STATE OF VERMONT PUBLIC UTILITY COMMISSION Case No. --INV Investigation into the petition of Green Mountain Power Corporation's tariff filing requesting an overall rate increase in the amount of.%, to take effect January, 0. PREFILED DIRECT TESTIMONY OF EDWARD MCNAMARA ON BEHALF OF THE VERMONT DEPARTMENT OF PUBLIC SERVICE August, 0 Summary: Mr. McNamara presents the Department s position with respect to Green Mountain Power s power supply portfolio. His testimony includes a discussion of the statutory and regulatory requirements and policy objectives that frame Green Mountain Power s power-supply obligations. Mr. McNamara also introduces the testimony from Department witnesses Joan White and George Evans (of SAGE Management), which include specific recommendations regarding power-supply adjustments.
Case No. --Inv August, 0 Page of Q. Please state your name and title. A. My name is Edward McNamara. I am the Director of Energy Policy and Planning for the Vermont Department of Public Service ( Department or PSD ). My business address is State Street, Montpelier, Vermont. 0 Q. Please describe your professional background and experience. A. I have worked for the Department since 0. Prior to becoming Director of Energy Policy and Planning, I was Director of Regional Policy for the Department. I was also a staff attorney and hearing officer for the Public Utility Commission (the Commission ) from 00 until 0. Q. Have you ever testified before the Vermont Public Utility Commission (PUC or Commission)? A. Yes, in Dockets 00,, and Case No. -0-PET, among others. 0 Q. Please describe the purpose of your testimony. A. The purpose of my testimony is to explain the Department s position with respect to Green Mountain Power Corporation s ( GMP or the Company ) power supply portfolio. I also discuss the applicable statutory and regulatory framework through which GMP is guided in making its power supply decisions.
Case No. --Inv August, 0 Page of 0 Q. Please provide an overview of the Department s view on GMP s drive to become an innovative utility. A. The best articulation of GMP s perspective on the need to modify the traditional utility is contained within Mary Powell s April, 0 memorandum accompany the rate filing in this case: [T]he energy landscape is changing dramatically. GMP is experiencing flat or even declining sales, while at the same time costs to connect to the regional grid are rising at historic levels. This is not sustainable for customers. Green Mountain Power has embraced an innovative approach for helping customers make the transition to a home, business, and community based energy system in a cost-effective way, while still fulfilling our responsibility for the traditional grid for decades to come. The Department agrees with Ms. Powell s characterization of the challenges that GMP and other Vermont utilities face. Additionally, the Department has been supportive of many of the efforts that GMP has undertaken to further the transformation of the electric sector. 0 In less than a 0-year period, the number of resources producing electricity within Vermont has grown from less than a few dozen to over,00. The vast majority of these resources are small, residential-scale net-metered systems that are distributed throughout the state and which have come on-line in the past five years. The state is seeing additional innovative technologies, such as residential-scale battery systems, heat pumps, and electric vehicles, starting to interconnect to the system in increasing numbers. Individually, these residential-scale resources have negligible impact on the grid;
Case No. --Inv August, 0 Page of however, collectively the resources need to be managed in such a way as to maintain reliable service. 0 The transformation of the electric grid will require careful integration of numerous intermittent distributed resources into the existing central station, transmission reliant model. This effort will require increased infrastructure and communications systems to be constructed while also maintaining the costs of the existing structure. In other words, while the Department expects that long-term economic benefits will accrue from the transformation of the electric sector, there is the potential for an increase in capital costs in order to achieve this transformation. Q. To what extent will the transformation of the energy sector impact regulatory review of these costs? A. The Commission is currently reviewing alternative regulatory structures in a separate proceeding, however it is appropriate to consider the extent to which energy innovation affects the review conducted by the Department and the PUC. 0 Despite the fact that GMP is not a traditional utility, in that it is embracing the transformation of the sector and actively exploring ways to provide its customers with innovative services, it is still a natural monopoly with its reasonable costs passed on to captive customers (with respect to the term captive customer, while customers do have more choice with respect to self-generation and storage technologies, given the cost and
