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ATTORNEYS AT LAW
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March 14 2002
VIA OVERNIGHT DELIVERY
JUSTIN R. BOOSE
Direct [phone]
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Idaho Public Utilities Commission
472 W. Washington
Boise, ill 83702
Re:Case No. GNR-O2-
Enclosed for filing please find an original and 7 copies of COMMENTS OF P ACIFICORP in the
above-referenced matter. Copies have been served as indicated on the attached certificate of
servIce.
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J Ltstin R. Boose
Enclosures
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Washington
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Mary S. Hobson
Stoel Rives LLP
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John M. Eriksson
Justin R. Boose
Stoel Rives LLP
201 S Main Street, Suite 1100
Salt Lake City, UT 84111-4904
Phone: [phone]
Attorneys for PacifiCorp
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Investigation of the
Continued Reasonableness of Current Size
Limitations for PURP A QF Published Rate
Eligibility (i.1 MW) and Restriction on
Contract Length (i,5 Years).
Comments of PacifiCorp
Case No. GNR-02-
PacifiCorp (or the "Company ) hereby submits the following comments in response to
the Notice of Investigation issued by the Idaho Public Utilities Commission (the
Commission ) on February 4 , 2002.
Summary of Comments
The Company s position is that the Commission should not modify the existing 1 MW
threshold for published Qualifying Facility ("QF") avoided cost prices or the standard five-
year term of QF contracts. The fundamental assumptions about the future of the wholesale
electricity market that led the Commission to arrive at the 1 MW threshold and five-year
contract term remain equally valid today and in the foreseeable future. The 1 MW threshold
and five-year contract term reflect an appropriate balance between the congressional mandate
under the Public Utility Regulatory Policies Act ("PURPA") to promote the development of
COMMENTS OF P ACIFICORP -
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cogeneration and small power production while at the same time ensuring that ratepayers do
not absorb additional costs associated with that development. Reinstituting a 10 MW threshold
for surrogate avoided cost ("SAR") prices and/or 20-year levelized QF contracts may result in
a subsidy to the QF industry, at the expense of utility ratepayers and in violation of the policies
underlying PURPA. Moving to a 20-year contract term without adequate market-based pricing
mechanisms may force the utilities to make sustained purchases at a price above their true
avoided costs or the prevailing market prices. Raising the threshold for published avoided cost
prices to 10 MW prevents an individualized analysis of the true avoided costs associated with
those projects , and may make Idaho a magnet for above-market QF generation from
neighboring jurisdictions where the threshold is 1 MW.
Conversely, maintaining the current 1 MW threshold and five-year contract term does
not preclude the development of QF generation resources pursuant to individually negotiated
agreements in which the full range of factors (including actual avoided costs , dispatchability,
creditworthiness and reliability) may be considered.
To the extent the Commission is inclined to reimplement the 10 MW threshold, 20-year
levelized contract terms or both, or to otherwise expand the existing threshold and contract
term, PacifiCorp requests that the Commission not do so without also considering the other
variables that affect the balance of risks associated with QF contracts. Instead, the
Commission should open this proceeding to include a consideration of the full panoply of
interrelated QF issues-such as the appropriate avoided cost methodology, market-based
pricing mechanisms, fixed versus variable pricing, credit and collateral issues , levelization of
prices and related security issues-that affect the risks assumed by a utility and its customers
under long-term QF contracts. Such consideration cannot be had in accordance with the
Commission s Modified Procedures; therefore, PacifiCorp asks that if the Commission is
inclined to alter the status quo, it hold a full administrative hearing to allow reasoned
consideration of these issues.
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The Commission s Decision Should Be Guided by the Principle of RatepayerNeutrality
A fundamental principle underlying PURP A is that of ratepayer neutrality. Ratepayers
should be indifferent as to whether energy is purchased from a QF , generated from utility-
owned resources or acquired from other sources. This principle is embodied in the definition
of avoided costs:
" A voided costs means the incremental costs to an electric
utility of electric energy or capacity or both which, but for the
purchase from the qualifying facility or facilities, such utility
would generate itself or purchase from another source.
18 CFR ~ 292.201(b)(6).
Consistent with the ratepayer neutrality standard , states may not impose avoided cost prices
upon a utility that exceed the utility s actual avoided costs. See, e., Conn. Light Power
Co.70 FERC ~ 61 012 (1995) ("(I)fparties are required by state law or policy to sign
contracts that reflect prices for QF sales at wholesale that are in excess of avoided costs , those
contracts will be considered void ab initio. ). Parties aligned with the QF industry will likely
argue that the Commission should act to encourage the development of that industry.
