20090918Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
POBOX 83720
BOISE, IDAHO 83720-0074
[phone]
BARNO. 1895
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2Ung SEP I 8 PM I: 4 I
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 A REVIEW OF THE )
SURROGATE AVOIDABLE RESOURCE (SAR) )
METHODOLOGY FOR CALCULATING )
PUBLISHED AVOIDED COST RATES )
)
)
)
CASE NO. GNR-E-09-03
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilties Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Review of Avoided Cost Methodology and Notice of Comment Deadline issued on August 6,
2009, submits the following comments.
BACKGROUND
On August 6, 2009, the Idaho Public Utilities Commission (Commission) initiated a
generic electric case to assess the continued viabilty of the Commission's existing proxy unit or
surogate avoidable resource (SAR) methodology for calculating published avoided cost rates.
Specifically, the Commission intends to explore the continued reasonableness of using published
avoided cost rates as presently calculated for all QF resource types.
Out of the nationwide energy crisis of the late 1970s, Congress enacted the Public Utilty
Regulatory Policies Act of 1978 (PURPA). Sections 201 and 210 of PURP A require electric
STAFF COMMENTS 1 SEPTEMBER 18, 2009
utilties to purchase power produced by co-generators or small power producers that obtain
qualifying facilty (QF) status. Under PURP A Section 21 O(b) the rate to be paid for such power
is not to exceed "the incremental cost to the utilty of alternative electric energy."
Pursuant to Congressional directive, the Federal Energy Regulatory Commission (FERC)
promulgated rules implementing Sections 201 and 210 of PURP A. Under FERC rules, the utilty
requirement to purchase from QFs is set out in 18 C.F.R. § 292.303(a). The rate a qualifying
facilty is to receive for the sale of its power is generally referred to as the "avoided cost" rate -
the incremental cost to an electric utilty of electric energy or capacity or both which, but for the
purchase from the qualifying facilty, such utilty would generate itself or purchase from another
source. 18 C.F.R. § 292.101(b)(6). PURPA Section 210(b) and related FERC regulations
provide that the rates for QF purchases shall: (1) be just and reasonable to the electric consumers
of the electric utilty and in the public interest; and (2) not discriminate against qualifying co-
generators or small power producers. 18 C.F.R. § 292.304(a)(1)(i)(ii).
There are two general caveats under PURP A: (1) electric utilities are not required to pay
more than the utilty's avoided costs for purchases ofQF capacity and energy (PURPA Section
21O(b); 18 C.F.R. § 292.304(a)(2)); and (2) co-generators and small power producers in their
sales to utilties are not to be subjected to pervasive utilty type regulations, Le., regulation
respecting (i) the rates of electric utilties; and (ii) the financial and organizational regulation of
electric utilties. PURP A Section 21 O( e); 18 C.F.R. § 292.602( c)( 1 )(i)(ii).
In implementing PURP A, the Idaho Commission has developed a body of regulatory
decisions in generic rate setting and complaint actions since 1980 that set out the general
principles and framework under which Idaho electric utilties are to purchase power from
qualifying facilties.
Avoided Cost Methodology for QFs Larger than 10 aMW
PURP A requires only that the Commission establish and make available published rates
for projects 100 kW (Le., one-tenth of 1 MW) and smaller. 18 C.F.R. § 292.304(c). The curent
threshold established by this Commission for published rate eligibilty is 10 aMW. The
Commission-approved methodology for establishing rates for QFs larger than 10 aMW (QFs not
eligible for published rates) is based on a utilty's Integrated Resource Plan (IRP), using a least-
cost planing based methodology. As provided in Commission Order No. 25884, pages 4-5, this
methodology operates as follows: First, the utility determines though its least cost plan model
STAFF COMMENTS 2 SEPTEMBER 18, 2009
the cost of meeting load over the next 20 years. Whenever a proposed QF project is offered to
the utilty, the utilty inserts the generation and capacity of the project into the model and
determines what cost would be avoided over the 20-year period. That avoided cost is the rate
available to the developer. Requiring developers of such projects to prove their viabilty by
market standards ensures that utilties will not be required to acquire resources priced higher than
would result from a least-cost planing process. Ratepayers will not be disadvantaged and QFs
wil be treated fairly and consistently with the requirements and goals of PURP A.
The Commission in its Notice stated that it is satisfied that avoided costs for QFs larger
than 10 MW under curent methodology are calculated correctly. Accordingly, the avoided cost
methodology for large QFs is not being reviewed in this case docket.
