Before the Minnesota Public Utilities Commission State of Minnesota. Docket No. E002/GR Exhibit (KTH-1) Sales Forecast Policy

Transcription

1 Direct Testimony and Schedules Karen T. Hyde Before the Minnesota Public Utilities Commission State of Minnesota In the Matter of the Application of Northern States Power Company for Authority to Increase Rates for Electric Service in Minnesota Docket No. E00/GR 1- Exhibit (KTH-1) Sales Forecast Policy November, 01

2 Table of Contents I. Introduction 1 II. Importance of Accuracy in Sales Forecast III. Methodological Differences IV. Conclusion Schedules Resume Schedule Sales Forecast Variances Schedule i Docket No. E00/GR-1-

3 I. INTRODUCTION Q. PLEASE STATE YOUR NAME AND OCCUPATION. A. My name is Karen T. Hyde. I am the Vice President and Chief Risk Officer for Xcel Energy Services Inc. (XES). Q. PLEASE SUMMARIZE YOUR QUALIFICATIONS AND EXPERIENCE. A. I received a Bachelor of Science degree in Metallurgical Engineering from Lafayette College and a Master of Science degree in Mineral Economics from the Colorado School of Mines. After working as a Lead Nuclear Engineer for the Department of Defense and then a forecaster for Baltimore Gas and Electric, I began working for Public Service Company of Colorado in 1. I have worked for XES and the Xcel Energy Inc. operating companies in various positions since that time. In my current position as Vice President and Chief Risk Officer, I provide leadership and direction for the risk management function, including direct oversight of the sales and load forecasting department and approval of all sales and load forecasts. I also oversee transactional governance and valuation, non-retail credit risk management, commodity risk management, generation cost modeling, contract development, and distribution asset risk management. My resume is included as Exhibit (KTH-1), Schedule 1. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. In my testimony, I discuss the importance of an accurate sales forecast, the implications of the methodological differences between parties, and potential opportunities to resolve disagreements over methodology. 1 Docket No. E00/GR-1-

4 Q. IS ANY OTHER COMPANY WITNESS ADDRESSING SALES FORECAST ISSUES? A. Yes. In her Direct Testimony, Company witness Ms. Jannell E. Marks explains how the sales forecast is derived and describes why the forecast is a reasonable projection of the Company s sales in the test year. II. IMPORTANCE OF ACCURACY IN SALES FORECAST Q. PLEASE EXPLAIN WHY IT IS NECESSARY FOR THE COMPANY S SALES FORECAST TO BE AS ACCURATE AS POSSIBLE FOR PURPOSES OF SETTING RATES. A. We share with our customers the goal of having a sales forecast that predicts test year sales as accurately as possible. An accurate sales forecast provides the Company a reasonable opportunity to recover its cost of service and earn its authorized return, and it ensures that the rates customers pay closely reflect the actual cost the utility incurs to provide electric service. If the forecast overestimates sales (i.e., actual sales are lower than the forecast), as has been the case in recent years, rates will be set too low, and the Company will not recover the full cost of service. Conversely, if the forecast underestimates sales, rates will be set too high, resulting in customers paying more than what is necessary to recover costs. Thus, to get rates right, it is important to have a sales forecast that is as accurate as possible. Q. DOES THE COMPANY USE ITS SALES FORECAST FOR ANY PURPOSE OTHER THAN SETTING RATES? A. Yes. The Company also uses the sales forecast for resource planning and budgeting. Accuracy in the sales forecast is important for these purposes as well. An accurate forecast will help ensure the Company has an adequate supply of power at all times to provide reliable service to its customers. Docket No. E00/GR-1-

