Grace HuGrace Hu

Chief EconomistChief Economist

District of Columbia Public Service District of Columbia Public Service CommissionCommission

Thimpu, BhutanThimpu, Bhutan

October 7, 2002October 7, 2002

Least Cost PlanLeast Cost Plan& Electric Restructuring& Electric Restructuring

The Public Service CommissionThe Public Service Commission

The Public Service Commission of The Public Service Commission of the District of Columbia was the District of Columbia was established by Congress in 1913 as established by Congress in 1913 as an independent District an independent District Government agency to regulate Government agency to regulate the electric, gas and telephone the electric, gas and telephone companies in the District.companies in the District.

Check Check www.dcpsc.orgwww.dcpsc.org for more infor. for more infor.

Type of ProceedingsType of Proceedings

• (1) Formal Litigation(1) Formal Litigation– (a) Company’s Application(a) Company’s Application– (b) Notice of Intervention(b) Notice of Intervention– (c) Pre-hearing conference(c) Pre-hearing conference– (d) Order designates issues based on pre-hearing conference(d) Order designates issues based on pre-hearing conference– (e) Company’s Direct Testimony(e) Company’s Direct Testimony– (f) Intervener's Direct Testimony(f) Intervener's Direct Testimony– (g) Rebuttal Testimony(g) Rebuttal Testimony– (h) Pre-hearing briefs(h) Pre-hearing briefs– (i) Post-hearing briefs(i) Post-hearing briefs– (j) Commission Order (j) Commission Order

Type of Proceedings (Cont.)Type of Proceedings (Cont.)

• Rate case needs to be finished in 9 months. Rate case needs to be finished in 9 months. Both PSC hearings and community hearings Both PSC hearings and community hearings were conducted.were conducted.

• (2) Paper Proceedings(2) Paper Proceedings– CommentsComments– Reply CommentsReply Comments– Commission OrderCommission Order

Type of Cases on the Energy Type of Cases on the Energy SideSide

• (1) Rate Case(1) Rate Case

• (2) Least Cost Plan Case(2) Least Cost Plan Case

• (3) Industry Restructuring Case(3) Industry Restructuring Case

• (4) Merger Case(4) Merger Case

• (5) Tariff Update(5) Tariff Update

Conserve kWhConserve kWhPEPCO’s Least Cost PlanPEPCO’s Least Cost Plan

• Purpose of the PlanPurpose of the Plan– An integrated least-cost resource planning strategy An integrated least-cost resource planning strategy

requires the utility to consider all feasible demand-side requires the utility to consider all feasible demand-side options for implementation in this jurisdiction, to weigh options for implementation in this jurisdiction, to weigh these options against supply-side options and to develop a these options against supply-side options and to develop a plan which contains the most cost-effective strategies for plan which contains the most cost-effective strategies for the utility and its customers.the utility and its customers.

– The Plan considers possibilities of conserving energy, The Plan considers possibilities of conserving energy, generating and transmitting power, cutting costs, serving generating and transmitting power, cutting costs, serving customers and protecting the environment. This long-customers and protecting the environment. This long-term plan will meet customers’ growing needs at the term plan will meet customers’ growing needs at the lowest costs.lowest costs.

– See Appendix 1, pages 1-11.See Appendix 1, pages 1-11.

Reserve Margin AnalysisReserve Margin Analysis

• Compute your reserve margin by taking the Compute your reserve margin by taking the difference between the installed capacity and difference between the installed capacity and the net peak demand (gross demand minus the net peak demand (gross demand minus impact of Demand-Side Management impact of Demand-Side Management Programs)Programs)

• D.C. Commission used to require a 16% D.C. Commission used to require a 16% reserve marginreserve margin

• Regional reserve margin (22%) may be Regional reserve margin (22%) may be different from state’s (16% in the case of D.C.)different from state’s (16% in the case of D.C.)

