as modeled by

4 GRID to capture the impact of regulation up and load following up, both of which

5 are identified in the Wind Study. The assumption is that if the resources are

6 sufficient to serve the regulation up and load following up, they may be sufficient

7 to serve the regulation down and load following down. The amount of the total

8 load following requirements is based on the wind penetration level at 1,833

9 megawatts, which are 337 average megawatts and 196 average megawatts for the

10 east and west sides of the Company’s system, respectively. In addition, as

11 identified in the Wind Study, the Company also modeled the Currant Creek unit,

12 and Gadsby units 4, 5 and 6 as must-run units that do not subject to the logic of

13 being committed to run only when economic.

14 Q. Does the Company include an inter-hour or system balancing costs?

15 A. Yes. The Company modeled $0.72 per megawatt-hour costs as indentified in the

16 Wind Study for 2011 to account for the impact of day-ahead forecast errors.

17 Q. Do you believe that the Company reasonably modeled the Wind Study

18 results in GRID for the current filing?

19 A. Yes. Given the complexity of the subject, I believe that the result from GRID has

20 reasonably reflected the impact of integrating wind generation into the

21 Company’s portfolio. In addition, the Wind Study has addressed all the issues

22 raised by WIEC and Interwest Energy Alliance in the Company’s 2009 GRC,

23 such as reserve requirements being modeled within GRID, the requirements for

Page 46 – Direct Testimony of Gregory N. Duvall


1 wind generation being considered net of wind, and quality of data. However, also

2 given the limitation of data inputs to the normalized studies, I believe that the

3 GRID modeled impact of integrating wind resources tends to understate the real

4 costs, such as the GRID model uses expected wind profiles of the wind projects

5 that lack the variability reflected in the actual operations of the wind projects.

6 Q. What does the Company include as the inter-hour wind integration costs for

7 the non-owned wind projects, and the overall wind integration costs for

8 projects located in the BPA’s balancing area?

9 A. The forecast NPC in the current filing does not include inter-hour integration

10 costs for the wind projects located in the Company’s balancing areas that the

11 Company neither owns nor purchases the output based on the assumption that the

12 entities owns and/or operates those wind projects will provide the inter-hour wind

13 integration services prior to handing over their generation schedule to the

14 Company who balances the variations within the hour as the balancing area

15 authority. Following the same logic, in addition to calculate the intra-hour wind

16 integration costs based on the current BPA tariff rate, the forecast NPC includes

17 inter-hour wind integration costs for projects located in the BPA’s balancing area:

18 Leaning Juniper and Goodnoe Hills.

19 Q. Do you believe that the GRID model appropriately reflects the Company’s

20 forecasted net power costs over the test period?

21 A. Yes. The GRID model reasonably simulates the operation of the Company’s

22 system load and resource portfolio consistent with the Company’s operation of its

23 system including operating constraints and requirements. As describe previously,

Page 47 – Direct Testimony of Gregory N. Duvall


1 GRID produces a reasonable forecast based on “static” assumptions which will

2 not be the same as the actual NPC incurred by the Company in the rate-effective

3 period.

4 Q. Does this conclude your direct testimony?

5 A. Yes.

Page 48 – Direct Testimony of Gregory N. Duvall