5 Similarly, for budgeting purposes, the forecast informs our estimates of the cost to serve customers and the revenues we will receive to cover those costs. Q. PLEASE DESCRIBE THE COMPANY S OVERALL APPROACH TO FORECASTING SALES. A. We believe that our methodology and the rigorous analysis it incorporates are sound, consistent with industry best practices, and well-positioned to produce accurate results. As described in more detail by Ms. Marks, the Company relies on econometric models incorporating regression analyses to forecast sales in the test year. The models include variables that capture the effects of weather, the economy, and changes in electricity prices. These factors, along with increases in energy efficiency and known changes in operations for large Commercial and Industrial (C&I) customers, are the main drivers of our sales forecast. We closely monitor and analyze changes in these areas, including review of outside sources of data where appropriate, and we monitor the ongoing discussions between our account managers and large customers. Q. DOES THE COMPANY PERFORM ANY ANALYSES TO EVALUATE THE ACCURACY OF PRIOR SALES FORECASTS? A. Yes. We have analyzed the accuracy of our sales forecasts in each year since 00. Those analyses compared weather-normalized sales to forecasted sales for the previous years. While in many years our weather-normalized sales were lower than the forecasted amounts, we have significantly improved our performance in recent years. Exhibit (KTH-1), Schedule shows the comparison of forecasted sales to weather-normalized sales for each year from 00 through 01. I discuss the accuracy of the Commission-approved sales forecast for year-to-date 01 in the next section. Docket No. E00/GR-1-

6 III. METHODOLOGICAL DIFFERENCES Q. WAS THE SALES FORECAST A HIGHLY-CONTESTED ISSUE IN THE COMPANY S LAST RATE CASE? A. Yes. In the Company s last electric rate case in Docket No. E00/GR-1-1 (Docket No 1-1), the Department challenged the Company s sales forecast as being too low, based on issues related to customer count, future energy prices, loss of large industrial customers, and treatment of Demand Side Management (DSM). The Department produced an alternative sales forecast reflecting its recommended changes in this area. Their forecast represented a 0, MWh, or 1. percent, increase over the Company s rebuttal testimony sales forecast. Q. HOW DID THE ADMINISTRATIVE LAW JUDGE (ALJ) AND THE COMMISSION RESOLVE THE DEPARTMENT S CHALLENGES TO THE COMPANY S SALES FORECAST IN THE LAST RATE CASE? A. The ALJ recommended that the Commission adopt the Department s proposals on the customer count, the energy prices, and the effect of losing industrial customers. The ALJ also expressed support for the Department s alternative of using a four-year average to calculate embedded DSM, but the Commission disagreed and determined that no DSM adjustment was warranted: A DSM adjustment would underestimate test-year sales for several reasons. First, historical DSM efforts are already reflected in the sales data used in the forecast. Second, data provided by the Department show that Xcel s yearly DSM savings are leveling off, rather than increasing. Finally, Xcel s Docket No. E00/GR-1-

7 sales forecast with the DSM adjustment is consistently lower than actual data for five out of the last six months of In total, the Commission s decisions on the sales forecast increased the Company s projected test year retail revenue by $,,000. Q. HAS THE COMPANY ATTEMPTED TO ADDRESS THE CONCERNS RAISED BY THE COMMISSION AND THE DEPARTMENT IN THE LAST CASE? A. Yes. We appreciate the Commission s careful consideration of the sales forecast issue and the Department s assessment of the Company s sales forecasts in the last case. We have taken the feedback received from Docket No. 1-1 and attempted to address it in this case. Ms. Marks discusses the concerns raised by the Department with respect to the total number of customers, the estimated future energy prices, the effect of losing two large industrial customers, and treatment of DSM. Q. HAS THE COMPANY ADJUSTED ITS SALES FORECAST IN THIS CASE TO REFLECT SAVINGS FROM DSM EFFORTS? A. Yes. It is necessary to account for the impacts of DSM to ensure that the sales forecast represents, as accurately as possible, the impact that these efforts have on sales. By their nature and design, DSM programs reduce sales over time, and that reduction must be reflected to avoid overstating future sales. Not adjusting for DSM overlooks what DSM programs are intended to accomplish. Q. HAS THE COMPANY CHANGED THE WAY IT TREATS DSM IN THE FORECAST? 1 In the Matter of the Application of Northern States Power Company for Authority to Increase Rates for Electric Service in the State of Minnesota, Findings of Fact, Conclusions and Order at 0 (September, 01). Docket No. E00/GR-1-

