200153_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOUANN WESTERFIELD
TONYA CLARK
BILL EASTLAKE
DON HOWELL
LYNN ANDERSON
DAVE SCHUNKE
RICK STERLING
RANDY LOBB
GENE FADNESS
WORKING FILE
FROM:
DATE:
MAY 3, 2001 RE: CASE NO. IPC-E-01-10 (Idaho Power)
FIRM ENERGY SALES AGREEMENT—SECOND AMENDMENT
SIMPLOT POCATELLO FERTILIZER PLANT

On March 20, 2001, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) requesting approval of a proposed Second Amendment to a Firm Energy Sales Agreement between Idaho Power and the J.R. Simplot Company (Simplot) for the Pocatello Fertilizer Plant cogeneration project (project).
As reflected in the Application, Idaho Power and Simplot entered into the underlying Firm Energy Sales Agreement (Agreement) for the project on January 24, 1991. The project is a qualifying cogeneration facility under the Public Utility Regulatory Policies Act of 1978 (PURPA). The original Agreement approved by the Commission in Order No. 23552 established rates at which Idaho Power would purchase power and provided a five-year effective term ending December 31, 1995.
On December 31, 2000 the parties entered into a First Amendment extending the effective term of the Agreement to December 31, 2001, and changing the purchase rates. The rates established by the First Amendment were the average non-levelized rates approved by the Commission in Case No. IPC-E-93-04, Order No.24911, Appendix C. The First Amendment was approved by the Commission in Order No. 25353.
Under the terms of the proposed Second Amendment, the term of the current Agreement is extended from December 31, 2001 to December 31, 2003. Under the Second Amendment, the rates that will be in effect from January 1, 2001 through December 31, 2003 are summarized as follows:
Calendar
Year 2001 Calendar
Year 2002 Calendar
Year 2003 Price for first 240,000 kWh delivered per day

