08172001.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOUANN WESTERFIELD
BILL EASTLAKE
TONYA CLARK
DON HOWELL
LYNN ANDERSON
DAVE SCHUNKE
KEITH HESSING
RICK STERLING
RANDY LOBB
TERRI CARLOCK
ALDEN HOLM
KATHY STOCKTON
GENE FADNESS
WORKING FILE
FROM:
DATE:
AUGUST 17, 2001 RE: CASE NO. IPC-E-01-14 (Idaho Power)
TEMPORARY MOBILE GENERATION
REQUEST FOR (1) AN ACCOUNTING ORDER OR (2) DETERMINATION OF EXEMPT STATUS

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 Idaho Power to include expenses associated with the acquisition and operation of temporary mobile electric generating facilities in the true-up portion of the Company’s Power Cost Adjustment (PCA). In the alternative, the Company requests an Order determining that the generation from the temporary mobile generators be exempt from regulation by the Commission.
In response to projected low stream flows and high wholesale market prices for purchase of energy, Idaho Power states that it has entered into lease arrangements to temporarily obtain, install, and operate mobile electric generators. Idaho Power anticipates that these mobile generators will benefit customers by providing a reliable source of electric generation at a cost that is less than the cost of purchasing an equivalent amount of power from the wholesale markets during periods of time when the Company has deficiencies. If the Company experiences periods when there is surplus, generation from the mobile generators may be sold into the wholesale market if market prices exceed the cost of the mobile generation. Given projected energy market prices, the Company anticipates that the mobile generation will provide customer benefits whether the Company is surplus or deficient.
Idaho Power acknowledges that the temporary mobile generators are not identified as an alternative to market purchases in the near-term action plan in the Company’s 2000 Integrated Resource Plan (IRP). Nevertheless, the Company believes that installation of the temporary generation is consistent with the intent of the IRP. The mobile temporary generation provides, it states, a cost effective, short-term alternative to planned wholesale market purchases.
The mobile generators have been leased on a turnkey basis, which 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 anticipates locating eight individual units each 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, is $124 per Megawatt hour (MWh).
As Idaho Power identifies the exact sites where temporary generating units will be located and operated, the Company will supplement its Application. Reference Company Supplement to Application filed May 31, 2001.
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, and 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 as required maintaining Commission approval for ratemaking purposes.
While admitting that predicting future energy prices is not an exact science, Idaho Power’s marketing and trading analysts project that annual average heavy load period market prices for the next few years will likely be in the range of $50 to $350 per MWh. The estimated forward price, the Company states, is approximately $350 per MWh for April 2001 through March 2002. Hourly prices, it states, has historically been several times the annual average and could be in excess of $1,000 per MWh in the near term.
Idaho Power in its Application requests approval of specified accounting treatment so that the expenses incurred in 2001-2002 associated with the mobile generators may be included as a system power supply expense in the true-up portion of the Company’s May 2002 Power Cost Adjustment recovery.
Should the Commission determine that Idaho Power’s decision to install the temporary generation is not prudent for revenue requirement purposes, the Company requests that the Commission immediately issue an Order determining that the facilities, expenses and revenues associated with the temporary generation will be permanently exempt from Commission regulation. Such an Order, the Company states, is necessary to allow Idaho Power to sell the output from the temporary mobile generation at wholesale at market prices that would not be included in Idaho Power’s revenue for retail 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, Staff states, 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 application for permits for siting of the remaining 8 generators.
The Company proposes that all-actual costs of leasing and operating the diesel generating units be flowed through the power cost adjustment mechanism. Staff is concerned that the Company’s voluntary shut down of the 17 units due to complaints of the neighbors 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 the final 8 generators. Not doing so, Staff contends, subjects ratepayers to costs with no potential for offsetting benefits. Staff therefore proposes that adjustments be made to the actual power supply costs incurred by the Company. Staff 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 has been offered by the Company 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, due to 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 as it ponders the fate of Idaho Power’s diesel generators. 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 on the diesel generator vendor’s part. 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. The Company believes that an evaluation of prudency that declares a decision prudent on one day and imprudent the next is an inherently flawed evaluation. At the time the Company committed to the mobile generation strategy, the realistically available alternatives, the Company contends, 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. Initially 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 Moira were started and subsequently shut down. The Company then submitted a DEQ Application for the Double A Dairy site and decided to hold off in submitting a DEQ Application for an additional site. At the time the decision was made, the Company believed that based upon time constraints and available manpower, it would be better to initially pursue two sites followed rapidly by the third site once the first two are 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 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 states that it listened and responded to those customers that were being 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 contends that no adjustment should be made to expenses actually incurred.
The Company states 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 install an equivalent amount of mobile generation had estimated fixed expenses of approximately $8 million and variable expenses of nearly $14 million. The 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. Risk and reward are opposite sides of the same coin, the Company contends. 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. It was not intended to place pressure on the Commission in any way. The Company apologizes for any confusion that its Application in the alternative may have presented to the Commission.
Commission Decision
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. Staff criticizes the Company’s operation decision regarding permitting and siting and proposes operation adjustments in lieu of any “used and useful” adjustment. Staff recommends regulatory treatment with adjustment. ICIP recommends that the Commission provide the Company’s alternative relief, i.e., exempt from regulation. Idaho Power in Reply Comments characterizes its alternative relief as simply a request for expedited treatment. How does the Commission wish to treat the Company’s Application?

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DECISION MEMORANDUM 7