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Docket No. A.10-08-___ Exhibit No.

PPL/100 Witness: Hui Shu

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

PACIFICORP

Direct Testimony of Hui Shu

August 2010

PPL/100 Shu/1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Q. A. A. Q. Please state your name, business address and present position with PacifiCorp, dba Pacific Power (the Company). My name is Hui Shu, my business address is 825 NE Multnomah, Suite 600, Portland, Oregon 97232, and my present position is Manager, Net Power Costs. Qualifications Q. A. Briefly describe your education and business experience. I received an undergraduate degree in Electrical Engineering and finished training in the program for Master in Business Administration from University of Shanghai for Science and Technology. I received a PhD in Systems Science with a focus on Econometrics from Portland State University. I have worked for PacifiCorp since 1992 and have held positions in the commercial and trading and regulatory areas. I accepted my current position in February 2008. Please describe your current duties. I am responsible for the coordination and preparation of net power cost and related analyses used in retail price filings. In addition, I represent the Company on power resource and other related issues in regulatory proceedings across the Company’s six-state service territory. Summary of Testimony Q. A. Will you please summarize your testimony? I present the Company’s proposed Energy Cost Adjustment Clause (ECAC) Balancing Rate and Offset Rate for calendar year 2011. In addition, my testimony: • Presents the updated 2009 adjusted actual and 2010 adjusted actual/forecast

Direct Testimony of Hui Shu

PPL/100 Shu/2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 • • • • net power costs (NPC), which are used to develop the 2011 Balancing Rate; Presents the 2011 normalized forecasted NPC, which are used to develop the 2011 Offset Rate; Describes the new resources that have been added to the Company’s system since the Company’s last ECAC filing, A.09-07-032, D.09-12-027 (2010 ECAC Filing); Presents the carrying charge of coal fuel stock (Carrying Charge) as directed by the Commission in the Company’s general rate case, A.05-11-022, D.0612-11 (2005 Rate Case); and Describes the Company’s production cost model, the Generation and Regulation Initiatives Decision Tools (GRID) model, which is used to calculate the NPC. Overview of ECAC Filing Q. A. Please provide a brief overview of the Company’s ECAC filing. On August 1, 2009, the Company filed its 2010 ECAC filing which resulted in a rate decrease for California customers of approximately $4.6 million or 5.1 percent overall effective January 1, 2010. This decrease was driven primarily by lower retail sales across the system attributable to the weak economy, and declining market prices for natural gas and electricity. In this 2011 ECAC filing, the Company is requesting a $9.3 million increase or 10.7 percent overall effective January 1, 2011. As discussed in detail below, the increase is composed of: (1) an approximate $4.1 million increase associated with changes to the Balancing Rate, including the reversal of the credit

Direct Testimony of Hui Shu

PPL/100 Shu/3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Q. A. that has been flowing to customers; and (2) an approximate $5.2 million increase associated with changes to the Offset Rate due to an increase in forecast 2011 NPC. The major drivers for these increases are discussed in detail below. Please describe Exhibit PPL/101. Exhibit PPL/101 shows the calculation of the proposed Offset Rate and Balancing Rate for the 2011 rate effective period. Lines 1 through 14 are used to develop the Offset Rate. Lines 15 through 57 are used to develop the Balancing Rate. 2011 Balancing Rate Q. A. Please explain the Balancing Rate. The Balancing Rate is the rate which returns to or recovers from customers the Total California Balancing Account. The rate is calculated by: (1) calculating the sum of the changes in the 2009 adjusted actual NPC since the 2010 ECAC Filing, the 2010 adjusted actual/forecast Total California Balancing Account, and the Carrying Charge; (2) dividing by the California retail sales included in the Company’s most recent general rate case, A.09-11-015, (2009 Rate Case), (3) grossing up the amount for the Franchise Fees & Uncollectible Accounts Expense Factor. Pursuant to the Commission-approved terms of the ECAC, if the new Balancing Rate differs from the current rate by five percent or more, the rate is updated for the upcoming forecast period. Otherwise, the rate is not updated.

