prepared on behalf of: l'Association québécoise des consommateurs industriels d'électricité (AQCIE)
Conseil de l'industrie forestière du Québec (CIFQ)
Undertaking of:
Robert D. Knecht
Industrial Economics, Incorporated
2067 Massachusetts Avenue
Cambridge, MA 02140

U N DERTA K I N G 1
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4
Please provide the analysis that supports Mr. Knecht’s conclusion at page 5 of his evidence that supports his conclusion that it is “unlikely that new gas-fired capacity could be placed in service at a cost of less than $80 or $85 per MWh (in 2008 dollars).
Please include supporting information.
RE SPONSE 5
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19
20
21
22
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In preparing my evidence, I reached this conclusion based on informal calculations using current natural gas prices, as well as parameters from the “Assumptions to the
Annual Energy Outlook 2007” (which is attached). To respond to this undertaking, I prepared the attached analysis which is a more formal approach to the issue, with three scenarios.
The basis for each of the assumptions in the calculation is as follows:
Gas Prices at Henry Hub: The low scenario is based on a simple average of deflated
NYMEX gas futures prices for 2013 through 2017. The base scenario uses only the
2013 futures prices, and the high scenario is based on near-term gas price expectations. While I recognize that the futures markets are predicting a decline in gas market prices, I note also that even current gas prices are substantially below fuel oil prices on an energy-equivalent basis. This situation is counter to the expectations of some analysts. See, for example, NEB presentation at http://www.neb.gc.ca/clfnsi/rpblctn/spchsndprsnttn/2007/cndnrgftrfcsntrlgs/cndnrgftrfcsntrlgs-eng.html
To derive gas prices in Québec, I looked at differentials between Henry Hub, AECO spot (in Alberta) and Dawn. The current price differential between Henry Hub and
AECO spot prices is about $1.20 per mmbtu (see attached), but the NYMEX futures swaps show a narrowing of the Henry Hub premium to $0.65 to $0.70 by 2012 (which is the end of the series). The current Dawn/AECO differential is $1.60, and this is the value used in the base and high scenarios. While I have not performed a detailed analysis of historical patterns, I note some periods in which the differential is lower.
Thus, in the low scenario, I use $1.20 per mmbtu. Note that reviewing historical differentials between Dawn and Henry Hub produce a similar range of results.
Transportation rates Dawn to Québec in the low scenario are based on Union’s M12 transportation rate (at 80 percent load factor), including fuel charges. The base and high scenario include a provision for SCGM transport.
The EIA assumptions for the low and base scenario are based on a conventional combustion turbine, with established technology. For the high scenario, the EIA assumptions for an advanced combined cycle facility with carbon capture.
The capital recovery factor assumptions are detailed in the backup sheets, and are consistent with analysis that I presented to the Régie in 2006. A 15 percent figure, used in the base case, is a typical industry rule-of-thumb. The 80 percent capacity factor for combined cycle facilities is my estimate.
Undertaking of Robert D. Knecht Docket No. R-3648-2007

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10
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2
3
4
This more detailed analysis suggests a relatively wide range of possible prices needed to support a new gas-fired plant in Québec, including the possibility of a prices below
$80 per MWh (in 2008$). Nevertheless, the base case scenario is reasonably consistent with HQD’s replacement cost forecast for the 2013 to 2017 period.
Note also that I have not included any provision to reflect the flexibility benefit of the proposed contract modifications with HQP. As I mentioned, that contract provides
HQD with significant flexibility about when and how much capacity it will need to take in any year (and even within a year) from HQP. Were an independent generation supplier to provide a product with similar flexibility, it would likely charge a price premium above its costs, to reflect the value of this option that is provided to HQD.
Undertaking of Robert D. Knecht Docket No. R-3644-2007

Docket No. R-3648-2007 Undertaking of Robert D. Knecht
Estimate of Fully Loaded Combined Cycle
Cost per KWh: @ 2 May 2008
For 2013 to 2017
Delivered Gas Cost
Average $2008 HH Price
AECO Differential
AECO-Dawn Differential
Firm Transport to Quebec
Gas Cost
Low Scenario Base
$ 8.06
$ (0.70)
$ 1.20
$ 0.18
$ 8.74
$ 8.27
$ (0.70)
$ 1.60
$ 0.30
$ 9.47
High
Scenario
$
$
10.85
$ (1.20)
$
$
1.60
0.30
11.55
EIA Parameters for Conv. Gas/Oil CC
Heat Rate (Btu/kWh)
Overnight Capital Cost $2005/kW $
6,800
603.00
Variable O&M 2005$/MWh
Fixed O&M 2005 $/kW
$ 1.94
$ 11.75
6,800
$ 603.00
$ 1.94
$ 11.75
7,493
$ 1,185.00
$ 2.77
$ 18.72
Other Assumptions
Assumed Capacity Factor
US GNP Deflator 10/04 to 10/07
Capital Recovery Factor
Calculations
Fixed $2008 per kW
Fixed $2008 per MWh
Gas $2008 per MWh
Fully Loaded CC Cost
$
$
$
$
80%
8.9%
12.4%
94.24
13.45
59.46
72.90
$
80%
8.9%
15.0%
111.31
$
$
$
15.88
64.39
80.27
$
$
80%
8.9%
16.2%
229.48
$
$
32.75
86.54
119.29
2 May 2008

