2001618_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOUANN WESTERFIELD
TONYA CLARK
DON HOWELL
LYNN ANDERSON
DAVE SCHUNKE
RICK STERLING
RANDY LOBB
GENE FADNESS
WORKING FILE
FROM:
DATE:
JUNE 18, 2001 RE: CASE NO. IPC-E-01-12 (Idaho Power)
APPLICATION FOR A CERTIFICATE (IDAHO CODE 61-526)
OR ALTERNATIVE DETERMINATION OF EXEMPT STATUS
MOUNTAIN HOME GENERATION STATION

On April 4, 2001, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) for a Certificate of Public Convenience and Necessity for the ratebasing of a proposed Mountain Home Generation Station (Mountain Home Station; Station), or in the alternative, a Commission determination of exempt status for the Mountain Home Station. Reference Idaho Code 61-526 Certificate of Convenience and Necessity. The statute provides, in pertinent part:
61-526 Certificate of Public Convenience and Necessity. No … electrical corporation … shall henceforth begin the construction of a … plant … without having first obtained from the Commission a certificate that the future public convenience and necessity requires or will require such construction ….

Description of the Mountain Home Generation Station
The Mountain Home Station will initially consist of two (2) natural gas-fired combustion turbines rated at approximately 45 MW each. The Station is currently scheduled to be developed on an expedited basis and begin generating in the summer of 2001. Idaho Power believes that the site may accommodate a third 45-MW unit. The third unit would not be installed before 2002. Alternatively, the Company states the Station may be modified at some future date to operate as a combined-cycle plant.
The Mountain Home Station will be located in Elmore County, Idaho, approximately two miles from the city of Mountain Home. Idaho Power intends to interconnect the Station with an existing 138 KV transmission system that crosses the proposed site.
The natural gas fuel supply will be obtained from the Williams Northwest Pipeline that crosses the proposed site.
Water for generation will be pumped from a deep well utilizing existing permitted water rights. For simple-cycle operation the water consumption would be less than 50 gallons per minute.
The Station will operate in compliance with all appropriate air and water quality standards. Under present market conditions, the Station would operate approximately 5,000 hours per calendar year.
Consistency with Idaho Power’s 2000 Integrated Resource Plan (IRP)
Idaho Power in its 2000 Integrated Resource Plan Near-Term Action Plan, indicated that it intended by RFP to acquire additional dispatchable energy and capacity beginning in 2004. The RFP process is now completed and the Company has signed a letter of intent to purchase capacity and energy from its affiliate IdaWest (Garnet). For the 2000-2003 period, the Company in its IRP stated its continued intention to purchase energy and capacity from the Northwest market for its incremental resource needs.
Idaho Power acknowledges that the Mountain Home Station is not identified in the Near-Term Action Plan in the Company’s 2000 IRP. Nevertheless, Idaho Power believes that construction of the Station is consistent with the IRP. The Station, the Company contends, provides a cost-effective alternative to planned wholesale market purchases. Idaho Power believes that recent market prices for purchased power create a unique circumstance to be addressed for the 2001-2004 period. Idaho Power’s marketing and trading analysts predict that annual heavy load period market prices for the next few years will likely be in the range of $50 to $350 per MWh. Hourly prices have historically been several times the annual energy price and could be in excess of $1,000 per MWh in the near term. The combination of low stream flows and extremely high market prices in 2001, the Company states, is unprecedented and prompt reaction is warranted.
Capital Cost Commitment Estimate
The Station’s capital costs are currently projected to be $46 million upon completion in 2001. With an additional 20% for contingencies, Idaho Power’s “Commitment Estimate” for the capital cost portion for the Station is $55.2 million. Idaho Power commits to building the Station for the Commitment Estimate. If the final capital costs exceed the commitment, Idaho Power will absorb the extra costs and will include in its Idaho rate base only the amount up to the Commitment Estimate. The Commitment Estimate is the best estimate of the Station’s total capital cost based on the award of contracts for the turbines and generators, plus an additional amount of 20% to establish a cost ceiling for the Station. Changes required as a part of the environmental and regulatory process, the Company states, could result in the need to modify the design of the Station and materially change the original preliminary estimate. Additionally, the cost of the interconnection could also affect the final cost of the Station.
