28837.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

in the matter of THE APPLICATION OF IDAHO POWER COMPANY for an accounting order authorizing idaho power to include power supply expenses associated with temporary mobile generation in the power cost adjustment, or in the alternative, a determination of exempt status for the temporary generation. )
)
)
)
)
)
)
)
)
)

CASE NO. IPC-E-01-14

ORDER NO. 28837

On May 4, 2001, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) seeking an accounting Order authorizing recovery of expenses associated with the acquisition and operation of temporary mobile electric generating facilities in the true-up portion of the Company’s 2002 Power Cost Adjustment (PCA). In the alternative, the Company requested that the Commission immediately exempt the facilities and related expenses and revenues from regulation.
In response to projected low stream flows and high wholesale market prices for purchase of energy, Idaho Power entered into lease arrangements to temporarily obtain, install, and operate mobile electric generators. Idaho Power anticipated that these mobile generators would benefit customers by providing a reliable source of electric generation at a cost that was less than the cost of purchasing an equivalent amount of power from the wholesale markets during periods of time when the Company had deficiencies. The Company also anticipated selling any surplus generation from the mobile generators into the wholesale market if market prices exceeded the cost of the mobile generation. Given projected energy market prices, the Company anticipated that the mobile generation would provide customer benefits whether the Company was surplus or deficient.
The mobile generators were leased on a turnkey basis that includes all maintenance costs and all required fuel and fueling services from the leasing entity. Each mobile generator unit can provide approximately 1.6 MW of generating capacity. Each unit is a stand-alone module utilizing a diesel engine for its motive force. Idaho Power anticipated locating eight individual units at two separate sites and nine individual units at a third site. The fully distributed cost of the mobile generators, assuming 44,380 hours of operation at a 98% capacity factor between May 1, 2001 and October 31, 2001, was $124 per Megawatt hour (MWh). The Company proposes that all costs of leasing and operating the diesel generating units be flowed through the Power Cost Adjustment mechanism.
The current lease arrangement contemplates that the temporary mobile generators will only be in service through October 31, 2001. Depending on hydroelectric generating conditions, market prices, environmental permitting and other factors, the Company states that it may be prudent to increase the number of units and/or extend the term of the leases. If so, Idaho Power states that it will make additional filings with this Commission to seek Commission approval for ratemaking purposes.