Docket No. R-3648-2007 Undertaking of Robert D. Knecht
Month-Year
Deflated to
Mid- 2008
8.44
8.62
8.60
8.39
7.65
7.62
7.76
7.71
7.75
7.80
7.83
7.83
7.88
8.12
7.98
7.98
8.03
8.26
8.56
8.76
8.74
8.52
9.03
9.01
8.78
7.89
7.85
7.90
7.95
8.50
8.29
7.57
7.53
7.57
7.62
7.65
7.71
7.74
7.73
7.79
8.02
8.34
8.52
7.65
7.65
7.70
7.93
8.25
Settlement
Price
8.694
8.659
8.719
8.784
8.834
8.844
8.924
9.204
9.584
9.809
9.804
9.574
8.744
8.719
9.869
9.864
9.634
8.674
8.639
8.704
8.779
8.829
8.844
8.914
9.179
9.534
9.769
9.764
9.534
8.779
8.854
8.904
8.914
8.994
9.279
9.659
9.889
9.884
9.654
8.824
8.799
8.859
8.934
8.984
8.994
9.069
9.359
9.749
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
NYMEX US Dollar Henry Hub Futures Prices
Most Recent Settlement Values: 2 May 2008
Month-Year
Settlement
Price
Deflated to
Mid- 2008
9.074
9.049
9.109
9.189
9.239
9.254
9.334
9.629
10.029
10.264
10.259
10.029
9.229
9.209
9.984
9.979
9.749
8.929
8.904
8.964
9.044
9.094
9.109
9.189
9.479
9.879
10.119
10.114
9.884
9.269
9.349
9.399
9.414
9.489
9.779
10.179
10.409
10.404
10.174
9.374
9.354
9.414
9.494
9.544
9.564
9.654
9.954
10.354
8.16
8.34
8.32
8.12
7.46
7.43
7.48
7.45
7.48
7.54
7.57
7.57
7.62
7.85
7.60
7.60
7.65
7.88
8.20
8.38
8.36
8.16
8.44
8.42
8.21
7.51
7.47
7.51
7.57
8.27
8.07
7.43
7.40
7.43
7.48
7.47
7.52
7.55
7.55
7.59
7.81
8.12
8.29
7.51
7.51
7.57
7.80
8.10
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
2 May 2008

Docket No. R-3648-2007 Undertaking of Robert D. Knecht
Capital Recovery Factor (Inflation-Adjusted)
Nominal Debt Rate
Nominal AT Equity Rate
Tax Rate
Inflation Rate
Investment
0
(1.00)
YE Book Value
Dep'n (DDB-20)
Debt Balance
Equity Balance
1.00
1.00000
0.50
0.50
6.3%
12.0%
40.0%
2.0%
1
0.90
0.10
0.45
0.45
2
Debt Share
0.81
0.09
0.73
0.08
0.41
0.41
0.36
0.36
3
50%
0.66
0.07
0.33
0.33
4 5
0.59
0.07
0.53
0.06
0.30
0.30
0.27
0.27
6
0.48
0.05
0.24
0.24
7 8
0.43
0.05
0.39
0.04
0.22
0.22
0.19
0.19
9 10
0.35
0.04
0.17
0.17
15 20
0.17
0.03
-
0.03
0.09
0.09
-
-
Revenue
Dep'n
Debt Cost
Book Income
Taxes
Net Income
Depreciation
Debt Cash Flow
Net Cash Flow
Capital Recovery Factor ==>
Note columns hidden
($0.50)
$0.50
0.12
(0.10)
(0.03)
(0.01)
0.00
(0.00)
0.10
(0.05)
0.05
0.13
(0.09)
(0.03)
0.01
(0.00)
0.01
0.09
(0.05)
0.05
0.13
(0.08)
(0.03)
0.02
(0.01)
0.01
0.08
(0.04)
0.05
0.13
(0.07)
(0.02)
0.04
(0.01)
0.02
0.07
(0.04)
0.06
0.13
(0.07)
(0.02)
0.05
(0.02)
0.03
0.07
(0.03)
0.06
0.14
(0.06)
(0.02)
0.06
(0.02)
0.04
0.06
(0.03)
0.07
0.14
(0.05)
(0.02)
0.07
(0.03)
0.04
0.05
(0.03)
0.07
0.14
(0.05)
(0.02)
0.08
(0.03)
0.05
0.05
(0.02)
0.07
0.15
(0.04)
(0.01)
0.09
(0.04)
0.05
0.04
(0.02)
0.07
0.15
(0.04)
(0.01)
0.10
(0.04)
0.06
0.04
(0.02)
0.08
0.16
(0.03)
(0.01)
0.12
(0.05)
0.07
0.03
(0.02)
0.09
0.18
(0.03)
(0.00)
0.15
(0.06)
0.09
0.03
(0.02)
0.10
12.4%
2 May 2008

