29029.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

in the matter of THE INVESTIGATION OF THE CONTINUED REASONABLENESS OF CURRENT SIZE LIMITATIONS FOR PURPA QF PUBLISHED RATE ELIGIBILITY (i.e., 1 mw) AND RESTRICTIONS ON CONTRACT LENGTH (i.e., 5 YEARS). )
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CASE NO. GNR-E-02-1

ORDER NO. 29029

On February 5, 2002, the Commission initiated generic docket No. GNR-E-02-1 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).
By this Order the Commission increases QF project size limitations for published rate eligibility from 1 MW to 5 MW and increases maximum required contract length from 5 years to 20 years.
BACKGROUND
Congress in 1978 as part of the National Energy Act and as part of a package of legislation designed to address the then prevailing nationwide energy crisis passed the Public Utility Regulatory Policies Act (PURPA). Its purpose was to encourage the promotion and development of renewable energy technologies as alternatives to fossil fuels and the construction of new generating facilities by electric utilities. PURPA requires that electric utilities offer to purchase power produced by cogenerators or small power producers that obtain qualifying facility (QF) status.
The rate to be paid for QF power is not to exceed the “incremental costs” to the utility of alternative electric energy. Under the implementing rules and regulations of the Federal Energy Regulatory Commission (FERC), the rate a qualifying facility receives for the sale of its power is generally referred to as the “avoided cost” rate and is to reflect the incremental cost to an electric utility of electric energy or capacity or both, which, but for the purchase from the qualifying facility, such utility would generate itself or purchase from another source. PURPA and related FERC regulations provide that the rates for QF purchases (1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and (2) shall not discriminate against qualifying cogenerators or small power producers.
FERC promulgated the general scheme and rules, but left implementation to the regulatory authorities of the individual states. 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. In its discretion, this Commission has set the design capacity limit for published rates at 1 megawatt (MW). A special hearing to establish and approve such rates is required. Rates for facilities larger than 1 MW are to be determined using a Commission approved methodology that recognizes the generating characteristics of each individual project. Contracts are individually negotiated. FERC establishes no requirement regarding length of contract.
As recounted by Staff in its comments, the Commission’s policy with respect to standard contract length has evolved over the years. From 1980 when PURPA was first implemented in Idaho, through 1987, utilities were obligated to provide QFs with 35-year contracts. The reason for the 35-year maximum contract length was that 35 years was the amortization period allowed for similar utility owned facilities. A contract length that agreed with the projects amortization schedule served to make financing easier, and in effect, helped to encourage QF development. In 1987, the Commission shortened the standard contract length to 20 years reasoning that risk and uncertainty inherent in long range forecasting increases dramatically with time and that a shorter contract term would reduce that risk. Later in 1996, the Commission again re-examined the issue of contract length and shortened the required contract length to five years for projects 1 MW and larger. In 1997, the Commission extended the five-year contract limitation established for large QFs to smaller than 1 MW QFs as well.
In comments filed in Idaho Power Company Case No. IPC-E-01-37, the J.R. Simplot Company petitioned the Commission to revisit and review two issues, i.e., (1) the size of QF projects entitled to published avoided cost rates and (2) contract length. Simplot asked that the Commission re-examine the basis for its decisions to limit published rates to QFs smaller than 1 MW in size and set the required contract term at five years.
In Order No. 25884, Case No. IPC-E-93-28, the Commission found that there was a widely held expectation that there would be increasing competition within the electric utility industry. The Commission also found that ratepayers should be indifferent to whether a resource serving them was constructed by a utility or an independent developer. The cost and quality of service provided by either should be the same. Simplot contends that competition in the electric industry in Idaho is very unlikely in the foreseeable future and that such a rationale for limiting the size of QFs to 1 MW for published rates is no longer compelling or an eventuality. Order No. 25884 pp. 3-4. Simplot also questions whether ratepayers have been held indifferent. Simplot proposes that QF developers up to 10 MW in size should have access to published Surrogate Avoided Resource (SAR) based avoided cost rates. Simplot also advocates reinstatement of the 20-year contract as necessary for the QF industry to be able to assist the State’s regulated electric utilities in providing the capacity and energy they need.
