2001327_jh.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
JEAN JEWELL
RON LAW
BILL EASTLAKE
LOU ANN WESTERFIELD
GENE FADNESS
DON HOWELL
TONYA CLARK
RANDY LOBB
DAVE SCHUNKE
KEITH HESSING
TERRI CARLOCK
BEV BARKER
WORKING FILE

FROM: JOHN R. HAMMOND

DATE: MARCH 27, 2001

RE: IN THE MATTER OF THE APPLICATION IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY AND ASTARIS LLC FOR APPROVAL OF A LETTER AGREEMENT AMENDING THE ELECTRIC SERVICE AGREEMENT BETWEEN THE PARTIES, CASE NO. IPC-E-01-9.

On March 16, 2001, Idaho Power Company ("Idaho Power") filed an Application requesting Commission approval of a Letter Agreement amending the Electric Service Agreement (“ESA”) between the Company and Astaris LLC (fka FMC). The ESA dated December 30, 1997, requires Idaho Power to supply electric power to Astaris’ phosphate manufacturing facility in Pocatello, Idaho. Astaris also purchases electric power for its Pocatello facility under the terms and conditions set forth in the ESA. As a result of Astaris’ strategic business decision to switch to a different manufacturing process that uses significantly less electric energy, Idaho Power and Astaris mutually desire to amend the ESA.
Notice of Application, Notice of Modified Procedure, Expedited Deadline for Comments, and Order No. 28678 was issued on March 20, 2001. To this point Staff is the only party to submit comments.
Idaho Power Company and Astaris LLC ("Astaris") have entered into a Letter Agreement providing for revisions to the underlying Agreement dated December 30, 1997 ("Agreement"), between the parties. The revisions are set forth as items 1, 2, 3, 4, 5, 6, 7 and 8 in the Letter Agreement, included in their Application.
Astaris and Idaho Power, the two parties to the Agreement, have agreed to these revisions subject to Commission approval. The effect of the proposed contract modifications is to reduce Astaris' load by 50 MW. More specifically, the eight items in the Agreement provide for the following:
1. The Agreement shall terminate at midnight on March 31, 2003.

2. Provides for the permanent shut down of furnace No. 1 and No. 4 at the Astaris Pocatello facility, reducing contract demand by 130 MW per hour.

3. Astaris agrees to consume no more than 70 MW per hour and shall continue to purchase 120 MW per hour.

4. Idaho Power shall pay Astaris for this energy reduction at the rate of 86.5% of the forward market price. This is about 15.9¢ per kWh.

5. Idaho Power and Astaris will negotiate in good faith to develop a replacement electrical service agreement for the Pocatello facility, which would become effective after the termination of this Agreement.

