STATE OF IOWA BEFORE THE IOWA UTILITIES BOARD IN RE MIDAMERICAN ENERGY COMPANY Docket No. EAC-2016-0006 Docket No. EAC-2017-0006 MIDAMERICAN ENERGY COMPANY S INITIAL BRIEF
Table of Contents I. PROCEDURAL HISTORY AND BACKGROUND... 2 II. ARGUMENT... 5 A. MidAmerican s Energy Adjustment Clause Establishes the Recovery of All Negative Wind LMPs.... 5 B. Recovery of Negative LMPs Satisfies the Matching Principle.... 7 C. Recovery of Negative Wind Revenues Represents a Balanced Outcome.... 9 III. CONCLUSION... 12 i
STATE OF IOWA DEPARTMENT OF COMMERCE BEFORE THE IOWA UTILITIES BOARD IN RE MIDAMERICAN ENERGY COMPANY Docket No. EAC-2016-0006 MIDAMERICAN ENERGY COMPANY S INITIAL BRIEF COMES NOW, MidAmerican Energy Company ( MidAmerican ), by and through counsel, and pursuant to the Order Setting Procedural Schedule, 1 states as follows to the Iowa Utilities Board ( Board ) as MidAmerican s Initial Brief. The issue in this docket relates to the implementation of the Iowa Energy Adjustment Clause ( EAC ) and the inclusion of negative energy market revenue from the wholesale energy market. As is further identified below, MidAmerican s tariff provides that all negative energy revenues should be included in the EAC, regardless of whether the generation that produced the negative revenue is in rates and is producing federal production tax credits ( PTCs ) that are also flowing through the EAC. MidAmerican s interpretation of the tariff is consistent with past practice, the long-standing matching principle and is part of the balanced outcomes MidAmerican has achieved in its wind ratemaking principles 1 MidAmerican Energy Company, Docket No. EAC-2016-0006, Order Setting Procedural Schedule (February 27, 2017). MidAmerican is also filing this brief and supporting information in Docket No. EAC-2016-0006 pursuant to the Order Docketing Filing and Requesting Comments, MidAmerican Energy Company, Docket No. EAC-2017-0006 (March 3, 2017). 1
dockets. The Board s focus should be on the overall allocation of costs and benefits between customers and the company with particular focus on the fact that customers are getting significant benefits from wind generation, at no net cost to the customer. When viewed from this perspective, including negative energy revenues from all wind generation in the EAC is not only just and reasonable, but it is the outcome that maintains the balance between customers and MidAmerican. I. PROCEDURAL HISTORY AND BACKGROUND In Docket No. RPU-2013-0004 (MidAmerican s last rate case), the Board approved an EAC for MidAmerican designed to remove the fuel and purchased power costs related to Iowa jurisdictional sales from base rates and recover such costs through the EAC. 2 Among other items, the EAC includes pre-tax-level federal PTCs related to the wind facilities that are in base rates and renewable energy credit ( REC ) sales to offset some of these costs. The EAC also includes negative wind energy settlements in the markets administered by the Midcontinent Independent System Operator, Inc. ( MISO ). Negative wind energy settlements are also referred to as negative locational marginal prices ( LMP ). An LMP is the price for electric energy at each generator, which is composed of three elements an energy price, a congestion price, and a loss component. Under certain conditions, the LMP can be negative, which means electric generators pay the MISO market to produce power. This situation can arise for a variety of reasons, including market signals that too much generation is available and therefore generation will be encouraged to reduce output or go offline. Other reasons include technological or fuel-cost related reasons for plants to run continuously and therefore maintain output by offering to pay wholesale buyers to take electricity. 3 Another reason 2 MidAmerican Energy Company, Docket No. RPU-2013-0004, Order Approving Settlement, with Modifications, and Requiring Additional Information at 27-34 (March 17, 2014). 3 These reasons are identified by the Energy Information Administration at https//www.eia.gov/todayinenergy/detail.php?id=6730 2
