20040806Reply Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 WEST WASHINGTON STREET
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
THE PETITION FILED BY IDAHO POWER
COMPANY FOR APPROVAL OF
MODIFICATIONS TO THE SECURITY
PROVISIONS REQUIRED TO BE INCLUDED
IN POWER PURCHASE AGREEMENTS
BETWEEN ELECTRIC UTILITIES (IDAHO
POWER, A VISTA CORPORATION DBA
VISTA UTILITIES, AND P ACIFICORP DBA
UT AH POWER & LIGHT COMPANY) AND
PURPA QUALIFYING FACILITIES (QFs).
CASE NO. IPC-O3-
A VU - E-O3-
PAC-O3-
REPLY COMMENTS OF
THE COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Scheduling, and in response to Order No. 29515 issued on June 9, 2004, submits the following
comments.
BACKGROUND
On November 5 2003 , Idaho Power Company (Idaho Power; Company) filed a Petition with
the Idaho Public Utilities Commission (Commission) requesting authority among other things 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
REPLY COMMENTS AUGUST 6, 2004
the second lien requirement. Staff noted 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
the Company intended to outsource the legal work and requested that it be permitted to collect the
estimated $1 000 - $1 500 cost directly from the QF or alternatively recover the lien expense as part
of its annual Power Cost Adjustment (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-
, A VU-03-, and PAC-03-13. In its Order the Commission denied'ldaho Power s request to
eliminate the second lien requirement as a risk mitigation measure for PURP A Power Purchase
Agreements containing levelized avoided cost rates. For new levelized contracts the Commission
authorized the Company to recover its lien expense 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 (IDAPA 31.01.01.331)
or in the alternative a Petition for Clarification (IDAP A 31.01.01.325) regarding the portion of
Commission Order No. 29482 that provides the option for QFs to prepare and file the lien or
security interest documentation. The Company cited the following specific Order language to be of
concern:
The Commission continues to find value for ratepayers in the presence of a
second lien to secure overpayment liability. We recognize that securing a lien
may entail some expense. We assume the Company s decision to outsource is
based on a determination that the utility has no in-house expertise or that the cost
of outsourcing the task is less than performing the task itself. The Commission
finds that it is inappropriate to recover this type of expense as part of the
Company s PCA. We find it reasonable, however, for the Company to assess this
cost to QFs. Alternatively, we find it reasonable that the QF be permitted to
prepare the lien documentation and to file the lien itself. The procedure that we
approve for recovery of lien expense is for new levelized PURP A contracts only.
Order No. 29482, p. 12.
The Company also expressed its concern with the following language from the
Commission s final Order No. 29482:
REPLY COMMENTS AUGUST 6, 2004
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 9 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.
On June 9, 2004, the Commission in Order No. 29515 granted reconsideration of that
portion of Commission final Order No. 29482 pertaining to the risk mitigation second lien
requirements in levelized contracts and the option provided to QFs to prepare and file related
security interest documentation. In its Petition for Reconsideration, the Company requested that the
QF be required to submit the proposed QF-prepared security interest (second lien) filing to the
utility for prior review and approval. The Company also requested 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. As part of the reconsideration, the Commission noted that its
decision to authorize recovery from QFs of Company legal expenses related to second liens is also
at issue.
ANALYSIS
The 292 Second Lien Requirement Not broken No need to fIX
In its initial Petition in this case recommending elimination of the Second Lien
Requirement, Idaho Power represented that QFs were apprising the Company "that the financing
structures of existing projects do not allow Idaho Power to place a second lien on the project as
required in the -292 case." IPCO Petition, page 4. The Company considering the QF claims
concluded that "it is possible that the financing arrangements of existing projects would preclude a
subsequent lien position by Idaho Power or any other party without the consent of the primary
lender." Petition, page 4.
REPLY COMMENTS AUGUST 6, 2004
Further in its initial Petition, the Company states:
In certain cases, the financing arrangements of a CSPP do not allow a second lien
position as anticipated in Order No. 21690, as amended. However, where those
restrictions do not exist, the Company either places a second lien on a project at
the time a levelized rate agreement is executed or at the time a proj ect is
amended to conform to the risk mitigation requirements of Order No. 21690, as
amended.
The clear inference from the Company s original Petition language is that there existed a
number of QFs with levelized rate contracts with no second lien in place. That Staff was of this
opinion is evidenced further in Staff s Comments wherein it states "Due to what the Company
contends is the marginal value of the secondary lien position and the inability of the Company, in
some circumstances, to obtain security in the form of a second lien Idaho Power proposes to delete
the secondary lien rights as a risk mitigation measure in levelized rate arrangements with QFs.
emphasis added. The Company in reply comments did nothing to disabuse Staff of this
misperception. In preparing for reconsideration comments, Staff determined the facts to be
otherwise. Staff, in Production Request No. 12, requested that the Company identify all Idaho
Power/QF contracts with levelized rates that are subject to the Commission s -292 Second Lien
Security Requirement; identify all projects with an existing and filed second lien; and for those QF
projects without a second lien indicate whether this was a result of a) administrative neglect by
Idaho Power or b) an election by the QF to post liquid security. . .
