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SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
ISB NO. 1895
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
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.
MW) AND RESTRICTIONS ON CONTRACT
LENGTH (I.E., 5 YEARS).
CASE NO. GNR-O2-
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
Investigation, Notice of Modified Procedure and Notice of Comment /Protest Deadline issued on
February 5, 2002 submits the following comments.
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 (PURP A). 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. PURP A requires that electric utilities offer to
purchase power produced by cogenerators or small power producers that obtain qualifying
facility (QF) status.
STAFF COMMENTS MARCH 15 2002
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 ofthe 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 should 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. PURP
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. PURPA, however, does not prohibit the publishing of rates for larger
projects. Reference 18 c.F.R. 9 292.304( c). Requirements regarding length of contract are not
specified by either PURPA or FERC's implementing regulations. Consequently, both ofthese
issues are matters that lie within the Commission s discretion.
In comments filed in Idaho Power Company Case No. IPC-01-, the l.R. Simplot
Company petitioned the Commission to revisit and review two issues, i., (1) contract length
and (2) the size of QF projects entitled to published avoided cost rates. Simplot asks that the
Commission re-examine the basis for its decisions to set the required contract term at five years
and to limit published rates to QFs smaller than 1 MW in size.
The Commission in its Order No. 28945 in Case No. IPC-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. As a result, the Commission initiated this generic docket
soliciting comments, Case No. GNR-02-01. On February 5 2002, a Notice ofInvestigation
Notice of Modified Procedure and Notice of Comment /Protest Deadline was issued.
CONTRACT LENGTH
Background
The Commission s policy with respect to standard contract length has evolved over the
years. From 1980 when PURP A was first implemented in Idaho, through 1987, utilities were
STAFF COMMENTS MARCH 15 2002
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 project's amortization schedule served to make financing
easier, and in effect, helped encourage QF development.
In 1987 (Reference Case No. U-1500-170, Order No. 21630) 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. The Commission ruled that contracts longer than 20 years would be available to QFs only
upon a persuasive showing of need.
Later, in 1996, the Commission again reexamined the issue of contract length. In Order
No. 26576 in Case No. IPC-95-, the Commission further shortened the required contract
length from 20 years to five years for projects 1 MW and larger, based on the following
reasonIng:
Significant changes have swept through the electric industry since we
last examined the issue of contract length. The FERC has mandated
open access to the transmission system, thermal technologies have
improved, gas prices are low, there is a considerable surplus of energy
available in this region resulting in very low spot market prices for
electricity and, finally, even the continued existence ofPURP A is
being called into question. We find that as industry as a whole
continues to a more free market model, we cannot justify obligating
utilities to 20-year contracts for PURP A power. As the utilities in this
case note, such an obligation does not reflect the manner in which they
are currently acquiring power to meet new load; through short-term
(five years or less) purchases. Consequently, it would be nothing more
than an artificial shelter to the QF industry to provide those projects
with contract terms not otherwise available in the free market. We can
find no justification for insisting that Idaho s investor-owned utilities
and their ratepayers assume such an obligation simply to foster one
particular segment of an increasingly competitive industry. We find
therefore, that Idaho s investor-owned utilities shall not be required to
offer contracts to QFs in excess of five years until further action is
taken by this Commission. This rule, however, does not prevent
utilities from offering for approval QF contracts with terms that exceed
five years should the utilities believe that such contracts are in the best
interests of their ratepayers.
In 1997, the Commission extended the five-year contract length limitation established for
large QFs to smaller than 1 MW QFs as well. Reference Case No. IPC-97-, Order No. 27111.
STAFF COMMENTS MARCH 15 2002
Shortly after approving Idaho Power s application to limit all QF contracts to five years, both
Avista and PacifiCorp petitioned for and received approval to limit all QF contracts to five years
Reference Case Nos. WWP-97-, Order No. 272l2; UPL-97-, Order No. 27213.