Direct Testimony of Hui Shu

PPL/100 Shu/4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Q. A. Q. A. A. Q. How are the differences in actual NPC and the Carrying Charge reflected in the Balancing Account adjusted for the actual collections based on the Offset Rate? The Balancing Account balance is reduced or increased for the over or undercollection of the Offset Rate for the same period. What is the Company’s proposed Balancing Rate? As shown on Exhibit PPL/101, line 57, the proposed Balancing Rate is $1.34 per megawatt hour. The Balancing Rate currently in effect is ($3.67) per megawatt hour. As shown on line 54 of the exhibit, the change in the proposed Balancing Rate exceeds the five percent threshold required for updating the rate. 2011 Offset Rate Q. A. What is the Offset Rate? The Offset Rate sets the amount of forecast NPC and Carrying Charge that will be recovered from customers for the forecast test year. Pursuant to the Commissionapproved terms of the ECAC, if the new Offset Rate differs from the current rate by five percent or more, the rate is updated for the upcoming forecast period. Please explain the Offset Rate calculation and the proposed Offset Rate. The Offset Rate is calculated by dividing 2011 California-allocated NPC by California retail sales and then grossing up that amount by the Franchise Fees & Uncollectible Accounts Expense Factor. As shown in Exhibit PPL/101, line 14, the proposed Offset Rate is $28.35 per megawatt hour. This differs from the current rate of $22.14 per megawatt hour by more than five percent.

Direct Testimony of Hui Shu

PPL/100 Shu/5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 A. A. Q. Q. Q. A. 2009 Adjusted Actual and 2010 Adjusted Actual/Forecast NPC and Carrying Charge Q. A. Please explain NPC. NPC are defined as the sum of fuel expenses, wholesale purchase power expenses and wheeling expenses, less wholesale sales revenue. Please explain adjusted actual NPC. Adjusted actual NPC is the sum of the total Company amounts recorded in FERC Accounts 501, 503 and 547 (Steam Production Fuel Expense) for coal, steam and natural gas purchased and/or sold; 555 (Purchased Power); 565 (Wheeling); and 447 (Sales for Resale). These amounts are adjusted to: 1) remove actual costs consistent with the rate setting process for the non-NPC items in those accounts so comparable costs are being used in the deferral calculation, and 2) remove prior period accounting entries recorded during the deferral period that are not applicable to the current period. Are the forecast NPC for this filing calculated the same way as in the 2010 ECAC Filing? Yes. Why are the 2009 adjusted actual NPC different from what the Company included in its 2010 ECAC Filing? At the time of the 2010 ECAC Filing, actual NPC were only available for January through May 2009. As a result, the data used to calculate the Balancing Rate for 2010 included five months of adjusted actual NPC (January through May 2009) and seven months of forecast (June through December 2009) NPC. In the current filing, the Company updated its 2009 data to incorporate the actual NPC for the

Direct Testimony of Hui Shu

PPL/100 Shu/6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Q. A. A. Q. A. Q. entire 12-month period. The 2009 adjusted actual NPC are shown in Exhibit PPL/102. Based on the updated 2009 data, how much has the Company deferred in the California Balancing Account in 2009? In the 2010 ECAC Filing, the amount estimated to be deferred for 2009 was a balance owed to customers of $3,552,072. The actual amount deferred for 2009 was only $1,981,005, including interest. The difference of $1,571,067 between the estimated deferral in the 2010 ECAC Filing and the actual deferral is included in the calculation of the proposed Balancing Rate for 2010 in the current filing. Based on the 2010 adjusted actual/forecast NPC, and the NPC recovered in rates, how much has the Company deferred in the California Balancing Account in 2010? Based on the 2010 actual data for five months (January through May 2010) and forecast NPC for seven months (June through December 2010), the deferral, including interest, for 2010 is estimated to be a $501,089 balance owed to customers. What are the primary drivers of the differences in NPC? In 2009, the differences between forecast and actual NPC were mainly due to the impact of lower hydro generation from Company-owned facilities and purchase contracts, lower wind generation (approximately 0.7 million megawatt-hours), and lower actual retail load than was forecast. However, the retail load was higher in the months when market prices were higher. For the actual and forecast deferral in 2010, the differences from the 2010

