19990625.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
MYRNA WALTERS BILL EASTLAKE
DON HOWELL
STEPHANIE MILLER
TONYA CLARK
RON LAW
RANDY LOBB
RICK STERLING
DAVID SCOTT
WORKING FILE

FROM:

DATE: June 25, 1999

RE: CASE NOS. AVU-E-99-3, IPC-E-99-5, UPL-E-99-2
AVOIDED COST VARIABLE RATE—ANNUAL REVISION
REQUESTED CHANGE IN METHODOLOGY

On May 4, 1999 Avista Corporation dba Avista Utilities—Washington Water Power Division (Avista; Water Power) filed with the Idaho Public Utilities Commission its annual revised and updated calculations for the adjustable portion of avoided cost rates. Avista submitted two sets of adjustable rate calculations: one for coal (Colstrip) and the other for gas (Sumas). The Colstrip adjustments apply only to existing contracts under the previous SAR methodology while the Sumas adjustments apply only to new projects, 1 MW and less. The annual adjustable rate calculation based on Colstrip was addressed in Order Nos. 23349 and 26080, issued in Case Nos. WWP-E-89-6 and WWP-E-95-3/IPC-E-95-7/UPL-E-95-2, respectively. The annual adjustable rate calculation based on Sumas was addressed in Order Nos. 25883 and 26086, issued in Case No. WWP-E-93-10.

Adjustable Rates–Colstrip
The adjustable portion under the previous-170 coal-fired SAR methodology (Case No. U-1500-170) is based on the variable costs associated with the operation of Colstrip, a coal-fired generating facility in southeast Montana. An annual filing is required by Order No. 23349 (Water Power), Order No. 23357 (Idaho Power), and Order No. 23358 (PacifiCorp). Pursuant to the Commission’s administrative determination of avoided cost rates, the adjustable portion of avoided cost rates is the same for all of Idaho’s major electric utilities.
By Order No. 23738 issued in Case Nos. WWP-E-89-6, IPC-E-89-11 and UPLE895 issued June 17, 1991, the Commission approved the methodology utilized by Water Power (now Avista) in annual Colstrip adjustable avoided cost rate submittals. The Commission indicated that future adjustable rate updates would require only a single filing by Water Power, with copies and party status provided to Idaho Power and PacifiCorp. The Commission directed that all applications for future or subsequent annual updates be filed by June 1 with the effective date for the new adjustable rate to be July 1. Under the established practice, the revised updated calculations set forth in Avista’s May 4, 1999 filing are recognized as being submitted also for approval for Idaho Power and PacifiCorp dba Utah Power & Light Company.
Avista represents that the Colstrip adjusted avoided cost rate calculated on actual 1998 costs changed from 10.00 mill/kWh to 8.86 mill/kWh. Coal costs decreased 9.8% from $7.72/MWh to $6.96/MWh. Variable O&M costs decreased 20%. Generation increased 32%.

Adjustable Rates–Sumas
By Order Nos. 25883, 25884 and 25882 issued in Case Nos. WWP-E-93-10, IPC-E-93-28 and UPL-E-93-3/UPL-E-93-7 on January 31, 1995, respectively, the Commission determined that the adjustable portion of avoided cost rates for future projects should be based on annual average gas prices indexed at Sumas, Washington. The purpose of including an adjustable component in the avoided cost rates is to capture annual changes in natural gas fuel costs. Under the Commission approved SAR avoided cost methodology, the adjustable portion of avoided cost rates is the same for all of Idaho’s major electric utilities and an annual filing is required.
Water Power (now Avista), in consultation with the Commission Staff, devised a methodology for making annual adjustments, which was accepted by the Commission in Order No. 26135 in Case Nos. WWP-E-95-3/IPC-E-95-7/UPL-E-95-2. As reported by Avista in its annual filing of May 4, 1999, the 1998 annual average gas price indexed at Sumas, Washington was $1.61/mmBtu resulting in a decrease of $0.09/mmBtu. The previously approved base gas price of $2.35/mmBtu minus the $0.09/mmBtu decrease results in a gas price of $2.26/mmBtu for 1999-2000 year. This by Staff’s calculation, equates to an SAR fuel cost of 16.61 mills/kWh as used in the model. The difference in the Sumas average price and the new base gas price is the result of a timing difference and the use of a trailing average. A proposed schedule of revised rates and a detailed sheet of variables for each utility was prepared by Staff and reviewed by the utilities.
The methodology approved for determining the variable components of the avoided cost rate is a relatively simple arithmetic recalculation. Attached to this memo as Appendices A, B and C are the tables showing the adjustable rates as updated by Avista’s filing for Avista, Idaho Power and PacifiCorp, respectively.
All utilities have reviewed Staff calculations and accept them (see Staff letter and utility responses attached). As it does each year, Avista (previously Water Power) notes some minor rounding differences.