However , the overriding principle for the Commission to follow in evaluating the threshold for
published avoided cost prices and the term for QF contracts is that of ratepayer neutrality.
The Commission Should Not Raise the Term for QF Contracts to 20 Years
In deciding to reduce the term of QF contracts from 20 to 5 years , the Commission
made the following findings:
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
considerable surplus of energy available in this region resulting in
very low spot market prices for electricity and, finally, even the
continued existence of PURPA is being called into question.
find that as the industry as a whole continues to transform 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 the load; through short-
COMMENTS OF P ACIFICORP - 3
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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," Order 26576 at 6-
Notably, as discussed below, these findings remain largely true today. Open-access
transmission linking the supply markets throughout the Western System Coordinating Council
has been implemented. I Thermal technologies continue to improve. Natural gas prices have
returned to historical levels and, combined with normal hydro conditions , have resulted in
electricity prices that are relatively low throughout the region. There is legislation presently
before Congress that would repeal the mandatory purchase obligation under section 210 of
PURPA. See Electric Supply and Transmission Act , H.R. 3406 , 1O7th Cong (2001),2 Finally,
20-year purchase terms are inconsistent with the shorter purchase terms (five years or less)
currently used by utilities to meet their supply needs. In sum, because the same concerns that
prompted the move away from 20-year levelized agreements are still present, the Commission
should maintain the current five-year term.
1 The U. S. Supreme Court recently upheld FERC's open access orders and affirmed
the breadth of FERC's jurisdiction in the area of transmission. See New York et al., v. FederalEnergy Regulatory Comm US (2002 WL 331835 , March 4 2002).
2 Testimony by FERC Chairman Pat Wood in support of H.B. 3406 recognizes that themandatory purchase obligation is an unnecessary holdover from the precompetitive era:
As indicated in the bill's proposed findings , PURPA's 'forced
sale ' requirement is no longer necessary to promote competition
in light of the availability of open access transmission, and moreoften serves to distort competitive outcomes. Thus , I agree thatCongress should repeal PURPA but 'grandfather' existingPURPA contracts.See Testimony of Pat Wood , 2001 WL
26188233 at *9.
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Wholesale Competition Is a Fundamental Reality of the Electric Industry
In its comments that led to the opening of this docket , the J.R. Simplot Company
(" Simplot ) stated that " (r )egardless of one s view as to the desirability of competition in the
electric industry, it has decidedly not come to Idaho and is very unlikely to do so in the
foreseeable future." (Comments of Simplot at 4, Case No IPC-01-37.) Because it refers to
the retail market and not to the applicable wholesale market, this statement conveys an
inaccurate understanding of the electric industry as it relates to the issues at hand.
In the early 1990s , sweeping regulatory changes occurred at the federal level to
facilitate competition in the wholesale energy markets , the part of the business in which the QF
industry resides. Congress passed the Energy Policy Act of 1992 , paving the way for
unregulated generators of electricity to enter the market as exempt wholesale generators.
Order 888, FERC implemented mechanisms to require open access on the nation
transmission grids and to allow sellers of electricity to transact according to market-based
prices. These regulatory changes, coupled with technology enhancements , led to the
proliferation of unregulated power marketers, market indexes, unbundled products, electricity
futures and derivatives. Notwithstanding last year s price spikes , the recent demise of Enron
and the decreased focus on retail deregulation, competition at the wholesale level is here to
stay.
A Five-Year Term Is Consistent with the Company s Portfolio and the
Industry Generally
In support of lowering the term of QF contracts to five years , the Commission relied
upon evidence that utility power purchases were overwhelmingly moving toward terms of five
years or less. This is still the case today. A significant portion of the Company s power
purchase needs are being met by purchases of five years or less. The shrinking of the term of
power purchases is a direct outgrowth of the advent of competitive wholesale markets.
Because competitive markets are alive and well, PacifiCorp projects that it will continue to
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meet a significant portion of its incremental resource requirements with purchased power on
terms of five years or less.
Moreover, short-term purchases are consistent with the company s need for flexible
resource options. The Company recently conducted a request for proposals process to procure
needed peaking resources for summers 2002-04. The company received 52 proposals from 27
different parties and has secured 400 MW of flexible resources at highly competitive prices.