Staff Analysis
The vast majority ofQF contracts signed in Idaho since the implementation ofPURPA
have been for a term of35 years. Attachment A shows that approximately 86 percent of the
contracts have been for a term of 35 years, about 8 percent have been for 20 years, and only a
single contract has been signed for a term of five years. Attachment A also shows the time and
rate at which QF contracts have been signed over time. Clearly, most contracts were signed
during the period from about 1983 through 1989. Only a couple of contracts have been signed
since 1996. Most contracts will expire during the 2016 through 2023 time frame.
While most existing QF contracts are for 35-year terms, Staff does not wish to imply that
long contract lengths have been the only reason for the intensity and timing of QF development.
Avoided cost rates have decreased substantially since the first QF contracts were signed.
addition, the most favorable sites for QF development were developed early, leaving fewer
attractive sites to be developed later. Nevertheless, it is undeniable that longer contracts have
proven to be an incentive to QF development, and conversely, that very short contract length
limitations have proven to be a barrier to development.
Staff acknowledges the complaints expressed by potential QF project developers that
limiting contract lengths to only five years effectively precludes nearly any new project from
being developed. Financing is nearly impossible to obtain with only a guarantee of a five-year
revenue stream. Few, if any, projects are able to generate enough revenue to enable construction
debt to be retired in five years or less.
In the earlier proceeding in which the Commission reduced required contract lengths
from 20 to five years (IPC-95-9), Staff advocated maintaining the standard 20-year contract
term. Staff contended that it was reasonable to require 20-year contracts for QFs since utilities
long-term acquisition planning is still primarily based on the acquisition of long-lived resources
under long-term commitments. Staff reasoned that as long as the rates that utilities pay for QF
power are based on the utilities ' avoidance of planned resources , the utilities should be required
to offer 20-year contracts if the planned resources have lives of 20 years or more. Staff believed
STAFF COMMENTS MARCH 15,2002
that although utilities were then relying on short-term market purchases to satisfy their short-
term needs, the fact that their respective IRPs called for acquisition oflong-term resources could
not be overlooked and justified requiring 20-year contracts terms for QF projects.
Staff continues to believe that its earlier position has merit. Each of the utilities has
either recently built new generation, is currently adding new generation, or plans to add new
generation in the very near future. Idaho Power, for example, recently completed a 90 MW gas-
fired plant at Mountain Home. The utility is also currently seeking Commission approval for a
power purchase contract from a 250 MW gas-fired plant to be constructed by Ida- West near
Middleton (IPC-01-42). The proposed contract for purchases from the plant is for a five-year
term with options to renew the contract for anyone or all of the five successive years. The
contract also contains provisions to permit Idaho Power to purchase the plant after the initial
five years, or alternatively after ten years. The plant itself is expected to have a useful life of 30
years.
A vista is in the process of completing the 280 MW Coyote Springs II plant. A vista
Utilities will own and receive the output of half of the new plant. Avista is also finalizing
construction of a small gas-fired plant called Boulder Park. The plant is located in the Spokane
area and has a capacity of25 MW. In addition, Avista is adding a combustion turbine with a
capacity of7 MW at its Kettle Falls plant. Along with the addition of new generation capacity,
Avista has signed a market purchase agreement for 125 MW through 2006, and has proposed an
additional 100 MW purchase for 2007-2010.
PacifiCorp is pursuing adding single-cycle gas turbines at its Gadsby site in Salt Lake
City and at West Valley City in Utah to meet near term capacity constraints. The Company is
also considering building a fourth coal unit at its Hunter plant in Utah.
It is certainly true that each of the utilities continues to make substantial purchases from
the market under contracts five years or less in length. However, it is also true that each of the
utilities has either already made, or is considering, long-term commitments for new generation.
All of the new generation plants being built by the utilities will have useful lives in excess of20
years. Because the utilities are making long-term commitments, there is no more danger that
QF contracts will become stranded costs in the future than the utilities' own new generating
plants.