Published Avoided Cost Rates (for QFs Smaller than 10 aMW)
The curent administrative SAR methodology for calculation of published avoided cost
rates for QFs smaller than 10 aMW is based on the estimated costs that a utilty would incur in
constructing a natural gas-fired combined cycle combustion tubine (CCCT). Prior to that, the
surogate was a hypothetical base load coal-fired generation plant. In selecting a gas-fired
CCCT to replace the coal SAR, the Commission in Case No. IPC-E-93-28 noted that the
Northwest Power Planing Council (Council) had adopted a gas-fired CCCT as the regional
resource of choice. Order No. 25884, p. 3. The Commission then stated that if, in the future, a
gas CCCT proves not to be a viable, cost-effective resource, then the Commission is free to again
alter its choice of the surogate. ¡d. Based on recent filings at the Commission by Idaho's
electric utilties, the Commission is concerned that a disparity exists between Idaho's published
avoided cost rate established using a natural gas-fired surogate resource and the cost to a utility
of developing and operating its own wind generation project.
The appropriateness of a single avoided cost SAR methodology for published rates is
being re-examined in the context ofPURPA and FERC requirements and the comparative and
different generation and operation capabilties of resources being offered to Idaho utilties, e.g.,
capacity factor, dispatchabilty, intermittency.
To establish a basis for discussion and analysis and to determine the natue and scope of
further procedure, the Commission in its Notice posed the following questions:
1. Does the present SAR methodology for published avoided cost rates need to be
modified or augmented? Yes or no.
STAFF COMMENTS 3 SEPTEMBER 18, 2009
2. If answer to Question 1 is no, please provide the basis for your answer.
3. If answer to Question 1 is yes,
a. Please provide the basis for your answer.
b. In broad and general terms, how should the methodology be modified or
augmented?
STAFF ANALYSIS
As described in the background section of these comments, the SAR method has been
used since PURP A was first implemented in Idaho. In Staffs opinion, the SAR method has
generally worked well. Approximately 100 QF contracts representing over 700 MW have been
signed since 1982. The contribution ofQF power to the power supply portfolios of Idaho's
utilties is significant.
It is difficult to judge at contract inception whether PURP A avoided cost rates have been
set too high or too low. Until contracts reach the end of their term, it is not always possible to
compare contract rates with the prices a utilty would have paid for power from another source.
Maximum contract lengths have ranged from 20 to 35 years, and no contract has yet reached its
full term. Rates that may have seemed high at the time the contracts were signed now seem
reasonable compared to today's prices and may seem like a bargain as contracts approach
expiration.
A base load resource has historically been used as the SAR because it has been assumed
that QFs would generate as much and as often as they could, and that the utility would be forced
to accept delivery of the power regardless of its need for either capacity or energy at the time of
delivery. Most early QFs were either small hydro projects or cogeneration projects at wood
products companes. Furhermore, the majority of small hydro projects utilzed irrgation
systems - either irrigation supplies or irrigation runoff. Although generation from these projects
was seasonal, when they did generate, they did so predictably and consistently.
For an SAR method to be effectively employed, the SAR must share some of the same
generation characteristics as the QF resources whose output is being purchased by the utilty.
Ideally, the SAR is similar in terms of its abilty to provide capacity and energy, its relative
proportion of fixed and fuel costs, its environmental costs and benefits, its transmission costs,
and other factors. Diffculties with the SAR method arise when the SAR has characteristics that
STAFF COMMENTS 4 SEPTEMBER 18, 2009
are very different from the QF resource. Adjusting for the differences can require awkward
adjustments that may not be very accurate.
In the past few years, the majority of new QFs have been wind facilties, although there
have been a few hydro projects and anaerobic digestion facilties at dairies. A gas-fired CCCT
- the curent SAR - obviously has characteristics that are much different than a wind project.
For example, a gas-fired CCCT is dispatchable, provides firm capacity, provides generation
generally considered to be base load, and has substatial fuel cost and fuel price risk. A wind
facilty is not dispatchable, provides little or no firm capacity, provides varing amounts of
intermittent generation, and has no fuel costs or fuel price risk. The curent gas-fired CCCT
SAR is a poor fit for a wind QF.
Although it would be convenient if a single SAR could be used as the basis for
computing rates for a variety of different QF generation technologies, in Staffs opinion, the
widely differing characteristics of new QF technologies no longer makes that possible. As new
technologies have emerged or become cost effective, differences in the characteristics and value
of the power produced by those technologies has become more apparent.