These resources are dispatchable entirely at the Company s option , whereas QF resources are
not typically dispatchable, Further, the suppliers were subjected to stringent , ongoing
creditworthiness requirements not typically found in QF contracts. Two of the resources are
three-year purchase options for the summer months. The third is a 15-year plant lease with
purchase/termination options in the third and sixth years.
These resources are representative of the tailored products available in the wholesale
market. While forced, long-term purchases of inflexible supply will certainly benefit the QF
industry, such purchases are out-of-step with the Company s supply needs and other market
alternatives and are inconsistent with PURPA's ratepayer neutrality standard.
Current Wholesale Prices Are Below Published Avoided Cost Prices
The Commission need only look to current wholesale market prices for evidence that
the competitive wholesale markets are alive and well. The table below compares the prices of
various resources available to the Company in Idaho:
Resource Type Price (levelized $/MWH)
PacifiCorp 2002 Non-Fueled A voided Cost Prices for Idaho
Five- Year Contract Term 55.
Twenty- Year Contract Term 73.
PacifiCorp 2001 Average Price under Existing Idaho QF 53.Contracts
Mid-Columbia 2002 Average Market Price 28.
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During the market price spikes that occurred last year , the Company experienced a surge in
QF proposals for projects seeking to take advantage of high market-based prices. Now that
market prices have fallen, QFs are advocating for expanded access to published avoided cost
prices. Under these circumstances , a return to 20-year levelized contracts increases the risk
that utilities will be forced to make sustained above-market QF purchases , in violation of
PURP A's ratepayer neutrality requirement. Recent experience of the California Department of
Water Resources confirms that entering into long-term, fixed-price power purchases without
adequate market-based price adjustment mechanisms may force the purchaser to make
significant above-market purchases. Ultimately, such costs are borne by ratepayers.
The Commission Should Not Increase the Threshold for Published QF A voided
Cost Prices to 10 MW
As with the QF contract term, the findings supporting the Commission s decision to
reduce the availability of standard QF avoided cost prices from 10 MW to 1 MW still apply:
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. * * * Thus
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. * * * We believe that lowering the threshold, along
with adopting an IRP-based 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 energy technologies with the need to
protect ratepayers from paying for resources which have not
proven their cost effectiveness." Order No. 25882 at 3-
As explained above , competition exists in the regional wholesale market. Accordingly,
QF purchases over 1 MW should not be subjected to a static pricing regime over a 20-year
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period that may force the utility to pay above-market prices. To increase the threshold to 10
MW could result in an artificial subsidy of the QF industry by utility ratepayers. Such an
outcome is not consistent with PURP
The Expansion of Published Prices Prevents Consideration of All Relevant
Supply Options in Determining Avoided Costs
If the threshold for published avoided cost prices is raised to 10 MW, a significant
percentage of QF generation will be exempted from an individualized avoided cost
determination. Such a shift appears to conflict with FERC rulings that all relevant supply
sources should be considered in determining avoided costs. See, e.
g"
S. Cal. Edison Co. and
San Diego Gas Elec. Co.70 FERC , 6l 215 at 61 677 (1995) ("(WJhether a state
determines avoided cost administratively or through bidding, a state must in its process reflect
prices available from all sources able to sell to the utility whose avoided cost is being
determined." (emphasis in original)). Indeed , FERC itself noted that in view of the transition
to competitive markets
, "
the need to ensure that the States are using procedures which ensure
that QF rates do not exceed avoided cost becomes more critical." Ed. at 61 675-76.
Published prices , which currently are required to be calculated in accordance with the
SAR methodology, do not permit an individualized evaluation of the actual avoided costs
associated with the particular resource. For example , FERC regulations for calculating
avoided costs require consideration of the QF's peak availability, dispatchability, reliability,
ability to coordinate outages , usefulness during system emergencies and actual value to the
utility s system. See 18 CFR ~ 292.304(e). Relatedly, the Commission has previously
recognized that it is appropriate to consider the effect of transmission constraints on a utility
ability to wheel QF generation to meet load in other areas of its system. See Order 25870 at
1l-12. Significantly, no adjustments are provided under the SAR methodology for these
factors. As indicated by the above discussion of other flexible, less expensive resource options
COMMENTS OF P ACIFICORP - 8
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available in the wholesale supply markets, application of the published SAR prices to QFs up
to 10 MW will likely cause PacifiCorp s customers to incur higher than necessary costs.
