20020122_sw.doc

DECISION MEMORANDUM

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

FROM: SCOTT WOODBURY

DATE: JANUARY 22, 2002

RE: CASE NO. IPC-E-01-37 (Idaho Power)
PETITION FOR DECLARATORY ORDER
QF ELIGIBILITY FOR PUBLISHED NON-FUELED RATES

On October 29, 2001, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) requesting a Declaratory Order clarifying the intent of Order No. 25884 issued by the Commission in Case No. IPC-E-93-28 dated January 31, 1995. Reference IDAPA 31.01.01.101. In Order No. 25884 the Commission approved two avoided cost rate methodologies for qualifying cogeneration and small power production facilities (QFs) smaller than 1 MW. Reference Public Utility Regulatory Policies Act of 1978 (PURPA); 18 C.F.R. § 292. One methodology was adopted for “…non-fueled projects, e.g., wind, solar, hydro…”, Order No. 25884, p. 14, and a separate methodology was approved for pricing power generated by “fueled projects.” Order No. 25884 did not provide examples of fueled projects but did state that it was the Commission’s intent to encourage the development of non-fossil fuel generation. Both methodologies assume the costs Idaho Power would avoid and the costs associated with a combined cycle combustion turbine (CCCT). The methodologies, although structured differently, are presumed to be equivalent, each representing the purchasing utility’s avoided costs, i.e., the “incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source.” 18 C.F.R. § 292.101(b)(6) definition—Avoided Costs.
Fueled Project Methodology
As reflected in the Company’s Petition, the published avoided cost rates for fueled projects track very closely to the typical cost structure for a CCCT. Rates for fueled projects contain a non-adjustable component equivalent to the fixed cost of the CCCT and an adjustable component which is intended to track the price of the natural gas fuel for a CCCT. The adjustable portion is changed annually based on the price of natural gas at the Sumas, Washington hub. Like the actual costs of a CCCT, the non-adjustable component is relatively small when compared to the cost of the adjustable component, i.e., the natural gas fuel.
Non-Fueled Project Methodology
In contrast, the published rates for non-fueled projects, the Company states, look more like the typical cost structure for a hydro plant than for a CCCT. The total costs, fixed and variable, are combined into a large non-adjustable payment with a small increment for variable O&M that is escalated at a fixed rate and the total amount is fixed over a 20-year life. The rates for non-fueled projects are currently higher than the rates for fueled projects.
Idaho Power states that it continues to receive requests from QFs seeking to develop projects smaller than 1 MW. Most developers seek to have their projects categorized as non-fueled so that they can receive higher, fixed prices. Many of these proposed projects, the Company states, utilize a “fuel” to produce the motive force for their generating facilities. For example, anaerobic digesters utilize animal waste to produce methane gas, which is then combusted to provide motive force for the production of electricity. Wood processing facilities desire to utilize wood waste to burn to produce steam for the motive force for their generation equipment. Clearly these generating facilities, the Company contends, utilize materials that have variable O&M expense associated with acquisition, storage and handling of the “fuel” for the facilities. On the other hand, this fuel is a “non-fossil fuel” consisting of a waste product that is a by-product of other industrial processes or agricultural products. It generally is not purchased from third parties and may or may not have market value for other uses. Thus, the Company admits, it is not subject to price fluctuations in the same manner that the price of fossil fuels varies over time.
Idaho Power states that it is cognizant of the possible system benefits associated with distributed generating resources using renewable sources of fuel. However, the Company states it is also desirous of complying with the Commission’s intent that there be a distinction between fueled and non-fueled projects.
Idaho Power requests that the Commission issue a Declaratory Order clarifying Order No. 25884 with respect to QF eligibility for entitlement to published rates for non-fueled small power projects. Order No. 28854, the Company states, clearly identifies renewable resources such as wind, solar, and hydro as being eligible for non-fueled rates. Additional clarification is required as to whether non-fossil fuel fired generating facilities utilizing waste products, as fuel will also qualify for non-fueled rates.