In the past it has been implicitly assumed that the SAR was a single resource type,
whether a coal plant or a gas-fired CCCT, that represented the next resource likely to be built by
the utilty, and that would be deferred or displaced by QF generation. The reality, however, is
that each utility's new resource portfolio is a blend of multiple resource types. In fact, each
utilty's new resource portfolio is generally a combination of conservation, gas-fired peaking and
base load facilities, and wind or other renewables. Because all three of the utilities have wind as
a significant portion of their future resource portfolios, it is highly likely that all three utilties
wil acquire, or continue to acquire, wind outside of the PURP A process.
As defined by PURPA, "avoided cost" is the incremental cost to an electric utilty of
electric energy or capacity or both which, but for the purchase from the qualifying facility, such
utilty would generate itself or purchase from another source. 18 C.F.R. § 292.101 (b)( 6). For
the first time in the history of PURP A in Idaho, utilities are actually acquiring the same tye of
resources outside of PURP A as though PURP A. This presents an opportity to accurately
match PURP A avoided cost rates to the rates utilties are paying to acquire new generation.
Clearly, use of a wind project as an SAR to compute avoided cost rates for wind QFs
makes a lot of sense, but whether it is necessar is a separate question. Whether the current
published avoided cost rates are a fair price for wind generation should probably be determined
STAFF COMMENTS 5 SEPTEMBER 18,2009
by examining the costs utilties would incur to acquire wind through mechanisms other than
PURP A. If a utilty is acquiring or planing to acquire the same type of resources under RFP
processes as it is being obligated to acquire under PURP A, the prices for the same type of
resources should be similar regardless of the means employed to acquire them. All three of the
utilties should have curent cost data for wind projects as a result of recent acquisitions, RFPs,
or unsolicited proposals. Wind project cost and performance data should be readily available
since wind generation has become common in or around the service territories of all three
utilities. Staff is hopeful that each of the utilties will provide cost information in this proceeding
that will permit fair comparisons between curent avoided cost rates and prices for wind acquired
through mechanisms other than PURP A.
Different Rates for Different QF Technologies
FERC rules implementing PURP A provide that rates for purchases may differentiate
among qualifying facilities using various technologies on the basis of the supply characteristics
of the different technologies. 18 C.F.R. § 292.304(3)(ii). In other words, different rates for
different QF technologies are permissible under PURP A. It would seem to follow then that
different methods could be used to compute rates for different technologies, and fuhermore,
that multiple SARs with different costs and characteristics could be used to compute avoided
cost rates. Consequently, Staff believes there are no legal impediments to adopting a wind SAR.
Renewable Energy Credits
One issue that has been paricularly contentious between utilties and QF developers is
that of ownership of Renewable Energy Credits (RECs). While there are curently no REC
requirements in Idaho, Avista and PacifiCorp already must satisfy REC ownership requirements
in other states. If a utility builds a renewable project, it owns the environmental attributes or
RECs associated with the project's generation. However, if the utilty buys from an otherwse
identical QF wind project, there is uncertainty, at least in Idaho, about whether the utilty or the
QF owns the RECs. Furthermore, there is uncertainty about whether the authority to determine
ownership rests with the Commission or the Legislatue. In any case, RECs have value, whether
to meet state or federal requirements, or as a marketable commodity.
Utilties are concerned that if they are not assigned the RECs associated with QF
purchases, they may need to pay a premium above curent avoided cost rates to acquire them; or
STAFF COMMENTS 6 SEPTEMBER 18, 2009
alternatively acquire RECs to meet RPS requirements in another maner. Utilties are also
concerned that they may be required to pay more for QF purchases that do not come with RECs
than they would pay to acquire wind generation through other mechanisms where RECs are
included.
While the REC ownership question has been at the forefront, Staff believes that the real
issue is whether the avoided cost rate is set fairly given whichever assumption is made about
who owns the RECs - utilty ownership or QF ownership. An avoided cost rate that reflects the
inclusion of RECs should naturally be higher than an avoided cost rate that does not include
them.
If a wind SAR were adopted, the issue of REC ownership would be resolved, at least in
the case of wind projects. With a wind SAR, the utilty would own the project and all attibutes
associated with it, including its RECs. Consequently, the avoided cost rates computed based on
the wind SAR would include the RECs regardless of their value. It would not be necessar to
compute a separate value for RECs because their value would be embedded in the cost of wind
used to establish the avoided cost rate. In exchange for paying the wind SAR-derived avoided
cost rate, the utilty would receive both the energy and the RECs from the QFs.
Staff acknowledges that a wind SAR might not resolve all the issues related to RECs,
however. For example, a wind SAR may resolve the REC ownership question for wind QFs, but
it does not resolve the ownership question for other types ofQFs. If the avoided cost rates for
QF technologies other than wind continue to be set using a gas-fired CCCT that produces no
RECs, the ownership question will remain an issue. In addition, a wind SAR also would not
resolve the REC ownership question for existing contracts or those that are curently being
negotiated, no matter what type of generation technology they use.