Direct Testimony of Hui Shu

PPL/100 Shu/7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 A. Q. Q. A. A. Q. Offset Rate are mainly due to increases in prices of existing contracts for electricity and coal supply, and lower-than-expected hydro generation (approximately 0.5 million megawatt-hours). The increases are significantly offset by lower-than-expected retail load (approximately 1.2 million megawatthours). Are the NPC differences also impacted by the inclusion of the variable costs from new renewable energy facilities expected to be in service during the test period? Yes. The NPC now include expected generation from the 111-megawatt Dunlap wind project located in Wyoming that is expected to be in service in October 2010. Because the Company owns this wind facility, the variable cost of this resource is close to zero, except for the costs to integrate its generation into the Company’s system. Which months in 2010 reflect adjusted actual results? January through May 2010 reflect adjusted actual results of the Company’s operations. June through December 2010 is a forecast of the Company’s operations. Consistent with the design of the mechanism, these are combined to reflect the overall forecast NPC for 2010. The 2010 adjusted actual/forecast NPC are shown in Exhibit PPL/103. Please explain which data inputs are updated for the June through December 2010 forecast period as compared to those used to set the level currently in rates. NPC data inputs are updated to include:

Direct Testimony of Hui Shu

PPL/100 Shu/8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Q. A. Q. A. • • • • • • • • The Company’s June 30, 2010 forward price curve for electricity and natural gas prices; New wholesale electricity sales and purchase transactions, both physical and financial; New natural gas purchase and sales transactions, also both physical and financial; New wheeling contracts; Updates to existing contracts for wholesale sales and purchases of electricity and natural gas, wheeling, and coal supply, as well as hydro generation; Updates to forecast loads; Updates to the capabilities of Company’s owned generation resources; and New owned resources, purchase power resources and exchange contract resources listed in Exhibit PPL/106. How will the forecast be reconciled to actual NPC? The difference between adjusted actual NPC and the forecasted amount is recorded in the Balancing Account where it accrues interest based on the Commercial Paper Rate. Does the Balancing Account also include the Carrying Charge? Yes. A Carrying Charge in the amount of $30,205 is included in the 2011 Balancing Account. The calculation is discussed in more detail later in my testimony.

Direct Testimony of Hui Shu

PPL/100 Shu/9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Q. A. Q. A. A. Q. How does the Company capture the difference in the Balancing Account between what was authorized by the Commission and what was actually collected or returned to customers? The Company includes the unamortized balance from the prior year in the current year’s ECAC filing. In the 2009 ECAC, the Company was authorized to collect $452,026 from customers in the Balancing Account. For that period, due to variations in customer usage, the actual collection was only $428,117, including interest. In other words, there is a balance of $23,909 that remains uncollected from the authorized amount, including interest. How is this balance included in the current filing? The amount of $23,909 is included in the Balancing Account beginning January 2010 and accrues interest at the Commercial Paper Rate. 2011 Forecast NPC Q. A. What are the forecast 2011 NPC? Forecast NPC for calendar year 2011 are $1.394 billion total Company, or approximately $23.0 million on a California-allocated basis. The Company’s 2011 net power cost study is provided as Exhibit PPL/104, and the allocation of the Company’s NPC to California is provided as Exhibit PPL/105. How does this projection compare with the level currently included in rates? The 2011 forecast total Company NPC are approximately $288.1 million higher than the $1.106 billion 2010 forecast total Company NPC used to determine the Offset Rate in the Company’s 2010 ECAC Filing.

Direct Testimony of Hui Shu

PPL/100 Shu/10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 • • A. Q. Q. A. What are the major drivers of the increase in the forecast NPC? The increase is driven by a range of factors, including changes in the Company’s portfolio of wholesale purchase and sales contracts, expiration of the long-term gas supply contracts, increases in third-party coal contract costs, and increases in system retail load. Factors that help offset the increase in NPC for 2011 include the addition of new transmission and generation resources. What are the major changes to power contracts in the calendar year 2011 test period? The major changes to contracts in the 2011 test period include: • On June 30, 2011, the exchange contract between the Company and Alcoa Power Generating Inc. for approximately 100 megawatts of capacity from the Rocky Reach project expires. Under this contract, the Company receives energy during peak periods and returns energy during off-peak periods, and thus takes advantage of the market price differential between the two periods. On October 31, 2011, the contract between the Company and the Chelan Public Utility District for generation from the Rocky Reach project expires. Power purchased by the Company under this contract is priced at the embedded cost of the project, which is lower than market prices. On August 31, 2011, the contract between the Company and the Bonneville Power Administration (BPA) for 575 megawatts of capacity expires. Under this contract, the Company receives energy during peak periods and returns energy during off-peak periods. In addition, power