6. This Agreement is conditioned on favorable approval by the Idaho Public
Utilities Commission.

7. Payments made to Astaris are requested to be passed through the PCA.

8. All other terms and conditions of this Agreement remain the same, unless expressly modified.

ANALYSIS
Staff believes the issues in this Application are limited to the amount of the load reduction payment; the ratemaking treatment of those payments; and the ratemaking treatment of the cost of the derivative.
Load Reduction Payment
In order to assess the reasonableness of the load reduction payment, one must evaluate both the quality and price of the energy purchased as compared to other resource options such as market purchases, generation alternatives and other load reduction programs.
The Astaris load reduction payment is calculated as 86.5% of the projected market price. Therefore, the payment will be less than market if these projections are accurate. The risk associated with the Agreement, when compared to the market purchase alternative, is that actual market prices will turn out to be lower than the price paid for the load reduction. The projected prices used to establish energy prices under the Agreement appear to be reasonable. The comparison to other resource alternatives is more difficult.
Supply side alternatives, whether from system generation, contracts or market purchases, are considered the firmest or most reliable and thus the most valuable method to meet demand. Load reduction programs must be evaluated in light of how confident the Company is in actually achieving the level of reduced load that it pays for. To the extent there are concerns about timing, reliability, measurement and other secondary problems associated with load reduction, the value of such programs is diminished.
The Astaris load reduction agreement does not have the same energy acquisition uncertainties that were associated with the irrigation buy-back program in Case No. IPC-E-01-4. Astaris’ load reduction is also absent the concerns over lost revenue impact associated with the irrigation buy-back program. Under the Agreement, Astaris continues to pay Idaho Power as if it were using its entire load. Idaho Power then simply buys back a portion of the energy. A comparison of acquisition costs shows that energy purchased under the Agreement in 2001 is approximately 24.4 cents/kWh, dropping to 10.8 cents/kWh in 2002 and 2003. Energy purchased under the irrigation program costs 15 cents/kWh with the potential to exceed 19 cents/kWh including lost revenues. Both of these programs compare favorably to projected market purchase alternatives with a larger discount applied to the irrigation buy back prices to account for greater acquisition uncertainties.
This Program appears to be somewhat more costly than other diesel or natural gas fired generation alternatives described by the Company. However, siting and environmental considerations may limit the availability of these resources. Consequently, Staff believes that prices paid for energy saved under the Agreement are within a reasonable range when compared to other alternatives.
Treatment of the Load Reduction Payment
Idaho Power requests that the load reduction payments to Astaris be treated as system power supply costs that are passed through the Power Cost Adjustment ("PCA") mechanism like any other power supply expense. In the alternative, the Company proposes that it be authorized to sell the energy saved off system and treat the costs and revenues as non-system transactions. Staff is opposed to either purchasing system load or selling system resources for any purpose other than for the benefit of system customers. In this case, Staff believes that it is particularly inappropriate for the Company to propose selling system resources off system for the benefit of an affiliate if it does not obtain a favorable cost recovery ruling from this Commission. This is particularly true given the system need for resources. Staff also believes that it is the Company’s responsibility to evaluate the merits of the transaction and either include the load reduction in its resource portfolio to meet system needs or acquire other resources. In either case, the Company should be prepared to justify its decision. Based on a comparison of alternative resource prices, Staff does not oppose recovery of reasonably incurred Astaris load reduction costs through the PCA should the Commission approve the Agreement.
The Derivative
Idaho Power maintains that it will be necessary to purchase a derivative for the period of time that this matter is pending before the Commission. The Company states that this is required because it does not know if the Commission will approve the transaction for the system or for non-system. The Company requests that the cost of the derivative, estimated at just over $200,000, be paid primarily by ratepayers through the PCA mechanism.
Through conversations with the Company, it is Staff’s understanding that the derivative protects Idaho Power Company’s affiliate, Idaho Energy Service (IES), from declining future market prices in the event the Commission rejects the Agreement for the purpose of serving the system. With the derivative, the Company states that IES can turn around and sell the energy saved under the Agreement off system (non-system transaction) at a guaranteed profit. As previously indicated, it is the Company’s position that benefits derived from the non-system transaction would not be shared with system customers.
The Company also maintains that the Agreement would not have been presented to the Commission without the derivative and indicates that once the Commission approves the transaction as a system resource, then no protection from declining future market prices is required.
Based on Staff’s understanding, it appears that the derivative is designed not to protect Idaho Power Company and its customers but to protect the Company’s affiliate from risk should the Commission not approve the transaction for the system. The need for the derivative also assumes that the Commission would allow the resource to be sold as a non-system transaction for the sole benefit of Idaho Power Company’s affiliate, IES.
As previously stated, Staff is opposed to any purchase or sale of system resources that are not deemed beneficial to the system. Therefore, Staff opposes recovery of derivative costs designed to protect an affiliate under such conditions.
Staff does not view the Agreement with Astaris any differently than any other buy back program or system resource that is subject to market price risk. The Company must assess the risks and either undertake the transaction as a system resource or pursue other resource options. Regardless of the Commission decision in this case, Staff believes that the Company is obligated to pursue the acquisition of least cost resources. Furthermore, it is inappropriate to charge ratepayers to protect an unregulated affiliate from risk.
Recommendations
The following is a summary of Staff’s recommendations.
1. The prices paid for the Astaris load reduction under the Agreement appear to be lower than reasonably projected forward market prices and comparable on average to prices paid for other resources. Staff recommends that the Agreement be approved as a system resource and that the load reduction be added to the Company’s resource portfolio.

2. Staff recommends that the reasonably incurred costs associated with the Astaris load reduction agreement be passed through the PCA like any other power supply expense.
3. Staff opposes treatment of the Agreement as a non-system transaction that accrues benefits solely to an Idaho Power Company affiliate. Consequently, Staff opposes recovery from ratepayers, of derivative costs that protect the affiliate from risk. Staff recommends that the cost recovery of the derivative be denied.

COMMISSION DECISION:
Does the Commission wish to approve the Letter Agreement as a system resource and that the load reduction be added to the Company’s resource portfolio?
Does the Commission whish to allow reasonably incurred costs associated with the Astaris load reduction agreement to be passed through the PCA like any other power supply expense?
Does the Commission wish to deny or approve the proposed cost recovery of the derivative that Idaho Power has purchased?

John R. Hammond

Staff: Keith Hessing

M:ipce019_jh
Astaris has decided to change the base material used in its manufacturing process from elemental phosphorus to purified phosphoric acid.
For instance, this Program combined with Astaris' decision to change its production process could impact the Company's employees.

DECISION MEMORANDUM 6