Case No. --Inv August, 0 Page of duration of current battery technology and the long winters in Vermont, for almost all GMP customers it is still more cost effective to continue to be served from the distribution system rather than go off-grid). The Department s review of GMP s capital costs, as described in detail in Mr. Winn s prefiled testimony, accepts that some costs are a result of GMP s approach to innovation and transformation. This consideration cannot, however, displace the need to ensure that GMP reasonably considered all least cost options related to capital expenditures necessary to achieve this transformation. 0 Q. Please provide an overview of the Department s perspective of GMP s power supply portfolio. A. The Department believes that GMP s power supply portfolio largely reflects statutory requirements and wholesale market conditions. Vermont has mandated several programs over the last twelve years to incentivize utilities to increase the amount of renewable generation in its portfolio. Additionally, legislative direction and Vermont s regulatory policy have encouraged Vermont utilities to provide rate certainty through stably priced long-term contracts. GMP s decisions related to additions to its portfolio are reasonable in light of these considerations. 0
Case No. --Inv August, 0 Page of Q. Does the Department recommend any adjustments related to GMP s power supply portfolio? A. Yes. Both Ms. White and Mr. Evans recommend adjustments to certain items included in GMP s 0 rates. Several of these adjustments are discussed briefly, below, and in more complete detail of the prefiled testimony of Ms. White and Mr. Evans. 0 0 Q. Before discussing those recommendations, for context, can you briefly describe the overall statutory framework for considering GMP s power supply portfolio. A. Yes. Vermont s energy policy, codified in 0 V.S.A. 0a, states: It is the general policy of the State of Vermont: () To assure, to the greatest extent practicable, that Vermont can meet its energy service in a manner that is adequate, reliable, secure, and sustainable; that assures affordability and encourages the State s economic vitality, the efficient use of energy resources, and costeffective demand-side management; and that is environmentally sound. This statute makes clear that there are three primary goals that a Vermont utility must meet in providing electric service: it must be reliable, affordable, and clean. With respect to the affordability component, this means that GMP is required to provide reliable service while meeting the statutory requirements related to clean energy all at least cost. In addition, Vermont statutory and regulatory policy have encouraged stably priced, long-term contracts as a means of mitigating price volatility, which is also a component of affordable rates. The environmental sustainability component is primarily expressed through a utility s power supply, which I discuss in detail, below. Messrs. Winn and Vondle discuss the Department s review of how GMP approaches projects needed for reliability.
Case No. --Inv August, 0 Page of Q0. Please also provide an overview of the different renewable requirements and goals that should be considered in reviewing GMP s power supply portfolio. A0. The relevant statutes have changed over time, but Vermont utilities would be expected to comply with each while that statute was effective. The primary statutes that impact GMP s portfolio are: Sustainably Priced Energy Enterprise Development Program ( SPEED ) (0 V.S.A. 00 from 00 to 0); 0 Renewable Energy Standard (0 V.S.A. 00 from 0 to present); Net-metering (0 V.S.A. a from to 0; 0 V.S.A. 00 from 0 to present); Standard Offer Program (0 V.S.A. 00a from 00 to present); and Renewable Energy Goals (0 V.S.A. 00 from 00 to present). Q. Please provide a summary of the SPEED Program. A. SPEED required Vermont utilities to collectively enter into long-term, stably priced contracts for at least % of statewide load in 0 and then a second requirement of 0% of statewide load in 0. SPEED explicitly did not require Vermont utilities to retain renewable energy credits ( RECs ) associated with the energy from SPEED projects. This provision allowed the Vermont utilities to offset some of the costs of the program. 0
Case No. --Inv August, 0 Page of Q. To what extent did the SPEED Program influence GMP s power supply portfolio? A. There are two prominent examples of resources included in GMP s supply mix as a result, at least in part, of the SPEED requirements. First, in 00, the PUC approved a petition by GMP (along with Central Vermont Public Service Corporation, which GMP subsequently acquired) to enter into a 0-year power purchase agreement ( PPA ) with the Granite Reliable wind project, a MW resource located in New Hampshire. Under the PPA, GMP obtained energy, capacity, and renewable energy credits from the project. 0 Additionally, GMP specifically cited to SPEED as a rationale for its decision to construct the MW Kingdom Community wind project in Lowell, Vermont. In its Order approving the project, the PUC concluded that the project would contribute to both GMP s and VEC s need for committed power-supply resources in their portfolios, as well as assist Vermont in meeting its goals related to new renewable power-supply resources.... 0 Q. Please provide a summary of the Renewable Energy Standard ( RES ). A. In 0, the Vermont legislature brought Vermont into line with the other New England states (and many other states in the country) by establishing a renewable standard that requires each Vermont utility to retire an amount of RECs equal to a certain percentage of its annual MWh sales. Docket, Order of //0 at. The municipalities that belong to the Vermont Public Power Supply Authority may meet the requirements collectively.
