ORDER NO. 97-422

ENTERED OCT 31 1997

This is an electronic copy. Appendices not included.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

LC 18

DISPOSITION: PLAN ACKNOWLEDGED

On February 14, 1997, WP Natural Gas (WPNG or the company), a division of The Washington Water Power Company (WWP), filed its integrated resource plan (IRP) in accordance with Public Utility Commission of Oregon (Commission) Order No. 89-507. WPNG held technical conferences prior to filing its plan. A summary of those activities is contained in Appendix A.

Staff's informal discussions with WPNG, during June of 1997, resulted in a schedule for this proceeding. The schedule established dates for petitions to intervene by interested persons, for written comments by parties, and for company presentations at public meetings. Staff briefed the Chairman of the Commission on the company’s integrated resource plan on September 4, 1997. Staff circulated a draft proposed order recommending that the Commission acknowledge WPNG's plan on August 5, 1997. WPNG, by letter dated August 7, 1997, accepted the proposed order as presented. Staff’s final proposed order was distributed August 26, 1997. At a public meeting on September 30, 1997, the Commission considered and adopted staff's final proposed order.

PROVISIONS OF THE PLAN AND COMMENTS

WPNG'S Least-Cost Plan

WPNG's least-cost plan (LCP, IRP or the plan) for Oregon is one section in WWP’s document titled, 1997 Natural Gas Integrated Resource Plan. The entire document was submitted to both the Oregon and Washington commissions. The document summarizes the resource decision making process, its conclusions, and two-year action plan. Technical appendices, modeling exhibits, and a glossary provide detailed supporting documentation.

WPNG's 1997 IRP describes the basic components of the company's planning process. The planning process includes a forecast of its future market demand, assessments of demand-side and supply-side resource options, analysis and selection of resource options for meeting future needs, and identification of actions required in the next two-year period to carry out the company's resource strategy.

Forecast. WPNG's medium growth demand forecast is the company’s best estimate of future core market firm energy resource requirements over the twenty-year planning horizon. The forecast provides the basis for company revenue budgeting, supply planning activities, and integrated resource planning efforts. It is based on projected economic trends for the region, anticipated gas prices, expected population growth patterns, and estimated usage patterns of large industrial and commercial customers. This year, the company applied the low and high gas consumption forecast ranges developed in the 1995 Plan to derive high and low expected range variations to its preferred forecast scenario. As a result, WPNG believes the medium growth forecast scenario is the most likely to occur. Under this scenario, the company expects sales to firm residential customers to grow by 3.69% per year, and sales to firm commercial customers to grow by 2.77% per year. WPNG expects that sales to the firm industrial class will grow by 1.84% per year in the planning period. WPNG’s Two-Year Action Plan includes several forecasting refinements.

Demand-Side Resources. WPNG's IRP presents an overview of its 1995 demand-side management (DSM) Two-Year Action Plan accomplishments and existing DSM programs. The company will continue to fund its market transformation programs at or near 1995 and 1996 historical levels. Also, WPNG is working to improve program efficiencies by reducing the administrative costs of the state-mandated programs. One important component of WPNG’s 1997 two-year action plan is a collaborative study to determine appropriate long-term levels of utility energy efficiency expenditures.

DSM’s Impact on Small Businesses. The company's IRP discusses how its DSM measures and programs will be provided through the private sector. The company states: "the primary means of delivery of programmatic energy efficiency services is through the private sector" and finds that its programs do not negatively impact small businesses within the company’s service area. While utility staff administer the programs, all installation and other direct services for the customer are performed "by independent businesses in the energy management field." This addresses the concern expressed in Section 303 of the Energy Policy Act of 1992 of the potential impact that utility integrated resource planning and DSM activities could have on small businesses.

