The Montana PSC has approved increasing NorthWestern Energy's Power Cost and Credits Adjustment Mechanism (PCCAM) from nearly $62 million to just under $79 million. The rise comes in part from NWE having to spend more on capacity contracts to ensure it has enough power when it needs it.
The commission temporarily approved the utility's request to increase its revenue requirement to $156 million—$79 million for the PCCAM base plus about $77 million for QF contracts—in a unanimous vote at the commission's June 29 meeting [2021.04.047]. The regulators issued an interim order June 30 allowing NWE to begin collecting the increased revenue beginning July 1, giving them time to review the utility's application and for intervenors to weigh in.
NorthWestern's higher power costs are in part due to greater use of intermediate-term capacity contracts in place of straight energy contracts. Utility officials say the shift is driven by separate market pricing of capacity and energy and concerns about market supply.
"Given the regional capacity deficits, we can no longer count on energy being available in the short-term markets, so we have begun to shift our approach," NorthWestern Energy's Joe Stimatz said in prefiled testimony to the MPSC. Stimatz manages asset optimization in the utility's energy supply group.
To make sure it has enough power when it is short, NWE officials told the commission, the company has started relying more on intermediate power purchase agreements for capacity, which come with fixed capacity payments each month.
"The structure of these transactions allows us to ensure that we have the capacity when we need it, but we are not forced to take energy in hours when we do not need it or when we cannot economically sell it to a third party," Stimatz said.
In the past, the company could rely on the short-term market having enough supply to cover its peak demand deficits.
However, NWE is concerned that it can no longer count on short-term market supply, Stimatz said. "Given the regional capacity deficits, we can no longer count on energy being available in the short-term markets, so we have begun to shift our approach."
The company uses block energy contracts to cover most of its daily peak deficits.
"It is not feasible or economic to purchase blocks of energy for an entire month to match the peak hourly load that we will see only in a few hours in that month, but we need to ensure that we have the ability to serve that peak load when it occurs," Stimatz said.
NWE is increasingly using capacity contracts to close the rest of the gap, which is more expensive than the company's previous approach, he said. "While these contracts do not materially change the amount we expect to pay for energy, the capacity payments were not previously contemplated in PCCAM, so their inclusion raises the cost of reliably serving customers."
NorthWestern's application also cites increased fuel costs for Colstrip Generating Station and its two natural gas-fired plants.
Starting this year, the company began using market purchases to provide operating reserves through at least 2024. This frees up capacity to use for balancing and meeting peak load, according to the utility's application.