Case No. --Inv August, 0 Page of Tier of the RES requires that each Vermont utility retire RECs associated with % of its annual MWh sales in 0, rising to % in 0. There are no vintage or size limitations on the renewable resources that are eligible to produce RECs for this tier. Tier of the RES requires retirement of RECs from renewable resources with a nameplate capacity of less than MW, commissioned after June 0, 0, and interconnected with the distribution or sub-transmission of a Vermont utility. The Tier requirement is a carve-out of the Tier amounts and starts at % of annual MWh sales in 0, rising to 0% in 0. 0 Tier of the RES is not directly related to power supply purchases but instead directs utilities to pursue energy transformation projects such as: building weatherization, increased electric vehicle adoption, and fuel switching of thermal sources. Q. To what extent has the RES influenced GMP s power supply portfolio? A. The RES replaced SPEED and imposed a more market-based approach with respect to compliance. Since Tier compliance can be achieved through the retirement of relatively low-priced RECs from older hydroelectric units, the RES incentivizes the sale of higher value RECs from the projects built under the SPEED. 0 Tier also relies on REC retirement; however, given the limited number of resources eligible (constructed post June 0, 0, under MW, and interconnected to the Vermont distribution or sub-transmission network) there is a much smaller market for these RECs.
Case No. --Inv August, 0 Page of 0 The vast majority of eligible resources constructed since June 0, 0, have been either standard offer, net-metering, or utility-owned. Consequently the ability to simply purchase Tier compliant RECs is still fairly limited. Additionally, while RECs from the standard offer and net-metering programs are eligible for compliance with Tier, the timing and amount of these resources coming into service is largely outside of GMP s control. This setup presents increased complexity from a planning perspective given the uncertainty as to the amount of RECs GMP will receive from the standard offer and netmetering programs, as well as the uncertainty associated with the amount of retail sales during the year. As it takes time to permit and construct a resource needed to comply with Tier, GMP has the choice of either having sufficient resources to comply with Tier of the RES and selling excess RECs out-of-state, or paying the Alternative Compliance Payment ( ACP ) associated with not meeting RES compliance. Since RECs from Tier resources are likely to cost less than the ACP, I would expect that GMP would chose a strategy that results in some over-procurement of RECs, at least until there is greater fluidity in the Tier REC market. 0 Q. Please provide a summary of the net-metering program. A. Net-metering provides an incentive for customers to self-generate power and net this generation against the electric bill. The net-metering program has been in place since but had relatively low adoption rates until 00, when the legislature required that solar net-metered projects receive an adder, on top of retail rates, for each kwh generated. This requirement, combined with significantly lower photovoltaic ( PV )
Case No. --Inv August, 0 Page 0 of panel costs, resulted in a very high number of new net metered customers in the past few years. A second component of the growth in net-metering is the ability for customers to enter into group net metered systems whereby the system does not need to be located anywhere near the customer and instead the customer essentially buys a share of the output of a project. 0 Q. What has been the impact of the net-metering program on GMP s power supply portfolio? A. The net-metering program has seen explosive growth in the past few years as a result of the technology costs significantly decreasing while the rate paid to net-metering customers remaining the same. Figure on the following page illustrates the growth of net-metering through 0. 0
Case No. --Inv August, 0 Page of Figure Net-metering Applications from through 0 As explained in Mr. Smith s prefiled testimony on behalf of GMP, the amount and expense of net-metering resources means that the amount of net metered excess MWh (those not used by the customer within the month the MWh are generated) represents one of GMP s largest power supply expenses, comparable to the company s largest PPAs. Smith, April PFT at.