Dispatchabilty
One of the biggest differences between the curent SAR and PURPA QFs is that the SAR
is fully dispatchable and PURPA QFs are not (at least none to date have been dispatchable).
Dispatchable resources have value for a utilty, both because they can be operated whenever
needed and because they do not need to be operated when not needed. All dispatchable
resources provide some capacity. However, even some non-dispatchable QFs provide some
capacity, while other QFs provide none at all. For example, a geothermal QF produces nearly
the same amount of generation during all hours throughout the year. A hydro QF on an irrigation
STAFF COMMENTS 7 SEPTEMBER 18, 2009
system generates a consistent, predictable amount during irrigation season. Wind QFs, on the
other hand, provide little or no capacity because their generation is intermittent and
unpredictable.
A project must provide capacity in order to be dispatchable. The value of capacity
depends on when it is provided. Capacity provided during peak hours, days or seasons has
substatially more value than capacity provided at other times. There may be times when
providing capacity has no value. Consequently, higher capacity factors do not always
necessarily mean higher value. Moreover, the value of capacity will var over the life of the
project depending on the utility's capacity position.
The difference between different QF resources' and an SARIs dispatchabilty and abilty
to provide capacity has never been accounted for in Idaho's avoided cost methodologies. While
it may be more necessary now than ever before, to do so could be difficult, especially now that
there has become a much wider diversity ofQF resource types with characteristics quite different
from a gas-fired CCCT SAR.
However, if a wind SAR were adopted for puroses of computing avoided cost rates - at
least for wind QFs - assigning a value to capacity or dispatchability would not be necessar.
As long as the SAR used to compute rates has the same characteristics as the QF resources for
which the rates are being set, there is no need for adjustments to account for differences.
Wind Integration
A wind integration charge is curently applied to the published avoided cost rates for
wind QFs. The wind integration charge acts as a discount to reduce the rates paid to wind
projects and accounts for the increased cost to the utilty of integrating an intermittent resource.
Wind integration charges have been established based on studies performed by each utilty.
Establishment of wind integration charges has historically been time consuming and
contentious. If a wind SAR is adopted, wind integration charges would no longer have to be
quantified. The presumption would be that the utilty would incur wind integration charges of
the same magnitude whether the resource was an SAR owned by the utility or a wind QF owned
by someone else. Although there stil may be other reasons for computing wind integration
charges, it would not be necessar to compute them for puroses of published avoided cost rates.
STAFF COMMENTS 8 SEPTEMBER 18, 2009
Emission Adders, Fuel Risk Adders
Nothing in the curent SAR methodology recognizes the value of reducing fossil fuel use
(e.g., reduction in C02 taxes, value ofS02 credits), benefits that a QF may provide that would
not be provided by a gas-fired CCCT. If a QF causes some fossil-fueled resource to be deferred,
displaced, or operated less, and thus have lower emission costs, it curently receives no credit for
it. As emission costs begin to be imposed on fossil-fueled facilties, it could be argued that credit
for the emission reductions attributable to QFs is waranted.
Similarly, some QFs, wind in paricular, have no fuel costs. Therefore, unlike a gas-fired
CCCT SAR, wind presents no fuel cost risk. It could be argued that QFs with no fuel cost risk
deserve credit for this benefit also.
If a wind SAR were adopted, the questions of emission adders and fuel risk adders to
published avoided cost rates become moot. One reason utilties IRPs include wind resources in
their preferred portfolios is because of the absence of emission costs and fuel price risk. As long
as utilties continue to plan to acquire wind resources outside of PURP A, it is reasonable to
assume for puroses of avoided cost rates that wind is truly an "avoided resource." Thus,
adoption of a wind SAR will permit the Commission to steer clear of addressing the thorny issue
likely to arise in the future of emission adders and fuel risk adders.
Development of a Wind SAR
Development of a wind SAR would be technically straightforward in Staffs opinion. A
modified avoided cost spreadsheet could be developed, very similar to the spreadsheet curently
used to compute rates using a gas-fired CCCT SAR. It would require that a variety of input data
be adopted, including identification of reliable data sources and a process for consistent
updating. However, in addition to the usual cost and performance assumptions and variables, it
would also require consideration of new variables such as ta credits (production tax credits,
investment tax credits, sales tax exemptions, loan guarantees, and other financial incentives
available to utilties).