The preliminary estimate of the levelized cost per megawatt hour (MWh)would range from an upper level of $223 per MWh based on a capital cost for the Station of $55.2 million, 500 hours of annual generation, and levelized fuel costs of $5.05 per MMBtu over the 30-year life of the Station, to a lower range cost of $77 per MWh based on a Station cost of $46 million, 5,140 hours of annual dispatch, and average fuel costs of $5.05 per MMBtu. If the Station is approved for rate base treatment, Idaho Power will provide periodic updated Station cost reports during the construction phase. The final cost report on the Station will compare the actual completed cost to the Commitment Estimate.
Fuel Costs
The major component of the operating costs of a combustion turbine generating plant, the Company states, is the cost of the natural gas fuel. Idaho Power reports that it has taken the initial steps to assure the availability of fuel and fuel transportation for the Station. As a part of this Application, Idaho Power is requesting that the Commission’s Order allow Idaho Power to include the Station’s cost of fuel, fuel storage and fuel transportation for recovery through the existing Power Cost Adjustment (PCA) mechanism. Levelized fuel costs for the station are currently estimated to be $5.05 per MMBtu.
Alternative Request for Determination of Exempt Status
If the Commission determines that Idaho Power’s investment in the Mountain Home Station should not be rate based for revenue requirement purposes, Idaho Power requests that the Commission immediately issue an Order determining that the Mountain Home Station will be permanently exempt from Commission regulation.
An Order establishing the permanent exempt status of the Station, the Company states, is necessary to allow Idaho Power to sell the Station or the output of the Station at market-based rates that would not be included in Idaho Power’s revenue for retail ratemaking purposes.
If the Commission determines that the Station should not be rate based, Idaho Power states that, the Commission’s Order should be clear, that the Station will not constitute operating property of Idaho Power and that the investment, expenses (current or accrued tax benefits or revenues incident to the Station) will not be considered for regulatory purposes in the state of Idaho including, but not limited to, revenue requirement and power supply purposes.
On May 2, 2001, the Commission issued Notices of Application and Modified Procedure in Case No. IPC-E-01-12. The deadline for filing written comments was May 30, 2001. Comments were filed by Commission Staff and Power Development Associates, LLC. On June 8, 2001, Idaho Power filed Reply Comments. The comments can be summarized as follows:
Commission Staff
Consistency with IPCo’s 2000 IRP
Although the Mountain Home Station is not identified in the near term action plan in the Company’s 2000 IRP, Staff believes that the Mountain Home Station reflects the very type of deviation from the IRP that was envisioned when the Commission adopted the IRP requirements. Citing Commission Order No. 25260. Extremely high market prices, Staff contends, are a good reason to deviate from the plan when lower cost alternatives exist. Staff notes that the Mountain Home Station represents just one part of a package of solutions that the Company is implementing to deal with current high market prices. In Commission Order No. 28722 issued May 1, 2001, in Case Nos. IPC-E-01-07 and IPC-E-01-11, the Commission directed Idaho Power to prepare and file a report that would identify and outline plans for meeting loads during the summer and winter of 2001. Staff notes that the report has not yet been filed.
Capital Cost Commitment Estimate
Staff states that it has no basis to dispute the Company’s capital cost estimate of $46 million or a 20% contingency amount. Should the Commission allow ratebasing of the project, Staff assumes that only the actual project costs, not to exceed the commitment estimate, would be included in rate base. Staff notes that Idaho Power did not bid the equipment contract or the construction contract. Consequently, Staff contends that there is no assurance that the cost of the project is not higher than it would be if bids were solicited. Staff further states that it cannot be certain whether the possibility of paying a higher price for the project is offset by the advantage of getting the project on line sooner.
Fuel Costs
Regardless of whether the Commission ultimately agrees to allow the project in rate base, Staff believes that it is appropriate to include the total cost of fuel, fuel storage and fuel transportation for recovery through the existing PCA mechanism, subject to the usual 90/10 sharing. Although the Station may operate nearly two-thirds of the time in the first year or two, Staff contends that it ultimately is likely to be used as a peaking plant. Its relatively high operating cost will position it near the top of the Company’s resource stack and restrict its use to times of low water conditions and high market prices. Absent these conditions, the Station may operate much fewer hours. In addition, because the station will be fueled by natural gas, Staff contends, that its cost of operation will likely be volatile and difficult to predict on an annual basis. While volatility and gas prices and uncertainly in operation will make normalization of expenses difficult for recovery in base rates, Staff contends that the PCA is well suited to recover costs outside the norm.