Case No. --Inv August, 0 Page of Additionally, as the number of net-metering systems increased exponentially it changed the characteristics of the system such as changing the peak hour to later in the day and decreasing load during what are typically times of higher prices. As a consequence of these system changes, the value of net-metering has declined and the offsetting savings to GMP customers has also declined. 0 Q. Does the Department have any concerns with the net-metering costs? A. Yes. However, GMP is required by statute and rule to accept net-metering customers and there is no basis for the Department to contest the inclusion of these resources in GMP s power supply portfolio. The cost and pace of deployment of these resources has been addressed to some extent by the Commission in its recent revisions to the net-metering rule and the Department may be offering further suggestions to ensure that the costs are commensurate with the value, while meeting the statutory requirement that customers continue to have access to the program. 0 Q. Please provide an overview of the standard offer program. A. The standard offer program was designed to provide a financing mechanism for smallscale renewable projects by requiring that the electric utilities through a centralized procurement process enter into long-term contracts with new renewable resources with a nameplate capacity of. MW or less. As originally enacted in 00, the Commission established a set price for each eligible technology and all resources that utilized that technology received the same price. The second iteration of the program required
Case No. --Inv August, 0 Page of developers to participate in a competitive selection process whereby the lowest priced resources were selected. This process has significantly decreased the cost of the program for example, the price paid to solar projects is approximately / lower now than it was in 00. 0 Q. What has been the impact of the standard offer program on GMP s power supply portfolio? A. Standard offer resources remain a relatively small percentage of the total resources in GMP s supply mix. However, some of the resources are particularly expensive on a per MWh basis. For example, the solar resources selected in 00 are priced at $00/MWh and the 0 standard offer request for proposals ( RFP ) small wind projects are priced at $/MWh. Section 00a(k)() specifically provides that all reasonable costs of a Vermont retail electricity provider incurred under this subsection shall be included in the provider s revenue requirement for purposes of ratemaking.... 0 The standard offer program costs are offset to some degree by the ability of Vermont utilities to sell RECs associated with these projects to the extent that they are not necessary for compliance (or are not eligible for compliance due to the vintage of individual projects) with the RES. Additionally, the competitive selection process used since 0 has been useful in providing a more accurate estimate of solar costs.
