20120720Legal Brief.pdf

KRIST1NE A. SASSER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
P0 BOX 83720
BOISE, IDAHO 83720-0074
TELEPHONE: [phone]
E-MAIL: kris.sasser(puc.idaho.gov
IDAHO BAR NO. 6618
STREET MAILING ADDRESS:
472 WEST WASHINGTON STREET
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
RECEiVED
2012JUL20 PM 3:58
DAHO PUBLk1 UTLTES COMMSSCN
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE COMMISSION'S
REVIEW OF PURPA QF CONTRACT
PROVISIONS INCLUDING THE
SURROGATE AVOIDED RESOURCE (SAR)
AND INTEGRATED RESOURCE PLANNING
(IRP) METHODOLOGIES FOR
CALCULATING PUBLISHED AVOIDED
COST RATES.
CASE NO. GNR-E-11-03
STAFF LEGAL BRIEF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
attorney of record, Kristine A. Sasser, Deputy Attorney General, and in response to the Notice of
Scheduling issued on November 2, 2011 (Order No. 32388), submits the following legal brief.
BACKGROUND
On November 5, 2010, Idaho Power Company, Avista Corporation, and PacifiCorp
dba Rocky Mountain Power filed a Joint Petition requesting that the Commission initiate an
investigation to address various avoided cost issues related to the Commission's implementation
of PURPA. The Commission first examined eligibility to published avoided cost rates. As a
result of the evidence and arguments presented, the Commission lowered eligibility to published
avoided cost rates to 100 kW for wind and solar QFs while it continued its investigation.
STAFF LEGAL BRIEF 1
In its second phase, the Commission explored whether it was just and reasonable to
utility customers and in the public interest for large projects to disaggregate into smaller QF
projects in order to be eligible for published avoided cost rates that may not be an accurate
reflection of the utility's true avoided costs for such projects. Ultimately, the Commission
determined that any attempt to implement criteria in an effort to prevent disaggregation would be
met by attempts to circumvent such criteria. The economic motivation for such action was too
strong. The Commission emphasized that PURPA and Idaho's published rate structure were
never intended to promote large scale wind and solar development to the detriment of utility
customers. The Commission determined that allowing the current trend to continue could cause
customers to pay for resources at an inflated rate and, potentially, before the energy is actually
needed by the utility to serve its customers. The Commission stated that such a result is clearly
not in the public interest.
In order to ensure that the Commission is approving just and reasonable avoided cost
rates, the Commission initiated a third phase of this proceeding to allow the parties to investigate
and analyze both the SAR methodology and the IRP methodology. The Commission is now in
the third phase of its investigation. The scope of the Commission's inquiry also includes (but is
not limited to) considerations regarding the dispatchability of varying resources, curtailment
options, integration costs, renewable energy credits, delay security and liquidated damages,
timing and schedule of negotiations, and contract milestones. Direct testimony and rebuttal
testimony has been filed. A technical hearing on all issues is scheduled to begin on August 7,
2012.
Staff intends for this legal brief to address issues that do not lend themselves to
testimony by expert witnesses. The absence of a stated legal argument regarding any particular
issue should not be construed as acquiescence of positions already taken by Commission Staff in
prefiled testimony or to be taken at hearing.
ARGUMENT
A. Renewable Energy Credits
Congress passed the Public Utility Regulatory Policies Act (PURPA) in 1978 in
response to the national energy crisis. Its purpose was to lessen the country's dependence on
foreign oil and to encourage the promotion and development of renewable energy technologies
as alternatives to fossil fuels. To encourage the development of renewable generating facilities,
STAFF LEGAL BRIEF 2
Section 210 of PURPA requires that electric utilities purchase power produced by co-generators
or small power producers that obtain qualifying facility (QF) status under PURPA. 16 U.S.C. §
824a-3(b); 18 C.F.R. § 292.303(a). This mandatory purchase requirement is often referred to as
the "must purchase" provision of PURPA and its implementing regulations as promulgated by
FERC.