Direct Testimony of Hui Shu

PPL/100 Shu/11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 A. Q. • • • received under this contract is delivered directly to a variety of the Company’s load pockets in the western control area at the Company’s discretion, which makes it possible for the Company to avoid entering into multiple contracts to wheel power to those load pockets, and for the Company to take advantage of the market price differential between peak and off-peak periods. On September 30, 2011, the contract between the Company and the Grant Public Utility District for displacement generation expires, which is priced at BPA’s Priority Firm Power rate, and is lower than market prices. On December 31, 2010, the purchase contract between the Company and the Top of the World Wind Energy, LLC will take effect. On January 1, 2011, the amount of sales to the Public Service Company of Colorado reduces per the contract terms. This is a legacy sales contract at a contract price relatively higher than market prices. Has the Company included in the forecast 2011 NPC certain contracts that expire prior to the test period? Yes. The contract between the Company and Kennecott for generation incentive payments and the contract between the Company and Monsanto for operating reserve purchases both expire at the end of 2010. However, due to the nature of these contracts, it is likely that parties will enter into new contracts for periods extending after the end of the current contracts. In the forecast 2011 NPC, the current terms of these contracts are assumed to continue. Any differences between the new contract terms and the ones assumed in the current filing will be

Direct Testimony of Hui Shu

PPL/100 Shu/12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 A. A. Q. reflected in the Balancing Rate in the Company’s 2012 ECAC filing. How does the expiration of the long-term contracts to supply natural gas for the Hermiston plant impact the NPC? The expiration of the long-term natural gas contracts for Hermiston increases the NPC. The long-term contracts supplying natural gas for the Hermiston plant were entered into in 1996, when the prices for natural gas were low. Even with escalation, the contract prices are still lower than the current market prices. Replacing expiring long-term contracts with market purchases to supply gas to the Hermiston plant not only increases costs, but also reduces the generation from the plant. Transmission Topology Q. Has the Company changed its topology modeled in GRID that is used to calculate the forecast NPC? Yes. To assure the reliability of the transmission network in the area governed by the Western Electricity Coordinating Council (WECC), the constraint in the cut plane named Tot 4A in Wyoming has been redefined by PacifiCorp Transmission and approved by WECC. As a result, the previously modeled transmission areas of “Wyoming NE” and “Wyoming SW” in GRID have been redefined. In addition, because of constraints that are present in the previous “Wyoming SW” transmission area, a “Trona” transmission area has been added to the topology to reflect such constraints.

Direct Testimony of Hui Shu

PPL/100 Shu/13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 A. Q. Q. A. Q. A. A. Q. Does the Company model the impact of the Populus to Terminal transmission addition, for which the capital costs were included in the Company’s pending general rate case (A.09-11-015)? Yes. The addition of the Populus to Terminal line increases the transmission capacity across Path C from southeast Idaho to northern Utah by approximately 650 megawatts. The additional transmission capacity improves the system reliability in the area, and makes it possible to better utilize the market price differentials between the east and west sides of the Company’s system. How does the system retail load differ? Compared to the forecast NPC for 2010 included in the 2010 ECAC Filing, the forecast system load in 2011 is approximately 1.1 million megawatt hours higher, which is an increase of approximately two percent. The increase in load alone increases NPC by approximately $42 million on a total-Company basis. Are coal costs higher than the levels in the Company’s 2010 ECAC Filing? Yes. The cost of coal supplied to the coal-fired generating facilities from both the Company’s captive mines and contracts with third parties has increased. The increase in third party costs is primarily driven by contract re-openers under longterm coal supply agreements with Arch for Sufco coal and with Chevron Mining’s Kemmerer mine to supply coal to the Utah plants, and price increases under the coal supply agreement with Black Butte for the Jim Bridger Plant. Do the forecast 2011 NPC include the variable costs from renewable energy facilities expected to be in service during 2010? Yes. As previously mentioned in my testimony, the Dunlap wind facility is