Case No. --Inv August, 0 Page of 0 Q0. Please provide an overview of Vermont s renewable energy goals. A0. The renewable energy goals are not specific requirements, however, they provide guidance to Vermont utilities, the Department, and the Commission with respect to the policies that the state supports. There are eight enumerated goals, of which the following are most relevant to the power supply portfolios of Vermont s electric utilities: (a)() Providing an incentive for the State s retail electricity providers to enter into affordable, long-term, stably priced renewable energy contracts that mitigate market price fluctuations for Vermonters; (a)() Providing support and incentives to locate renewable energy plants of small and moderate size in a manner that is distributed across the State s electric grid, including locating such plants in areas that will provide benefit to the operation and management of that grid through such means as reducing line losses and addressing transmission and distribution constraints; and (a)() Promoting the inclusion, in Vermont s electric supply portfolio, of renewable energy plants that are diverse in plant capacity and type of renewable energy technology. 0 Q. To what extent does the Department take the Vermont renewable energy goals into consideration when reviewing GMP s power supply decisions? A. The renewable energy goals are not mandatory and do not override other important policy considerations, such as the need to provide affordable and reliable service pursuant to 0 V.S.A. 0a. It would be difficult for the Department to support a power supply
Case No. --Inv August, 0 Page of addition that is clearly not cost-effective over the life of the resource or that degrades system reliability. However, the renewable energy goals constitute policy expressions of the State of Vermont and cannot simply be ignored. For a resource that is of marginal economic benefit to ratepayers, the renewable energy goals could constitute a thumb on the scale and provide a qualitative justification for why it is reasonable for the utility to include that resources in its power supply portfolio. This would particularly be the case if it was a relatively new type of resource that clearly fit within the renewable energy goals and represented a pilot project from which a utility could gain operational and economic experience that would inform subsequent resource choices. 0 Q. Please provide an overview of GMP s hedging strategy. A. GMP is the only vertically integrated, non-public power utility in New England. The other New England states required non-public power utilities to divest resources and power purchase agreements and, typically, these utilities are not allowed to own resources or enter into contracts for a term of greater than five years without express approval from the state s public utility commission. As a result, the power supply costs of most other utilities in the region tend to be tied more closely to market prices. 0 In contrast, GMP owns a number of hydro and solar resources as well as two wind projects. In addition, it has entered into long-term contracts with HydroQuebec and a number of other renewable resources. GMP s exposure to the market is fairly limited and is primarily connected through the duration and terms of its contracts. For example, the
Case No. --Inv August, 0 Page of price of the HydroQuebec contract was originally set at a fixed price and then fluctuates to a limited amount with market prices. Additionally, GMP utilizes shorter-term contracts in a laddered approach to minimize price volatility. 0 Q. Does the Department support GMP s hedging strategy? A. Yes. Too often the view of hedging strategies changes with the price of the commodity. During periods with relatively high prices, hedging strategies are looked upon favorably while they are used as evidence of poor judgment if the prices are low. A hedge represents an informed judgment that a set price will be reasonable over the term of the contract or resource life, not in every year during that term. In 0, New England experienced the lowest annual average wholesale prices since the introduction of the wholesale markets. Consequently, GMP s hedging strategy (note that GMP is less hedged than most of the other Vermont utilities) is likely to be subject to greater criticism for the short-term impacts. 0 However, this criticism is short-sighted. New England wholesale energy prices have been trending down as the price of natural gas has fallen. Natural gas-fired units are typically the marginal units in the region and therefore set the price natural gas prices and wholesale energy prices correlate extremely well; given constraints on the gas pipelines in the winter (due to natural gas being primarily used for heating in the winter) Docket 0, Order of //.
Case No. --Inv August, 0 Page of this means that annual average energy prices have become primarily dependent on winter temperatures. 0 Figure, below, illustrates both the annual and monthly wholesale energy prices since January, 00. As can be seen in this chart, in the past five years, prices spike considerably during the winter and then are considerably lower for the rest of the year. New England experienced particularly mild weather in 0, which resulted in the lowest average annual prices since the start of the wholesale markets. However, it would be a mistake to assume that these prices are representative of wholesale energy prices going forward, as a particularly cold winter could significantly increase prices again.