for negative LMPs is the PTC benefit, which is one component of a bid into the market for wind generation. 4 Due to this, negative LMPs are more typical in markets with large amounts of nuclear, hydroelectric units, or wind generation. From a market perspective, however, a negative LMP is not a negative for customers for at least two reasons. First, wind energy typically displaces more expensive sources of generation. The outcome of using less-costly generation is a reduction in MidAmerican s total use of fuel, which reduces the fuel cost that is recovered from customers. Second, the negative prices drive down the overall market price for electricity, which is also beneficial for customers. When MidAmerican filed its first annual EAC on February 27, 2015, 5 the overall benefit to customers was 6 as identified in Confidential Exhibit 1. The EAC reconciliation filed with the Board included actual negative energy revenue of. 7 The Board approved the filing on March 6, 2015 with no discussion of the negative wind revenue line item. 8 On February 25, 2016, MidAmerican filed its second annual EAC. 9 The overall benefit to customers was 10 as identified in Confidential Exhibit 2. This second EAC reconciliation filed with the Board included actual negative energy revenue of. The Board accepted the 4 That is, an owner of wind generation is willing to pay the market a negative price because the PTC benefit (which is up to $22/MWh) will make the end result positive for the generator (i.e., a negative LMP of $-12/MWh will still result in an $10/MWh revenue due to the PTC value). 5 MidAmerican Energy Company, Docket No. EAC-2015-0007, EAC (Summary) Annualized (Monthly Reporting) (February 27, 2015). 6 This figure is referenced as the total Iowa EAC Recoverable Costs for 2014 in Tab 1 of the Exhibit. 7 The EAC reconciliation filings include detail on MidAmerican s budgeted (or forecasted) amounts for negative wind revenue. The figures identified in this brief are the actual amounts that have been included in MidAmerican s reconciliation filings. However, these figures are not identified in Exhibits 1-3. 8 See, Approval Letter, Docket No. EAC-2015-0007 (March 6, 2015). 9 MidAmerican Energy Company, Docket No. EAC-2016-0006, Annual Energy Adjustment Clause Reconciliation (February 25, 2016). 10 This figure is derived from the total cumulative Iowa EAC Recoverable Costs less the recoverable amount from the prior year ( = ). 3
filing on March 25, 2016, subject to complaint and investigation. 11 The Board s approval of the second EAC contained an observation about the negative wind revenue line item, specifically indicating the need for more information about whether it was appropriate to include negative wind revenue from generation that does not have a corresponding PTC flowing through the EAC. 12 On February 24, 2017, MidAmerican filed its third annual EAC. 13 The overall benefit to customers was 14 as identified in Confidential Exhibit 3. The EAC calculation filed with the Board included a line item for negative wind revenue for. The Board has not yet approved this filing, but effectively consolidated the issue of the treatment of negative wind revenues with Docket No. EAC-2016-0006. 15 As identified in Confidential Exhibit 3, since filing the annual EAC, customers have realized a cumulative of in benefits (assuming the third annual EAC is approved). In turn, that the in negative wind revenue has flowed through the EAC. It is important to note in customer benefits is net of the negative wind revenue. In other words, customers have received this total benefit after negative wind revenue has been subtracted. On March 25, 2016, the Board docketed MidAmerican s EAC filing and requested the Board staff schedule a meeting with MidAmerican and OCA. 16 The Board asked the parties to address the following MidAmerican s proposed EAC collection may include negative wind revenues but not the corresponding PTCs for projects added after Wind VII. It is unclear whether it is appropriate for 11 MidAmerican Energy Company, Docket No. EAC-2016-0006, Order Docketing Filing and Requesting Comments (March 25, 2016). 12 Id. at 2. 13 MidAmerican Energy Company, Docket No. EAC-2017-0006, Energy Adjustment Clause Reconciliation Workpapers (February 24, 2017). 14 This figure is derived from the total cumulative Iowa EAC Recoverable Costs less the total cumulative recoverable amount identified in the prior year ( - = ). 15 MidAmerican Energy Company, Docket No. EAC-2017-0006, Order Docketing Filing and Requesting Comments (March 3, 2017). 16 MidAmerican Energy Company, Docket No. EAC-2016-0006, Order Docketing Filing and Requesting Comments (March 25, 2016). 4
