Callahan’s Cleveland Diary

Testimony prepared for Cleveland City Council Public Utilities Committee hearing on PURPA Part II Standards, January 16, 2008

To Chairman Zone and Members of the Public Utilities Committee:

I’m submitting the following in lieu of oral testimony, and to amplify my presentation at the Committee’s earlier hearing on November 29.

The first thing I want to make clear is that, as a died-in-the-wool Cleveland Public Power supporter and 25-year residential customer, I’m very grateful to see our electric company and our City Council engaged in a methodical, ambitious, and transparent discussion of system transformation. My compliments to the Mayor, the Director, the Commissioner and his staff, and the Committee for bringing us so far, so fast. I only wish this had happened ten years ago.

The second thing I want to say is that I want to like the capacity plan that CPP has presented to this Committee. I want to like the move toward substantial generating capacity under CPP’s ownership, developed in cooperation with other AMP-Ohio members. I think the general approach the Mayor and CPP are now taking – looking, with an open mind, at a diverse portfolio of power sources planned against some serious benchmarks for non-fossil components – is the right approach.

However, the longer I look at the proposal for CPP’s 80-to-100-MW participation in the American Municipal Power Generating Station (AMPGS) project, the more concerned I become about the significant constraints and downside risks this proposal would impose on CPP. My goals in this testimony are:

• to describe those constraints and risks, as I see them, and
• to ask the Committee to put off final Council approval of CPP’s participation in the AMPGS project until the City has taken a thorough, duly diligent look at all of CPP’s long-term power supply and demand management options, with competent professional assistance, and created a complete integrated supply and demand strategy – an Integrated Resource Plan — for CPP’s medium and long-term future.

Here are my main concerns about CPP’s AMPGS proposal. (Some of the numbers used here are from CPP’s recent presentations to the Committee, and are cited as such. In other cases, they represent my best estimates in the absence of publicly available data from CPP. )

1) CPP is currently relying on power purchase contracts for between 155 and 160 MW of baseload capacity. Their October 24 presentation to the Public Utilities Committee projects that the system’s baseload need will grow to 163 MW by 2013, 173 MW by 2023, 198 MW by 2033, 223 MW by 2043, etc. (This “incremental” load growth projection equals 1 MW per year through 2023, and 2.5 MW per year thereafter.) The proposed AMP-Ohio project commitments are part of a strategy to meet these needs with CPP-owned capacity rather than continued outside power purchases.

“Baseload”, by definition, is generating capacity used on a 24/7 basis. Our understanding is that all of the proposed new AMP-Ohio capacity will be contracted for on a “take or pay” basis. Thus if CPP signs contracts for all three new AMP-Ohio resources – the 50 MW of Ohio River hydro and 25 MW of Prairie State coal power already approved, and 80 MW of AMPGS power – it’s committing to pay for these pro rate shares of costs of the three plants, round the clock and round the year, whether it’s the cheapest available power or not, and whether we need it or not.

The baseload power portfolios presented by CPP for 2013 and 2023 include…

NYPA (Ontario hydro power) — 8 MW
AMP-Ohio hydro (committed) — 50 MW
AMP-Ohio Prairie State (committed) — 25 MW
AMPGS (proposed) — 80 MW

Total MW available — 163 MW

… before making provision for any local wind, biomass or cogeneration sources, let alone a strategic investment in energy efficiency or other distributed generation. This 163 MW is more than the system’s entire current baseload, 100% of CPP’s own 2013 projection, and 95% of its own projection for 2023 – fifteen years from now. It will be more than 25 years before CPP’s own projected growth allows local renewables and energy efficiency to occupy a 20% share of its portfolio without displacing coal or hydro power that the system has to pay for.

And that’s if we accept CPP’s growth assumptions. But suppose we don’t?

2) CPP sold 3,000,000 fewer kwh in 2006 than in 2000, and had nearly 2,000 fewer customers. This loss was mainly in the residential class, which represents a little more than 25% of CPP’s sales. Here are the system’s total annual sales since 1994:

CPP’s residential customer base grew from 66,600 households in 1994 to nearly 80,000 in 2000 – and then stopped. By 2006 it fell back below 78,000. No doubt this reflects the city’s population losses, specifically our foreclosure crisis. If it does, there’s every reason to believe CPP’s residential base and sales will continue to shrink until that crisis ends and we begin to rebuild our housing market.

Total business kwh sales have also been stagnant since 2000, varying mainly with air conditioning use (which is a peaking load, not a base load).

These trends are not dramatic. Simply looking at the numbers, it’s reasonable to hope that small changes – a few new commercial developments, a small housing market improvement – could put CPP sales back on a modest growth track. Unfortunately, it’s just as reasonable to believe that things could get much worse. (More than a hundred Cleveland properties are going to Sheriff’s sale every week, and most of them remain vacant.)