Raising the Threshold to 10 MW May Create a Magnet Effect, Attracting
Above-Market QF Generation to Idaho
Based on its experience during prior periods in which standard prices were available to
QFs up to 10 MW , PacifiCorp is concerned that raising the threshold will again create a
magnet effect , attracting above-market generation to Idaho. PURPA permits a QF located in a
utility s service area to wheel generation to neighboring areas and subjects the neighboring
utility to the same PURPA requirements as the original utility. See 18 CFR ~ 292.203(d).
Accordingly, because the threshold in nearly every other jurisdiction in the region is 1 MW, a
10 MW threshold in Idaho may prove attractive to both new and existing QFs located in
neighboring states.
Previously, when the 10 MW threshold existed in Idaho, the Company received a
number of requests from QFs over 1 MW located in other jurisdictions. See Direct Testimony
of Roger Weaver in UPL-93-3/PPL-93-3 at 4-6. The risk for migration to Idaho is
particularly acute given low wholesale market prices and the availability of open access to
transmission. Such imports may force Idaho utilities and their ratepayers to subsidize a
disproportionate share of higher-priced QF resources in the region. Moreover, the wheeling of
QF generation may result in inefficient allocation of scarce transmission resources. Like the
Commission, PacifiCorp does
not believe that PURPA has as a goal the eradication of state
boundaries and the creation of a 'value of service ' pricing
mechanism whereby the utility with the highest avoided costs bids
up the price and becomes the recipient of all power available
from all cogenerators and small power producers in a given
region." (Commission Order No. 15746 at 39 , Case No.
300-12.
If QFs are truly competitive with utilities and other suppliers, they should be able to survive in
the competitive market , without the artificial shelter provided by the published price.
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This issue particularly affects PacifiCorp in that a portion of its Idaho QF costs will be
included in rate cases in PacifiCorp s other jurisdictions, as a function of the interjurisdictional
allocation method. These states may not agree to subsidize above-market QFs , presenting
PacifiCorp with additional rate recovery risk.
Raising the Threshold to 10 MW May Discourage the Development of
Larger, More Efficient QFs
A 10 MW threshold may be contrary to the development of efficient, appropriately
sized QF facilities. The Company s experience is that a 10 MW threshold encourages QFs to
size facilities at just under 10 MW (e,9 MW) or to construct multiple smaller facilities in
order to take advantage of the published avoided cost prices. (See, e.Application of
PacifiCorp at 3 , Case No. UPL-93-3/PPL-93-) The imposition of a 10 MW threshold
may lead QF developers to forego larger , more economical development in order to take
advantage of the published prices.
Transaction Costs Associated with Negotiated Avoided Cost Prices Are Not
Unreasonably Burdensome upon QFs over 1 MW
PUPRA generally requires utility purchases at the utility actual avoided costs. See
CFR g 292.202(b)(6). The rationale proffered by FERC in creating an exception for small
projects under 100 kW was that the "transaction costs " associated with negotiating
individualized prices "would likely render the program uneconomic for this size of qualifying
facility." Order No. 69 , FERC Regulations Preambles 1977-1981 , 30 128 , , 30 848
45 Fed. Reg. 12 214 45 Fed. Reg. 24 126 (1980). Originally, FERC had proposed that the
threshold be only 10 kW. Id. FERC was aware of the concern (shared by PacifiCorp) that
supply characteristics of a particular facility may vary in value from the average rates set
forth in the utility s standard rate(.
)"
Id. Although FERC granted states the authority to
require published prices for projects above 1 MW, the above authorities make clear that
standard prices are appropriate only to the extent that transaction costs would otherwise stifle
QF development. This rationale does not apply to QFs over 1 MW.
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Transaction costs in negotiating avoided cost prices are not unreasonably burdensome
on QFs over 1 MW. Such costs represent a small percentage of overall QF start-up costs , the
remainder of which do not vary significantly based on the size of the resource. As previously
found by the Commission in lowering the threshold to 1 MW
, "
the costs of negotiation for
projects larger than 1 MW should not be so significant as to render an otherwise viable project
infeasible." Order 25882 at 5. This finding remains equally valid today. If anything, the
transaction costs associated with negotiated prices will likely be lower today in view of the
Commission s established IRP methodology for setting such prices. Given this, no persuasive
rationale exists for raising the threshold. To do so would be contrary to the policies set forth
in PURPA.