8 A. Yes. While we continue to believe a DSM adjustment is appropriate, we explored alternative methods of incorporating DSM in the forecast. To reduce disagreement over the level of embedded DSM and the appropriate time period to calculate it, the Company used a different approach to account for future reductions in sales due to DSM. As explained by Ms. Marks, the Company added back monthly historical DSM impacts to historical sales to determine what sales would have been had the Company not offered its DSM programs. The sales forecast is then modeled with this reconstructed data series, which creates a forecast with no DSM achievements included. To arrive at a sales forecast that reflects the impact of DSM on sales, we subtracted the amount of future DSM related to both historical achievements with continuing impacts and planned future new programs from the no-dsm forecast. Q. HAS THE COMPANY COMPARED THE SALES FORECAST APPROVED BY THE COMMISSION IN DOCKET NO. 1-1 AND THE COMPANY S PROPOSED FORECAST IN THE PRIOR CASE TO YEAR-TO-DATE ACTUAL SALES? A. Yes. As noted by Ms. Marks, the sales forecast approved by the Commission in Docket No. 1-1 is 1. percent higher than the Company s actual sales on a weather-normalized basis through the end of August 01. In contrast, the year-to-date actual sales for the same time period are 0. percent lower than the Company s rebuttal sales forecast. Q. WHAT ARE THE IMPLICATIONS OF THESE FORECAST VARIANCES? A. While a 1. percent variance sounds small, the estimated year-to-date revenue impact of this variance between year-to-date actual total retail sales and the approved sales forecast is under-recovery of $1. million. This revenue Docket No. E00/GR-1-

9 impact will increase if the variance continues. Thus, relatively small differences in methodology can result in large impacts to revenue. As a result, although we are attempting to address the concerns voiced by the Commission and the Department in the last rate case, we continue to believe that our sales forecasting method is fundamentally sound and should be relied upon by the Commission for setting rates in this proceeding. Q. HOW MIGHT DISAGREEMENTS ABOUT FORECASTING METHODOLOGY BE RESOLVED? A. While we believe there is general consensus within the industry on the overall methodology used in sales forecasting, we acknowledge that the complexity inherent in developing forecasts lends itself to differences of opinion between experts on the finer details. In many cases, there is no definitive right or wrong way to address these details, which is why there continues to be debate on some of these issues. Nonetheless, while we can appreciate this kind of technical and academic debate, the selection of a sales forecast in a rate-setting context has significant financial implications. While we have taken steps in this case to reduce or eliminate disagreement between parties on components of the Company s methodology, we would not anticipate elimination of all differences between the Company and the Department. Given the importance of the forecast to the overall rate-setting process, it may be worthwhile for parties to consider alternative ways of resolving these differences. Q. PLEASE EXPLAIN. Docket No. E00/GR-1-

10 A. While methodological discussions are important, it would be helpful to recognize that, at the end of the day, it is the overall accuracy of the forecast that counts. The Company would be willing to explore with parties mechanisms for ensuring a more accurate sales forecast, regardless of methodological differences. For example, the Company is proposing a decoupling mechanism for its residential and non-demand metered customers beginning in the second year of our proposed multi-year plan. This mechanism may mitigate disputes between parties by allowing for an annual true-up with actuals for the affected rate classes. While the proposed decoupling mechanism will not be applied to the demand-metered business class, it is worth considering whether expanded use of actual sales data through the course of the test year and the rate case proceeding can assist in resolving differences among parties. This type of discussion may ultimately prove more beneficial than continued disagreement and focus on components of the methodology. Q. DOES THE PROPOSED DECOUPLING MECHANISM ELIMINATE THE NEED TO ADJUST FOR DSM IN THE SALES FORECAST? A. No. As previously stated, adjusting for DSM is part of producing an accurate forecast. Having a decoupling mechanism in place does not lessen the importance of an accurate forecast. This is particularly true in this case, where the proposed decoupling mechanism would not apply to demand-metered customers, which represent approximately 0 percent of the 01 forecasted sales and contribute over half of our total DSM program savings. Thus, the annual true-ups as part of the decoupling mechanism will not address reductions in sales for our largest customer classes, and we continue to need the DSM adjustment to determine an accurate forecast. Docket No. E00/GR-1-