• See Appendix I, Page 12See Appendix I, Page 12

System Planning ModelSystem Planning Model

• Based on linear and mixed integer liner Based on linear and mixed integer liner programming techniques.programming techniques.

• Model identifies least cost plan additions.Model identifies least cost plan additions.• Least cost expansion plan is entered into the linear Least cost expansion plan is entered into the linear

programming model to determine marginal capacity programming model to determine marginal capacity and energy costs.and energy costs.

• Objective function: Minimize over the planning Objective function: Minimize over the planning horizon the discounted present value of incremental horizon the discounted present value of incremental capital costs and operating costs of existing and new capital costs and operating costs of existing and new generating units.generating units.

• See Appendix 1, Page 46.See Appendix 1, Page 46.

SPM model (Cont.)SPM model (Cont.)

• Constraints include system constraints Constraints include system constraints and plant or unit constraintsand plant or unit constraints

• The sum of all new plus existing plant The sum of all new plus existing plant capacity must meet or exceed capacity must meet or exceed forecasted peak demand by 16% forecasted peak demand by 16% (minimum reserve margin)(minimum reserve margin)

Planned Investment ApproachPlanned Investment Approach

• 1. Used to calculate marginal transmission, 1. Used to calculate marginal transmission, marginal subtransmission, marginal marginal subtransmission, marginal distribution and marginal customers costsdistribution and marginal customers costs

• 2. This approach is not a mathematical or 2. This approach is not a mathematical or economic model but a considerably simple economic model but a considerably simple calculationcalculation

Planned Investment Approach Planned Investment Approach (Cont.)(Cont.)

• Components needed to calculate these marginal Components needed to calculate these marginal costscosts– Total demand related additions to transmission Total demand related additions to transmission

plantplant

– Growth in system peakGrowth in system peak

– Incremental cost per CP kWIncremental cost per CP kW

– Real carrying charge rateReal carrying charge rate

– Annualized cost per CP kW Annualized cost per CP kW

– See Appendix 1, Page 47.See Appendix 1, Page 47.

Avoided Costs and Least Cost Avoided Costs and Least Cost PlanPlan

• Marginal costs are generally used for rate design Marginal costs are generally used for rate design purpose and avoided costs are used for least cost purpose and avoided costs are used for least cost plan purpose.plan purpose.

• Avoided costs: The costs avoided as a result of Avoided costs: The costs avoided as a result of conservation measures are used to account for the conservation measures are used to account for the benefits for the conservation measures.benefits for the conservation measures.

• Utilities avoided costs are a major component to Utilities avoided costs are a major component to calculate benefits of utilities. If benefits are calculate benefits of utilities. If benefits are greater than costs, the DSM program is cost greater than costs, the DSM program is cost effective. The avoided costs play a major role in effective. The avoided costs play a major role in screening DSM programs.screening DSM programs.

Demand-Side Management Demand-Side Management ProgramsPrograms

• Program Screening – Various Cost/Benefit Program Screening – Various Cost/Benefit Tests were applied.Tests were applied.

• All-Ratepayers Test measures the impact of All-Ratepayers Test measures the impact of DSM on the customers’ bills.DSM on the customers’ bills.

• Rate Impact Measure (RIM) Test measures the Rate Impact Measure (RIM) Test measures the impact of DSM on the customers’ rates.impact of DSM on the customers’ rates.

• We currently consider both. However, many We currently consider both. However, many programs passed the All-Ratepayers Test programs passed the All-Ratepayers Test would not pass the RIM test.would not pass the RIM test.

DSM Programs (Cont.)DSM Programs (Cont.)

• We no longer have LCP requirement since We no longer have LCP requirement since PEPCO sold its generation assets.PEPCO sold its generation assets.

• We have a Reliable Energy Trust Fund We have a Reliable Energy Trust Fund (RETF) which collects a surcharge to (RETF) which collects a surcharge to finance (1) Energy Efficiency Programs (2) finance (1) Energy Efficiency Programs (2) Renewable Resource Programs and (3) Renewable Resource Programs and (3) Low-Income Direct Assistance Programs.Low-Income Direct Assistance Programs.