Direct Testimony of Hui Shu

PPL/100 Shu/14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 A. Q. A. Q. Q. A. expected to be placed into service in October 2010. The 2011 forecast NPC includes a full year of operation from Dunlap. Are there other costs that offset the increases in the NPC? Yes. Wheeling expenses have decreased since the 2010 ECAC filing. The costs associated with the BPA wheeling contract are higher than previously projected. However, due to reduced market transactions, as well as changes in the pricing structure of the California ISO, the short term wheeling expenses are significantly lower and more than offset the increases from other contracts. What is the wind integration charge that the Company has included in the current filing for the resources located in BPA’s control area? As indicated in the Company’s 2010 ECAC filing, BPA issued a Record of Decision (ROD) on July 21, 2009 that includes a wind integration charge of $1.29 per kilowatt-month beginning in October 2009 for variations in the wind generation within 30 minutes. The BPA ROD was issued after the NPC study had been completed for the 2010 ECAC, where the Company included $1.58 per kilowatt-month based on BPA’s estimate at the time. The difference has been incorporated in the current filing for both the Balancing Rate and the Offset Rate. Has the Company changed the methodology for determining the cost of integrating wind generation in the control areas where it is the balancing authority since the 2010 ECAC filing? No. The methodology remains the same, but the value has been updated for the current test period.

Direct Testimony of Hui Shu

PPL/100 Shu/15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 A. Q. A. Q. A. Does the 2011 Offset Rate include the forecast Carrying Charge? Yes. An amount of $54,267 has been included in the 2011 Offset Rate. The calculation will be discussed in further detail later in my testimony. New Resources Q. Please describe the new resources included in NPC since the Company’s 2010 ECAC Filing. In addition to the Dunlap wind facilities previously discussed, there are also new purchase contracts included in the 2010 and 2011 forecast NPC. The new resources are described in Exhibit PPL/106. The Company has entered into four new purchase contracts since the 2010 ECAC Filing, each of which accounts for more than one percent of the total purchases. Pursuant to the terms of the ECAC, copies of the contracts are provided as Exhibits PPL/107 through PPL/109, and Confidential Exhibits PPL/110 and PPL/111. Determination of Carrying Charge Q. A. What is the fuel stock carrying charge included in the ECAC filing? In the 2005 Rate Case, the Commission approved the settling parties’ agreement to exclude fuel stock inventories from general ratebase, and allow recovery of carrying charge in the ECAC. See D.06-12-011, Attachment A, p.4. How is the Carrying Charge determined for the fuel stock in the period from June 2009 through December 2010? The Carrying Charge is calculated using the Company’s actual monthly coal inventory level accumulating interest based on the Company’s all-in short term borrowing costs, which is compared with the amount of Carrying Charge that is

Direct Testimony of Hui Shu

PPL/100 Shu/16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Q. A. A. Q. Q. A. currently in rates. Since the Carrying Charge in the 2010 ECAC is zero, the full amount of $30,205 is included in the 2010 Balancing Rate. Is the projected Carrying Charge for 2011 calculated in the same manner? Yes. The calculation uses the most recent projection of the monthly coal inventory in 2011, and the projected all-in short term borrowing costs. A Carrying Charge of $54,267 is included in the 2011 Offset Rate, which will be trued up in the Company’s next ECAC filing. Determination of NPC Q. A. Please explain how the Company forecasts NPC using its GRID model. NPC costs are calculated for a future test period based on projected data using the GRID model on an hourly basis. Is the Company’s general approach to the calculation of NPC using the GRID model the same in this case as in previous cases? Yes. The Company has used the GRID model in several NPC and general rate case filings in California. GRID Model Inputs and Outputs Q. A. What inputs were updated for this filing? The net system load, wholesale sales and purchase power expenses, wheeling expenses, market prices for natural gas and electricity, fuel expenses, hydro generation, characteristics of the thermal resources, planned maintenance and outages inputs are updated for this filing. What reports does the GRID model produce? The major output from the GRID model is the NPC report. The 2011 report is

Direct Testimony of Hui Shu

PPL/100 Shu/17 1 2 3 4 5 6 7 8 9 10 11 12 Q. A. A. Q. attached to my testimony as Exhibit PPL/104. Additional data with more detailed analyses are also available in hourly, daily, monthly and annual formats by heavy load hours and light load hours. Do you believe that the GRID model appropriately reflects the Company’s forecast NPC over the 2011 test period? Yes. The GRID model reasonably simulates the operation of the Company’s system load and resource portfolio consistent with the Company’s operation of its system including operating constraints and requirements. Any variances from forecast NPC are handled through the use of a balancing account where forecast NPC are trued up to actual NPC each month. Does this conclude your direct testimony? Yes.

Direct Testimony of Hui Shu

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