Cogeneration Partners
Also filed this year by Rupert Cogeneration Partners Ltd and Glenns Ferry Cogeneration Partners Ltd (collectively Cogeneration Partners) are comments and a request for modification of the methodology (attached), specifically, the annual adjustable rate calculation based on Colstrip. The Cogeneration Partners contend that significant recent changes in the operation, ownership, and recent mediation settlement involving the coal supplier have now eliminated Colstrip’s ability to “reasonably track energy cost escalation rates.”
Montana Power’s sale of its interest in Colstrip to a non-regulated, non-utility, entity, Cogeneration Partners contend, will change the manner in which the plant is operated, and in the competitive world that the new owners operate, may preclude continued access to verifiable data.
As further evidence suggesting Colstrip should not be used as an “index” of general coal cost escalation rates, Cogeneration Partners note that in early 1997, the coal supplier pursuant to a mediation settlement compensated the utility owners with lower coal costs (approximately 30% lower) that are not associated with external or market coal price changes.
Cogeneration Partners state that they have no reason to believe that prior to 1997 Colstrip was not a reasonable surrogate as an index. Cogeneration Partners’ recommended solution uses 1996 as a starting point for the application of a generally accepted index (specifically the Producer Price Index) to measure changes in the market price of coal.
Cogeneration Partners request that the Commission reject Colstrip as the method for indexing changes in the cost of coal and O&M and substitute the recommended PPI index or another reasonable replacement that does not suffer from any of the deficiencies associated with Colstrip.
Utility responses to the requested change of methodology by Cogeneration Partners were filed on June 24 by Idaho Power Company and Avista Corporation. (attached).

Idaho Power
Regarding the change in ownership of Colstrip and its possible ramifications, Idaho Power notes that Avista has not sold its share of Colstrip and suggests that before any decision is made to scrap the existing methodology that Avista be consulted to confirm (1) that there will be material changes in the plant operation and (2) that Avista will not have continuing access to data concerning the costs of coal and variable O&M at Colstrip.
Regarding the 1997 settlement negotiations and resulting price reductions for coal, Idaho Power contends that the pricing dispute arose because of changed economic conditions and because the price of coal for Colstrip generation exceeded market prices. Rather than being an extraordinary event, Idaho Power contends that the negotiations and settlement are similar to pricing reductions obtained by other western utilities. Idaho Power itself notes that it and its co-owners of coal-fired power plants have undertaken similar negotiations and obtained price reductions at the Bridger, Boardman and Valmy projects. Idaho Power suggests again that before any change is made that Avista’s input be solicited.
As to the proposed use of the identified Producer Price Indices for adjusting the variable portion of the energy purchase price, Idaho Power contends that the proposed indices are probably not the best indicators of current coal and variable O&M costs in the Powder River Basin. The PPI index is national in scope and includes both eastern and mid western coal prices. Further, Idaho Power is advised and apprises the Commission that the proposed index is a discontinued series which the Bureau of Labor Statistics intends to retire.
Finally, Idaho Power reminds the Commission that it is the total avoided cost used to set purchase prices paid to QFs that must be determined. Federal law, it states, precludes the Commission from ordering electric utilities to purchase power from QFs at prices that exceed a utility’s avoided costs. If there is some material error in the avoided cost methodology, then the total purchase price, and both the fixed and variable component may very well have to be reconsidered to ensure that the total payment does not exceed total avoided cost.
Idaho Power notes that it has nine contracts representing 61,775 kW that are of a vintage affected by the proposed change. The Cogeneration Partners, Idaho Power states, currently receive approximately 60 mills/kWh for their energy. Market prices for energy are currently 20 to 25 mills/kWh.

Avista
Avista notes that Cogeneration Partners does not contend that the figures filed by Avista fail to reflect the actual Colstrip variable operating costs. Because the filed figures themselves are not challenged and because the approved methodology continues until changed, both Avista and Idaho Power recommend that the Commission approve the revision to the variable avoided cost rate for 1999-2000, based upon the filed figures for effective date July 1, 1999.
With respect to the proposed change in methodology, Avista represents that it has not yet had the opportunity to fully analyze all the contentions of Cogeneration Partners. Both Avista and Idaho Power recommend that if the Commission wants to consider changes to methodology that it establish a separate docket and provide all affected parties the opportunity to fully analyze and prepare their own recommendations.

Commission Decision
As acknowledged by Cogeneration Partners the annual adjustment to the variable rate for avoided costs is a simple ministerial arithmetic recalculation. In this case, Cogeneration Partners suggests that the Colstrip-related variable price may no longer be reasonable. The Sumas-related variable rate is already indexed-based and is unaffected by Cogeneration Partners’ requested change in Colstrip methodology. Should both the Colstrip and Sumas-related variable rates based on existing methodology be changed for effective date July 1, 1999? Should a separate docket be established to investigate the continued reasonableness of Colstrip-related costs and whether the variable rate can be changed independent of the fixed rate? What is the Commission’s preference?

vld/M:AVU-E-99-3_sw

DECISION MEMORANDUM 1