Comparison to Other Generation Alternatives
Staff believes that the key question regarding the Mountain Home generating station is whether it represents the least cost alternative for meeting load. Staff is confident that the Station will be a lower cost alternative than relying on the market—at least in the short-term. The Station, Staff states, is also more attractive than other short-term measures that the Company has taken to minimize its exposure to the market. According to Idaho Power, the preliminary estimate of levelized cost per kilowatt hour (KWh) for the Mountain Home Station would range from an upper level of 22.3¢ per KWh to a lower range cost of 7.7¢ per KWh. The cost of a two-year 50 MW Astaris Buy-Back is 15.9¢ per KWh; the Irrigation Buy-Back is 15¢ per KWh (or more if lost revenues are included); the Simplot Second Amendment is 7.5¢ per KWh in the first year, 9¢ per KWh in the second year and 85% of market price in the third year; and the expected cost of mobile generators is 12.4¢ per KWh.
Although the cost of the Mountain Home Station will clearly be below the cost of these short-term measures, Staff states that there is an important difference between them. The short-term measures are intended to endure for only about two years or less, while the Mountain Home Station will have an expected life of 30 years. Consequently, Staff suggests that a cost comparison between such different alternatives, while not entirely inappropriate, is also not complete.
Over the long-term, however, Staff contends, that beating the cost of the current high market is a very low standard that almost any new generation alternatives could meet. Staff submits that a higher standard should be applied to projects that are intended to meet load over the long-term. That standard should be based on the least cost alternative over the expected life of the project.
Making an accurate comparison with the cost of long-term generation alternatives, Staff states, is somewhat difficult in this case for several reasons. First, Idaho Power has not provided any comparisons of its own. In August 2000, Idaho Power, Staff notes, released an RFP seeking proposals for 250 MW of generation, generally during the months of June, July, August and December. Although the RFP was broad enough that smaller projects could be proposed, only a handful of proposals were received in response to the RFP, and of the proposals received, only two were for less than the requested amount of capacity and energy. It is not known how many smaller proposals may have been deterred because they could not supply the requested 250 MW. When the need for a new, additional generation became apparent due to exceedingly high market prices, the Company did not release a new RFP for 90 MW.
Another factor disadvantaging competing proposals, Staff states, was that Idaho Power never made it known that it desired 90 MW of new capacity as early as the summer of 2001. The August 2000 RFP did not indicate a need for new generation until 2004. By the time it became publicly known that Idaho Power needed new generation this summer, Staff states that the Company had already taken steps to acquire turbines and locate a site for its own project. The head start gained by Idaho Power put competing proposals at a disadvantage because competing proposals could not get projects on line as quickly as Idaho Power.
Staff states that it is aware of one competing project not bid in the RFP, but instead proposed specifically to address Idaho Power’s immediate need for power. That proposal is from Power Development Associates, LLC (PDA) of Boise. The proposal as Staff understands it, is to install two 45 MW gas turbines near Mountain Home at a location different than the one proposed by Idaho Power. The project could not come on line until early in 2002 (perhaps earlier as reflected in PDA comments). The proposed turbines, Staff believes, are more efficient in a simple cycle mode than the turbines Idaho Power plans to install, but are less efficient in a combined cycle mode. Idaho Power, Staff states, has not shown evidence that it has compared its own project to PDA’s. (See Idaho Power Reply Comments).
Staff believes that it is likely that the need for generation output from the Mountain Home Station will change over time. For the immediate future, Idaho Power indicates that it intends to operate the Station 5,140 hours per year, i.e., up to the limit allowed by its air quality permit. Once the Garnet project comes on line in 2004, however, the role of the Mountain Home Station, Staff states, could change. Output from the Garnet project should be less expensive because of its higher efficiency. The Mountain Home Station could become even more of a peaking plant. As long as the Company still needs a peaking resource on its system and market prices remain high, the Mountain Home Station, Staff admits, could still be a valuable resource even though its cost will be spread over fewer kilowatt hours.
Another basis for comparison, Staff states, is Idaho Power’s own avoided cost rates. Beginning in July, the fueled, levelized rate for a 20-year QF contract will be approximately 7.1¢ per KWh (for projects smaller than one MW). This, Staff notes, is less than Idaho Power’s low estimate for Station project cost of 7.7¢ per KWh. Although it is possible that enough PURPA qualifying facilities could be developed to replace the need for the Mountain Home Station at a lower overall cost, Staff states, it is very unlikely that the projects could be brought on line soon enough to meet Idaho Power’s immediate need.