DSM ProgramsDSM Programs

• High-Efficiency Air Conditioner Rebate High-Efficiency Air Conditioner Rebate ProgramProgram

• Rebate dropped from $600 to $300 from 1992 Rebate dropped from $600 to $300 from 1992 to 1997 because of market transformation.to 1997 because of market transformation.

• Through the program, PEPCO has increased Through the program, PEPCO has increased customer awareness of the benefits of high-customer awareness of the benefits of high-efficiency HVAC equipment and has efficiency HVAC equipment and has encouraged HVAC dealers, contractors, and encouraged HVAC dealers, contractors, and retailers to stock high-efficiency equipment.retailers to stock high-efficiency equipment.

• See Appendix 1, Pages 31-40.See Appendix 1, Pages 31-40.

New Building Design ProgramNew Building Design Program

• It is a commercial DSM program.It is a commercial DSM program.• Program rebates are based on the Program rebates are based on the

average incremental cost between average incremental cost between standard-efficiency and high-efficiency standard-efficiency and high-efficiency equipment.equipment.

• The program also encourages thermal The program also encourages thermal energy storage applications in new energy storage applications in new buildings.buildings.

Other Conservation Program Other Conservation Program ConceptConcept

• A. Shared Savings ApproachA. Shared Savings Approach– Win-win for both Energy Service Companies Win-win for both Energy Service Companies

and Customersand Customers

• B. Pay As You SaveB. Pay As You Save– Customers pay additional surcharge on their Customers pay additional surcharge on their

bill to cover the cost of energy efficiency bill to cover the cost of energy efficiency programs.programs.

Energy Use Management Energy Use Management Programs (EUM)Programs (EUM)

• Residential Time of Use RatesResidential Time of Use Rates• Kilowatchers ClubKilowatchers Club

– A cycling program for central air conditioners, heat A cycling program for central air conditioners, heat pumps, and electric water heaters.pumps, and electric water heaters.

– PEPCO limits the cycling of air conditioners to no PEPCO limits the cycling of air conditioners to no more than 15 non-holiday weekdays over the five-more than 15 non-holiday weekdays over the five-month period and to no longer than six hours month period and to no longer than six hours between noon and 8 p.m. For air conditioning, the between noon and 8 p.m. For air conditioning, the air conditioner compressors may be cycled off for 13 air conditioner compressors may be cycled off for 13 minutes and then on again for the next 17 minutes of minutes and then on again for the next 17 minutes of each half-hour of program operation.each half-hour of program operation.

EUM Programs (Cont.)EUM Programs (Cont.)

• Commercial Time of Use RatesCommercial Time of Use Rates• Curtailable Load ProgramCurtailable Load Program

– PEPCO offers summer billing period credits of $8.6 per PEPCO offers summer billing period credits of $8.6 per kW reduced to commercial customers who agree to kW reduced to commercial customers who agree to provide at least 100 kW of load curtailment. Upon provide at least 100 kW of load curtailment. Upon receipt of a signal from PEPCO, participating customers receipt of a signal from PEPCO, participating customers reduce their electricity demands to a “firm service level” reduce their electricity demands to a “firm service level” for the duration of a curtailment request. Participants for the duration of a curtailment request. Participants who fail to reduce their demand to the firm service level who fail to reduce their demand to the firm service level pay a penalty of $17.20 for each kW used above the firm pay a penalty of $17.20 for each kW used above the firm service level.service level.

• See the Appendix 1, Pages 13-30. See the Appendix 1, Pages 13-30.

Demand Response ProgramsDemand Response Programs

• Mitigate the Supply-Side market power and Mitigate the Supply-Side market power and enhance reliability.enhance reliability.

• Regional ISO programs supplement states’ Regional ISO programs supplement states’ programs.programs.