11 IV. CONCLUSION Q. PLEASE SUMMARIZE YOUR TESTIMONY. A. We have a shared interest with our customers to produce a sales forecast that is as accurate as possible. An accurate forecast protects the Company from under-recovery of costs resulting from rates that are set too low and protects customers from paying too much if rates are set too high. Given the importance of an accurate forecast, it is understandable that the sales forecast would be reviewed in great detail. However, forecasting is not an exact science, and there is room for disagreement among experts on the finer points of forecasting. We engaged in such debate in our most recent rate case. To facilitate review of the forecast in this case, we have made some changes to components of our methodology in response to concerns and suggestions raised by parties. We also compare the Company's and Department s forecasts to actual sales available to date, which shows that the Department s forecast, while higher than actual sales by only 1. percent, results in estimated under-recovery of $1. million as of August. We believe this underscores the need to focus on the overall accuracy of the forecast and highlights the risk of making isolated adjustments that may appear minor but could have larger implications. While we have created a forecast that we believe will closely match actual future sales and address parties concerns, we believe parties would benefit from a constructive dialogue on alternative methods to ensure that we arrive at accurate forecast. This could include greater reliance on actual sales data Docket No. E00/GR-1-

12 through our proposed decoupling mechanism or expanded use of actual data throughout the proceeding. Q. DOES THIS CONCLUDE YOUR TESTIMONY? A. Yes. Docket No. E00/GR-1-

13 Northern States Power Company Docket No. E00/GR-1- Exhibit (KTH-1), Schedule 1 Page 1 of 1 Resume Karen T. Hyde Vice President and Chief Risk Officer Xcel Energy 100 Larimer Street, 1 th Floor Denver, CO 00 Current Responsibilities (August 01 to Present) Provide leadership and direction for the company s risk management function, which includes transactional governance and valuation, non-retail credit risk management, commodity risk management, generation cost modeling, contract development, sales and load forecasting, distribution asset risk management and the corporate Key Risks function. Education Bachelor of Science, Metallurgical Engineering Lafayette College Master of Science, Mineral Economics Colorado School of Mines Previous Positions Xcel Energy and predecessor company New Century Energies Regional Vice President, Rates and Regulatory Affairs Vice President, Rates and Regulatory Affairs Colorado Vice President, Resource Planning and Acquisition Director, Purchased Power Team Manager, Purchased Power - 1 Team Lead, Purchased Power Public Service Company of Colorado 1 Business Development Analyst 1 1 Senior Planning Engineer, Generation Planning 11 1 Planning Engineer, Generation Planning 1 11 Forecaster, Economic Research Prior Technical Experience 1-1 Research Analyst, Baltimore Gas and Electric 1 - Nuclear Engineer, Department of Defense/Navy

14 Northern States Power Company Docket No. E00/GR-1- Exhibit (KTH-1), Schedule Page 1 of Sales Forecast Variances Forecast Variance February 00 Forecast 0.% -0.% -1.1% -.% March 00 Forecast -1.% -.% -.0% -.0% March 00 Forecast -0.% -1.% -.% -.% September 00 Forecast -0.% -.% -.1% -.% March 00 Forecast -1.% -.% -.% -.% October 00 Forecast -0.% -.1% -.1% -.% March 00 Forecast -.% -.% -.% -.% October 00 Forecast 0.1% 0.1% -1.% -.1% March 0 Forecast 0.% -1.0% -.% July 0 Forecast -0.1% -1.0% -.% March 0 Forecast -0.% -.% September 0 Forecast -0.% -1.% March 01 Forecast 0.0% July 01 Forecast 0.%