20040602_853.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLAND ER
COMMISSIONER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:MAY 24, 2004
RE:CASE NOS. IPC-03-16 (Idaho Power); A VU-03-9 (A vista); PAC-03-
(PacifiCorp)
MODIFICATIONS TO PURP A CONTRACT SECURITY PROVISIONS
PETITION FOR RECONSIDERATION/CLARIFICATION OF FINAL ORDER
NO. 29482 - (Idaho Power)
On November 5, 2003 , Idaho Power Company (Idaho Power; Company) filed a
Petition with the Idaho Public Utilities Commission (Commission) requesting authority to
eliminate the second lien requirement as a risk mitigation measure in PURP A Power Purchase
Agreements containing levelized avoided cost rates. Staff objected to the proposed elimination of
the second lien requirement noting that without a second lien, PURP A Qualifying Facilities (QFs)
desiring levelized rates must post 35% liquid funds as security for the calculated overpayment that
results from the front-end loading that occurs with a levelized rate structure. Idaho Power in reply
comments represented that should the Commission continue with the second lien requirement that
the Company intended to outsource the legal work and requested that it be permitted to collect the
estimated $1 000-500 cost directly from the QF or alternatively recover the lien expense as part
of its annual PCA filing. Addressing this issue of cost recovery, Staff contended that this was a
contract administration cost and has never been a cost directly billed to QFs; nor was it the type of
power cost that was appropriate for recovery through the PCA. Staff opposed the direct billing of
this cost to QFs or the recovery of same through the PCA.
On April 27, 2004, the Commission issued final Order No. 29482 in Case Nos. IPC-
03-, AVU-03-, and PAC-03-13. In its Order the Commission denied Idaho Power
request to eliminate the second lien requirement as a risk mitigation measure for PURP A Power
DECISION MEMORANDUM
Purchase Agreements containing levelized avoided cost rates. The Commission authorized the
Company for a new levelized contract to recover lien expense (estimated $1 000 to $1 500) from
the contracting QFs; or alternatively, permitted a QF to prepare the lien documentation and file the
lien itself.
On May 17 , 2004, Idaho Power filed a Petition for Reconsideration (IDAP A
31.01.01.331) or in the alternative a Petition for Clarification (IDAPA 31.01.01.325) regarding
that portion of Commission Order No. 29482 where QFs are provided the option to prepare and
file the lien or security interest documentation.
Background - Levelized Rates/Second Lien Requirement
In Order No. 21446 in the -292 case the Commission made the following findings
regarding lien rights:
We believe that some form of security and/or risk mitigation is necessary to
achieve an optimum level of ratepayer indifference. ...
The lien rights available to secure ratepayer interests in (QFJ projects are
usually subordinate to the first lien of the project financier. The value of a
second lien position in all the QF property and facilities is the measure or
degree of control over the project that it imparts with respect to its continued
financing, operations and maintenance. Although it provides no liquid fund for
satisfaction of overpayment obligation we nevertheless recognize it as a
valuable tool in safeguarding the interests of the ratepayer. To be acceptable a
lien should be subordinate only to the first lien of the project financier and the
FERC license, as evidenced by an appropriate policy of title insurance.
In Commission Order No. 21690 the Commission stated:
The value to the utility and the ratepayer of a lien is directly related to the
quality of the underlying QF. Hence, the 35% reduction in liquid security
requirement for this risk mitigation item shall remain in effect only so long as
the QF fulfills all requirements of Sections G. (Basic Insurance), H.
(Engineering Certification), 1. (Maintenance Escrow) and J. (Lien Rights).
Failure to maintain these terms and conditions at any time during the life of the
power sales agreement shall result in the 35% reduction being revoked. Failure
to establish and maintain the appropriate new level of liquid overpayment
security shall constitute breach of contract.
Order No. 29482, p. 6.
