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DECISION MEMORANDUM TO: COMMISSIONER KJELLANDER COMMISSIONER SMITH COMMISSIONER HANSEN JEAN JEWELL RON LAW LOU ANN WESTERFIELD BILL EASTLAKE DON HOWELL DAVE SCHUNKE RICK STERLING RANDY LOBB LYNN ANDERSON TONYA CLARK BEV BARKER GENE FADNESS WORKING FILE FROM: SCOTT WOODBURY DATE: JUNE 21, 2002 RE: CASE NO. GNR-E-02-1, ORDER NO. 29029 - QF SIZE AND CONTRACT LENGTH MOTIONS TO STAY ENTITLEMENT TO RATES - IDAHO POWER/AVISTA PETITIONS FOR RECONSIDERATION - IDAHO POWER/AVISTA/SIMPLOT/EARTH POWER On February 5, 2002, the Commission initiated generic docket No. GNR-E-02-01 soliciting comments on the continued reasonableness of current QF project size limitations for published rate eligibility (i.e., 1 MW) and restrictions on contract length (i.e., 5 years) from the PURPA QF community, from interested persons and from those regulated electric utilities (Idaho Power, Avista and PacifiCorp) required to purchase QF power pursuant to Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA), and the implementing rules and regulations of the Federal Energy Regulatory Commission (FERC). On May 21, 2002, the Commission issued Order No. 29029 in Case No. GNR?E?02?01 increasing QF project size limitations for published rate eligibility from one megawatt to five megawatts and increasing maximum required contract length from 5 years to 20 years. MOTIONS TO STAY ENTITLEMENT TO RATES Idaho Power On May 21, Idaho Power Company filed a Motion to Stay Entitlement to Published Rates. A critical issue raised by the Company's Motion, it states, is the distinction between "eligibility" to published rates and "entitlement" to published rates. Idaho Power does not want to repeat what was a series of grandfathering complaints by QFs when the Commission last changed the avoided cost methodology and rates. Idaho Power contends that the published rates are much higher than the cost the Company believes it would actually incur if it were to construct a new combined cycle combustion turbine (CCCT) today or if it purchased energy generated by a new CCCT owned and operated by a third party. See Motion Attachment A. Idaho Power believes that the reason the published rates are so much higher than the Company's estimate of today's actual CCCT costs is that the assumptions used to compute the published levelized non-fueled rates are based on 1995 data and assumptions which have not been updated. Idaho Power alternatively contends that it would be reasonable for the Commission to direct the utilities to continue to negotiate in good faith and enter into contracts for the purchase of power from QFs. However, the Company recommends that those QF contracts include a provision that makes the purchase price subject to the Commission's final rate determination regarding the Company's current avoided cost. Reference Commission Order No. 25361 (1994). Avista On June 11, 2002, Avista Utilities filed a Motion to Stay requesting similar relief. Avista contends that if current published avoided costs were applicable to a single 5 MW project with an online date of 2007, the net present value (2002) of acquiring the output of that project over 20 years would amount approximately to $28,580,000. This, it states, compares with a net present value (2002) cost of approximately $13,716,000 for a generic combined cycle combustion turbine project over the same 20 year term using assumptions from the Generating Resource Advisory Committee of the Pacific Northwest Electric Power and Conservation Planning Council. Avista reminds that Commission that the issue of when an entitlement to a particular avoided cost rate arises has been a source of considerable controversy and litigation in the past. Reference Empire Lumber Company v. Washington Water Power Company, 114 Idaho 191 (1988). J.R. Simplot-Answer to Idaho Power Motion (Petition) to Stay J.R. Simplot Company on June 10th filed an Answer to Idaho Power's Motion to Stay. Simplot initially notes that the Company cites no Commission rule or authority under which its "Motion" was filed. Commission Rule of Procedure 53, it states, defines any pleading seeking "modification, amendment or stay of existing orders or rules" as Petitions, not Motions. Reference IDAPA 31.01.01.053.01 Simplot contends that the Company's Petition is a back-door attempt to reverse the Commission's decision. Simplot notes that the Commission in its Order declared "Although many parties recommend that we expand the proceedings in this docket to explore avoided cost methodology and other QF issues, we find no reason to expand the scope of this case beyond the issues identified for investigation, i.e., PURPA QF published rate eligibility and restrictions on contract length." Order No. 29029 at pp. 4-5. If the Company is successful in obtaining a stay of entitlement of the published rates, then Simplot contends that it will have, once again, succeeded in its efforts to stymie the QF industry. This is true, it states, because if the Commission stays the entitlement to published avoided cost rates then no QF will actively pursue a project unless and until entitlement is restored. Simplot contends that any perceived staleness in avoided cost rates is due to utility inaction. The assertion by Idaho Power that avoided cost rates are too high is not new, Simplot contends. Utilities, it states, always make false comparisons between their QF rates and short-term wholesale market prices to support their erroneous assertions that the QF industry is subsidized. Idaho Power is no different: Market prices are a reasonable measure of the costs Idaho Power could avoid acquiring the smaller, non-dispatchable, non-firm resources offered by QF developers. Idaho Power comments filed March 15, 2002, p. 10. Such false comparisons, Simplot contends, mislead the public as to the real value QFs provide to the ratepayers of a large slow-to-change incumbent utility. However, if the utility really believes that avoided costs are too high then Simplot contends that it should have filed a case with the Commission making its point. Every July 1, Simplot notes, the Commission issues a new Order approving changes to the variable portion of the avoided costs. In those Orders, the Commission makes a finding that the avoided cost rates are fair, just and reasonable. If Idaho Power really "believes" that the avoided cost rates are based on stale information and are therefore unfair, unjust and unreasonable, Simplot contends it was incumbent upon it to bring that belief to the Commission's attention. The Company, Simplot contends, should not be permitted to passively stand by and let the Commission issue Order after Order that it "believes" contain inaccurate rates and now, at this late date, step in and seek an emergency stay of the rates contained in those Orders. Idaho Power's passive acquiescence in the Commission's annual avoided cost ratesetting Orders, coupled with its sudden concern with implementation of those rates, Simplot contends, is a classic case of "unclean hands" or laches. Simplot notes that Staff's comments contain several references to the continued accuracy and validity of the current avoided cost rates and the methodology used to set those rates. Simplot contends that Idaho Power has not made a convincing case that avoided cost rates are excessive. The Company's avoided cost calculations are not an accurate reflection of avoided costs over 20 years, Simplot contends, because it is a snapshot in time of a versatile and robust methodology that adapts to changing circumstances. The rates reflected in Idaho Power's calculation change each and every July 1st. Therefore, any suggestion by the Company, Simplot contends, that the current rates are static is simply wrong. Idaho Power's Motion, Simplot contends, is akin to the ratepayers informing the Commission that wholesale prices seem to be dropping and therefore their requirement to continue to pay retail rates should be made somehow conditioned upon later findings by the Commission. Simplot requests that the Commission deny Idaho Power's Petition to Stay the effectiveness of today's published avoided cost rates. Commission Staff Answer On July 14, 2002, the Commission Staff filed an Answer to the Petitions of Idaho Power and Avista to Stay entitlement to published rates. Reference IDAPA 31.01.01.02. Staff recommends that the Commission deny the Utilities Petitions for Stay. Staff contends that the utilities have had seven years to seek changes to input variables. Staff states that it fully expected that the variables would be updated over time, but understood that to change any variable would require a filing by a utility. Avoided cost rates, Staff contends, do not suddenly become "wrong" because contracts are lengthened or because or because eligibility for the rates is expanded. If avoided cost rates are, in fact, incorrect, Staff contends they are incorrect whether contracts are five or twenty years and whether project size is 1 or 5 MW. Staff recommends that the Commission open a new docket to consider changes in variables. Staff notes that there have been improvements in combined-cycle technology since the variables were first adopted. Each of the utilities now also has direct experience in acquiring generation from combined-cycle plants. Accurate information on combined-cycle plant costs, Staff contends, should now be readily available. Staff does not believe the methodology to compute the avoided cost rates is flawed. Staff along with representatives from each utility and other interested parties worked collectively to develop a spread sheet that computed the costs of a combined-cycle combustion turbine. No party, Staff contends, has offered any compelling reasons to change the computation methodology. Until changed by Commission Order, Staff believes that QF contracts should continue to be made available at the published rate. Plummer Forest Products - Answer Plummer Forest Products owns and operates a sawmill in Plummer, Idaho and has a 5 MW wood fired boiler and steam turbine connected to Avista's grid. It is Plummer's intention to operate the boiler and sell the power as a PURPA Qualified Facility. Plummer contends that it is continually thwarted in its effort by the utilities. Plummer's experience over the last year is that the utilities do not take QFs seriously nor do they treat QFs with any respect. By continued legal maneuvering Plummer believes they intend to wait the QFs out. Plummer contends that all parties had ample time to study the relevant issues prior to the Commission's Order No. 29029 and recommends that the Commission make the utilities do what was ordered. Intermountain Forest Association (IFA) - Answer Intermountain Forest Association represents lumber mills and forestland owners and acts as a voice with them on public policy issues in Idaho and the intermountain region. IFA supports the Commission Staff's recommendation and agrees that the Commission should deny the utilities' Petitions for Stay. IFA contends that there is an adequate public process to address rate changes and there has been