Under the must purchase provision, the rate a QF is to receive for the sale of its power
to a utility is generally referred to as the "avoided cost" rate. The avoided cost rate represents
the incremental cost to the purchasing utility of power which, but for the purchase of power from
the QF, such utility would either generate itself or purchase from another source. Rosebud
Enterprises v. Idaho PUC, 128 Idaho 624, 917 P.2d 781 (1996); 18 C.F.R. § 292.101(b)(6). The
PURPA avoided cost rates are intended to compensate the QF only for the purchased power.
Avoided cost rates "are not intended to compensate the QF for [RECs]." Morgantown Energy
Associates, 139 FERC 61,066 at ¶ 47 (April 24, 2012); American Ref-Fuel Company, 105 FERC
61,004 (Oct. 1, 2003); Xcel Energy Services v. FERC, 407 F.3d 1242 (D.C. Cir. 2005). "PURPA
does not address the ownership of RECs." American Ref-Fuel, 105 FERC at ¶ 23.
Issues regarding REC ownership have generally arisen since states began adopting
renewable portfolio standard (RPS) programs over the last 15 years. American Ref-Fuel, 105
FERC at ¶ 23; Xcel Energy, 407 F.3d at 1242; In Re Ownership of Renewable Energy
Certificates, 913 A.2d 825 (N.J. App. Div. 2007). FERC observed in 2003 that "RECs have
been created in recent years by State programs typically designed to promote increased reliance
on renewable energy resources." American Ref-Fuel, 105 FERC at ¶ 23. RECs "exist outside
the confines of PURPA. . . . States, in creating RECs, have the power to determine who owns
the RECs in the initial instance, and how they may be sold or traded; it is not an issue controlled
by PURPA." Id. at ¶ 23 (emphasis added); Order No. 29480; Idaho Wind Partners, 136 FERC,
61,174 at n.10 (Sept. 15, 2011). "[I]nsofar as RECs are state-created, different states can treat
RECs differently." American Ref-Fuel, 107 FERC 61,016 at n.4.
Clearly, PURPA and FERC have left a determination regarding ownership of RECs
to the states. Unlike many of our surrounding states, the Idaho Legislature has neither adopted
an RPS, nor created a state REC program. 2012 Idaho Energy Plan § 3.2.2 at 78 (Jan. 10, 2012).
This Commission has, on numerous occasions, encouraged utilities and QFs to negotiate the
issue of REC ownership. However, there is no Commission Order or state law that currently
STAFF LEGAL BRIEF 3
dictates which entity should own the RECs produced when a QF obligates a utility to purchase
its energy. Therefore, there is no legal impediment to determining who appropriately owns
renewable energy credits.
The Idaho Legislature has delegated authority to the Public Utilities Commission "to
deal broadly with existing and future rates, rate schedules and contracts affecting rates."
Washington Water Power Co. v. Kootenai Environmental Alliance, 99 Idaho 875, 880, 591 P.2d
122, 127 (1979); See generally Idaho Code §§ 61-502 and 503. The Idaho Supreme Court has
recognized "the difficulty of having the legislature regulate intelligently the rates, service and
other matters which need regulation in connection with utility corporations." Id. at 882. The
expertise, technical skill and constant attention necessary to regulate utilities "was held to be a
strong argument for the delegation of the legislative authority to a commission." Id. Authority
to determine ownership of RECs lies with this Commission because the consequences of such a
decision are inextricably tied to existing rates, future rates and contracts affecting rates.
Specifically, the costs associated with QF contracts are directly recovered from ratepayers
through the retail rates charged by utilities and, although REC ownership is not a matter
controlled by PURPA, RECs have become an inescapable element of negotiations between
utilities and QFs in Idaho. Furthermore, with its expertise, technical skill and ongoing oversight
of regulated utilities and QF transactions, the Commission is in the best position to weigh and
analyze the consequences of REC ownership to the ratepayers, the utilities and the renewable
industry. The Idaho Commission is well-versed in PURPA and FERC regulations and adept at
appropriately administering federal and state law. Consequently, the Commission is the
appropriate forum for a determination of REC ownership.
