29069.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-02-01

ORDER ON PETITIONS
FOR RECONSIDERATION AND MOTIONS FOR STAY

NOTICE OF HEARING AND PROCEDURAL SCHEDULE

ORDER NO. 29069

Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA) and pertinent regulations of the Federal Energy Regulatory Commission (FERC) require regulated electric utilities to purchase power from qualifying facilities (QFs). On February 5, 2002, the Commission initiated this generic docket soliciting comments on the reasonableness of existing project size limitations for QFs of 1 MW, and on the current five year restriction on QF contract length. On May 21, 2002, the Commission issued Order No. 29029 increasing the size of QFs eligible for published rates from 1 MW to 5 MW and increasing the maximum required contract length from five years to 20 years.
On May 21, 2002, Idaho Power Company filed a Motion to Stay Entitlement to Published Rates, and Avista Utilities filed a similar motion on June 11, 2002. On June 10, 2002, Petitions for Reconsideration were filed by J. R. Simplot Company (Simplot) and Earth Power Resources, Inc. (Earth Power). Petitions for Reconsideration were also filed by Idaho Power and Avista on June 11, 2002. Answers to the Petitions for Reconsideration were filed by Plummer Forest Products (Plummer) and Empire Lumber Company, and on June 14, 2002, the Commission Staff filed an Answer to the motions filed by Idaho Power and Avista for a stay on entitlement to published rates. Answers to the Motions for Stay were also filed by Simplot, Plummer and Intermountain Forest Association (Intermountain). Finally, Staff filed a Supplemental Answer to the Motions for Stay on June 25, 2002, which was responded to by Plummer and Intermountain.
By this Order, the Commission grants the Petitions for Reconsideration and will convene a hearing on reconsideration on August 12-14, 2002. The Commission additionally grants the Motions for Stay, delaying the effective date of the published rates for new QF contracts until the Commission has an opportunity to review the appropriateness of the published rates on reconsideration.
ORDER NO. 29029
The Commission initiated this case to review by written comments whether the current size limitations for QFs eligible for published rates and restrictions on contract length were still reasonable. Comments were received from developers of QF facilities, from interested persons and from the regulated electric utility companies (Idaho Power, Avista, and PacifiCorp) required to purchase QF power. Prior to the issuance of Order No. 29029, QFs were eligible to contract to sell energy at the published rates if the facility produced up to 1 MW of electricity, and the purchasing utilities were required to provide a contract length of at least five years.
Regarding the standard contract length, the Commission noted in Order No. 29029 that its policy has changed during the years that PURPA has been effective in Idaho. For the first seven years, through 1987, utilities were obligated to provide QFs with a 35-year contract. In 1987, the Commission shortened the standard contract length to 20 years to reduce the risk and uncertainty inherent in long range forecasting. The Commission in 1996 again shortened the standard contract length to five years for projects 1 MW and larger.
Regarding the production capacity of QFs eligible to receive published rates, FERC rules and regulations require only that QFs with a design capacity of 100 kW or less be eligible. See 18 C.F.R. § 292.304(c). PURPA does not prohibit larger projects from being eligible for published rates and this Commission had set the design capacity limit at 1 MW.
After reviewing the comments filed by all the parties, the Commission in Order No. 29029 found “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.” Order No. 29029, p. 9. Despite a recommendation made by many parties in the case to expand the proceedings to explore avoided costs methodology and other QF issues, the Commission declined to expand the scope of the case beyond the issues identified, i.e., restrictions on contract length and QF published rate eligibility. After Order No. 29029 was issued, Idaho Power and Avista filed Motions to Stay Entitlement to the Published Rates and Petitions for Reconsideration. Simplot and Earth Power also filed Petitions for Reconsideration.
MOTIONS FOR STAY
In its Motion for Stay, Idaho Power asserts the “published rates are much higher than the cost Idaho Power 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.” Idaho Power Motion for Stay, p. 2. The Company asserts the reason the published rates are much higher than the Company’s estimate of actual CCCT costs is that the published levelized non-fueled rates are based on 1995 data and assumptions which have not been updated. As an example, the Company notes the escalation rate for fuel costs in the 1995 published rates assumes an annual increase of 6%, and asserts this assumed percentage increase is more than double what current estimates of fueled cost escalation would be for a newly constructed CCCT. Idaho Power stated it “is prepared to file testimony and exhibits on reasonably short notice which would present a prima facia case that the existing 20 year levelized published rates are well in excess of the 20 year cost of a modern CCCT and well in excess of Idaho Power’s current avoided costs for 20 years.” Idaho Power Motion for Stay, p. 4.
In its Motion for Stay, Avista argued “that current published avoided cost rates, if applied to 20-year contracts for QFs would result in unfair and unreasonably high costs, which Avista’s customers would have to bear.” Avista Motion for Stay, p. 2. Like Idaho Power, Avista voiced concern “that QFs may be entitled to contract at existing published avoided cost rates, if the Commission does not afford an opportunity for those rates to be revised, before Avista’s obligation to contract is made mandatory.” Id. Avista also stated it is prepared, should the Commission grant its Motion to Stay, “to expeditiously file a proposal to revise applicable variables used in determination of the published avoided cost rates.” Avista Motion for Stay, p. 3.
