MCP Basis Adjustments

All of the avoided cost proposals are based on the CEC's MCP forecast, which uses the MULTISYM model to generate long term forecasts for gas and electricity prices. All the parties, except for ORA, agree that the CEC's MCP forecast is not a reasonable estimation of short-term electric prices in light of current gas and electric market conditions in California and that the forecast is too low. In support of modifications to the MCP forecast, the utilities posit that the forecast is too low because it does not: 1) consider higher forecasted load growth in the Western States Coordinating Council than historical experience would indicate; 2) consider that projected new generation power plant online dates could be delayed; 3) include an updated gas price forecast reflecting recent price increases; because it: 4) assumes the use of natural gas would expand at essentially constant costs for the foreseeable future, and because: 5) the bidding behavior in the model does not completely replicate recent observed high prices. In support of modifications to the CEC's MCP forecast, TURN points out that the MCP forecast understates current MCPs, gas prices, future demand, the cost of RECLAIM emission reduction credits, and the availability of imports from out-of-state generating resources.

Based in the above, the utilities propose the following basis for calculating the MCP:

TURN expressly states its agreement with use of historical data for Program Years 2001 and 2002; neither TURN nor any other party, except ORA, expresses any disagreement with the other values proposed by the utilities. ORA states that the CEC MCP forecast data should be used, which presumably means that it objects to any adjustment at all. It does not give any rationale for its recommendation.

The preferable method of updating the MCP basis would be to use a forecast prepared from a revised run of the MULTISYM model, using the parameters suggested by the CALMAC sub-group in its September 25, 2000 letter to the CEC. However, since the CEC has not performed these data runs, use of the utilities' proposal is the next best alternative.

The use of historical data from October of 1999 through September of 2000 reflects the reasonable expectation that the behavior of wholesale prices over the next two years is more likely to mimic last year's prices than the downward trend forecast by the MULTISYM model. Adding 20% to the MCP forecast prices for PY 2003 - 2010 is a reasonable way to adjust the low natural gas prices forecast by the MULTISYM model and to reflect the lack of RECLAIM credit costs in the long-term prices for energy. Absent better data, the use of the MCP forecast for PYs 2011-2020 is reasonable, as is the proposal to escalate the MCP by the average growth rate in the last five years of the forecast.

The utilities' adjustments to the MCP basis should be used in the cost-effectiveness analysis for PY 2001 programs. The utilities should use the same adjusted forecast prices, using a consistent format.

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