On November 8, 2001, the Commission issued Notices of Petition and Modified Procedure in Case No. IPC-E-01-37. The deadline for filing written comments was November 29, 2001. Comments were filed by J.R. Simplot Company, BioMass Energy Systems Technology, Idaho Diarymans Association, Idaho Farm Bureau, Twin Falls County Commissioners, Commission Staff and a number of interested parties.
On December 12, 2001, Idaho Power filed a motion to strike portions of comments of J.R. Simplot Company. On December 17, 2001, J.R. Simplot Company filed an answer to the Company’s motions.
The comments filed can be summarized as follows:
J.R. Simplot Company (Simplot)
Simplot in its comments addresses three issues: (1) QF eligibility for published non-fueled rates; (2) QF size; and (3) contract length.
1. QF Eligibility for Published Non-Fueled Rates.
Simplot believes that the intent of the Commission’s Order No. 25884 in Case No. IPC-E-93-28 is clear and that clarification is unnecessary. Because the two methodologies (fueled and non-fueled) are, as reflected in the Commission’s Notice language presumed to be “equivalent,” the purchasing utility (and ultimately its ratepayers), Simplot contends, should be indifferent as to which method is used. Quoting language from the Order, Simplot contends that it is clear that the non-fueled rate is to be made available to all non-fossil fueled projects. Idaho Power’s concern that non-fossil fuels such as biomass may be considered “fuel” for purposes of the Commission’s Order, it states, is unwarranted. To remove any doubt, Simplot is supportive of the Commission issuing an Order clarifying that all projects, regardless of motive source are entitled to their choice of fueled or non-fueled rates.
Simplot additionally petitions the Commission to revisit and review what it contends are two related issues decided or implicated by Order No. 25884, i.e., the size of QF projects entitled to published avoided cost rates and contract length.
2. QF Size.
As reflected in Simplot’s comments, in Order No. 25884 the Commission limited the availability of published rates to QFs smaller than 1 megawatt in size. As a basis for the change the Commission found that:
There is a widely held expectation that there will be increasing competition within the electric utility industry. In light of that, we believe it is especially important that the QF industry be able to demonstrate that the energy resources it offers are as cost effective as those that a utility could construct. Ratepayers should be indifferent to whether a resource serving them was constructed a utility or an independent developer. The cost and quality of service provided by either should be the same.

Order No. 25884 pp. 3-4. Regardless of one’s view as to the desirability of competition in the electric utility industry, it has decidedly not come to Idaho, Simplot notes, and is very unlikely to do so in the foreseeable future. Such a rationale for limiting the size of QFs to published rates, Simplot contends, is no longer compelling or an eventuality.
Furthermore, the Commission’s admonition that the ratepayer be indifferent to the cost, Simplot contends, has also not come to fruition. Indeed, it states, just the opposite has proven true. Simplot provides a table identifying Company resources brought on line since PURPA was first implemented and their related costs. (Cascade rebuild – 12 MW at 90 mills/kWh; North Valmy Coal – 260 MW at 62.5 mills/kWh; Milner Hydro Retrofit – 59 MW at 62.74 mills/kWh; Swan Falls Hydro Rebuild – 28 MW at 73.05 mills/kWh; Mountain Home Natural Gas Combustion Turbine – 90 MW at 77 mills/kWh and temporary mobile generators at 124 mills/kWh.) Simplot concludes that PURPA projects (60 PURPA contracts – 166 MW of capacity year end 2000 at an average cost of 61 mills/kWh) cost ratepayers less than the Company’s own resources.
The best way to cure this inequity, Simplot contends, is to allow QF developers up to 10 MW in size access to published SAR based avoided cost rates.
In reducing the project size at which a QF is entitled to the published SAR rates, Simplot quotes the Commission as stating:
By lowering the threshold to 1 MW, we are striking a reasonable balance between encouraging the development of independent, alternative energy technologies with the need to protect ratepayers from paying for resources which have not proven their cost effectiveness.