If the Commission Is Inclined To Increase the Threshold and/or Contract Term,
Should Expand This Docket To Consider Other Related Issues
As discussed above, PacifiCorp is concerned that reimplementation of 20-year fixed-
price, levelized agreements and a 10 MW threshold for published prices may have an adverse
effect on retail rates , in violation of PURPA's ratepayer neutrality requirement, and impose
additional cost recovery risks on utilities. These risks are largely interconnected with other
aspects of QF contracts that are not currently included in the scope of this docket.
For example, the risk that a utility will be forced to pay above market prices under
long-term agreements can be addressed in part by the implementation of market-based pricing
mechanisms. As one option, the Commission could adopt a 20-year contract term in which the
prices are adjusted at five-year intervals , based upon a market price forecast. A second option
could involve a "deadband" of a predetermined percentage being placed above and below the
contract price. If the actual market price of electricity stays within the deadband , the contract
prices would remain unchanged. If the market prices are outside the deadband , the contract
prices would automatically be reset to a revised market price forecast, with a new deadband.
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Similarly, if the Commission is inclined to revert to a 20 year contract term, it should
open this docket to consider the efficacy of price levelization as a means of incenting QF
development. Under long-term leveIized agreements , above-market prices in initial years may
result in payments to QFs that exceed the utility's actual avoided costs , whereas below-market
prices in later years may be below the utility s actual avoided costs. Utilities need adequate
assurances that QFs will continue to operate during the out of-the-money years , so that both
parties obtain the benefits of the bargain underlying such contracts. While the Commission
Order No. 21690 did address the security concerns associated with leveIized pricing, it is
unclear whether the existing security provisions are adequate to address the risks that Idaho
utilities will face if 20-year, levelized contracts are reinstituted.
Additionally, as the utilities will face increased risks associated with QF
nonperformance under 20-year contracts , the Commission should consider requiring express
creditworthiness and collateral provisions in such contracts. Alternately, these factors could be
considered in the calculation of avoided costs. While the FERC regulations indicate that the
ability of a QF to perform and the contractual penalties for nonperformance are relevant
consideration in calculating avoided costs see Order 69 at , 30 884, the implementation of
such provisions is a matter left to state commissions. Uniform creditworthiness and collateral
provisions , promulgated by the Commission, will obviate the need for the parties to negotiate
individuaIIy over such terms.
With respect to the threshold for published avoided cost prices , if the Commission
moves to a 10 MW threshold , the Commission should consider the extent to which the SAR
methodology may compensate QFs in excess of the utilities actual avoided costs and make
Idaho a magnet for out-of-state QFs. A more robust methodology for calculating published
avoided cost prices may help mitigate these concerns.
In sum, the above suggestions are not intended to be an exhaustive treatment of the
protections necessary to minimize the risks associated with 20 year contracts or a 10 MW
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threshold. Rather, they are being provided as examples of the need for the Commission to
consider all the interrelated issues involved in QF contracts. Accordingly, to the extent the
Commission is inclined to alter the status quo in this proceeding, PacifiCorp requests that the
Commission open this docket for a full hearing in which the full range of interrelated QF
issues-such as market pricing, levelization and security-may be fully considered.
Conclusion
For the above reasons, PacifiCorp respectfully requests that the Commission issue an
order retaining the current QF contract term and threshold for published avoided cost prices
, in the alternative, that any changes to the current system be addressed in the context of a
full hearing dealing with other interrelated QF issues.
DATED: March 14 2002.
'- :, .. "'..-------
r ,So Hobson
Jon M. Eriksson
Justin R. Boose
Of Attorneys for PacifiCorp
COMMENTS OF P ACIFICORP - 13
Portlnd3.1374665.4 0019436-00036
CERTIFICA TE OF SERVICE
I hereby certify that I served the foregoing COMMENTS OF PACIFICORP on the
following named person(s) on the date indicated below by
Mailing with postage prepaid
Hand deli very
Facsimile transmission
Overnight delivery
to said person(s) a true copy thereof, contained in a sealed envelope, addressed to said
person(s) at their last-known address(es) indicated below.
Robert J. Lafferty
Blair Strong
PO Box 3727
Spokane, WA 99220
Barton L. Kline
Idaho Power Company
PO Box 70
Boise ID 83703-0070
Conley Ward
Givens Pursley LLP
PO Box 2720
Boise , ID 83701-2720
William J. Nicholson
Potlatch Corporation
244 California Street, Suite 610
San Francisco, CA 94111
DATED: March 14 , 2002
Justi R. Boose
Of At orneys for PacifiCorp
CERTIFICATE OF SERVICE - 14
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