Supply-Side EvaluationsSupply-Side Evaluations

• Considering PEPCO’s generating Considering PEPCO’s generating facilities, power purchase facilities, power purchase agreements, renewable resource agreements, renewable resource options, fuel supply arrangement, options, fuel supply arrangement, and Clean Air Act compliance.and Clean Air Act compliance.

Transmission and Distribution Transmission and Distribution Improvement PlansImprovement Plans

• Commission had established a Productivity Commission had established a Productivity Improvement Working Group (PIWG) Improvement Working Group (PIWG) which consists of PEPCO, Office of which consists of PEPCO, Office of People’s Counsel, and Commission Staff.People’s Counsel, and Commission Staff.

• PIWG meets monthly to discuss G, T, D PIWG meets monthly to discuss G, T, D related projects and all the productivity and related projects and all the productivity and fuel related issues.fuel related issues.

T&D Improvement Plans (Cont.)T&D Improvement Plans (Cont.)

• PEPCO is required to file a PEPCO is required to file a Productivity Improvement Plan (PIP) Productivity Improvement Plan (PIP) each year with the Commission. each year with the Commission. Commission will issue an order once Commission will issue an order once the plan and OPC & Staff’s comments the plan and OPC & Staff’s comments are reviewed.are reviewed.

Key Components of PIPKey Components of PIP

• (1) Productivity Improvement Projects(1) Productivity Improvement Projects

• (2) Industry Comparison includes:(2) Industry Comparison includes:– Annual unitAnnual unit

• Operating availability factors comparisonOperating availability factors comparison

• Equivalent availability factors comparisonEquivalent availability factors comparison

• Capacity Factor comparisonCapacity Factor comparison

• Equivalent forced outage factors comparisonEquivalent forced outage factors comparison

– System heat rate comparisonSystem heat rate comparison

Key Components of PIP (Cont.)Key Components of PIP (Cont.)

• System Energy Losses ComparisonSystem Energy Losses Comparison

• (3) Fuel prices, consumption and (3) Fuel prices, consumption and expenditures forecast (the % difference expenditures forecast (the % difference between forecasted values vs. actual values between forecasted values vs. actual values were presented too.)were presented too.)

• (4) Technical Terms and Engineering (4) Technical Terms and Engineering Process Process

Regional Transmission Regional Transmission Expansion PlanExpansion Plan

• On Transmission side, PEPCO is a member of On Transmission side, PEPCO is a member of Pennsylvania, New Jersey and Maryland Pennsylvania, New Jersey and Maryland Independent System Operator.Independent System Operator.

• Stakeholders and PUC representatives Stakeholders and PUC representatives collaboratively decide the transmission collaboratively decide the transmission expansion plan for the region.expansion plan for the region.

• PEPCO participated in regional studies and PEPCO participated in regional studies and conducted internal transmission studies.conducted internal transmission studies.

Planning FrameworkPlanning Framework

• Step 1: Resource ScreeningStep 1: Resource Screening• Step 2: Baseline Load ForecastsStep 2: Baseline Load Forecasts

– 15 Years15 Years

• Step 3: Full- Loop IntegrationStep 3: Full- Loop Integration– The plans minimize total revenue The plans minimize total revenue

requirements for their respective scenarios.requirements for their respective scenarios.

• Step 4:Sensitivity Analysis and Base Plan Step 4:Sensitivity Analysis and Base Plan SelectionSelection

Planning Framework (Cont.)Planning Framework (Cont.)

• Step 5: Development of Alternative PlansStep 5: Development of Alternative Plans– With the Base plan as a starting point, With the Base plan as a starting point,

PEPCO develops alternative resource plans PEPCO develops alternative resource plans that address a broader set of planning that address a broader set of planning criteria.criteria.

• Step 6: Analysis of Candidate PlansStep 6: Analysis of Candidate Plans– Each alternative plan is analyzed to Each alternative plan is analyzed to

determine how well it meets each planning determine how well it meets each planning objective.objective.