In its Answer to Idaho Power’s Motion for Stay, Simplot argued the Motion amounts to a backdoor attempt by Idaho Power to reverse the Commission’s decision, contending “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 Answer, p. 3. Regarding Idaho Power’s belief that avoided cost rates are set using outdated assumptions and data, Simplot pointed out that an adjustable portion of the rates are changed and become effective July 1 of each year. Simplot also contends “Idaho Power’s avoided cost calculations are not an accurate reflection of avoided cost over 20 years because it is a snapshot in time of a versatile and robust methodology that adapts to changing circumstances.” Simplot Answer, p. 7. Simplot argues that Idaho Power can file for a change in avoided cost rates at any time if it believes the current rates are not accurate.
The Commission Staff also filed an Answer to the Motions for Stay filed by Idaho Power and Avista, recommending the Commission deny the Motions. Staff stated it believes the variables used in the avoided cost calculations will be updated over time and argued that avoided cost rates do not become wrong simply because contracts are lengthened or because eligibility for the rates is expanded. Staff also recommended, however, that the Commission open a new docket to consider changes in variables and assumptions in the avoided cost rate calculations.
Staff supplemented its Answer in a filing on June 25, 2002. In its supplemental response, Staff reiterated that it does not believe it is appropriate for the Commission to stay the avoided cost rates. At the same time, however, Staff recognized that if the Commission denies the Motions to Stay the rates, “rates could be available that both the Staff and the utilities agree may be too high.” Staff Supplemental Answer, p. 2. Under the current avoided cost methodology, the fuel component of the rate for non-fueled projects is established from an average of the natural gas prices during the previous calendar year at Sumas, Washington. The starting fuel prices then escalate at a 6% rate over the life of the QF contract. Staff noted that “the effect of this computation is that a contract signed in a year when gas prices are high enjoys the benefit of that high gas price for the duration of the contract.” Staff’s Supplemental Answer, p. 2. Staff stated it previously was aware of the difference between contracts signed in a high and low gas price year “but dismissed its significance because Staff did not anticipate the extreme volatility in gas prices recently experienced.” Staff Supplemental Answer, p. 3. Staff admitted “the difference is magnified by the Commission’s recent decision to increase contract length from 5 to 20 years.” Id.
Responses to Staff’s Supplemental filing were filed by Plummer and Intermountain Forest. Plummer urged the Commission “to take into account the serious hardship that would result to Plummer from a stay.” Plummer Response, p. 2. Plummer apparently has a generating facility that is fully constructed and operational, and currently is in need of a power sales agreement. Intermountain Forest in its Response again urged the Commission to deny the utility companies’ Motions for Stay. Intermountain argued that granting a stay would discourage alternative generating facilities currently seeking QF contracts.
PETITIONS FOR RECONSIDERATION
The sole issue raised by the Petitions for Reconsideration filed by Simplot and Earth Resources is regarding the Commission’s decision on the size of QFs eligible for published rates. Simplot and Earth Power asked the Commission to grant reconsideration to increase the eligible QF size from 5 MW to 10 MW. The companies point out that QFs in size between 5 and 10 MW provide 56% of the total megawatt capacity provided to Idaho Power by QFs. Simplot contends the 5 MW limitation will prevent many QFs, such as wind, geothermal and biomass, from capturing economies of scale. Simplot and Earth Power also contend the effect of a 10 MW versus a 5 MW QF on a utility’s electrical system is inconsequential. The companies assert that if the published avoided rates are no longer fair and accurate, the appropriate response is to adjust the rates, rather than limit too narrowly the size of QFs eligible for published rates.
As in their Motions for Stay, the Petitions for Reconsideration of Idaho Power and Avista address the reasonableness of the existing rates, especially in light of the Commission’s decision to extend the contract period to 20 years. Idaho Power contends the Commission’s Order 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 for payment to qualifying cogenerators and small power producers (QFs) exceed the level permitted by federal law.” Idaho Power Petition for Reconsideration, p. 1. The Company contends federal law requires that purchase rates set by the Commission cannot result in the utility paying QFs more than the utility’s avoided costs. Idaho Power asserts that the Commission, by focusing only on QF eligibility size and the mandatory contract length, failed to recognize the real effect of the Commission’s decision on those issues. According to Idaho Power, “by changing the mandatory term of the contract from 5 years to 20 years, the Commission increased the levelized published rates Idaho Power will have to offer to pay to QFs that become entitled to receive the published rates. The resulting levelized purchase prices substantially exceed Idaho Power’s current avoided costs.” Idaho Power Petition for Reconsideration, p. 3. Idaho Power in its Petition for Reconsideration again asked the Commission to stay the effectiveness of Order No. 29029 to allow time to update the assumptions in the existing avoided cost rate methodology.