KWh delivered in excess of 240,000 per day 7.5¢ per kWh

50% of market price 9¢ per kWh

90% of market price 85% of market price

85% of market price
The market price defined in the Agreement uses the same index (Dow Mid-C) that the Commission has approved for non-firm purchases of power under the Company’s existing Rate Schedule 86.
The Company represents that the rates in the Second Amendment for calendar year 2001 will result in a reduction that would have been otherwise paid by Idaho Power to Simplot during 2001 under the terms of the existing Firm Energy Sales Agreement. As reflected in Application Attachment 2, during the first two months of 2001 Idaho Power’s customers under the proposed Second Amendment will save approximately $485,000. The Company also contends that the purchase prices under the Second Amendment during calendar years 2002 and 2003 will be cost-effective when compared to alternative market purchases of equivalent availability and reliability. The modified rates for 2001 and the prices contained in the two-year extension, the Company contends, represent compromises made by both Idaho Power and Simplot.
Idaho Power requests that the Commission approve the Second Amendment for an effective date of January 1, 2001. The Company requests a Commission finding that the purchase of power on the rates, terms and conditions set out in the Second Amendment will be in the public interest. The Company also requests that all costs of purchasing power under the Second Amendment be allowed to Idaho Power as prudently incurred power purchase expense for ratemaking purposes.
On April 6, 2001, the Commission issued Notices of Application and Modified Procedure in Case No. IPC-E-01-10. The deadline for filing written comments was April 27, 2001. Commission Staff was the only party to file comments. Staff supports the Company’s Application and the proposed Second Amendment. Staff’s comments can be summarized as follows:
Staff notes that the proposed Second Amendment rates are negotiated rates. They are not based on the Commission approved avoided cost methodology. Reference Order No. 27576, Case No. IPC-E-95-09. Staff proposes several alternative rates to use as a benchmark in assessing whether the resulting contract is fair and reasonable to both parties, and whether the contract rates truly reflect Idaho Power’s avoided cost, i.e.,
Over 1 MW Avoided Cost Rates
Comparison rates were not computed using Commission approved avoided cost methodology. The Company declined Staff’s request to run the model. Staff agrees that the long-term IRP based methodology is not necessarily representative of the short-term avoided cost the Company expects to pay over the period of the Simplot Second Amendment.
Under 1 MW Cost Rates
This methodology is based on the use of a natural gas combined cycle combustion turbine as a surrogate. Rates change annually as natural gas prices change. The current levelized rate for a three-year contract with a 2001 online date is 34.01 mills/kWh. Based on updated information, effective July 1 this rate will increase to approximately 50.14 mills/kWh. In either case, the rates are substantially below the Second Amendment rates.
Astaris Letter Agreement
In Order No. 28695 issued on April 10, 2001, the Commission approved a Letter Agreement between Idaho Power and Astaris concerning the rates and conditions under which Idaho Power would in effect “buy-back” 50 MW from Astaris. Under the Agreement, Idaho Power will pay an amount equivalent to approximately 15.9¢ per kWh. The term of the Agreement is for the period April 1, 2001 through March 31, 2003. The 15.9¢ per kWh rate has been derived by taking 86.5% of projected forward monthly market prices.
Despite differences between the Agreements, Staff believes they are similar enough to be fairly compared. The rates to be paid under the Simplot Second Amendment are not fully known because portions of the rates are based on actual market prices in the future. Nonetheless, Staff believes that the 15.9¢ per kWh rate under the Astaris Agreement is very likely to significantly exceed the rates in all three years of the Simplot Second Amendment. Consequently, the Simplot Second Amendment is favorable in comparison to the Astaris Agreement.
Idaho Power Short-Term Programs
Idaho Power’s Irrigation Buy-Back Program was approved by the Commission on March 13, 2001, in interlocutory Order No. 28676. The Buy-Back program is a volutary short-term program for 2001. Under the program, Idaho Power is authorized to pay 15¢ per kWh to “buy back” energy from its irrigation customers. Should the Company be authorized to recover lost revenue, the complete cost to Idaho Power will likely exceed 15¢ per kWh. In any case, the rates contained in the Simplot Second Amendment are significantly below the approved Buy-Back rate.
New Idaho Power Generation Projects
Idaho Power has proposed several new generation projects. One proposed project is a 90 MW single cycle combustion turbine project to be located near Mountain Home. In its application, the Company estimates that the levelized cost per MWh would range from an upper level of $223 to a lower level of $77 per MWh depending upon the number of hours the plant will operate each year. These cost estimates are also based on a natural gas price of $5.05 per MMBTU. It is the Company’s intention to have the plant operational by the summer of 2001.
The upper level of the estimated price range ($223/MWh = 22.3¢/kWh) significantly exceeds the prices in the Simplot Second Amendment in all three years of the contract. However, the lower level of the estimated price range ($77/MWh = 7.7¢/kWh) is less than the prices of the Simplot Amendment. The lower level of the price range, however, is still very close to the Simplot rates. Staff believes the rates in the Simplot Second Amendment are reasonable in comparison to the proposed Mountain Home generation project.
Idaho Power has also publicly announced its intention to install about 25 MW of diesel-fired generation in approximately 1 MW increments at strategic locations throughout its system. Staff is uncertain as to the expected cost of this generation. However, because the generation is expected to be temporary, Staff anticipates that its cost will greatly exceed the prices in the Simplot Second Amendment.
Comparison to Existing Contract
In its Application, Idaho Power compares the Second Amendment costs that were paid in January and February of 2001 to the costs that would have been incurred under the pre-existing Agreement. The analysis shows the savings have been approximately $485,000 in these two months. Staff agrees with the analysis performed for the first two months of the year. However, Staff believes that a similar analysis performed using historical generation of the project would show an opposite result. Generation totals in January and February of 2001 were two of the top 10 months during the more than ten years the contract has been in place. Consequently, more generation than usual was priced at the lower “excess energy” rate in January and February. In most months, the old contract would have been more favorable to Idaho Power, particularly if market prices drop in the future.
Despite this, Staff realizes that the old contract was set to expire at the end of 2001. There is no reason to believe that Simplot would have been willing to extend its contract under the old rates. Consequently, Staff does not believe that a comparison of the new contract to the old contract is meaningful for anything more than for the year 2001. For this year, because market prices are unknown and because the project’s generation cannot be predicted with certainty, it is not possible to accurately speculate whether the old contract would have been superior to the new contract.
Commission Decision
Idaho Power requests approval of the proposed Second Amendment for an effective date of January 1, 2001. The Company requests a Commission finding that purchase of power on the rate, terms and conditions set out in the Second Amendment will be in the public interest. The Company also requests a Commission determination that all costs of purchasing power under the Second Amendment will be allowed to Idaho Power as prudently incurred power purchase expenses for ratemaking purposes. Does the Commission find it reasonable to approve the Second Amendment to the Firm Energy Sales Agreement for the Pocatello Fertilizer Plant electric generating project as proposed by the Company?

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DECISION MEMORANDUM 1