In response to Staffs Production Request No. 12, the Company identified 25 projects with
levelized rates that are subject to the Commission s -292 Second Lien Security Requirements. All
of the projects with the exception of one have an existing and filed second lien. The one exception
elected to post liquid security in the form of a letter of credit. Staff concludes that the -292 Second
Lien Security Requirement was not broken, continued to be of value and required no elimination
adjustment, modification or fix.
Self-Perfection Option
Idaho Power Position
In its Petition for Reconsideration, Idaho Power presented two alternative options: (1) that
the Commission eliminate the self-perfection option; or (2) if the self-perfection option is retained
that Idaho Power have the right to review and approve the QF's documentation and
REPLY COMMENTS AUGUST 6, 2004
perfection process. Idaho Power addressed both options in its Initial Comments on
Reconsideration.
Idaho Power first explains the complexity of the process of perfecting and maintaining a
valid second priority security interest for the various types of property comprising a QF project.
Due to this complexity of the process and the specialized legal practice it demands, Idaho Power
states that it is not comfortable using its in-house legal counsel to prepare and perfect QF second
liens. Further, the Company believes that the cost of outsourcing the work is less than the cost of
performing the task itself.
Idaho Power also expresses concern 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 do not have a proper incentive 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
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-
perfect, Idaho Power will have no obligation to take remedial steps if the QF developer fails to
adequately cover all project assets or fails to file any required continuation statements to maintain
the viability of the security interest over the full-term of the contract.
ST AFF RECOMMENDATION
Staff believes that Idaho Power s arguments are compelling for eliminating the QF option to
self-perfect second liens. By not allowing the self-perfection option, Idaho Power can avoid
incurring additional legal expense that would otherwise be necessary for review and approval of
REPLY COMMENTS AUGUST 6, 2004
second liens perfected by the QF. In addition, removing the self-perfection option will alleviate the
Company s concern about risk if those security interests are not enforceable or do not cover all of
the assets associated with a QF project.
Cost Recovery of Legal Expenses Incurred in Preparing and Perfecting Second Lien
Staff Recommendation
Staff simply reiterates the position it expressed earlier in this case-that the legal expenses
of preparing and perfecting a second lien, whether done in-house or outsourced, is a contract
administration cost and has never been a cost directly billed to QFs. Staff opposes the direct billing
of this cost to QFs. The legal costs attendant to securing a second lien are an operating expense
appropriate for consideration in rate case revenue requirement calculations.
STAFF CONCLUSIONS AND RECOMMENDATIONS
Staff concludes that the -292 Second Lien Security Requirement is not broken, continues to
be of value and required no elimination, adjustment, modification or fix.
Staff recommends that the Commission rescind its earlier decision to permit QFs to self-
prepare and perfect second liens. Staff also recommends that the Commission rescind its decision
permitting Idaho Power to recover the cost of legal expenses incurred in preparing and perfecting
second liens, directly from QFs, regardless of whether the legal work is performed in-house or
outsourced.
Respectfully submitted this 71a day of August 2004.
Scott Woodbury
Deputy Attorney General
Technical Staff: Rick Sterling
i:umisc:comments/ipceO3.avueO3.9 -paceO3.13replyswrps
REPLY COMMENTS AUGUST 6, 2004
CERTIFICA TE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 6TH DAY OF AUGUST 2004
SERVED THE FOREGOING REPLY COMMENTS OF THE COMMISSION STAFF,
IN CASE NOS. IPC-03-, AVU-03-, PAC-03-, BY MAILING A COpy
THEREOF POSTAGE PREPAID TO THE FOLLOWING:
BARTON L KLINE
MONICA B MOEN
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RANDY ALLPHIN
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
H DOUGLAS YOUNG
AVISTACORP.
PO BOX 3727
SPOKANE W A 99220-3727
DALE G RASMUSSEN
ASSOCIATE GENERAL COUNSEL
ACIFICORP
825 NE MULTNOMAH ST SUITE 1800
PORTLAND OR 97232
R BLAIR STRONG
PAINE HAMBLEN ET AL
71 7 W SPRAGUE AVE SUITE 1200
SPOKANE W A 99201
COLIN PERSICHETTI
DIRECTOR, MARKETING & TRADING
ACIFICORP
825 NE MUL TNOMAH SUITE 600
PORTLAND OR 97232
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SECRET AR Y
CERTIFICATE OF SERVICE