Planning Framework (Cont.)Planning Framework (Cont.)

• Step 7: Preferred Plan SelectedStep 7: Preferred Plan Selected– PEPCO selects a preferred plan that balances PEPCO selects a preferred plan that balances

effects on prices, utility revenue requirements and effects on prices, utility revenue requirements and customer bills, reliability, and customer service customer bills, reliability, and customer service objectives.objectives.

• Step 8: Action PlanStep 8: Action Plan– A four-year action plan details PEPCO’s projected A four-year action plan details PEPCO’s projected

capital costs, budgets, and schedules for carrying capital costs, budgets, and schedules for carrying out the Preferred strategy.out the Preferred strategy.

• See Appendix 1, page 41.See Appendix 1, page 41.

Integration ProcedureIntegration Procedure

• Baseline Load ForecastsBaseline Load Forecasts– See Appendix 1, Pages 48-51.See Appendix 1, Pages 48-51.

• Marginal Cost DeterminationMarginal Cost Determination• DSM Cost-Effectiveness AnalysisDSM Cost-Effectiveness Analysis• Net Load ForecastsNet Load Forecasts• Resource IntegrationResource Integration

– See Appendix 1, pages 42-45, 67.See Appendix 1, pages 42-45, 67.

Key Planning AssumptionsKey Planning Assumptions

• For alternative cases, the planning For alternative cases, the planning assumptions vary.assumptions vary.

• Key assumptions include:Key assumptions include:– General InflationGeneral Inflation– GDP growth ratesGDP growth rates– Price of ElectricityPrice of Electricity

Built or Buy DecisionsBuilt or Buy Decisions

• Evaluated outside of the filing of Least Evaluated outside of the filing of Least Cost PlanCost Plan

• Previously, two projects were considered Previously, two projects were considered – PEPCO would like to sign two power PEPCO would like to sign two power

purchase agreementspurchase agreements– One with Patowmack Power Partners, Inc., One with Patowmack Power Partners, Inc.,

(PPP) and the other with Panda-Brandywine (PPP) and the other with Panda-Brandywine L.P. (Panda)L.P. (Panda)

Panda and PPP ProjectsPanda and PPP Projects

• PEPCO requested that the Commission PEPCO requested that the Commission approve these non-company power approve these non-company power projects in the context of a projects in the context of a modification to its least-cost plan modification to its least-cost plan (LCP) and find the contract payments (LCP) and find the contract payments to be below the Company’s avoided to be below the Company’s avoided costs.costs.

Panda and PPP ProjectsPanda and PPP Projects

• The Commission investigated two issues:The Commission investigated two issues:

• (1) Is the need for and the timing of the (1) Is the need for and the timing of the Panda and PPP projects prudent and Panda and PPP projects prudent and consistent with PEPCO’s least cost consistent with PEPCO’s least cost planning activities?planning activities?– If so, should PEPCO’s LCP be amended as If so, should PEPCO’s LCP be amended as

proposed by PEPCO to include these two proposed by PEPCO to include these two contracts?contracts?

Panda and PPP ProjectsPanda and PPP Projects

• (2) Whether the proposed (2) Whether the proposed payments for energy and capacity payments for energy and capacity pursuant to the terms of the Panda pursuant to the terms of the Panda and PPP contracts are below and PPP contracts are below PEPCO’s applicable avoided PEPCO’s applicable avoided costs?costs?

Panda and PPP ProjectsPanda and PPP Projects

• PEPCO suggested accepting both PEPCO suggested accepting both projects.projects.

• OPC suggested accepting one OPC suggested accepting one project Panda.project Panda.

• Staff suggested rejecting both Staff suggested rejecting both projects.projects.