Avista made a similar argument in its Petition for Reconsideration. Avista claims the 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 Company contends the published rates over a 20-year period are much higher than Avista’s current estimates of the costs associated with constructing a combined cycle combustion turbine. Avista requests that the Commission grant rehearing for the purpose of receiving evidence and current information on avoided costs before QFs are entitled to 20-year contracts.
COMMISSION DECISION
The Commission has determined to grant the Petitions for Reconsideration filed by Simplot and Earth Power and increase the size of the QF projects eligible for published rates from 5 MW to 10 MW. Simplot and Earth Power have made convincing arguments that the size of the project, at least as between a 5 MW and a 10 MW project, will not have a significant effect on the regulated utilities or the reasonableness of the avoided cost rates. In Order No. 29029, the Commission noted 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.” Order No. 29029, pp. 6-7. Simplot argued that this statistic is irrelevant in determining whether projects of 5 to 10 MW should be entitled to published rates, pointing out that over 60% of Idaho Power’s QF capacity is provided by 14 QF projects between 5 and 10 MW. The Commission agrees that the fact that most projects are smaller than 5 MW does not by itself provide a logical basis for limiting published rate eligibility to QFs of that size. The Commission also agrees with the argument of Simplot and Earth Power that the reasonableness of the published rates should not be affected by the size of the QF. As the companies urged, if the rates are no longer fair and accurate, the appropriate response is to adjust the rates, not to limit the size of the QFs eligible for the rates. The Commission also agrees that economies of scale can be achieved by larger QF facilities and that a larger eligibility size will encourage development of alternative energy projects, such as geothermal, wind and biomass. Accordingly, the petitions of Simplot and Earth Power are granted for the purpose of increasing the size of the QFs eligible for published rates from 5 MW to 10 MW.
The Commission has also determined to grant the Petitions for Reconsideration and Motions for Stay filed by Idaho Power and Avista. The Commission initiated this case to review only the reasonableness of existing limitations on QF contract length and the size limitation on QFs eligible to sell energy at published rates. As the petitions and motions of Idaho Power and Avista make clear, however, changing those factors in the equation can have a significant effect on the overall reasonableness of the QF terms during the life of the contract. In this case, the Commission has approved very large increases in the maximum QF project size, from 1 MW to 10 MW, and in the contract length, from five years to 20 years. If the variables that make up the avoided cost formula are inaccurate, the effect will be magnified significantly by leaving the resulting rates in place over a 20 year contract. As Simplot and Earth Power suggest, the cure is not to shorten the contract length or to decrease the maximum project size, but to review and adjust if necessary the variables in the avoided cost formula.
The other factor the Commission cannot ignore is the recent “extreme volatility in gas prices,” as stated by Staff in its supplemental answer, and its effect on the published rates. The published rates are adjusted each year based on the average gas price at Sumas, Washington. The past two years saw extremely high spikes in natural gas prices, resulting in higher published rates. Gas prices have returned to more normal levels, and may not spike to such levels any time soon. QF contracts signed now with abnormally high rates that escalate each year under the avoided cost rate formula could result in unreasonable and unfair costs borne by the regulated utility, which ultimately will be paid by its ratepayers. The Commission cannot expose ratepayers to avoided cost rates that rely heavily on gas price levels that existed during the recent volatility in the market. To do so would condemn ratepayers to the lingering effects of last year’s energy crisis for another 20 years.
The Commission is concerned, however, that a stay on published rates may preclude the signing of QF contracts for eligible projects. Thus, although the Commission will stay the published rates until reconsideration of Order No.29029 is completed, the Commission is determined to make the stay period as short as possible. Not only Idaho Power and Avista, but every other party interested in participating in a hearing, must be prepared to expeditiously file and present its case on the reasonableness of the variables in the avoided cost rate calculation. The Commission also intends to limit the issues for hearing to better facilitate a speedy hearing process. Thus the Commission grants reconsideration to review the reasonableness of the actual numbers comprising the avoided cost formula, and will not consider other issues, such as whether eligibility for published rates depends on the “nameplate” generating capacity of the QF project.
The Commission will convene a hearing within the time allowed for reconsideration to consider whether variables to the avoided cost methodology should be revised. Parties wishing to present direct testimony must prefile their testimony by July 22, 2002. Rebuttal testimony must be filed by August 5, 2002, and the hearing on reconsideration will convene August 12, 2002. The scope of the review will be limited to changes in the avoided cost rate calculation variables. Other questions, such as whether eligibility should be based on nameplate capacity as Idaho Power recommends, will not be the subject of reconsideration.
NOTICE OF HEARING
YOU ARE HEREBY NOTIFIED that the Commission will convene a hearing on reconsideration on AUGUST 12-14, 2002, AT 9:30 A.M. IN THE COMMISSION HEARING ROOM, 472 WEST WASHINGTON STREET, BOISE, IDAHO, TELEPHONE [phone]. The purpose of the hearing is to receive evidence on the reasonableness of the variables in the existing avoided cost rate methodology. The parties should prepare and file testimony and exhibits on the following dates:

July 22, 2002
August 5, 2002 All parties file direct testimony and exhibits
All parties file rebuttal testimony and exhibits
YOU ARE FURTHER NOTIFIED that all hearings and prehearing conferences in this matter will be held in facilities meeting the accessibility requirements of the Americans with Disabilities Act (ADA). Persons needing the help of a sign language interpreter or other assistance in order to participate in or to understand testimony and argument at a public hearing may ask the Commission to provide a sign language interpreter or other assistance at the hearing. The request for assistance must be received at least five (5) working days before the hearing by contacting the Commission Secretary at:
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone] (Telephone)
[phone] (FAX)
E-Mail: [e-mail]

YOU ARE FURTHER NOTIFIED that all proceedings in this case will be held pursuant to the Commission’s jurisdiction under Title 61 of the Idaho Code and that the Commission may enter any final Order consistent with its authority under Title 61.
O R D E R
IT IS HEREBY ORDERED that the Petitions for Reconsideration filed by Simplot and Earth Power are granted and the size of QFs eligible for published rates is increased from 5 MW to 10 MW.
IT IS FURTHER ORDERED that the Petitions for Reconsideration filed by Idaho Power and Avista are granted for the purpose of reviewing the reasonableness of the variables in the existing avoided cost rate methodology. Direct and rebuttal testimony and exhibits must be filed by the dates identified in this Order, and a hearing on reconsideration will be convened on August 12, 2002.
IT IS FURTHER ORDERED that the Motions for Stay filed by Idaho Power and Avista are granted. The published rates resulting from Order No. 29029 are stayed, except as they apply to existing QF contracts, until the Commission renders its decision on reconsideration.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of July 2002.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

/O:GNRE0201_ws recon

ORDER ON PETITION FOR RECONSIDERATION
AND MOTIONS FOR STAY
NOTICE OF HEARING AND
PROCEDURAL SCHEDULE
ORDER NO. 29069 1

Office of the Secretary
Service Date
July 2, 2002