Despite being relatively straightforward technically, however, Staff believes that it would
be quite difficult for Staff, utilties, intervenors and other interested paries to reach consensus on
the details of a wind SAR. There will likely be disputes over which variables to include and over
the values assigned to each variable. Nearly all of the diffculties experienced in defining values
for the curent CCCT SAR would also be experienced with a wind SAR.
STAFF COMMENTS 9 SEPTEMBER 18, 2009
Staff believes that if a wind SAR is adopted, it should be used only to compute avoided
cost rates for wind QFs. The existing gas CCCT SAR should continue to be used to compute
rates for all other resource types. It may be necessary at some time in the future to make further
adjustments to the avoided costs rates from either SAR, or even to introduce another new SAR.
Solar, for example, could be the next major wave ofQFs in the futue, and it has generation
characteristics different from any QF technologies now being widely used. Similarly, wind
generation, while now becoming commonplace, might be able to utilze new energy storage
technologies or be supplemented by backup generation that could increase its value.
Adjustments to Avoided Cost Rates Would Stil Be Necessary with a Wind SAR
Even if a wind SAR is adopted, there are stil some adjustments made to avoided cost
rates that Staff believes need to be retained. "Seasonalization" is an adjustment made to
recognize changes in the value of power throughout the year. In seasons when power is
normally plentiful and less expensive, in the spring for example, a seasonalization factor less
than one is applied to reduce avoided cost rates. In other seasons when power is more expensive,
such as in the sumer and winter, a seasonalization factor greater than one is applied to increase
avoided cost rates.
A daily load shape adjustment recognizes differences in power value between heavy and
light load hours. The adjustment increases avoided cost rates for power delivered in heavy load
hours and decreases rates for power delivered in light load hours. Staff believes this adjustment
is stil appropriate for all QF generation technologies, regardless of what type ofSAR is used to
compute avoided cost rates.
In addition to retaining seasonal and daily load shape adjustments, Staff also believes that
the curent requirement for a mechanical availabilty guarantee (MAG) should be retained.
MAG requirements for wind projects recognize reliabilty by requiring that project facilties are
mechanically available to operate whenever there is sufficient wind.
RECOMMENDATIONS
Adoption of a wind SAR will not completely solve all the issues associated with use of a
gas-fired CCCT SAR for computing published avoided cost rates for all QF resource types. In
addition, the process of developing a wind SAR is likely to be contentious and time-consuming.
STAFF COMMENTS 10 SEPTEMBER 18, 2009
Nevertheless, Staff believes a wind SAR is necessar in order to establish avoided cost rates that
are fair for QF resource tyes with very different characteristics.
Staff recommends that the Commission issue an order adopting a wind SAR to be used as
the basis for computing PURP A avoided cost rates for intermittent wind projects. The order
should direct the Commission Staff, the utilties and all interested paries to conduct workshops
for the purose of identifying generic and utilty-specific variables needed to fairly and
accurately compute avoided cost rates for wind projects. Once those variables are identified,
they should be quantified and a source or process should be identified that wil enable regular
updates. A reasonably simple, transparent model should be developed to perform the necessar
computations, similar to the model curently used to compute avoided cost rates for other
PURP A projects. Anticipating that the process may take several months to complete,
grandfathering criteria should be proposed to determine eligibility for existing rates of wind
projects already engaged in contract negotiations. Existing rates should continue to be available
to grandfathered wind projects and to all other generating resource types, and the existing gas-
fired CCCT avoided cost model should be retained to compute rates in the future for all non-
wind projects.
Respectfully submitted this ~
ig äay of
September 2009.
cdcØ~Scott Woodbur
Deputy Attorney General
Technical Staff: Rick Sterling
i:umisc:commentsgnre09.3swrs comments
STAFF COMMENTS 11 SEPTEMBER 18, 2009
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 18TH DAY OF SEPTEMBER 2009,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. GNR-E-09-03, BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
CLINT KALICH
MICHAEL ANDREA
A VISTA UTILITIES
PO BOX 3727
SPOKANE WA 99220-3727
R BLAIR STRONG
PAINE HAMBLEN ET AL
SUITE 1200
717 W SPRAGUE AVE
SPOKANE WA 99201
BARTON L KLINE
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RADY ALLPHIN
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
DANIEL SOLANDER
PACIFICORP
DBA ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
MARK MOENCH
PACIFICORP
DBA ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
GREG DUVALL
LARENHALE
PACIFICORP
825 NE MUL TNOMAH ST
PORTLAND OR 97232
TED WESTON
PACIFICORP
DBA ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
-.~SECRETA. ~
CERTIFICATE OF SERVICE