Panda and PPP ProjectsPanda and PPP Projects

• Staff’s main reasons:Staff’s main reasons:– PEPCO would not need any capacity to satisfy the PEPCO would not need any capacity to satisfy the

reserve margin requirement until 1995reserve margin requirement until 1995

– PPP was supposed to be on-line starting with 1994PPP was supposed to be on-line starting with 1994

– Panda and PPP created excess capacity for six Panda and PPP created excess capacity for six years, during a time when PEPCO’s reserve margin years, during a time when PEPCO’s reserve margin exceeds 20 percentexceeds 20 percent

– See Appendix 2, PSC (B)-7 to PSC (B)-10.See Appendix 2, PSC (B)-7 to PSC (B)-10.

Panda and PPP ProjectsPanda and PPP Projects

• Based on both need, timing and Based on both need, timing and avoided costs analysis, Staff avoided costs analysis, Staff rejected both projects.rejected both projects.

• Commission decided to accept Commission decided to accept Panda rather than PPP.Panda rather than PPP.

Retail Electric Competition and Retail Electric Competition and Consumer Protection Act of 1999Consumer Protection Act of 1999

Additional Highlights:Additional Highlights:

• The Commission is actively establishing customer The Commission is actively establishing customer education programs including a Commission hosted education programs including a Commission hosted website to facilitate price comparisonswebsite to facilitate price comparisons

• See See www. dcpsc.orgwww. dcpsc.org, click on customer information, , click on customer information, electric.electric.

• Establishing Reliable Energy Trust Fund ProgramsEstablishing Reliable Energy Trust Fund Programs• Establishing code of conduct between PEPCO and its Establishing code of conduct between PEPCO and its

affiliatesaffiliates• Determining fuel mix information disclosure for the Determining fuel mix information disclosure for the

consumersconsumers

The 1999 Act (Continued)The 1999 Act (Continued)• Establishing procedural rules for Establishing procedural rules for

complaints, investigations and complaints, investigations and dispositional hearingsdispositional hearings

• Governing market power proceedings Governing market power proceedings in both retail and wholesale marketsin both retail and wholesale markets

• Implementing competitive bidding Implementing competitive bidding process to select default service process to select default service provider prior to July 1, 2004 provider prior to July 1, 2004

• New New SOSSOS provider should start on provider should start on January 1, 2005.January 1, 2005.

The 1999 Act (Continued)The 1999 Act (Continued)• In additionIn addition::

a) The Act states that the Mayor, in a) The Act states that the Mayor, in conjunction with the conjunction with the

Commission, shall issue Commission, shall issue regulations governing a municipal regulations governing a municipal

aggregation program.aggregation program. b) Net Metering provisions include:b) Net Metering provisions include:

Facilitating the development of Facilitating the development of distributed generation. distributed generation.

c) Competitive billing shall begin on c) Competitive billing shall begin on

January January 1, 2002.1, 2002.

Act Implementation & Act Implementation & the “Retail Choice Program” the “Retail Choice Program” Jan. 1, 2001Jan. 1, 2001

• The Commission completed the “Three-The Commission completed the “Three-Phase” Rate Reductions Phase” Rate Reductions

• The total rate reduction for three-phases The total rate reduction for three-phases amounts to amounts to 7%7% for for Residential Residential customerscustomers and and 6.5%6.5% for for Commercial Commercial customers.customers.

• 11 Suppliers/Aggregators were 11 Suppliers/Aggregators were approved by the Commission.approved by the Commission.

Current StatisticsCurrent Statistics

• 8.3% of residential and 19.1% of non-8.3% of residential and 19.1% of non-residential customers have switched to the residential customers have switched to the third-party suppliers.third-party suppliers.

• In terms of total MWs, 48.9% of the load has In terms of total MWs, 48.9% of the load has switched.switched.

• See page 68 for a copy of recent D.C.’s market See page 68 for a copy of recent D.C.’s market monitoring report.monitoring report.

• For a copy of Electric Policies in the Public For a copy of Electric Policies in the Public Interest, see Appendix 1, Pages 52-66.Interest, see Appendix 1, Pages 52-66.

THANK YOU!THANK YOU!