adequate time for the utilities to seek changes to input variables and methodology to compute avoided cost rates. PETITIONS FOR RECONSIDERATION On June 10, 2002, Petitions for Reconsideration were filed by J.R. Simplot Company and Earth Power Resources, Inc. On June 11, 2002, Petitions for Reconsideration were filed by Idaho Power Company and Avista Corporation. On June 18 and 19, 2002, the Commission received Answers to the Petitions for Reconsideration by Plummer Forest Products and Empire Lumber Company. J.R. Simplot Company/Earth Resources, Inc. J.R. Simplot Company (Simplot) and Earth Power Resources, Inc. (Earth Power) request reconsideration of Commission Order No. 29029 on the sole issue of QF project size limitations for published rate eligibility. In its Order the Commission made the following finding regarding size: In establishing the threshold at 5 MW we balance utilities' concerns regarding the effect of large QFs on a utility's electrical system with an acknowledgement of the fact that over 80% of existing contracts in Idaho have been for projects smaller than 5 MW. Indeed, only three contracts larger than 10 MW have ever been signed - Potlatch, Simplot and Boise Cascade. Order No. 29029, pp. 6-7. Simplot and Earth Power urge the Commission to increase the size at which a QF is entitled to publish avoided costs from 5 MW to 10 MW. Alternatively, they request a hearing to demonstrate why the Commission's decision produces an unfair and unreasonable result. The different effects of a 10 MW and 5 MW QF on a utility's electrical system, the Petitioners state, are inconsequential. The size of a QF, they contend, is only one factor that impacts a utility's electrical system - other factors are the proximity of the QF to transmission, distribution, substations and the utility's load. All factors impacting a utility, they state, are in each case detailed in an Interconnection Study conducted by the utility (and paid for by the QF). Should such a study reveal that the interconnection of a QF will have a detrimental impact on a utility's system, the Petitioners state that the QF must pay for corrective measures or it will not be connected. The fact that most QF projects are for projects smaller than 5 MW, the Petitioners state, does not diminish the importance of the larger than 5 MW projects to the host utility's portfolio. The key is not how many contracts there are, but how much power is provided to the ratepayer by these contracts. The 14 contracts between 5 and 10 MW in Idaho Power's QF portfolio, they note, comprise only 21% of the total number of QF contracts held by the Company, yet provide 56% of the total MW capacity provided. If the rates are no longer fair and accurate, the appropriate response, the Petitioners contend, would be to adjust the rates, not limit entitlement to them. If the past is an indication of the future, Simplot contends that the "black box" phenomenon will result in no contracts over 5 MW being signed. Simplot is prepared on rehearing to sponsor expert testimony as to the lack of effects that would prevent QFs of up to 10 MW from successfully and seamlessly connecting to a utility's system. Noting that 5 MW limitation will prevent many QFs (wind, geothermal and biomass) from capturing economies of scale, Earth Power states that it is prepared to offer expert testimony as to the necessity for larger QF projects and the price stability that will result from the increased use of non-fossil fueled QF renewables. Idaho Power Company Idaho Power maintains that the Commission's Order No. 29029 is "unreasonable, unlawful, erroneous, unduly discriminatory, not based on facts in the record, and is inconsistent with applicable law because the rates established by the Order…exceed the level permitted by federal law." Despite Idaho Power and PacifiCorp's request that it do so, Idaho Power points out that the Commission declined to consider additional evidence bearing on whether the current published rates are consistent with current utility avoided costs. Indeed, the Commission stated: "although many parties recommend that we expand the proceedings in this docket to explore avoided cost methodology and other QF issues, we find no reason to expand the scope of this case beyond the issues identified for investigation, i.e., PURPA QF published rate eligibility and restrictions on contract length." Order No. 29029, pp. 4-5. The Commission, Idaho Power contends, fails to recognize the real effect of increasing QF project size limitations for published rate eligibility and increasing maximum required contract length. By changing the mandatory term of the contract from 5 to 20 years, Idaho Power contends that the Commission increase the levelized published rates that the Company will have to offer to pay QFs that become entitled to receive the published rates. Idaho Power in its Petition provides current Company projections of combined cycle combustion turbine (CCCT) costs using updated assumptions. Idaho Power contends that the 2002-2003 values contained in its avoided cost calculation model are more indicative of the actual cost of constructing and operating a 2002 CCCT for 20 years than are the 1995 vintage assumptions that are used to derive the current published rates. Idaho Power contends that the Commission's decision not to consider evidence bearing on whether the current published rates are consistent with current avoided costs was erroneous and constitutes arbitrary and capricious decision making. The only language in Order No. 29029 that directly