customers to pay negative wind costs to make PTC benefits that flow to MidAmerican. 17 On June 27, 2016, the Office of Consumer Advocate ( OCA ) filed a Response to the Board s March 25, 2016, order indicating that the OCA met with MidAmerican to discuss the negative wind revenue issue and requested a meeting be scheduled between the OCA, Board staff, and MidAmerican to discuss the issue as directed in the Board s Order. 18 On August 4, 2016, Facebook, Inc., Google Inc. and Microsoft Corporation (collectively the Tech Companies ) filed a Petition to Intervene. 19 The Board granted the request for intervention on October 11, 2016. 20 In response to the OCA s March 25, 2016 Response, the Board staff scheduled a meeting between the OCA, the Tech Companies, MidAmerican (the Parties ) and Board staff. That meeting was held December 6, 2016. On January 26, 2017, the Board requested a status report regarding the discussions between the Parties. On February 9, 2017, the Parties filed the required status report and indicated they were not able to resolve the issues raised by the Board. 21 The Parties requested the Board establish a procedural schedule for resolution of the EAC filing. 22 II. ARGUMENT A. MidAmerican s Energy Adjustment Clause Establishes the Recovery of All Negative Wind LMPs. MidAmerican s EAC provides for the recovery of all negative wind energy revenue, which has been MidAmerican s practice since the initial EAC filing in 2015. Specifically, the tariff states The cost of energy will be adjusted by the pre-tax amount of any federal production tax credits associated with renewable power projects, grossed up at the rate of 1.643 as entered into account 409.1, reduced for any negative energy settlements from those renewable power projects that result during 17 Id. at 2. 18 MidAmerican Energy Company, Docket No. EAC-2016-0006, Office of Consumer Advocate Response to Board Order Issues March 25, 2016 (June 27, 2016). 19 MidAmerican Energy Company, Docket No. EAC-2016-0006, Petition to Intervene (August 4, 2016). 20 MidAmerican Energy Company, Docket No. EAC-2016-0006, Order Granting Intervention (October 11, 2016). 21 MidAmerican Energy Company, Docket No. EAC-2016-0006, Status Report (February 9, 2017). 22 Id. at 2. 5
the period the projects are eligible for the production tax credit, as recorded in account 447.043. 23 The underlined clause clearly allows for the recovery of negative wind revenue during the time that wind generation is eligible for the PTC benefits. Intervenors will argue that the underlined clause allows for recovery of negative wind revenue only if the PTC benefits from that generation are also flowing through the EAC. This reading of the tariff language when considered in the context of MidAmerican s wind ratemaking cases is incorrect. The EAC tariff language establishes a two-step process (1) the cost of energy is adjusted by any PTCs from renewable projects; and then (2) the EAC is reduced for any negative revenue from renewable projects that are eligible for PTCs. This creates the rule that all PTCs and all negative wind revenues will flow through the EAC unless there is an exception to this rule created in a subsequent proceeding or other Board action. With respect to PTCs, the Board modified the rule in subsequent dockets by adopting ratemaking principles for wind projects Wind VIII, Wind IX, Wind X and Wind XI. 24 In each of those dockets, the Board approved ratemaking principles that allow MidAmerican to retain the PTCs for those projects until the projects are included in rates. 25 That is, the PTC benefits are specifically excluded from the EAC. Without these ratemaking principles, by the terms of the EAC tariff, the PTCs would flow through the EAC immediately. Importantly, the ratemaking principles decisions in Winds VIII, IX, X and XI do not modify the rule with respect to the treatment of negative wind revenue because there was not a ratemaking principle or agreement modifying their 23 MidAmerican Energy Company Tariff at Sheet No. 433 (emphasis added). 24 Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, Docket No. RPU- 2015-0002, Order Approving Settlement with Modification and Requiring Reports at 14 (August 21, 2015) (Wind X Order); Wind IX Order at 14; Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, Docket No. RPU-2013-0003, Order Approving Settlement and Requiring Reports at 14-15 (August 9, 2013) (Wind VIII Order). 25 Id. 6