Simplot requested that the Commission (1) expand entitlement to the Commission’s published avoided cost rates to all QFs that are 10 MW or less in capacity and (2) increase the standard PURPA contract length for all QFs 10 MW or less in capacity from 5 to 20 years, with the QF developer retaining the right to choose the term up to 20 years.
The Commission in its Order No. 28945 in Case No. IPC-E-01-37 found the issues of contract length and size limitation raised by Simplot to be important issues meriting a separate forum or docket for discussion.
The Commission’s February 5 Notice in Case No. GNR-E-02-1 was a Notice of Investigation and Modified Procedure. The deadline for filing written comments was March 15, 2002. The Commission received comments from the following parties:
Avista Corporation Idaho Power Company PacifiCorp
Commission Staff Sorenson Engineering Windland, Inc.
Intermountain Forest Association (IFA) Vulcan Power Company Representative Bert Stevenson—District 24
EnXco Idaho Rural Council Land and Water Fund of the Rockies
Idaho Rivers United Idaho Irrigation Pumpers Association
Dairymen’s Association Potlatch Corporation Plummer Forest Products, Inc.
J.R. Simplot Company Independent Energy Producers of Idaho
Idaho Farm Bureau Empire Lumber Company Black Hills Energy Capital
JUB Engineers Water Power LLC Valerie Chisholm Bill Arkoosh Christopher Scott Harriman
David A. O’Day
Comments can be generally summarized as follows:
Idaho’s three major electric utilities contend that J.R. Simplot Company and the other QF developers and consultants are over-reacting to what was the “perfect storm” of drought, gas shortages and California restructuring problems that led to extraordinarily high wholesale market prices that occurred in 2000-2001. Although the Companies acknowledge that the regional surplus in energy has evaporated and all are involved in acquiring additional resources, they contend that changes to PURPA QF rules and requirements are not necessary or required. Should the Commission be inclined to alter the status quo, the Companies request a full administrative hearing to consider the full panoply of inter-related QF issues, such as, to quote PacifiCorp, the appropriate avoided cost methodology, market based pricing mechanisms, fixed versus variable pricing, credit and collateral issues, levelization of prices and related security issues. All other commenting parties recommend raising the size limitations for PURPA QF published rate eligibility from 1 MW to 5, 10, 18 (Windland), 30 (Vulcan), or 30-50 (Black Hills) MW and increasing the contract length from 5 to 20 years.
Commission Findings
The Commission has reviewed and considered the filings of record in Case No. GNR-E-02-1 including the comments and recommendations of the electric utilities, the QFs and proponents of renewable energy technologies and Commission Staff. We find that a convincing case has been made to increase the QF size threshold for published rate eligibility to 5 MW and also to provide QFs with contracts of up to 20 years in length. Although many parties recommend that we expand the proceedings in this docket to explore avoided costs 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.
Utilities contend that the reasons the Commission cited in reducing the size threshold to 1 MW and contract term to 5 years are as valid today as they were then. They disagree with QF contentions that competition has not occurred in Idaho. They caution against confusing wholesale competition with retail competition. Utilities contend that what has developed is a very robust and competitive regional wholesale market. Open access transmission linking the supply markets throughout the WSCC region, PacifiCorp contends, has been implemented. Thermal technologies, the utilities argue, continue to improve. Natural gas prices, they note, have returned to historical levels. The price spikes that occurred in 2000 and 2001 we are asked to ignore, as if it was merely an anomaly. What has not changed, we find, is the utilities’ opposition to PURPA and the QF industry. Despite a QF history of industry reliability and an opportunity presented to utilities to diversify their resource base by adding renewables, utilities continue to regard PURPA QFs as interlopers. Although we are reminded by PacifiCorp that there is legislation presently before Congress that would repeal the mandatory purchase obligation under Section 210 of PURPA, we remind PacifiCorp that utilities have been actively lobbying for its repeal since it was enacted and that as of today it continues to be the law.
When this Commission reduced the published rate eligibility threshold to 1 MW and shortened the contract length to 5 years we did so at utility request to conform to the acquisition strategy of utilities set forth in their Integrated Resource Plans and with little adverse commentary. This was also done in the context of what was perceived to be impending industry restructuring and the advent of a more competitive market. The utilities today contend that the pricing methodology for QF power should mimic a market-based approach. Yet we cannot ignore that all of Idaho’s major electrics are now constructing or have recently constructed long-term new generation resources, either directly or through their affiliates. This was not the case when we lowered the size threshold and contract term. At that time, all utilities were looking to the market to supply future needs. The utilities were looking to avoid mandatory purchases and the potential of stranded investment. The collective or cumulative consequences of such a reliance by electric utilities on the market and short term contracts were increased risk of shortfall, service interruption and higher prices, especially in late 2000 and early 2001. Reserve margins decreased and the region went out of surplus and into deficit.