While the Mountain Home Station may be a more costly alternative than other alternatives over the long-term, Staff states, that it does have a couple of features that minimize this weakness. First, the project is relatively portable. The turbines could be relocated in the future if necessary. The turbines are by far the single biggest part of the project’s capital cost. The balance of the plant, although not insignificant, is not a major cost nor is it difficult to reconstruct elsewhere. The turbines could be sold if they are no longer needed or if other lower cost alternatives became available. Expansion of the project, either by the addition of more turbines or by conversion of the Station to combine cycle is also a realistic possibility. Simple cycle plants are attractive, Staff states, because their capital costs are low, they are small, easier to site and quicker to build. Their disadvantage is that they sacrifice efficiency. Combined cycle plants are much more efficient, but their capital costs are higher.
Staff believes that there could be both advantages and disadvantages to ratebasing the project. If the Station is rate based, the Company is guaranteed the opportunity to earn a return on investment. Output from the Station would then be dedicated to serving the Company’s native load customers and would be available whenever needed. Ratepayers are assured of receiving the benefits of the project, but at the same time, are also saddled with the cost of obligations regardless of how much the plant is operated. On the other hand, Staff states, if the Station is not rate based, the Company is not guaranteed the opportunity to earn a return on the investment and rates are not set to provide such a return. The Company is then free to utilize the Station as it desires and is not obligated to make the output available to serve its regulated load except one required by purchase contract. Any profits produced through off system sales would then flow to shareholders. Ratepayers would not be guaranteed the benefits of the project, but also would not be obligated with its costs.
Staff Recommendations
Staff recommends that the Commission approve the Company’s request to rate base the Mountain Home Station and proceed with its construction. Staff believes the benefits of ratebasing the project outweigh any disadvantages. The project, Staff states, appears to be a cost-effective alternative for reducing the Company’s reliance on the market. The savings likely to be achieved instead of purchasing from the market could be high enough after just the first couple of years to pay for the investment.
Staff does not recommend that the Commission make a decision at this time about the amount to be included in rate base. Staff believes that determination should be made in a future rate case. There appears, Staff states, to have been at least two viable alternatives to the Mountain Home Station that the Company could have chosen. Because Idaho Power has not provided (or has not been authorized to provide) a comparison of the project alternatives or demonstrated that constructing its own plant is a superior alternative, Staff states, that it is not able to conclude that the commitment estimate of $55.2 million is reasonable. Including both capital costs and fuel over the 30-year project life, the present value of this project, even by the Company’s conservative estimate, Staff notes, is more than $420 million. The project deserves greater scrutiny than the Company has shown or than the Staff has been able to provide in this case. In addition, Staff notes that some of the information requested in production requests has yet to be provided. In some instances, the requested information is not yet even available to Idaho Power. Ratepayers, Staff states, deserve the assurance that the Mountain Home Station is the best choice. So far, Staff states, that assurance is missing. At the time of its next rate case, Staff recommends that the Company be required to provide a detailed comparison of alternatives that were available at the time a decision was made to pursue the Mountain Home project. Such comparison should include both price and non-price factors.
Over the long-term, Staff states that the project could prove to be a more costly resource than other alternatives. If so, Staff recommends that the Company closely monitor the costs of other alternatives and periodically analyze the advantages and disadvantages of either selling the turbine generators or converting the station to combined cycle.
Power Development Associates, LLC
Late comments were filed in this case by Power Development Associates (PDA). PDA is attempting to develop a natural gas-fired generating project in Mountain Home, Idaho. Its development efforts commenced in late fall 2000. PDA in its comments relates its negotiations with Idaho Power and the timing and relationship of those negotiations vis-à-vis the Company’s self-build option. PDA believes that Company communication regarding the Company’s needs could have been better. PDA believes that the options it presented to the Company would have reduced ratepayer risk and provided the Company with significant flexibility at the lowest possible energy costs. PDA believes that the Company’s proposed construction and on-line date is either extremely optimistic, if not unrealistic.
Idaho Power Reply Comments
Idaho Power expresses considerable concern regarding Staff’s recommendation that at the time Idaho Power files to have the cost of the project included in its rate base, the Company should be required to provide a detailed comparison of alternative resources that were available, but not chosen, at the time Idaho Power decided to pursue the Mountain Home project; a comparison, that Staff states, should include both price and non-rice factors. On this specific point, the Company contends that Staff’s recommendation is at variance with prior Commission rulings and would place Idaho Power in an untenable position, i.e., an after the fact review of the initial decision to proceed. Presumably, Staff , the Company speculates, would conclude that if the Commission were to find in this after the fact review, that some other alternative resource or action, i.e., DSM, energy Buy-Backs, etc. might have been less expensive than the project, then all or a portion of the project investment could be excluded from recovery in rates.