treatment that was approved by the Board. This means that the rule established in the EAC tariff is maintained, and all negative wind revenues should run through the EAC immediately. The language of the tariff does not require the treatment of PTCs and negative wind settlements to be tied together merely because they are referenced in the same sentence. The two concepts are in separate and independent clauses of the sentence, with the first clause requiring all PTCs to run through the EAC (unless modified later) and all negative wind revenue to run through the EAC (unless modified later). Since the PTCs have different treatment due to the subsequent ratemaking principles dockets that modified their treatment, and those dockets do not address negative wind revenue, the plain language of the EAC tariff requires that the negative wind revenue is included in the EAC calculation. B. Recovery of Negative LMPs Satisfies the Matching Principle. MidAmerican s proposal to recover costs associated with negative wind revenue is consistent with the regulatory principle of matching. As articulated by MidAmerican witness Specketer in several advanced ratemaking principle cases [a] fundamental regulatory principle known as the matching principle requires that all costs associated with a business activity are counted against the revenue from the same business activity. Providing the benefits to customers of the environmentalrelated attributes without a corresponding recovery of the Wind XI investment and other related costs, and recognition of other benefits, violates the matching principle. 26 The matching principle has been recognized by the Board and Iowa courts for many years. It has also been quoted with approval by the Iowa Supreme Court in Davenport Water Co. v. Iowa State Commerce Commission. 27 26 Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, Docket No. RPU- 2016-0001, Direct Testimony of Thomas B. Specketer at 8 (April 14, 2016). 27 190 N.W.2d 583, 605 (Iowa 1971). 7
Witness Specketer discussed the matching of costs and benefits as they relate to the EAC explicitly in the Wind XI case. He stated As was true for Wind VIII, Wind IX and Wind X, recognizing all costs and benefits of Wind XI at the time of a future rate proceeding, including those benefits that would be included in the EAC, ensures there will be proper matching of the customer benefits and expenses of the Project. It would be unbalanced and unreasonable for MidAmerican s electric customers to get all the benefits of these renewable attributes without incurring costs associated with any of the rate base and expense necessary to provide such benefits. 28 As noted above, there are substantial benefits flowing to customers from MidAmerican s wind projects. Most of those benefits flow through the EAC in the form of zero cost fuel. As has been articulated, one of the costs associated with providing these benefits are negative wind LMPs which result in negative wind revenue. Negative wind revenues are unavoidable in order to deliver benefits to customers in the form of reduced fuel costs. In this case, it would be a mismatch for customers to get all of the benefits from the wind projects without also factoring in some of the costs associated with generating those benefits. To demonstrate compliance with the matching principle, note that MidAmerican proposed, and the Board accepted, a different approach to the recovery of negative wind revenue in Wind XI. In this docket, because of the way costs and benefits will flow through the EAC, it was just and reasonable to exclude the negative wind revenues from the EAC. Witness Specketer reasoned that [u]nlike prior wind projects, all of the costs and benefits of Wind XI are excluded from both base rates and the EAC, and included in the proposed revenue sharing calculation as modified by the Rate Mitigation ratemaking principle. Therefore, it is appropriate to exclude the Wind XI negative wind revenue from the EAC. 29 28 Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, Docket No. RPU- 2016-0001, Direct Testimony of Thomas B. Specketer at 8 (April 14, 2016). 29 MidAmerican Energy Company, Rebuttal Testimony of Thomas B. Specketer at 21, Docket No. RPU-2016-0001 (June 28, 2016). 8
To explain this further, in Wind XI MidAmerican proposed a ratemaking principle that includes all of the benefits from the project in the revenue sharing calculation and, subject to the provisions of revenue sharing, applies those benefits to the depreciation of certain coal and wind assets. 30 Because of this, for Wind XI, none of the benefits flow through the EAC. As such, MidAmerican reasoned it would not be consistent with the matching principle to recover negative wind revenue through the EAC and therefore voluntarily agreed not to recover the negative wind revenue through the EAC because it would violate the matching principle. Wind X also has a ratemaking principle that accelerates depreciation of specified assets using the fuel cost savings from Wind X. However, unlike Wind XI, it is still consistent with the matching principle to recover the negative wind revenues from this project through the EAC even though the fuel cost savings aren t flowing directly through the EAC. This is because fuel cost savings are still being calculated but applied in a different manner. In the case of Wind X, the fuel savings will go directly to depreciate certain fossil fuel assets instead of flowing through the EAC. As explained by witness Specketer To determine the amount of Wind X-related fuel savings, MidAmerican will calculate the monthly EAC retail fuel recoveries with and without the Wind X generation, with the difference representing Wind X-related fuel savings. 