STAFF COMMENTS MARCH 15 2002
Staff believes, however, that there are key differences between utility-owned plants and
QFs that should not be overlooked. While utilities are making long-term commitments to new
generating resources, most of those resources are dispatchable peaking or base load facilities
with relatively low capital costs and avoidable variable costs. When it is not economical to
operate utility-owned plants, they can be idled, saving fuel and other variable costs. With QFs
on the other hand, utilities must continue to purchase their output regardless of whether cheaper
power is available from the market or some other source. Under the current pricing
methodology for QFs, the surrogate avoided resource used as the basis for calculating rates is a
non-dispatchable combined cycle combustion turbine (CCCT). Therefore, no consideration is
given to whether plants can be dispatched or not. While a twenty-year contract for QFs would
be more consistent with utility-owned resources, a pricing methodology for QFs that fails to
account for dispatchability may produce rates that are too high when compared to utility-owned
resources. Staff believes that it may be appropriate to apply some discount to the published
avoided cost rates for non-dispatchable plants. To do so, however, would require a Commission
approved change to the existing methodology.
Staff Recommendations
Staff believes that the Commission should revise its rules to return to 20 years as the
required minimum length for QF contracts. However, Staff believes that the Commission may
wish to consider whether some adjustment to the current avoided cost rate calculation
methodology is warranted to discount rates for QFs that cannot be dispatched by the utility.
Staff believes this may be necessary in order to treat QF projects on an equal footing with utility-
owned plants.
AVAILABILITY OF PUBLISHED RATES
Background
When PURP A was first implemented in Idaho, published avoided cost rates were made
available to projects smaller than 10 MW. For projects larger than 10 MW, contracts were to be
individually negotiated. However, even for these larger projects, published rates were still
expected to form the starting point for negotiations. The utilities contended that these facilities
STAFF COMMENTS MARCH 15 2002
because they represent a significant generating resource on each utility s system, require special
operating and scheduling procedures. Reference Case No. P-300-, Order No. 15746.
In 1989, utilities requested that published avoided cost rates be limited to facilities with
capacities less than 1 MW rather than 10 MW. However, the Commission rejected the request
and maintained 10 MW as the limit at which projects were eligible to receive published rates
Reference Case No. U-1500-170, Order No. 22636. In 1995 , in Case No. IPC-95-, the
Commission was again asked by the utilities to lower the threshold for published rates from 10
MW to 1 MW. This time, the Commission agreed, stating the following:
There is a widely held expectation that there will be increasing
competition within the electric utility industry. In light of that, we
believe it is especially important that the QF industry be able to
demonstrate that the energy resources it offers are as cost effective as
those that a utility could construct. 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 should be the
same. Ratepayers should not be asked to subsidize the QF industry
through the establishment of avoided cost rates that exceed utility costs
that would result from an effective least cost planning process.
Reducing the threshold correspondingly reduces the risks associated
with the published rates being set either too high or too low.
Pursuant to 18 C.R. 292.304(c), PURPA requires only that we
establish and make available published rates for projects 100 kW (i.
1/10th of 1 MW) and smaller. We believe that lowering the threshold
along with adopting a least cost planning methodology as discussed
later, will help to ensure that a greater number of QF projects are cost
effective by market standards before they are acquired by our utilities.
By lowering the threshold to 1 MW, we are striking a reasonable
balance between encouraging the development of independent
alternative technologies with the need to protect ratepayers from
paying for resources which have not proven their cost effectiveness.
As of the effective date of this Order, only QF projects smaller than
MW will be entitled to receive the published, SAR-based rates. Rates
for projects 1 MW and larger will be established using a least cost
planning methodology, ... Reference Case No. IPC-95-, Order No.
25884.
Staff Analysis
Approximately half of the QF contracts signed in Idaho since PURP A's implementation
have been for projects smaller than 1 MW. Over 80 percent of the contracts have been for
STAFF COMMENTS MARCH 15 2002
projects smaller than 5 MW. Only three contracts larger than 10 MW have been signed, each of
which is at existing industrial facilities (Potlatch, Simplot's Pocatello plant , and Boise Cascade
Emmett sawmill). Attachment B shows the size distribution for QF contracts in Idaho since
1980.