DECISION MEMORANDUM
IPCo - Petition for Reconsideration/Clarification
While Idaho Power states that it understands the Commission s desire to minimize QF
transaction costs, the Company states that it is concerned with the conflict of interest created by
allowing QF developers to prepare and file the documents needed to secure Idaho Power s security
interest in the assets of their respective QF projects.Idaho Code, Title 28, Chapter 9, the
Company notes, sets out very precise documentation and filing requirements to protect security
interests. If the requirements are not filed precisely, the security interest is not perfected and is
subject to attack in the event of competing creditors seeking to foreclose on the QF's assets. The
QF's failure to correctly document, perfect and maintain its security interest in QF project assets
would jeopardize the Company s ability to maintain a priority creditor position on the assets
covered by the security interest. Idaho Power maintains that QF developers have a disincentive to
do a thorough job of creating and perfecting Idaho Power s security interest. If the Commission
still desires to provide this option to QF developers, Idaho Power requests that the Commission
clarify Order No. 29482 by requiring that QF developers electing to prepare and file the lien
documentation must permit the Company to review and approve all aspects of the creation of the
security interest. The Company also requests that the Commission clarify that if the QF exercises
this option to self file, Idaho Power will have no obligation to take remedial steps if the
developer fails to adequately cover all project assets or fails to file any required continuation
statements to maintain the viability of this security interest over the full-term of the contract.
Idaho Power notes that the recommended review and approval procedure will require
the Company to incur additional legal expense. Nevertheless, Idaho Power believes the initial
review and approval by Idaho Power is necessary to at least reduce the likelihood of potential
problems if a QF project experiences financial problems.
The Commission s final Order No. 29482 contains the following language.
. . .
For existing levelized PURP A contracts, the Company is expected to
administer its contracts in a responsible fashion and to require QF compliance
with Commission -292 security requirements. For those levelized QF contracts
without a second lien, the QF should be brought into compliance or the
Company should require a posting of liquid security. The Commission expects
the Company to follow Commission Orders. Reference Idaho Code ~ 61-706.
If liquid security is required but not enforced, it is the Company and not its
customers that are at risk for the foregone security.
Order No. 29482, p. 12.
DECISION MEMORANDUM
Idaho Power in its Petition believes that it is unreasonable for the Commission to require the
Company to accept a security interest created by the QF developer and then put the Company at
risk if those security interests are not enforceable or do not cover all of the assets associated with a
QF project. If the Commission gives QF developers the option to prepare and file the documents
needed to perfect Idaho Power s security interest in the QF's assets, the Company believes that it
should be relieved of any liability, even if it has review and approval authority, if it is ultimately
determined that the security interest provisions of the Commission s -292 security requirements
do not cover all of the QF assets or cannot be enforced.
If the Commission grants reconsideration, Idaho Power believes that written comments
would be sufficient to address the issues raised by its Petition.
COMMISSION DECISION
Idaho Power has requested reconsideration and/or clarification of that portion of
Commission Order No. 29482 pertaining to -292 security lien requirements and the QF option to
prepare and file related documentation. The Company requests that the QF be required to submit
the proposed QF -prepared security interest (lien) filing to the utility for prior review and approval.
The Company also requests that the utility be relieved of any liability, even if it has review and
approval authority, should the QF -prepared lien later prove to be insufficient or unenforceable.
Regarding the liability issue raised by the Company with respect to QF -prepared lien
documentation - Staff suggests that the Company-referenced Commission Order language, i.
, "
liquid security is required but not enforced, it is the Company and not its customers that are at risk
for the foregone security,is taken out of context and should be read with the immediately
preceding language, as set forth above. The Commission s language was an admonition regarding
the Company s QF contract administration practice - it appearing from Company filings and
representations that there are a number of levelized Idaho Power/QF contracts out there with no
second lien and for which the Company has not required a posting of liquid security nor requested
Commission authorization to exclude same.It was in that context, Staff contends, that the
Company was being reminded to follow the Commission s Orders. The issue of liability
regarding sufficiency or enforceability raised by the Company for QF -prepared documentation is a
separate issue. Arguably the issue would be the same if preparation of the lien documents were
outsourced by the Company. Staff notes that part of the contract package currently used by the
Company for QFs includes engineer certification forms. Staff contends that an appendix form
DECISION MEMORANDUM
could also be included for liens, setting out or referencing Title 28 , Chapter 9, Idaho Code lien
requirements and including any stock or sample lien language that the Company desires to have
included in security interest documentation. Required changes to the lien could be addressed in
the Company s contract administration QF report and certification requirements.
Does the Commission wish to grant reconsideration or provide any clarification?
Scott Woodbury
Vld/M:IPCEO316 AVUEO309 PACEO313 sw2
DECISION MEMORANDUM