It is reasonable and just to conclude that RECs should be owned by the utility that
purchases the energy from the QF. But for PURPA and its requirement that utilities purchase the
renewable energy that a QF produces, the QF would not exist. If a QF strips the renewable
attributes prior to conveying the energy to a utility, then the basis for which the QF initially
received its status and gained its authority to sell no longer exists. Said another way, if the utility
is being compelled to purchase based on the energy being renewable, then the renewable status
should remain with the energy purchased by the utility. Moreover, an environmental attribute is
an intangible characteristic of the energy generated by a renewable energy facility, not a
characteristic of the facility itself.
STAFF LEGAL BRIEF 4
The public interest also requires that the RECs belong to the utility. QFs receive
guaranteed recovery at a guaranteed rate for every kilowatt they produce. Because of PURPA,
the utility must purchase the energy that a QF generates. PURPA was intended to reduce the
country's dependence on fossil fuels by encouraging renewable technologies and cogeneration.
Southern Cal. Edison Co., San Diego Gas & Electric, 71 FERC ¶ 61,269 at 62,079 (1995).
However, "the intention was to make ratepayers indifferent as to whether the utility used more
traditional sources of power or the newly-encouraged alternatives." Id. at 62,080. The federal
government did not intend to create an environment in which renewable energy producers thrive
to the detriment of the utilities' ratepayers - hence, the avoided cost requirement.
Notwithstanding the fact that Idaho does not currently have an RPS, if the utility is purchasing
renewable energy, then the utility should be able to claim the renewable energy in its portfolio.
If a utility must purchase QF power without the renewable attributes attached, but is held to an
RPS, then the utility would be required to purchase or obtain additional RECs at the expense of
the ratepayer. It is illogical, unreasonable and unjust for ratepayers to pay for what is, in reality,
renewable energy through a must-purchase obligation under PURPA, not get the benefit of the
renewable attribute that is produced with each kilowatt, and then be required to pay through rates
again when the utility purchases RECs to meet an RPS.
Finally, because RECs exist outside the confines of PURPA, a utility cannot be
accused of failing to negotiate in violation of PURPA when the QF and utility are at an impasse
regarding REC ownership during contract negotiations. PURPA does not require that the utility
negotiate REC terms into a power purchase or firm energy sales agreement.
B. Curtailment -Proposed Schedule 74
As part of its testimony in this case, Idaho Power Company submitted tariff Schedule
No. 74, through which Idaho Power states that it wishes to reiterate Section 292.304(f) of
FERC's PURPA regulations. FERC's regulation provides in relevant part:
Any electric utility which gives notice pursuant to paragraph (f)(2) of this
section will not be required to purchase electric energy or capacity during any
period during which, due to operational circumstances, purchases from
qualifying facilities will result in costs greater than those which the utility
would incur if it did not make such purchases, but instead generated an
equivalent amount of energy itself.
STAFF LEGAL BRIEF 5
18 C.F.R. § 292.304(f). FERC explained that
This section was intended to deal with a certain condition which can occur
during light loading periods. If a utility operating only base load units during
these periods were forced to cut back output from the units in order to
accommodate purchases from qualifying facilities, these base load units might
not be able to increase their output level rapidly when the system demand later
increased. As a result, the utility would be required to utilize less efficient,
higher cost units with faster start-up to meet the demand that would have been
supplied by the less expensive base load unit had it been permitted to operate
at a constant output. The result of such a transaction would be that rather than
avoiding costs as a result of the purchase from a qualifying facility, the
purchasing electric utility would incur greater costs than it would have had it
not purchased energy or capacity from the qualifying facility.
Order No. 69 (FERC Stats. & Regs. 130,128 at 30,886 (1980). FERC further elaborated that
[S]uch periods must be due to operational circumstances. The Commission
does not intend that this paragraph override contractual or other legally
enforceable obligations incurred by the electric utility to purchase from a
qualifying facility. In such arrangements, the established rate is based on the
recognition that the value of the purchase will vary with the changes in the
utility's operating costs. These variations ordinarily are taken into account,
and the resulting rate represents the average value of the purchase over the
duration of the obligation. The occurrence of such periods may similarly be
taken into account in determining rates for purchases.