Supply-Side Resources. WPNG employs traditional supply-side options such as storage and flowing gas supplies through interstate pipelines. WPNG contracts with Northwest Pipeline Corporation (NPC) for interstate pipeline transportation into the WPNG service areas. WPNG also contracts with NPC for Jackson Prairie storage and Plymouth LNG. Jackson Prairie Storage is an underground storage project located next to NPC’s mainline near Chehalis, Washington. Plymouth LNG is a liquefied natural gas storage facility located next to NPC mainline near Plymouth, Washington. WPNG contracts with Pacific Gas Transmission (PGT) for interstate pipeline transportation to Medford which commenced November 1995. With the availability of PGT’s Medford extension, WPNG released some of its NPC capacity to mitigate the effects of straight fixed variable ratemaking required by the Federal Energy Regulatory Commission (FERC) in Order 636. The company’s strategy is to contract for a reasonable amount of firm transportation to serve firm customers should a design peak day occur in about a seven- to ten-year period. From the company perspective, too much firm transportation could impair their goal of being a low-cost energy provider, but with the increasing ability to do capacity releases, this is minimized. On the other hand, too little firm transportation impairs the company’s ability to be a reliable energy provider. According to its two-year action plan, WPNG expects to increase annual gas purchases, instead of winter only purchases.

Environmental Externality Costs. Consistent with OPUC Order No. 93-695, WPNG’s plan includes an analysis to consider the impact of environmental externality costs in planning for future energy resources. The company’s analysis includes a range of potential cost impacts that range from $0.06082 to $0.24166 per therm based on the emission cost adders specified in the OPUC Order. This analysis considers the natural gas environmental cost impacts from emitting carbon dioxide, nitric oxide, carbon monoxide, and methane.

Integration Strategies. WPNG's integrated resource portfolio, developed using the company's SENDOUT model, indicates: DSM options are an important resource but do not have significant volume impacts in the forecast period due to cost-effectiveness considerations; Alberta supplies via PGT firm transportation are taken at a very high level, with swings coming from supplies via NPC; and PGT firm transportation will provide the additional capacity needed by the WPNG system for load growth into the next decade. The company’s resource strategy implements DSM measures it has proposed and budgeted; continues diversification of its firm transportation sources by increasing its supply access via firm PGT and NWP transportation; and pursues capacity releases of firm transportation, as long as ten years out for new annual releases and for multiple years for non-winter releases.

Two-Year Action Plan. WPNG's Two-Year Action Plan describes the actions the company will take in 1997 and 1998 to implement its resource strategy and accomplish its goal of meeting customers’ needs for low-cost and reliable gas services. WPNG will focus on five primary areas to further its objective of integrating the company's operations with its resource planning process: forecasting, modeling, supply/capacity activities, demand-side activities, and distribution planning. Forecasting and modeling tasks include: examining economic drivers of gas price and the volatility of gas price, evaluating cost impacts on demand elasticity, evaluating impacts of consumer choice pilot programs on system planning, collaborating with Electronic Data Systems Corporation (EDS) on software improvements to the gas resource optimization model, and increasing the use of the resource optimization model as a decision aid for gas operations. Supply-side/capacity tasks include increasing the load factor on swing or peak supply contracts, exploring more cost-effective ways to utilize Jackson Prairie and Plymouth LNG storage, exploring capacity releases, exchanges, and off-system sales to lower core customers’ gas costs, and exploring the use of financial hedging. The DSM action items include working with staff to determine long term levels of utility energy efficiency expenditures, and, along with the DSM Advisory Group, proceeding with impact and process evaluations. Distribution planning tasks include Stoner systems flow modeling to evaluate the impacts of geographically targeted DSM programs on selected Oregon distribution nodes. In addition to these primary tasks cited in WPNG's Two-Year Action Plan, Commission staff recommended, and the company has agreed, that WPNG will brief staff by summer 1998 on alternative resource selections that compete with the increasing reliance on spot resources for the 2002-2006 time period. Finally, the company’s two-year action plan discusses the steps WPNG will take to keep the Commission, staff, and its customers abreast of the activities the company will pursue in the next two years.

Comments of the Parties

The Commission staff developed extensive comments on the company’s draft integrated resource plan submitted in October 1996, and developed draft recommendations on the company’s final IRP which were distributed to all parties on April 11, 1997. WPNG responded affirmatively to staff’s recommendations on April 24, 1997. Even though parties have been given notice of Staff’s activities during the development of this IRP, other parties’ participation has been absent.