addresses whether or not the published rates represent current utility avoided costs, the Company states, is located on page 6 of the Order wherein the Commission states: Commission Staff recommends that the threshold for availability of published rates be increased to 5 MW. Based on its analysis, Staff concludes that the published rates continue to be fair and reasonable and accurately represent the costs of the surrogate avoided resource (SAR) adopted by the Commission, i.e., a non-dispatchable natural gas fired combined cycle combustion turbine (CCCT) over a 20-year period. Order No. 29029. Details of Staff's analysis that produced the above-referenced conclusion, the Company states, were not presented as part of Staff's comments. Because the Commission declined Idaho Power and PacifiCorp's request to convene a proceeding to consider current avoided costs, these parties, it states, were denied the opportunity to test the validity of Staff's analysis and conclusions. For the Commission's Order to cite the Staff's conclusion that the published rates are equivalent to current avoided costs (1) without any further discussion of that critical issue in the Order; (2) without giving the other parties an opportunity to review and challenge the Staff's conclusion; or (3) without allowing other parties to present evidence demonstrating that the published rates do not represent current avoided costs, Idaho Power contends, is unreasonable and constitutes arbitrary and capricious decision making. Idaho Power contends that the Commission's Order also fails to specify how the 5 MW limit would be established. The Company states that it has already received inquiries from one QF developer with four separate qualifying facilities, all of which have a nameplate capacity rating that exceeds 5 MW. It is the Company's position that the entitlement to published rates should be based on the nameplate capacity of a generating facility. Idaho Power in its Petition for Reconsideration requests that the Commission stay the effectiveness of Order No. 29029 to allow adequate time to update the assumptions in the existing methodology. On reconsideration Idaho Power states that it will provide testimony and exhibits which would demonstrate that the existing published rates result in purchase prices that exceed Idaho Power's avoided costs. Idaho Power contends that it would not utilize the proceeding to propose a totally new avoided cost methodology but will instead present testimony and exhibits that would update the assumptions to be utilized in the existing methodology to establish published rates that would be consistent with the estimated costs of building and operating a new combined cycle combustion turbine. Idaho Power states that it is prepared to proceed expeditiously within the time limits established for reconsidering Order No. 29029 as provided by Idaho Code 61-626. The Company notes that under Idaho Code 61-626(3) the Commission may issue an Order staying the effectiveness of its Order following the filing of a Petition for Reconsideration. Commission Rule of Procedure 324, the Company notes, also provides for a stay of a final Commission Order at any time. The Company believes that the evidentiary record in this case is not sufficient for the Commission to make a legally sufficient determination as to the issues raised in its Petition for Reconsideration. Idaho Power requests that the Commission reconsider its Order and upon reconsideration (1) review the necessity for mandatory 20-year contracts and revise the assumptions used to compute the published rates so that they are consistent with Idaho Power's current avoided costs; (2) confirm that eligibility to receive the published rates is to be determined on the nameplate rating of the generating capacity of the QF and that a QF with the nameplate capacity rating in excess of 5 MW is not eligible to receive the published rates; and (3) staying entitlement to the published rates included in Order No. 29029 until the Commission has completed its reconsideration of Order No. 29029. Avista Corporation Avista joins in the request of Idaho Power for reconsideration and stay of entitlement to rates. Avista seeks reconsideration on the basis that Avista's current published cost rates are not a fair, reasonable and accurate representation of the costs of the surrogate avoided resource (SAR) over a 20-year period. The published rates over a 20-year period, Avista contends, are much higher than the Company's current estimates of the costs associated with constructing a CCCT. Avista requests that the Commission grant rehearing for the purpose of receiving evidence respecting current information related to avoided costs before qualifying facilities are entitled to 20-year contracts. Empire Lumber Company - Answer to Petitions for Reconsideration Empire agrees with Simplot's conclusions that the Commission should increase the maximum QF size to 10 MW. Empire contends that the efficiencies of size between 5 MW and 10 MW are significant and will both increase the amount of competing projects and enhance the quality of QF projects. Idaho Power's argument concerning the level of QF costs, Empire contends, ignores its unwillingness to adjust the rates since 1996. To the extent the Commission sets an avoided cost for competing QF projects, Empire contends that such avoided cost rates should serve as a cap on any Company rate based plant. Based on recent filings, Avista notes that Idaho Power's Mountain Home project is substantially more expensive to ratepayers than the 