Staff believes that the level at which the Commission establishes the threshold for
published rates is both a matter of accuracy and administrative convenience. The presumption
seems to be that published rates reflect avoided cost rates that are too high, but as long as the
rates are restricted to small projects, they are acceptable. At the time the 1 MW and larger
methodology was adopted, it was acknowledged that the method was more complex than using
published rates, but it was also generally believed to be a more accurate method of establishing
rates. Since it was believed to be more accurate, it was reasonable to lower the threshold thereby
making it applicable to a greater proportion of QF contracts.
The 1 MW and larger methodology is sound in principle, but the methodology was
conceived with the assumption that a long term look at the utility s resource options was
appropriate since the QF contracts were also assumed to be 20 years in length. Currently, with a
contract limit of only five years, the methodology produces results that could be obtained more
easily by simply obtaining market quotes for similar products.
While the 1 MW and larger methodology is relatively straightforward conceptually, it is
fairly difficult to actually apply. Utilities must use complex, proprietary power supply models
that can be perceived as "black boxes." Rate computations can be very time consuming.
Furthermore, potential QF developers do not know in advance what the rate will be, making
planning much more difficult. To date, no contracts have been signed with rates computed using
the methodology.
The under 1 MW methodology is based on the assumed costs of a combined cycle
combustion turbine. Since this is, in fact, the same type of unit some of the utilities are now
pursuing, the rates computed using this methodology are nearly the same as the costs utilities are
actually incurring to build new generation. There is no evidence at this time to indicate that the
rates computed using this methodology do not accurately reflect the costs of a gas-fired CCCT
when viewed over a twenty-year period.
STAFF COMMENTS MARCH 15 2002
Staff Recommendations
Staff recommends that the threshold for availability of published rates be increased to 5
MW. Staff believes that published rates are fair and reasonable, and accurately represent the
costs of the surrogate avoided resource adopted by the Commission. As long as published rates
reasonably reflect utilities ' avoided costs , then there is little reason to restrict their availability to
projects smaller than 1 MW. A threshold set at 5 MW would permit most projects to receive
published rates, thereby reducing administrative complexity while still insuring a fair rate.
Staff further believes that a reduction in administrative complexity is sufficient reason to
increase the threshold for published rates to 5 MW even if the minimum contract length is not
increased to twenty years. However, if a five-year contract limit is retained, Staff believes that
the methodology for projects larger than the threshold be changed from the current least cost
planning methodology to a market based approach. Market prices for five years into the future
are readily available, constantly updated, and would be easy to apply.
Respectively submitted this 11--.day of March 2002.
SYd u~~Z~~~/Scott Woodbury
Deputy Attorney General
Technical Staff: Rick Sterling
SW:RPS:i:umisc/comments/gnreO2,j swrps comments
STAFF COMMENTS MARCH 15 2002
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Attachment A
Case No. GNR-E-02-
Staff Comments3/15/02
QF Project Size Distribution
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Project Capacity Range
Attachment B
Case No. GNR-E-02-
Staff Comments
3/15/02
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HA VE THIS 15TH DAY OF FEBRUARY 2002
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. GNR-02-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
ROBERT J LAFFERTY
BLAIR STRONG
AVISTA CORPORATION
PO BOX 3727
SPOKANE W A 99220
MARK WIDMER
ACIFICORP
825 NE MUL TNOMAH, SUITE 800
PORTLAND, OR 97204
JOHN M ERIKSSON
STOEL RIVES LLP
201 S MAIN ST STE 1100
SALT LAKE CITY UT 84140
BARTON L KLINE
SENIOR ATTORNEY
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
CONLEY WARD
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
WILLIAM J NICHOLSON
POTLATCH CORPORATION
244 CALIFORNIA ST STE 6l0
SAN FRANCISO CA 94111
0JLL~ )~OCL
SECRETARY
CERTIFICATE OF SERVICE