Unfortunately, Simplot contends that the Commission’s decision had the opposite effect. Instead of encouraging development, it discouraged development. Since 1994 (Order No. 25884), the Company, Simplot contends, has signed only two QF contracts.
3. Contract Length.
The other deadly blow dealt the QF industry, Simplot contends, was the reduction of the maximum contract term from 20 years to 5 years. In doing so the Commission concluded first, that competition was coming to the electric utility industry and second, that Idaho Power was only acquiring power to meet its load through “short term (five years or less) purchases.” Like the rationale for reducing QF size, Simplot contends that the rationale for reducing contract length is no longer valid in Idaho. Reference Case No. IPC-E-95-9, Order No. 26576 at p. 3. Only with the reinstatement of the 20-year contract, Simplot contends, will the QF industry be able to assist the State’s regulated electric utilities in providing the capacity and energy they need.
Simplot recommends that the Commission issue an Order
1. Clarifying the all non-fossil fueled QF projects are entitled to choose whether they wish to sell their output to Idaho Power as either fueled or non-fueled
And noting that Modified Procedure was used to implement part of the contract term reduction in the first instance, a further Order
2. Increasing the entitlement to the Commission’s SAR based avoided cost rates to all QFs that are 10 MW or less in capacity; and
3. Increasing the standard contract term for all QFs 10 MW or less in capacity from 5 to 20 years with the developer retaining the right to choose the term up to 20 years.
Idaho Power Response
Idaho Power responded to Simplot’s comments with a Motion to Strike that portion of Simplot’s comments pertaining to “contract length” and “size eligibility for published rates” as being unrelated to the clarification requested (i.e., the issue of entitlement to fueled versus non-fueled rates). If Simplot believes that the rules governing contracts between utilities and QFs should be changed, the Company contends that Simplot should file an application and assume the burden of proof that its proposed changes are in the public interest.
Without specificity at this time, Idaho Power contends that a substantial number of the allegations and much of the data presented by Simplot on the issues of size and contract length are incomplete, outdated, or represent unfair comparisons between resource alternatives.
This Commission, the Company contends, should resist Simplot’s invitation to expand the scope of this proceeding. To do otherwise, it states, would be procedurally improper.
Simplot Reply
Simplot believes that the issues raised (contract length and size) are relevant in any proceeding addressing the manner QF rates are implemented. Nevertheless, Simplot states that it is indifferent as to whether the Commission addresses the two additional issues in this docket or a new docket opened specifically for that purpose.
Idaho Dairymens Association
The Association believes that the Company’s request for clarification should result in an Order determining that non-fossil fuel fired generating facilities utilizing waste products as fuel, such as anaerobic digestion facilities for animal waste (to produce methane gas for power combustion) and wood waste product generation facilities, should be classified (and treated) as non-fossil fueled projects. Such treatment, the Dairymen contend, would encourage the development of small power production to help ease the potential power shortages which can occur in times of drought; and in the instance of anaerobic digestion facilities would promote an innovative solution to the very contentious and sometimes problematic issue of properly disposing of animal waste and dairy facilities.
Accord – BioMass Energy Systems Technology
Twin Falls County Commissioners
Idaho Farm Bureau Federation
Kevin Pack
Lee & Alfred McGlinsky (requests hearing)
Commission Staff
The Commission Staff summarizes the two methodologies under consideration, i.e., fueled versus non-fueled, and contends that Staff’s initial practice of designating rates as “fueled” or “non-fueled” was never intended to be descriptive of the types of projects eligible for each type of rate. Rather, the designation as “fueled” and “non-fueled” was intended to refer to the manner in which each type of rate is computed. Perhaps different designations such as “levelized-variable fuel” and “levelized-non-variable fuel,” Staff contends, would be more descriptive and would avoid some confusion.
Because fueled and non-fueled rates are equivalent on a present worth basis at a fuel escalation rate of 6%, Staff recommends that the developer of any QF project, regardless of type, have the option to choose either fueled or non-fueled rates. Developers can choose the type of rates that produce a revenue stream best suited to their needs. For example, developers who need predictable revenue stream to satisfy financing requirements can choose non-fueled rates. Developers who need a cash flow that increases when fuel prices increase can choose fueled rates.
Staff would expect that most project developers, if given a choice, would choose non-fueled rates. Although presumably equivalent over the life of the contract, Staff notes that non-fueled rates do provide a higher revenue stream in the early years of the contract, and they also provide a predictable revenue stream that makes financing easier. Staff believes very few projects would use natural gas (or some other fuel whose price is driven by the natural gas market) and still meet the definition of qualifying facility under PURPA. Cogeneration projects are likely to be the only types of generation to use natural gas or other fossil fuel and still be considered a QF. Although there have been a few cogeneration projects developed in Idaho, Staff notes that none are less than 1 MW in size.
Although Staff recommends that QF developers be permitted to choose either fueled or non-fueled rates, if the Commission wishes to restrict certain types of rates to certain types of projects, Staff recommends that the definitions of “small power production facility” and “cogeneration facility” as defined by PURPA be used a guide. Reference 18 CFR § 292.201-206. Small power production facilities would be eligible for non-fueled rates and cogeneration facilities would be eligible for fueled rates.

Commission Decision
1. Fueled vs, Non-fueled.
Idaho Power has filed an Application requesting clarification of Commission Order No. 25884 language regarding QF eligibility for published non-fueled rates. Was it the Commission’s intention to permit all QFs (regardless of motive force) to choose between fueled and non-fueled rates? Was it the Commission’s intention regarding eligibility to draw a distinction between fossil and non-fossil fuel generation? Should facilities utilizing animal or wood waste be entitled to select non-fueled rates?
2. QF Size and Contract Length.
Simplot requests that the Commission increase the QF size eligibility for published rates from 1 to 10 megawatts and extend the maximum contract length from 5 to 20 years. Idaho Power contends that size and contract length were not the subject of its Application or the Commission’s Notice and that considering same would be inappropriate. Simplot contends that the issues of contract length and size are timely and recommends that the Commission open a separate docket to consider them. How does the Commission wish to deal with the Company’s Motion to Strike?

Scott D. Woodbury

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DECISION MEMORANDUM 8