Size
Simplot recommends raising the threshold to 10 MW for published rate eligibility. The utilities contend that the effects of larger QF projects (i.e., QFs greater than 1 MW) on their electrical systems requires individual evaluation and negotiation of contract terms and conditions. Idaho Power in its comments recommends that QFs be required to participate in the IRP RFP process, i.e., in a competitive bidding process. This it states is the only way to ensure that QFs are on an equal footing with all other resources. The Commission, Idaho Power contends, must consider whether providing a sheltered environment and fixed rate long-term contracts for QF projects is good public policy.
PacifiCorp contends that FERC regulations for calculating avoided costs require consideration of the QF’s peak availability, dispatchability, reliability, ability to coordinate outages, usefulness during system emergencies and actual value to the utility system. The Commission does not need to be reminded of the litany of factors that must be taken into consideration in setting avoided costs. Those factors were considered in establishing the present methodology, a methodology which was developed in a case that all utilities participated in. No change has been proposed in the variables used in the methodology since the variables were adopted in 1995.
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.
In recommending an increase in the eligibility threshold, QFs and Staff argue that the negotiating process for QFs not eligible for published rates is a barrier to development, a “black box.” To date, Staff reports that no contracts have been signed with rates computed using the 1 MW or larger methodology. 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.
Contract Length
Utilities recommend that there be no change to required contract length. Stating that current power markets are focused on short-term arrangements (one month to five years in length), utilities oppose mandatory contracts of a longer duration. Options to renew or extend contracts, Avista states, may be more readily obtainable than initial terms for more than five years. Furthermore, a short mandatory time frame pursuant to published rates, Avista states, better reflects changing market prices and protects customers. PacifiCorp states that short-term purchases are a direct outgrowth of the advent of competitive wholesale markets and are consistent with the Company’s need for flexible resource options. The Commission, PacifiCorp contends, should be guided by the principle of ratepayer neutrality. Long-term purchases of an inflexible supply, PacifiCorp states, are out of step with the utility’s supply needs and other market alternatives. While we acknowledge the importance of short-term market purchases, we believe that they should only comprise a portion of a utility’s supply portfolio. The portfolio must be balanced. We cannot ignore that the focus of utilities on short-term arrangements was part of the reason for the extraordinary cost exposure and higher rates of the last year. The consequence of this industry focus is a transfer of risk and is a cost that the utilities are now looking to their customers to cover.
This Commission also cannot ignore the fact that since reducing the eligibility threshold to 1 MW and contract term to 5 years, there has been only one PURPA contract signed in Idaho. A longer contract, we find, better coincides with the amortization period or planned resource life of the renewable or cogeneration resources being offered, better reflects the amortization period of generation projects constructed by the utilities themselves and will coincidently provide a revenue stream that will facilitate the financing of QF projects.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over Avista Corporation dba Avista Utilities, Idaho Power Company, and PacifiCorp dba Utah Power & Light Company, electric utilities, pursuant to the authority and power granted it under Title 61 of the Idaho Code, and the Public Utility Regulatory Policies Act of 1978 (PURPA).
The Commission has authority under PURPA and implementing regulations of the Federal Energy Regulatory Commission (FERC) to set avoided costs, to order electric utilities to enter into fixed term obligations for the purchase of energy from qualified facilities, and to implement FERC rules.
O R D E R
In consideration of the foregoing and as more particularly described, IT IS HEREBY ORDERED that the current QF size limitation for published rate eligibility, (i.e., 1 MW) be increased to 5 MW and current restrictions on contract length, (i.e., 5 years) be increased to 20 years.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of May 2002.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

bls/O:GNRE0201_sw
ORDER NO. 29029 1

Office of the Secretary
Service Date
May 21, 2002