31 C. Recovery of Negative Wind Revenues Represents a Balanced Outcome. A hallmark of the Board s criteria in evaluating all of the wind projects presented to it is that that they should establish a reasonable balance of the risks and rewards between the customer and the company. 32 The EAC tariff language discussed in Section A, above, is a recognition of the 30 Wind XI Order at 13 (identifying Rate Mitigation principle). 31 MidAmerican Energy Company, Rebuttal Testimony of Thomas B. Specketer at 2 Docket No. RPU-2016-0001 (June 15, 2016). 32 See, e.g., Wind IX Order at 15-16 (discussing the need to reach a reasonable balance of the risks undertaken by MidAmerican and the risks assumed by customers). 9
balancing that occurs with MidAmerican s wind projects. As MidAmerican President and Chief Executive Officer Bill Fehrman testified in the Wind XI case the Board has established balanced outcomes that apportion the risk of renewable development appropriately between MidAmerican and customers. These outcomes have made Iowa an attractive place for sustainably-minded entities to build operations here. 33 Mr. Fehrman further explained this balance of risk and reward in the following way Customers receive 1) Environmental benefits of emissions-free energy and capacity; 2) Significant economic development manifesting in increased property tax revenue, additional revenues from labor and non-labor expenditures, jobs and income for landowners; 3) Rate mitigation that continues to keep electric rates stable and low both now and in the future; 4) Early depreciation of MidAmerican s coal assets which drives down rate base and is good for the environment; 5) Protection from fluctuations in fuel and transportation costs; 6) Use of MidAmerican s parent company to help monetize the PTC to pay for costs of the Project; and 7) A renewable generation asset built with a goal of not increasing customer prices that provides a significant hedge against future carbon taxes, increasing costs to customers and long-term stability of ownership with no recontracting risk post contract term in the event a PPA is used. 34 In turn, the Company receives 1) A reasonable opportunity to earn an [Return on Equity] ROE that reflects the value of renewable energy; 2) Ownership of a renewable asset that satisfies customers demands for an increased amount of renewable energy; 3) PTC payments that help pay for the Wind XI assets; and, 4) The assurance that when the assets go into rate base, the ratemaking principles are known in advance. 35 This balancing of rewards between MidAmerican s customers and the company involves many elements. It is important when evaluating this balancing that the total picture is taken into consideration. If one starts looking at individual components of these wind projects, it is easy to pick them apart and find a component that benefits either the customer or the company to a 33 Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, Docket No. RPU- 2016-0001, Rebuttal Testimony of William J. Fehrman at 11 (June 28, 2016). 34 Id. at 4-5. 35 Id. at 5. 10
different degree. This, however, is not how the projects have been presented to the Board for evaluation as to their justness and reasonableness. Instead, the entire project must be evaluated by how risk and rewards are distributed as discussed by Mr. Fehrman. From this perspective, customers are receiving significant benefits from Wind projects VIII, IX and X, as is identified in MidAmerican s semi-annual update filings. 36 For example, in the recent Wind VIII update, MidAmerican reported that customers received $45.2 million of fuel cost reductions related to the project for the year 2016. The Wind IX and X updates show benefits to customers of $6.2 million and $3.6 million respectively. 