7. Modifying Natural Gas and Electric Generation Avoided Costs to Reflect Updated Market Prices and Natural Gas Forecasts

The Final Report presents updates to the electricity market prices and natural gas prices currently used in the E3 calculator to produce revised natural gas and electric generation avoided costs.

Natural gas prices are updated using gas futures price data from NYMEX for the years 2006-2011. The long-run gas forecast for the years 2015-2030 is based on an average of Energy Information Agency, CEC and SoCalGas forecasts, which were also updated by E3 using the most recent forecasts available.⁵¹ The years 2012-2013 represent "transition" years based on a blend of NYMEX futures and the long-run gas forecast. These values were developed by extrapolating the 2011 NYMEX futures price to the 2015 long-run forecast. Attachment 3 presents these updated inputs. Using the same assumptions for translating natural gas price inputs into avoided costs during the evaluation of 2006-2008 energy efficiency portfolio plans, we have produced monthly natural gas avoided costs that reflect these updated inputs, by utility service territory. These include avoided environmental costs. (See Attachment 3.)

The Final Report also presents updated electric generation avoided costs that reflect the updated gas price forecast described above. In addition, electric generation avoided costs are updated to reflect electricity market price data for the years 2006-2007, prior to the "resource balance" year of 2008. The Final Report describes these updates to electric generation avoided costs as follows:

"The years 2006 through 2007 use electricity market prices. Electricity prices for January 2006, February 2006, and March 2006 are the historical closing prices from the final day of trading (dates were: 12/27/05, 1/30/06, and 2/27/06, respectively). The electricity forward prices are from Platts as of the close of the March workshops on 3/15/06. Years 2008 through 2011 are the long run cost of a CCGT (at resource balance) using natural gas prices from the NYMEX futures. Years 2012 through 2014 are the transition period, where the CCGT cost uses the natural gas prices that are transitioning from NYMEX to the long-run gas forecast. After 2014 the long run natural gas forecast is used exclusively for the CCGT cost. "⁵²

Attachment 3 presents the updated natural gas price forecast adjusted to reflect gas delivery charges and surcharges for electric generators, and the resulting electric generation avoided costs, by utility service territory. These avoided costs include all adders (e.g., environmental) and multipliers except for transmission and distribution, by utility.

The tables in Attachment 3 compare the updated natural gas price forecasts and electric generation avoided costs with the values used in the utilities' June 2005 filings in A.05-06-004 et al. for their energy efficiency portfolio plans. As indicated in those tables, electric generation avoided costs increase significantly through 2014, due somewhat to the updated electricity market data (2006 and 2007), but due mostly to the effect of the updated NYMEX natural gas forecasts (2008 to 2014). Similarly, the natural gas forecasts and resulting natural gas avoided costs increase significantly during that timeframe to reflect the updated NYMEX price data.

All parties agree that these updates should be made to the ex ante forecasts of avoided costs. TURN, however, expresses concern that if these updates are used to calculate shareholder earnings under a future risk/return mechanism, the utilities would receive a windfall for activities that they would have undertaken even with the lower avoided costs. However, using one set of avoided costs for program valuation and another set of costs for reward determination would not only be unduly complicated, but could create a disincentive for utilities to rebalance their portfolios to reflect the updated avoided costs. We note that TURN does not similarly argue that the higher avoided cost valuation for residential and commercial a/c units that it advocates (and that we adopt in terms of adjusting for TOU-averaging) would create such a windfall.

The ex ante avoided costs used for 2006-2008 portfolio rebalancing, as well as to evaluate 2006-2008 performance, should reflect the significantly changed realities in natural gas supplies and market prices that have emerged since the interim avoided costs were adopted in early 2005. These are reflected in the updated natural gas forecasts and avoided costs presented in Attachment 3. We will adopt them.

⁵¹ Ibid., pp. 36-39.

⁵² Final Report, p. 40.