Commission Staff Comments. As a result of the company’s cooperative approach to resource planning and its resolution of all of the substantive issues prior to filing its final integrated resource plan submitted in February 1997, staff makes only one suggestion for modification to the company's IRP. On August 5, 1997, staff distributed its recommendation that the Commission acknowledge WPNG's IRP if the company makes the modification discussed below:

Staff Briefing on Spot Gas Supplies. WPNG must add an action item to its Two-Year Action Plan which states, "The company will brief staff by summer of 1998 on alternative resource selections that compete with the increasing reliance on spot resources for the 2002-2006 time period." Staff believes it is prudent to begin examining alternative resources that may be more least cost than potentially high cost spot market prices in 2002. Rather than maintain a high level of uncertainty tied to future spot markets for this segment of the resource portfolio, Staff seeks to reduce that uncertainty sooner by examining other potential least cost options.

WP Natural Gas. On August 7, 1997, WPNG accepted the recommendation of the Commission staff, as set forth above. (WPNG's letter is attached as Appendix B). In its letter, the company stated that it "has a corporate commitment to integrated resource planning and has dedicated significant resources to make the resulting plan meaningful and consistent with all company planning, including forecasting and budgeting." The company expressed its view that this plan is a snapshot of a dynamic and ever changing operating environment In addition, the company’s letter describes how its IRP complies with the requirements of Order No. 89-507.

OPINION

Jurisdiction

WPNG is a public utility in Oregon, as defined by ORS 757.005, which provides natural gas service to or for the public.

On April 20, 1989, pursuant to its authority under ORS 756.515, the Commission issued Order No. 89-507 in Docket UM 180 adopting least-cost planning for all energy utilities in Oregon.

Requirements for Least-Cost Planning under Order No. 89-507

Order No. 89-507 establishes procedural and substantive requirements for least-cost planning and requires the Commission's acknowledgment of plans that meet the requirements of the order.

Procedural requirements. At a minimum, the least-cost planning process must involve the Commission and public prior to making resource decisions rather than after the fact. See Order No. 89-507 at 3.

WPNG sought public input during the planning process by informing the general public and customers about its planning process and by conducting technical conferences on the plan. The company's technical advisory group, consisting of representatives from other utilities, regulatory agencies, and the public, provided input on planning assumptions, energy resource options, and future scenarios that influence the demands for and supply of energy. The company distributed a draft plan for comment before developing and submitting the final plan to the Commission. Appendix A reflects these activities.

Substantive requirements. The substantive requirements were also set forth in the order as follows:

1. All resources must be evaluated on a consistent and comparable basis.

2. Uncertainty must be considered.

3. The primary goal must be least cost to the utility and its ratepayers consistent with the long-run public interest.

4. The plan must be consistent with the energy policy of the state of Oregon as expressed in ORS 469.010.

Order No. 89-507 at 7.

Evaluation of Resources. WPNG's IRP evaluates both supply- and demand-side resources consistently and comparably over time. Nearly 100 linear programming model runs were completed to evaluate resource scenarios for the company's plan and related gas operations. In addition, the company has included estimates of potential costs for environmental externalities consistent with Order No. 93-695, issued May 17, 1993, regarding the treatment of external environmental costs. The company also applied the same discount rate to costs for both demand- and supply-side resources. We conclude that WPNG satisfactorily complied with this requirement for purposes of this plan.

Uncertainty. WPNG's IRP planning approach addressed both uncertainty in demand and uncertainty in resource availability. The company considered uncertainty in demand by developing a range of demand forecasts. The forecasts include a medium case as well as high and low load growth scenarios. These scenarios reflect a range of possible economic and weather events which may affect customer demand. Other factors considered by the company to address planning uncertainty include customer price sensitivity, environmental externalities, changes in financial condition, pricing of alternative fuels, and the effects of changing public policy.

A gas utility's primary source of traditional supply is a flowing gas supply that is transported using interstate pipeline capacity. The cost and availability of pipeline capacity, however, is dependent on the actions of third party pipelines, other project sponsors, government agencies, and other market participants. The actions of these parties represent an element of uncertainty that is difficult to quantify for planning purposes. For example, WPNG's IRP describes uncertainty generated by FERC Order No. 636 and how it influenced the company's current resource decisions. We are satisfied that WPNG's IRP is sufficiently flexible to allow the company to respond to the uncertainties identified in the planning process.