37 This benefit is provided to customers each year despite the fact that the project is not included in base rates. Including the negative energy revenues in the EAC helps to maintain balance between the customer and MidAmerican. However, even if one performs a narrow analysis of costs and benefits and looks at just the retail fuel benefits received from the wind farms in question only during the hours the turbines are operating with negative LMPs, the result is still positive for customers. Confidential Exhibit 4 shows that the corresponding fuel benefit for customers in the form of reduced fuel costs is. Subtracting the negative wind revenues during these corresponding times, the net benefit to MidAmerican s Iowa customers was. Thus, customers even when only looking at fuel cost savings during the hours the turbines are producing MWhs with negative wind LMPs are receiving an overall benefit in fuel cost savings. Disallowing MidAmerican the opportunity to recover negative wind revenue will upset the balance of risk and reward between the customer and the company. 38 MidAmerican s customers 36 See e.g., Docket No. RPU-2016-0001, Wind VIII Update (March 1, 2017) 37 See e.g., Docket No. RPU-2016-0001, Wind IX Update (March 1, 2017); Wind X Update (March 1, 2017). 38 It is worth noting that, when Mr. Fehrman filed the testimony referenced above, the balanced outcome he was describing included MidAmerican s inclusion of all negative wind revenues through the EAC since MidAmerican had been doing so, with approval from the Board, to that point. 11
continue to receive the lower fuel cost benefit, lower LMP, revenue sharing, and increased depreciation benefits from its wind projects. However, if the company is not given an opportunity to recover the costs of providing such benefits, it jeopardizes the company s opportunity to earn a Return on Equity ( ROE ) that reflects the value of renewable energy. From a broader perspective of the relative risks and benefits between customers and MidAmerican, it has to be noted that customers are receiving benefits from MidAmerican s wind projects VIII, IX, X and XI (when in-service) with the goal of having these benefits at no net cost to customers. This is an extraordinary situation in the utility industry, which is fulfilled through the interaction of the EAC and revenue sharing. As explained by witness Specketer in Wind X and Wind XI [d]espite not receiving the revenues from the environmental attributes of Wind X, customers will still receive the environmental benefits of renewable energy credits, carbon credits, or other related benefits before the wind units are placed in rate base. This is because these environmental benefits will be included in the Company s revenue sharing calculation approved by the Board in the Company s 2013 Rate Case. 39 Not allowing MidAmerican to recover negative wind revenues in these circumstances where customers are receiving significant benefits from these wind projects (which are not included in base rates) risks upsetting the balance of risk and reward that MidAmerican, the OCA, other intervenors and the Board have worked so hard to achieve. III. CONCLUSION The EAC approved in RPU-2013-0004 allows for the recovery of negative wind revenue associated with renewable projects even if the PTCs from those projects do not flow through the 39 Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, Docket No. RPU- 2015-0002, Direct Testimony of Thomas B. Specketer at 8 (April 30, 2015); see also, Application of MidAmerican Energy Company for a Determination of Ratemaking Principles, RPU-2016-0001, Direct Testimony of Thomas B. Specketer at 8 (April 14, 2016). 12
EAC. This outcome is consistent with the matching principle, a key regulatory principle that requires that MidAmerican be allowed to recover negative wind revenue through the EAC for the Wind VIII, Wind IX and Wind X projects to properly balance the benefits and costs of wind generation between the customer and company. The opposite conclusion would be inconsistent with the language of the EAC and the policy of the matching principle. Further, excluding negative wind revenues from the EAC now would disregard the millions of dollars in fuel savings costs that flow to customers through the EAC while, at the same time, MidAmerican is not collecting the costs of this new generation through base rates. WHEREFORE, MidAmerican Energy Company respectfully requests the Board continue the policy established in the approval of the initial EAC filing, and allow for the continued recovery of negative wind revenue through its Board approved EAC. DATED this 14 th day of March 2017. Respectfully submitted, MIDAMERICAN ENERGY COMPANY By /s/ Brian J. Rybarik Brian J. Rybarik 666 Grand Avenue, Suite 500 Des Moines, Iowa 50309 Phone (515) 281-2559 Fax (515) 242-4398 Email bjrybarik@midamerican.com ATTORNEY FOR MIDAMERICAN ENERGY COMPANY 13