42.50 mills proposed as Idaho Power's new market rates. If QF projects are not allowed market fuel adjustments, then Empire contends that neither should rate based or affiliated projects be allowed special treatment for cost adjustments such as fuel. The Commission, Empire contends, should seek to develop a QF rate schedule that offers a level playing field to minimize the cost of new generation resources. With respect to how size limitations should be administered, Empire urges the Commission to adopt a policy limitation of 87,600,000 kWh in any twelve- (12) month period for any QF project to capture the 10 MW limitation (10,000 kWh x 8760 hrs per year). Other than asking the Commission to adopt an arbitrary limit of project size, Empire contends that Idaho Power's concern about a project size does not encourage QF development as an alternative resource. The value and reliability to ratepayers of receiving the first 10 MW of capacity and energy from a larger project, Empire contends, is significantly improved in comparison to a project that is undersized to satisfy an arbitrary size limitation. Does it economically matter to the ratepayers, Empire queries, if the first 10 MW of a 20 MW plant receive published rates and the balance is sold into the marketplace? Empire requests that both Idaho Power and Avista's Petitions for Reconsideration and Petitions for Stay/Entitlement be dismissed so that economic development can commence and competition in the creation of new power generation resources can once again resume. Plummer Forest Products - Answer to Avista Petition for Reconsideration Plummer contends that Avista's Petition and Motion should be seen for what they are, one more effort to slow-roll the QF industry and to deny Idaho ratepayers the benefits of diverse, renewable electric generation. Plummer requests that Avista's Petition and Motion be denied. Avista, Plummer notes, does not appear to contend that the Commission's Order is "unlawful or not in conformity with the law." Reference IDAPA 31.01.01.331. Indeed, Plummer contends that the Commission clearly has the legal authority to determine appropriate contract lengths for QF contracts. Avista must therefore show that the Order is "unreasonable or erroneous." The record before the Commission when it issued Order No. 29029, Plummer states, was replete with record-support for a decision to extend contract length to 20-years. Citing comments of Sorenson Engineering, John A. Bert Stevenson, Christopher Harriman, Intermountain Forest Association, JUB Engineering, David Day, Commission Staff, Plummer Forest Products and Potlatch. Avista may disagree with the Commission's decision, but when, as here, it is supported by substantial record-evidence, Plummer contends that it cannot be said that the decision is unreasonable or erroneous. The only ground for reconsideration, Plummer contends, is the generalized allegation that "published rates over a 20-year period are much higher than Avista's current estimates of costs.…" This, Plummer notes, is the identical ground alleged in Idaho Power's Petition. The Answers of Commission Staff and Simplot, Plummer notes, fully debunk this claim and Plummer adopts and supports those answers. Without repeating them verbatim, Plummer contends, they can be summarized as follows: Commission Staff: Utilities have had seven years to seek changes to input variables; Avoided cost rates do not suddenly become "wrong" because contracts are lengthened or because eligibility for rates is expanded. Simplot: The Petition is a backdoor attempt to reverse the Commission's decision. Any perceived staleness in avoided cost rates is due to utility inaction. Rates change, or are supposed to change, every year; any suggestion that current rates are static is wrong. Commission Decision Simplot and Earth Power request reconsideration on the Commission's decision to increase the eligibility threshold for published rates from 1 to 5 MW. The petitioners contend that threshold should be 10 MW. As reflected in the Commission's Order "under FERC rules and regulations, published rates are required only for purchases from qualifying facilities with a designed capacity of 100 kilowatts (kW) or less. Reference 18 C.F.R. § 292.304(c). PURPA, however, does not prohibit the publishing of rates for larger projects." Order No. 29029, p. 2. Does the Commission wish to change its Order regarding project size or grant reconsideration on this issue? Idaho Power and Avista request reconsideration on the Commission's refusal to expand the scope of the investigation to entertain utility arguments demonstrating that the published rates do not represent their current avoided costs. Does the Commission wish to grant reconsideration, i.e., re-open the docket and develop a record as to whether the published rates represent the current avoided costs of the Commission's regulated electric utilities? Does the Commission find it reasonable to deny reconsideration and establish a separate docket to consider same? Does the Commission find it reasonable to deny reconsideration and advise the utilities that if a utility believes that the published rates no longer represent the utility's avoided costs, that it should file an application (with supporting testimony, etc.) to change the rate? Does the Commission find it reasonable to stay entitlement to published rates pending determination of same? The statutory deadline for a Commission Order on the Petitions for Reconsideration (grant/deny) is Monday, July 8, 2002. Scott Woodbury Vld/M:GNRE0201_sw3