On June 18, 2001, the Commission issued a Notice of Application and Modified Procedure in Case No. IPC-E-01-14. The deadline for filing written comments was July 11, 2001. Commission Staff and the Industrial Customers of Idaho Power (ICIP) were the only parties to file comments. Reply Comments were filed by the Company on August 15th. The comments can be summarized as follows:
Commission Staff
Staff concludes that based on the information available at the time the Company made a reasonable decision when it entered into the lease agreements. Staff therefore proposes that the Commission accept the diesel generation units with their associated lease costs as regulated utility resources.
Staff notes that the Company leased a total of 25 diesel generating units beginning May 1, 2001, and installed 17 of the units at two separate sites. Since the decision was made to sign the lease agreements, two significant events have occurred. First, after installing and operating 17 of the 25 leased generating units for a few days, Idaho Power made the decision to shut them down and relocate them due to opposition from neighbors near the generating sites. Second, in early June the market price dropped below the operating cost of the diesel generation units where it has remained for most hours of most days since that time. The significance of the drop in market prices is that even if the generators were not voluntarily shut down awaiting permits to locate, the generators would not be running. It is Staff’s understanding that the Company has received alternate siting and operating authority for the 17 generators. The Company has made no permit application for siting of the remaining 8 generators.
Staff expressed concern that the Company’s voluntary shut down of the 17 units due to complaints of the neighbors will cost the general body of ratepayers a substantial amount of money. Staff is also concerned that the Company has never applied for siting permits for eight of the generators. Not doing so, Staff contends, subjects ratepayers to costs with no potential for offsetting benefits. Staff therefore proposes that the Company’s actual power costs be adjusted to reflect diesel generation costs and purchased power benefits that would have occurred if the 25 generating units had been continuously dispatched against market prices beginning May 1, 2001. Staff proposes that actual May power supply costs be reduced by $3,619,453 in PCA calculations and that June actual power supply costs be reduced by $213,210. The methodology developed and applied to May and June, Staff contends, should be applied to all months of the lease period until the Company has siting approval for all 25 units and is dispatching them against market price. For all months after that occurs, Staff recommends that the unadjusted actual costs be included in PCA calculations.
Industrial Customers of Idaho Power (ICIP)
ICIP notes that the Company has offered the Commission two regulatory options: (1) recovery of acquisition and operation costs through its PCA and (2) a determination that the mobile generators are exempt from Commission regulation. Although the second alternative may not be the Company’s preferred outcome, ICIP notes, it was offered by the Company in its filing and must therefore be considered by the Company and Commission to be an acceptable and reasonable result.
ICIP notes that the price assumptions that prompted Idaho Power’s lease decision are simply no longer valid. Wholesale and spot market conditions for electricity have changed dramatically since the Company filed its Application on May 4, 2001. The fully distributed cost of the mobile generators, assuming 4,380 hours of operation at a 98% capacity factor, is $124 per MWh. If the units are run at a reduced capacity factor, the distributed costs will increase.
ICIP contends that ratepayers should not be required to pay for what is now unnecessarily expensive and unneeded power. If the diesel generators are not operable, for whatever reason, ICIP contends that it is incumbent upon the Commission to disallow any costs associated with those inoperable units, as they will fail the requirement that plant be “used and useful” to the ratepayers before it is put into rates.
Assuming the plants become operable, ICIP contends that there are two questions facing the Commission. First, was the decision to acquire the generators a prudent decision for the Company to make at the time that it was made? ICIP contends that the answer to this question is yes. Acquiring needed power at least possible cost should be encouraged.
Second, if the decision was prudent, was it implemented in a reasonable manner? Either way the question is answered, ICIP contends that the result must be the same. ICIP contends that Idaho Power should have included a regulatory-out provision in its lease contract to protect against the possibility of the market going down or regulatory disapproval. If there was a regulatory-out, the Company is protected. If not, the customers should not be subjected to the risk. ICIP notes it has not had an opportunity to review the lease agreement because of confidentiality concerns of the diesel generator vendor. ICIP recommends that the Commission issue an Order adopting Idaho Power’s alternative recommendation and declare the mobile diesel generating units at issue in this docket to be exempt from regulation.
Idaho Power Reply
Idaho Power in reply states that based on information known at the time, the Company’s decisions regarding the acquisition and operation of the mobile generation units were reasonable. At the time the Company committed to the mobile generation strategy, the realistically available alternatives were to (1) enter into lease agreements with mobile generation providers, (2) enter into term contracts for the purchase of energy for the future, or (3) do nothing and wait to see what market prices would occur in “real time.” The wait and see strategy was not an option that was endorsed by anyone at the time.
Regarding the Company’s decision not to pursue all three site licenses from DEQ simultaneously, the Company notes that DEQ site licenses are initially obtained by issuance of a Consent Order. At the beginning, the Company did have a DEQ Consent Order for three sites (Cloverdale, Mora and Ten-Mile Substations). The Company decided to abandon the Ten-Mile site because of proximity of neighboring subdivisions and pursue the Trimco site as a replacement. Before submitting the Application to the DEQ for the Trimco site, Cloverdale and Mora were started and subsequently shut down. The Company then submitted a DEQ Application for the Double A Dairy site but decided to hold off in submitting a DEQ Application for an additional site. At the time the decision was made, the Company believed based upon time constraints and available manpower that it would be better to initially pursue two sites and follow rapidly with the third site once the first two were approved. The Company agrees that the Consent Order for the third site did not rapidly follow approval of the first two sites.