Id. (Emphasis added.) In response to concerns that a utility would abuse this ability to self-
generate rather than purchase from a QF, FERC clarified that its curtailment provision only
applied during "light loading" periods where, due to operational circumstances related to base
load generation, the true avoided cost rate would be negative. Id. Thus, curtailment is not
available to a utility at any point that it might be able to generate less costly power, but rather
only when specific operational circumstances arise. Despite representations by intervenors to the
contrary, Staff acknowledges that curtailment under FERC regulations is not appropriate for
general economic reasons.
No party disputes that 18 C.F.R. § 292.304(1) allows for curtailment under certain
circumstances. The debate arises around what specific circumstances were contemplated by
FERC - and whether the FERC curtailment regulation can be applied to existing contracts. As
clarified by FERC in Order No. 69, if base load units would have to be cut back in order to
accommodate purchases from QFs, but the base load units could not ramp-up quickly enough to
meet subsequent system demand and the utility is put in a position of using higher cost, less
STAFF LEGAL BRIEF 6
efficient units to meet load, curtailment is authorized. The justification behind FERC's
curtailment provision is obvious: PURPA intended that ratepayers be indifferent to the source of
a utility's energy. If curtailment of QFs under the above-stated operational circumstances were
not permitted, ratepayers would be subsidizing QFs during minimum load periods by bearing
higher costs in order to prevent QF curtailment. FERC has repeatedly stated that, in promoting
greater fuel diversity, "Congress was not asking utilities and utility ratepayers to pay more than
they otherwise would have paid for power." Southern Cal. Edison Co., San Diego Gas &
Electric, 71 FERC 1 61,269 at 62,079 (1995). Asking ratepayers to subsidize QFs would be
contrary to PURPA and in direct violation of FERC regulations.
Because the authorization to curtail during certain light load periods is provided for in
FERC regulations, the authority applies to all contracts - new and existing - despite the fact that
existing contracts may not expressly state the curtailment provision. "Existing law becomes part
of a contract, just as though the contract contains an express provision to that effect, unless a
contrary intent is disclosed." Primary Health Network, Inc. v. Idaho Dept. of Administration,
137 Idaho 663, 666, 52 P.3d 307, 310 (2002). "Extant applicable law is part of every contract in
this state as if it were expressly cited or its terms incorporated in the contract. . . . A contractual
adjustment of rights contrary to law must be clearly expressed in the agreement if applicable law
is not to be applied." Public Service Co. of Oklahoma v. Oklahoma Corp. Commission, 115 P.3d
861 at 884 (2005). Consequently, contracts entered into pursuant to PURPA and corresponding
FERC regulations assume those regulations as conditions. Id. Moreover, the majority of QF
developers now building projects in Idaho are sophisticated parties. These QFs should
reasonably be expected to know, understand and comply with existing PURPA law and FERC
regulations that impact their facilities whether or not such terms are expressly provided for in
their contracts.
"[T]he provisions of § 292.304(f) remain available to a utility even if its terms are not
expressly included in the power sales agreement, but its provisions may not be utilized by the
utility if operational circumstances have already been taken into account in calculating the
utility's avoided costs." Id. (emphasis in original). Several witnesses to this case assume that the
operational circumstances contemplated by FERC that would allow for curtailment are already
considered within the calculations of Idaho's avoided cost methodologies. However,
Commission Staff witness Rick Sterling maintains that "Idaho's published avoided cost rates ç
STAFF LEGAL BRIEF 7
not already reflect the variations in the value of the purchase in the lower overall rate during the
specific low loading scenarios when 304(f) is clearly intended to apply." Sterling Rebuttal at 5
(emphasis in original). Witness Sterling explains that the SAR methodology (used for
computing published avoided cost rates) is based solely on the estimated cost of building and
operating a combined-cycle combustion turbine resource - the surrogate avoided resource. The
methodology assumes that the resource will be operated during all hours that it is available. Id.
at 6. Because the low load operational circumstances contemplated by FERC have not
historically been taken into account when calculating avoided cost rates in Idaho, the provisions
of 18 C.F.R. § 292.304(f) would apply to such contracts.