While conceding that an ideal way to determine the cost of available alternative resources would be to initiate a Request for Proposals, the Company contends that pursuing the RFP route would likely delay a resource acquisition until 2002, thereby exposing the Company to increased levels of market purchases through fall and into the winter season.
In lieu of issuing an RFP, Idaho Power states that the best measure of the cost of alternative resources is market price estimates in effect at the time the decision to proceed was made.
Because the project is currently scheduled for commercial operation later this summer, Idaho Power states that is it likely that the project will be completed and in operation prior to the time the Company initiates a case to seek authorization to include the project’s capital investment in rates. For accounting, depreciation and other ratemaking reasons, Idaho Power states that it is critical that the Company know from the outset whether the generation from the project will be dedicated to serve native load or that it has been excluded from operating property and that the project generation will be sold in a wholesale market with the revenues from the sales excluded from regulation by the Commission.
All Certificates of Convenience and Necessity for generation projects issued to the Company by the Commission in the past ten (10) years (i.e., Twin Falls, Swan Falls and Milner), have, the Company states, included provisions in the final Order determining that prudently incurred costs of constructing the generating resource would be included in Idaho Power’s rate base when determining the Company’s revenue requirement. In fairness, Idaho Power states that if the Commission determines that it should not provide Idaho Power with the same rate recovery assurance for this resource, the Commission should immediately issue its Order exempting the project from further Commission regulation.
Idaho Power also responds to PDA comments. In all discussion with PDA, Idaho Power states that it emphasized that development of the Company’s self-built project was proceeding on a fast track. Idaho Power states it has advised PDA that bringing new generation resources on line as soon possible was critical. When the Company advised PDA on May 31, 2001, that it had run out of time to consider further offers from PDA, Idaho Power states, it believed that it had received PDA’s best offer. Based on the Company’s analysis of PDA’s May 20, 2001 offer, Idaho Power concluded that PDA’s offer still contained substantial financial disincentives and permitting and construction uncertainty. These disincentives and uncertainties are detailed by the Company in its Reply Comments. In the final analysis, Idaho Power states, that its decision to conclude its discussions with PDA was based on the need to bring finality to the process. Idaho Power made the decision to proceed with the self-built option because it believes its project is most likely to be completed in the shortest period of time. Idaho Power’s land use planning permits are in place. Idaho Power has purchased the land necessary to site the project. Idaho Power has the necessary rights-of-way for interconnection to the transmission system.
In conclusion, Idaho Power recognizes that it is requesting that the Commission make its decision with a very compressed time schedule. This time schedule, the Company states, is dictated by current adverse water conditions and expected wholesale market prices. Idaho Power’s Mountain Home project presents an opportunity, it states, to capture significant benefits for the Company’s customers by displacing wholesale purchases of energy. Idaho Power states, that it presented its Application in the alternative. This was done in recognition of the fact that a delay in the decision making process can have a substantial detrimental effect on the ability of of the project to capture identified and perceived benefits. Idaho Power believes it will be in the public interest for the Commission to issue its Order granting Idaho Power’s request for a Certificate of Public Convenience and Necessity with the understanding that the prudently incurred costs of constructing a project up to the commitment estimate amount, will be included in Idaho Power rate base. The contingencies which might cause the Company to increase the commitment estimate, it states, are described in the Application.
Commission Decision
The relief requested by Idaho in Case No. IPC-E-01-12 is in the alternative. How does the Commission wish to treat the Company’s Application?
IPCo requests a Certificate for the ratebasing of the proposed Mountain Home Generation Station. Reference I.C. 61-526.
Should Certificate approval be granted?
Should a decision be made at this time about the amount to be included in rate base; (IPCo: YES ___ prudently incurred costs of constructing station up to the commitment estimate—best measure of the cost of alternative resources is market price estimates in effect at the time the decision to proceed was made; Staff: NO ____ with no project alternatives to compare Station to or bids to assess the reasonableness of costs, Staff recommends requiring in a future rate case a detailed comparison of alternative resources that were available but not chosen at the time the Company decided to pursue the Mountain Home project (both price and non-price factors).
IPCo requests authority to include the Station’s cost of fuel, fuel storage and fuel transport for recovery through the Company’s existing PCA mechanism.
Alternatively, IPCo requests an Order establishing the permanent exempt status of the Station. If exempt status is granted, should the Company be required to develop the merchant plant through an unregulated affiliate?

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DECISION MEMORANDUM 12