The Company contends that Staff’s proposed adjustment to assume full availability of all mobile generation at all three sites for the May through October time period unduly shifts all of the risks associated with mobile generation availability to shareholders of the Company. Such a result, it contends, is patently unfair. The Company rejects Staff’s contention that the decision to operate or not operate the mobile generation should have been made solely on economics. In this instance, the Company listened and responded to those customers directly impacted by the noise and odor of the mobile generators. The Company contends that it should not be penalized for attempts to satisfy customer concerns. The Company argues that no adjustment should be made to expenses actually incurred.
The Company calculates that a forward purchase of flat product for 40 MWs at $300 per MWh during the May through October time period (4,417 hrs) would have cost over $53 million. The option to procure an equivalent amount of mobile generation was estimated at the time to have fixed expenses of approximately $8 million and variable expenses of nearly $14 million. This estimated savings of $31 million the Company admits, was not without risk.
The Company views Staff’s proposed adjustment as a “lost opportunity” adjustment based on Staff’s belief that the Company should have ignored customer concerns and operated the mobile generation units whenever the economics justified operation. In addition to the anticipated economic benefits, the Company states that the installation of temporary mobile generators also improved system reliability by (1) providing the ability to reduce potential system overloads and (2) in the event of an outage, serving load that would otherwise be off. It is unreasonable to expect shareholders to bear all of the risks associated with potential rewards that will be received by customers. Idaho Power urges the Commission to reject the risk shifting mechanisms proposed by Commission Staff (regulatory treatment with adjustment) and ICIP (exempt status).
In supplemental reply comments the Company contends that the primary purpose of its Application was to request regulatory treatment of its mobile generator lease and operation costs. The second alternative proposed, i.e., to exempt the mobile generation from regulation, was included, the Company contends, to simply request that the Commission expeditiously advise the Company so that the Company could make arrangements to market the energy on the wholesale markets. The Company apologizes for any confusion that its Application in the alternative may have presented to the Commission.
COMMISSION FINDINGS
The Commission has reviewed the filings of record in Case No. IPC-E-01-14 including the comments and recommendations of the Commission Staff and the Industrial Customers of Idaho Power and the reply comments of Idaho Power Company. The Commission continues to find it reasonable to process this matter pursuant to Modified Procedure. Reference IDAPA 31.01.01.204.
The Company in its Application requests (1) regulatory recovery of lease and operating costs for 25 mobile generating units or (2) a determination that the leased units are exempt from regulation. Both Staff and ICIP agree that the Company’s decision to lease was prudent when made. We agree. The Commission finds that at the time the Company made the decision to lease, it was a prudent means of securing supply in a volatile market.
ICIP points out the post-lease transaction events and changes in the market price of power and recommends that the Commission grant the Company its alternative relief, i.e., exempt it from regulation. The Company in its reply comments characterizes its alternative relief requested as simply a request for expedited treatment. We caution the Company that if expedited treatment is what it wants, that is what it should specifically request. With hindsight, we can see that exemption from regulation would shift the risk of this expense to the Company’s shareholders. However, we find it would also create inappropriate incentives for the Company in the future. We want Company management to plan for power supply in advance and take prudent steps to have adequate, reliable supply available. The fact that months later it can be determined that other options turned out to be lower cost does not invalidate the prudent decision made based on information known at the time. Therefore, we decline to choose exemption in this case.
We also do not wish to discourage the Company from being responsive to customers’ health concerns (air pollution and noise) and subsequent changes in the energy market. We make no findings in this case regarding the Company’s post-lease operating decisions. We find that the PCA is an appropriate mechanism for recovery of these temporary mobile generation expenses. The Company shall maintain separate sub-accounts to allow tracking and verification of these expenditures in the PCA. We make no decision in this case regarding the dollar amount to be included in the PCA nor do we foreclose the Staff or other parties from challenging the reasonableness of said amounts when the Company requests recovery.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over Idaho Power Company, an electric utility, and the issues presented in Case No. IPC-E-01-14 pursuant to the authority and power granted it under Title 61 of the Idaho Code and the Commission’s Rules of Procedure, IDAPA 31.01.01.000 et seq.
O R D E R
In consideration of the foregoing, IT IS HEREBY ORDERED and the Commission does hereby authorize Idaho Power Company to include expenses associated with the acquisition and operation of 25 temporary mobile electric diesel generators in the true-up portion of the Company’s 2002 Power Cost Adjustment (PCA) mechanism.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this _______ day of August 2001.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

vld/O:IPC-E-01-14_sw

ORDER NO. 28837 1

Office of the Secretary
Service Date
September 6, 2001