Idaho Power states that its proposed tariff governs operational dispatch of QFs,
including curtailment in certain circumstances as delineated by FERC. Specifically, the
Company maintains that Schedule 74 would establish rules under which Idaho Power could
curtail certain QFs if, due to operational circumstances, purchases from the QF would otherwise
require the Company to dispatch higher cost, less efficient resources to serve system load or to
make base load resources unavailable for serving the next anticipated load.
In its testimony addressing the proposed tariff Schedule 74, Idaho Power states:
The Company's proposal will relieve the Company of its obligation to
purchase energy from PURPA generators during low loading periods when
the Company is operating only base load resources and would be forced to cut
back output from those resources in order to accommodate unscheduled OF
energy purchases. Because the Company's coal units have slow, gradual
ramp times for them to reach full generating capacity, backing down such
base load units too much to accommodate QF purchases will impact their
ability to come back to full generating capacity to meet system load. If this
were to occur, Idaho Power would be in the position of dispatching higher
costs resources, such as the Company's natural gas peaker plants or more
expensive market purchases, to meet variations in system load. This is exactly
the type of scenario under which the FERC Rule was meant to apply and why
Idaho Power is requesting authority from the [Idaho PUC] to implement it.
Direct Testimony of Tessia Park at pp. 18-19 (emphasis added). As long as the Company's
Schedule 74 is modeled after the FERC regulation and does not expand the parameters under
which curtailment is authorized, Idaho Power's desire to implement a tariff that sets out a
procedural framework for such curtailments is entirely consistent with PURPA and FERC
regulations.
STAFF LEGAL BRIEF 8
Increasing amounts of intermittent, must-purchase generation will, inevitably,
increase the frequency of circumstances within which curtailment will be necessary because base
load units can only be backed down to a certain degree and a utility will always experience
lighter loads. Even a portfolio with no intermittent generation will require that some plants be
curtailed as load varies. FERC provided an exception with 18 C.F.R. § 292.304(f) to the PURPA
requirement that utilities purchase the entire output of QFs. This provision would be rendered
meaningless unless a utility is actually permitted to cease purchasing QF generation during a
period in which operational circumstances exist.
Respectfully submitted this 20 th day of July 2012.
4 ± Da. tAL1
Kristine A. Sasser
Deputy Attorney General
for Commission Staff
N:GNR-E-1 1-03_ks_Legal Brief
STAFF LEGAL BRIEF 9
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 20TH DAY OF JULY 2012,
SERVED THE FOREGOING STAFF LEGAL BRIEF, IN CASE NO. GNR-E-1 1-03, BY
E-MAILING A COPY THEREOF TO THE FOLLOWING:
DONOVAN E WALKER
JASON B WILLIAMS