CPP has not explained (publicly, anyway) why it expects “incremental” short to mid-term load growth under these circumstances. We’re left to assume that the system is counting on replacing its ongoing customer losses with even more new customers – for example, new households recruited in West Side expansion neighborhoods.

But to recruit new customers away from CEI, CPP needs a selling point. Traditionally that selling point has been price. Unfortunately, CPP no longer has a significant price advantage to offer. And we’re concerned that buying into the AMPGS plant will make CPP’s competitive position even worse, permanently.

3) For at least the last five years, CPP’s residential rates have been essentially the same as CEI’s. My Nov. 28 CPP bill for 381 kwh totalled $41.73, or just under eleven cents per kwh. If we were CEI customers the bill would have been just 32 cents — .8% — higher. Over the past year CPP customers have occasionally enjoyed a larger monthly advantage – as much as 3% or 4% — but the advantage is wiped away by the fact that CPP charges higher Summer rates for five months, compared to four for CEI. Overall, a Cleveland household has nothing to gain economically by switching from CEI to CPP.

Why are CPP bills so high? The answer is not high purchased power costs; CPP’s Energy Adjustment Charge has risen very little in recent years, and its average wholesale power cost in 2006 was about 5 cents per kwh. Instead, the problem seems to be high fixed costs (i.e. costs that don’t vary with sales), including daily operations, capital costs (including arrearage write-offs and replacement of all those rotten poles), and some capacity charges built into the system’s power contracts.

All told, CPP’s non-power costs apparently amount to around 6.5 cents per residential kwh, which is pretty high. (The comparable component of CEI’s residential rate – the regulated distribution charge — is less than six cents.) The only way to reduce that impact is to spread the system’s fixed costs over more kilowatt-hours, i.e. increase sales. But as we’ve shown above, the underlying market is not expanding and CPP has little or no price inducement to offer CEI customers to switch.

Thus the system is stuck in a vicious circle: no sales growth without lower rates, but no way to lower rates without sales growth.

ANY CREDIBLE STRATEGY FOR CPP’S FUTURE MUST INCLUDE A PLAN TO GET THE SYSTEM OUT OF THIS STAGNANT COST/PRICE/SALES SITUATION.

4) Unfortunately, we don’t see such a plan in CPP’s current proposal. Instead, we see the following assumptions:

1. Based on nothing going wrong with the AMP-Ohio projects’ finances (a huge leap of faith in the case of the AMPGS plant), CPP’s kwh charges will rise at least two cents per kwh over the next ten years.
2. This is better than CPP can do by continuing to buy any significant amount of its power supply in the wholesale market.
3. CEI’s rates are going to rise even faster, giving CPP a renewed competitive advantage even with its residential rates in the fourteen-cent-plus range.
4. Therefore, CPP can gain customers and grow its sales significantly over the next ten to twenty years, creating lots of room in its energy portfolio for local, renewable sources and “negawatts” (energy efficiency).

As far as we can see, not one of these assumptions has been supported with evidence, at least in public. The cost impact of CPP’s proposed supply strategy, especially AMPGS, is very likely be greater than anticipated. No study of future power markets showing an average jump in baseload power costs in excess of two cents per kwh has been shared with Council or the public. The inevitability of CEI “rate shock” after 2010 is highly debatable, even with no legislation to head it off. (This view is apparently shared by the Office of Consumers’ Counsel; I’ll be happy to provide appropriate references). And we’re not likely to know what that legislation, Senate Bill 221, will include before March at the earliest.

Suppose one or more of CPP’s assumptions is wrong? In five to ten years, CPP could find itself locked in – for a very long time – to higher rates than include even greater fixed costs, a negative competitive situation vis-a-vis CEI, a customer base that continues to stagnate or even shrink, no leeway for investments in substantial renewable or efficiency strategies, and no way out.

I’m not saying this future is the inevitable result of buying into 80-100 MW of the AMPGS project. But it’s well within the range of possibility. And as a CPP customer and supporter, I’m very concerned that the City’s rush to judgment on AMPGS, with virtually no due diligence in examining significant alternatives, looks very, very risky.

Given…

• the large downside risks I’ve just described;
• the extremely uncertain terrain (political, regulatory, technological, market, etc.) that CPP must traverse in the coming decades; and
• the expressed commitment of every participant in this discussion, including AMP, to maximize the contribution of renewable sources and efficiency to CPP’s portfolio – a commitment that is supported, as yet, by only minimal concrete development plans…

… given all these things, I believe that simple prudence should prevent City Council from giving final approval to CPP’s proposed fifty-year take-or-pay participation in the AMPGS project, until that decision can be made in the context of a complete long-term Integrated Resource Plan for CPP.