Docket No. R-3648-2007 Undertaking of Robert D. Knecht
Capital Recovery Factor (Inflation-Adjusted)
Investment
AA Utility Bond Rate
EIA Premium
Debt Rate
Beta
Rf
Market Premium
Nominal AT Equity Rate
Tax Rate
Inflation Rate
0
(1.00)
YE Book Value
Dep'n (DDB-20)
Debt Balance
Equity Balance
1.00
1.00000
0.50
0.50
6.0%
1.3%
7.3%
140.0%
4.9%
8.5%
16.8%
38.0%
2.0%
1
0.90
0.10
0.45
0.45
2
Debt Share
3
50%
4 5 6 7 8 9 10 15 20
0.81
0.09
0.41
0.41
0.73
0.08
0.36
0.36
0.59
0.07
0.30
0.30
0.53
0.06
0.27
0.27
0.43
0.05
0.22
0.22
0.39
0.04
0.19
0.19
0.17
0.03
0.09
0.09
-
0.03
-
-
Revenue
Dep'n
Debt Cost
Book Income
Taxes
Net Income
Depreciation
Debt Cash Flow
Net Cash Flow
Capital Recovery Factor ==>
($0.54)
$0.50
0.16
(0.10)
(0.04)
0.02
(0.01)
0.02
0.10
(0.05)
0.07
0.16
(0.09)
(0.03)
0.04
(0.02)
0.03
0.09
(0.05)
0.07
0.17
(0.08)
(0.03)
0.06
(0.02)
0.04
0.08
(0.04)
0.08
0.17
(0.07)
(0.03)
0.07
(0.03)
0.04
0.07
(0.04)
0.08
0.17
(0.07)
(0.02)
0.08
(0.03)
0.05
0.07
(0.03)
0.09
0.18
(0.06)
(0.02)
0.10
(0.04)
0.06
0.06
(0.03)
0.09
0.18
(0.05)
(0.02)
0.11
(0.04)
0.07
0.05
(0.03)
0.09
0.18
(0.05)
(0.02)
0.12
(0.05)
0.07
0.05
(0.02)
0.10
0.19
(0.04)
(0.02)
0.13
(0.05)
0.08
0.04
(0.02)
0.10
0.19
(0.04)
(0.01)
0.14
(0.05)
0.09
0.04
(0.02)
0.11
0.21
(0.03)
(0.01)
0.17
(0.06)
0.11
0.03
(0.02)
0.12
0.23
(0.03)
(0.00)
0.20
(0.08)
0.12
0.03
(0.02)
0.14
16.1%
Note columns hidden.
0.66
0.07
0.33
0.33
0.48
0.05
0.24
0.24
0.35
0.04
0.17
0.17
2 May 2008

Docket No. R-3648-2007 Undertaking of Robert D. Knecht
Title:
Series ID:
Source:
Gross National Product: Implicit Price Deflator
GNPDEF
U.S. Department of Commerce: Bureau of Economic Analysis
Release: Gross Domestic Product
Seasonal Adjustment: Seasonally Adjusted
Frequency:
Units:
Date Range:
Quarterly
Index 2000=100
2004-01-01 to 2007-10-01
Last Updated:
Notes:
2008-03-27 11:16 AM CDT
The number of decimal places reported varies over time. A Guide to the National Income and Product Accounts of the United States (NIPA) -
(http://www.bea.gov/bea/an/nipaguid.pdf)
DATE VALUE
2004-01-01 108.170
2004-04-01 109.173
2004-07-01 109.786
2004-10-01 110.666
2005-01-01 111.717
2005-04-01 112.442
2005-07-01 113.403
2005-10-01 114.384
2006-01-01 115.350
2006-04-01 116.338
2006-07-01 117.019
2006-10-01 117.511
2007-01-01 118.736
2007-04-01 119.512
2007-07-01 119.814
2007-10-01 120.535
8.92%
2 May 2008