IDAHO POWER COMPANY
P0 BOX 70
BOISE ID 83707-0070
E-mail: [e-mail]
Iwilliamsidahopower.com
MICHAEL G ANDREA
AVISTA CORPORATION
1411 EMISSION AVE
SPOKANE WA 99202
E-mail: [e-mail]
ROBERT D KAHN
NW & INTERMOUNTAIN POWER
PRODUCERS COALITION
1117 MINOR AVE STE 300
SEATTLE WA 98101
E-mail: rkahnnippc.org
ROBERT A PAUL
GRAND VIEW SOLAR II
15690 VISTA CIRCLE
DESERT HOT SPRINGS CA 92241
E-mail: robert2aul08gmaiLcom
ELECTRONIC SERVICE ONLY:
DR. DON READING
E-mail: dreading(mindspring.com
MARV LEWALLEN
CLEAR WATER PAPER CORP
601 W RIVERSIDE AVE STE 1100
SPOKANE WA 99201
E-mail: [e-mail]
DANIEL E SOLANDER
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
E-mail: [e-mail]
PETER J RICHARDSON
GREGORY M ADAMS
RICHARDSON & O'LEARY
515 N 27TH STREET
BOISE ID 83702
E-mail: [e-mail]
greg(richardsonando1e4ry.com
DON STURTEVANT
ENERGY DIRECTOR
J R SIMPLOT COMPANY
P0 BOX 27
BOISE ID 83707-0027
E-mail: [e-mail]
JAMES CARKULIS
EXERGY DEVELOPMENT GROUP OF
IDAHO LLC
802 W BANNOCK ST STE 1200
BOISE ID 83702
E-mail: [e-mail]
BILL BROWN CHAIR
BOARD OF COMMISSIONERS
OF ADAMS COUNTY ID
P0 BOX 48
COUNCIL ID 83612
E-mail: [e-mail]
TED S SORENSON P E
BIRCH POWER COMPANY
5203 SOUTH I ITH EAST
IDAHO FALLS ID 83404
E-mail: [e-mail]
CERTIFICATE OF SERVICE
R GREG FERNEY BILL PISKE MGR
MIMURA LAW OFFICES PLLC INTERCONNECT SOLAR DEVELOPMENT LLC
2176 E FRANKLIN RD STE 120 1303 E CARTER
MERIDIAN ID 83642 BOISE ID 83706
E-mail: greg(mimuralaw.com E-mail: [e-mail]
RONALD L WILLIAMS WADE THOMAS
WILLIAMS BRADBURY DYNAMIS ENERGY LLC
1015 W HAYS ST 776 E RIVERSIDE DR STE 15
BOISE ID 83702 EAGLE ID 83616
E-mail: [e-mail] E-mail: [e-mail]
JOHN R LOWE LIZ WOODRUFF
RENEWABLE ENERGY COALITION KEN MILLER
12050 SW TREMONT ST SNAKE RIVER ALLIANCE
PORTLAND OR 97225 BOX 1731
E-mail: [e-mail] BOISE ID 83701
E-mail: [e-mail]
kmiller(snakeriverailiance.org
C THOMAS ARKOOSH ELECTRONIC SERVICE ONLY:
CAPITOL LAW GROUP PLLC
205 N 10TH ST 4TH FL BRAIN OLMSTEAD
P0 BOX 2598 GENERAL MANAGER
BOISE ID 83701 E-mail: [e-mail]
E-mail: tarkooshcapitollawgroup.com
TED DIEHL
GENERAL MANAGER
E-mail: [e-mail]
DON SCHOENBECK
RCS
E-mail: [e-mail]
LORI THOMAS
CAPITOL LAW GROUP PLLC
E-mail: [e-mail]
M J HUMPHRIES ARRON F JEPSON
BLUE RIBBON ENERGY LLC BLUE RIBBON ENERGY LLC
3470 RICH LANE 10660 SOUTH 540 EAST
AMMON lID 83406 SANDY UT 84070
E-mail: blueribbonener'gmaiLcom E-mail: [e-mail]
DEAN J MILLER MEGAN WALSETH DECKER
CHAS McDEVITT SR STAFF COUNSEL
McDEVITT & MILLER LLP RENEWABLE NW PROJECT
P0 BOX 2564 421 SW 6TH AVE STE 1125
BOISE ID 83701 PORTLAND OR 97204
E-mail: [e-mail] E-mail: [e-mail]
[e-mail]
CERTIFICATE OF SERVICE
GLENN IKEMOTO BENJAMIN J OTTO
MARGARET RUEGER IDAHO CONSERVATION LEAGUE
IDAHO WINDFARMS LLC P0 BOX 844
672 BLAIR AVE BOISE ID 83702
PIEDMONT CA 94611
E-mail: g1ennienvisionwind.com
[e-mail]
TAUNA CHRISTENSEN DEBORAH E NELSON
ENERGY INTEGRITY PROJECT KELSEY J NUNEZ
769N 1100E GIVENS PURSLEY
SHELLEY ID 83274 601 W BANNOCK ST (83702)
E-mail: [e-mail] P0 BOX 2720
BOISE ID 83701-2720
E-mail: den(givenspursIey.com
[e-mail]
p1g, 0 al , ~,
&4 wn...c
CERTIFICATE OF SERVICE