Primary Goal of Plan Must Be Least Cost. The objective of least-cost planning is to plan for resources that both meet the needs of the utility's customers and minimize total system costs over the long term. WPNG has set forth its integrated resource plan goals to "properly balance the need to be a reliable" and "low-cost provider of energy." WPNG realizes that to be successful it must not only plan for, but implement, a least cost resource path, and believes that its 1997 IRP assists the company in meeting the reliability expectations of its customers at competitive prices. Based on the company’s analysis and its commitment to continue to develop and utilize the optimization modeling capability it has acquired, we are satisfied that WPNG has met this requirement for purposes of this integrated resource plan.

Consistency with Oregon's Energy Policy. The Legislature mandated certain energy-related goals in ORS 469.010. These goals relate primarily to the development of sustainable energy resources. WPNG's plan is consistent with these goals. WPNG has included conservation resources in its resource acquisition plan. The company believes that the supply- and demand-side "resources in the plan provide economic and environmental benefits to the citizens of Oregon." In addition, the company has indicated it will continue to assess the potential for additional residential, commercial, and firm industrial DSM programs.

Commission Decisions on Parties' Comments

Staff's final recommendation document contained one specific recommendation related to WPNG's Two-Year Action Plan and Commission acknowledgment of WPNG's plan. WPNG has agreed to the recommendation in staff's memo. The Commission believes that the recommendation and compliance dates proposed by staff, and agreed to by the company, are reasonable. We adopt that recommendation.

Conclusion

Based on review of WPNG's planning efforts and the company's August 7, 1997, agreement to the recommended modification included in this order, WPNG's 1997 Natural Gas Integrated Resource Plan is acknowledged. WPNG's IRP meets the minimum substantive and procedural requirements of Order No. 89-507. Achievement of the objectives in the company's 1997-1998 Action Plan and the Commission recommendation will enhance the company's efforts in the development of future integrated resource plans and assist the company in remaining a reliable and low-cost provider of natural gas service over the twenty-year planning horizon.

EFFECT OF THE PLAN ON FUTURE RATEMAKING ACTIONS

Order No. 89-507 sets forth the Commission's role in reviewing and acknowledging a utility's LCP or least-cost plan, as follows:

The establishment of least-cost planning in Oregon is not intended to alter the basic roles of the Commission and the utility in the regulatory process. The Commission does not intend to usurp the role of utility decision-maker. Utility management will retain full responsibility for making decisions and for accepting the consequences of the decisions. Thus, the utilities will retain their autonomy while having the benefit of the information and opinion contributed by the public and the Commission.

*****

Plans submitted by utilities will be reviewed by the Commission for adherence to the principles enunciated in this order and any supplemental orders. If further work on a plan is needed, the Commission will return it to the utility with comments. This process should eventually lead to acknowledgment of the plan.

Acknowledgment of a plan means only that the plan seems reasonable to the Commission at the time the acknowledgment is given. As is noted elsewhere in this order, favorable rate-making treatment is not guaranteed by acknowledgment of a plan. Order No. 89-507 at 6 and 11.

This order does not constitute a determination on the ratemaking treatment of any resource acquisitions or other expenditures undertaken pursuant to WPNG's 1997 IRP. As a legal matter, the Commission must reserve judgment on all rate-making issues. Notwithstanding these legal requirements, we consider the integrated resource planning process to complement the ratemaking process. In ratemaking proceedings, in which the reasonableness of resource acquisitions is considered, the Commission will give considerable weight to utility actions which are consistent with acknowledged integrated resource plans. Utilities will also be expected to pursue unanticipated least-cost opportunities beneficial to ratepayers which arise after Commission acknowledgment or, alternatively, explain why such opportunities were not pursued.

CONCLUSIONS

1. WPNG is a public utility subject to the jurisdiction of the Commission.

2. WPNG's 1997 Natural Gas Integrated Resource Plan, with the modification adopted herein, reasonably adheres to the principles for least-cost planning set forth in Order No. 89-507. The plan will assist in ensuring that WPNG's customers receive adequate service at fair and reasonable rates and is otherwise in the public interest.

ORDER

IT IS ORDERED that the 1997 Natural Gas Integrated Resource Plan filed by WP Natural Gas, on February 14, 1997, as modified herein, is acknowledged in accordance with the terms of this order and Order No. 89-507.

Made, entered, and effective ________________________.