Opinion ID: 2575983
Heading Depth: 1
Heading Rank: 7

Heading: the commission's determination of avoided capacity costs is supported by substantial evidence

Text: ¶ 33 The determination of a utility's avoided capacity costs begins with an analysis of the utility's capability to meet the demand made on it for electricity. Demand for electricity varies hourly and seasonally. A utility must have sufficient generating capability to meet the maximum demand, whenever that occurs. [63] Because electricity cannot be produced in advance and be then stored, a utility must have generation resources available to meet periods of peak demand. [64] Consequently, a portion of a utility's generating units will stand idle most of the day or year, coming online only during periods of peak demand. [65] ¶ 34 To economically deal with the situation of variable demand, utilities use three types of generating units that optimally match costs with usage. Baseload plants are designed to operate continuously to meet a system's minimum load. They are expensive to build, but because they use low cost fuels, they are relatively inexpensive to operate. [66] In contrast, peaking units are designed to run for only short periods of time when demand for electricity is at its highest. [67] They are less expensive to build than baseload plants, but because their fuel costs are higher, they are more expensive to operate. [68] The third category of generating units are intermediate plants, which as the name suggests operate more than a baseload unit and less than a peaking unit with commensurate costs. [69] ¶ 35 Based on evidence of PSO's capability to meet projected future demand, the Commission found that PSO will need to secure additional peaking capacity beginning in 2005 and that its need for capacity to meet peak demand and reserves will increase each year thereafter. Accordingly, the Commission found that PSO needs the capacity Lawton will provide. Having rejected competitive bidding and the offers received by PSO as means of determining avoided costs, the Commission selected a newly constructed combustion turbine peaking plant as the most efficient alternative source of supply of PSO's next unit of required capacity. These findings and conclusions are supported by substantial evidence. ¶ 36 The Commission found that a levelized capacity payment of $77.01/kW/year was a reasonable estimate of the capacity costs of a peaking plant. This amount was consistent with the testimony of expert witnesses regarding the capacity costs of a peaking plant. We hold that the Commission's findings and conclusion as to PSO's avoided capacity costs are supported by substantial evidence. ¶ 37 Although PSO does not dispute that its future need is for peaking capacity, it suggests that it might be more appropriate in this case to use the costs avoided by the addition of a hypothetical baseload unit on its system. This argument is based on the fact that the power sales agreement approved by the Commission requires PSO to accept power from Lawton not just at hours of peak demand when PSO needs Lawton's power to meet demand, but all day every day of the year. [70] In other words, PSO's need for peaking capacity is not matched by the amount of power it will have to accept from Lawton. PSO argues that the amount of power it must take from Lawton is characteristic of a baseload unit, not a peaking unit, so that regardless of what its future needs may be, its avoided costs for taking Lawton's power would be better reflected by using a baseload unit as the proxy. As PSO points out, energy costs make up a large percentage of total avoided costs. Hence, while the fixed costs of a baseload unit would be considerably greater than those of a peaking unit, over the course of the contract's term the higher capacity(fixed) costs of a baseload unit would be more than offset by that unit's lower operating costs. The Commission's staff witness in fact recommended that a baseload unit be used as a proxy for avoided costs during a portion of the contract's term. ¶ 38 In the next part of this pronouncement, we hold that on remand the Commission must revisit its determination of PSO's avoided energy costs. While the evidence of PSO's future capacity needs clearly supports the Commission's decision to base avoided capacity costs on the capital costs of a peaking unit, reconsideration of PSO's avoided energy costs may create a need to reconsider the use of a peaking unit as the proxy for avoided capacity costs during the entire contract term. We are not directing the Commission to make any particular decision in this regard, but are merely giving the commissioners permission to revisit this issue if necessary. Regardless of how energy payments are determined, it may well be that the lower costs of building a peaking unit make that unit a more accurate measure of capacity costs in current dollars than generating units that take longer to build, are more complex, and have greater exposure to regulatory and environmental measures. [71] We simply want to make clear that while we affirm the Commission's use of a proxy peaking unit for capacity costs, we are not forbidding the Commission to revisit the proxy unit chosen for capacity payment purposes to the extent that the Commission determines such revisiting of the subject is necessitated by its reconsideration of PSO's avoided energy costs.