Case No. --Inv August, 0 Page of These price spikes also provide significant rate volatility for utilities that primarily rely on the wholesale market. Through its hedging practices, GMP provides more stable electric rates for its customers. This stability allows businesses and residents to plan for energy expenditures without the dramatic spikes in rates that have occurred in other Northeastern states during cold winters. 0 Q. Please explain the Department s view of GMP s actions with respect to capacity prices. A. In addition to the likelihood of energy market volatility, capacity prices have been particularly difficult to predict as the ISO-NE Forward Capacity Market (FCM) rules have been constantly changing since the introduction of the market. In addition, because entry and exit (retirement) in the market is lumpy, even an FCM with stable rules will continue to have somewhat volatile prices. For example, the price in the 0 Forward Capacity Auction ( FCA ) was largely driven by the retirement of one particularly large unit. 0 The most recent FCA produced relatively low prices. To the extent these prices continue (particularly if there are a number of mild winters and corresponding lower energy prices), at some point these low prices will drive out resources that primarily rely on capacity revenues to stay economic. These are primarily older oil-fired units that run only a small number of hours per year; once these units retire capacity prices will likely increase significantly until the point where there is sufficient or excess capacity.
Case No. --Inv August, 0 Page of Figure Wholesale Capacity Prices In 0, the Commission approved a long-term contract between GMP and NextEra Energy Seabrook, LLC that primarily included the purchase of 0 MW of capacity for a -year term. The Department supported GMP s petition in that Docket as a reasonable hedge against capacity prices. The price in the most recent FCA is less than the contract price. However, the price was considered reasonable at the time that GMP entered into the contract and, as explained above, the price volatility of the capacity market suggests that GMP s hedge is reasonable. 0 See, Docket, Order of //.
Case No. --Inv August, 0 Page 0 of 0 Q. What is the Department s view of GMP s testimony of Regional Network Service ( RNS ) costs? A. As explained in Mr. Smith s prefiled testimony, RNS costs are a noticeable driver of GMP s requested rate increase. RNS charges are used to support regional transmissions service that ISO-NE determines supports reliability of the New England grid, and therefore benefits all customers in New England. The charge is based on each utility s monthly peak load, with the total dollar amount determined by the New England Transmission Owners and filed for approval by the Federal Energy Regulatory Commission. Consequently, decisions regarding these costs are, to a large part, outside of GMP s control. GMP has taken efforts to reduce its monthly peak and thereby reduce RNS costs, including through innovative services such as the Tesla Powerwall and other load reduction measures. 0 ISO-NE has publically stated that new transmission projects are unlikely to be needed for reliability in New England going forward because the system is already built out. Cost increases related to transmission will come from three categories: () ongoing maintenance of existing transmission infrastructure; () any public policy projects under Order 000 (such as accessing wind projects in Maine to meet renewable requirements in Connecticut); and () more stringent reliability standards imposed by FERC. The strategies that GMP employs to reduce RNS costs will therefore continue to help lower costs for ratepayers.
Case No. --Inv August, 0 Page of Q. Please explain the Department s view of the Joint-Venture ( JV ) GMP Solar projects. A. GMP proposed five solar projects in 0. Mr. Evans s prefiled testimony states that these resources are not cost-effective when compared to energy and capacity available from the New England Market and are not needed to supply Renewable Energy Credits. Mr. Evans calculated the rate year costs of these resources, compared to purchases from the ISO-NE wholesale market, at approximately $. million. 0 The Department does not recommend that these costs be removed from the rate year for several reasons. First, while the amount of Tier eligible resources is more than necessary, as explained earlier in my testimony, planning requirements associated with Tier is complicated by the amount of resources (standard offer and net-metering) that are outside of GMP s control. Further, the Department appreciates GMP s efforts to develop a tax equity structure to take advantage of the investment tax credit and therefore reduce the overall costs of the project, particularly as this tax credit is declining over time. Finally, it is important to note that the Department supported these resources in the Section proceedings. 0 Evans, August 0 prefiled testimony at.
Case No. --Inv August, 0 Page of Q. Does the Department have any other concerns with the power supply portion of GMP s operations? A. Mr. Evans s prefiled testimony provides specific critiques of GMP s power supply modeling. The Department shares Mr. Evans s concerns but is not recommending any specific action at this time; instead, the Department will work with GMP to more fully understand the costs and benefits of reconsidering GMP s model. Q. Does this conclude your testimony? A. Yes.