ipce01.37swrps.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 WEST WASHINGTON STREET
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE PETITION OF IDAHO POWER COMPANY FOR A DECLARATORY ORDER CONCERNING ENTITLEMENT TO PUBLISHED RATES FOR NON-FUELED SMALL POWER PRODUCTION FACILITIES. )
)
)
)
)
)
)
CASE NO. IPC-E01-37

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of Petition, Notice of Modified Procedure, and Notice of Comment/Protest Deadline issued on November 8, 2001, submits the following comments.
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-01-28 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. 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 a CCCT and an adjustable component that is intended to track the price of 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 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 look more like the typical cost structure for a hydro plant than for a CCCT. The total cost, fixed and variable, are combined into a 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 twenty year life.
Attached as Attachment 1 is a copy of Idaho Power Company’s current published avoided cost rates for fueled and non-fueled QFs smaller than one megawatt. These rates were approved by the Commission in Order No. 28758 in Case No. IPC-E-01-17.

Analysis
As can be seen from Attachment 1, the rates for non-fueled projects appear to be higher than the rates for fueled projects. For example, assuming a 2002 on-line date and a five year contract, the levelized non-fueled rate is 55.44 mills/kWh while the levelized fueled rate is 48.96 mills per kWh (13.53 mills/kWh plus 35.43 mills/kWh).
It is true that non-fueled rates exceed fueled rates in the first year of the contract. However, that will not necessarily hold true in the remaining years of the contract. In fact, at an assumed fuel price escalation rate of six percent, fueled and non-fueled rates are equivalent on a present worth basis. Staff has prepared Attachment 2 to illustrate this equivalency.
The graph on Attachment 2 shows fueled and non-fueled rates plotted for a five-year contract with a 2002 on-line date. The horizontal rates at 55.44 mills represent the non-fueled levelized rate that would be paid each year of the contract. In deriving the rate of 55.44 mills, an assumption is made that fuel costs will escalate from their first year levels at an annual rate of six percent. The increasing rates on the graph represent the fueled rate, with an assumed increase in fuel price of six percent per year. In reality, fuel prices will not increase at exactly six percent per year. Instead, they may go up or down from year to year, and would probably resemble a wavy line like the ones shown on the graph.
If the present worth of the series of annual rates for both fueled and non-fueled rates are computed using Idaho Power’s cost of capital (9.199%), then the total of the payments received using both types of rates are equal (except for a slight difference due to rounding). The table on Attachment 2 demonstrates this equivalence.
If fuel prices increase at more than six percent annually, fueled rates would produce a greater present worth than non-fueled rates. Conversely, if fuel prices increase at less than six percent annually, non-fueled rates would produce a greater present worth than fueled rates. Note that in either case, non-fueled rates would be higher in the first few years of the contract. Perhaps this is the reason that some people seem to have the perception that non-fueled rates are always higher.
Attachment 3 shows the actual adjustable component of fueled rates since their inception in 1994. Notice that on a year-to-year basis the component has decreased as much as 21.6 percent and increased as much as 72.2 percent in a single year. The average increase over the eight years the method has been in place has been 13.1 percent.
Although no contracts have actually been signed since fueled and non-fueled rates have been available, it is possible to look back in time to see which type of rates would have proven superior. For example, for a five-year contract beginning in 1994, a non-fueled rate would have resulted in a higher net present worth over the term of the contract than a fueled rate. However, for contracts beginning in each of the next three years, a fueled rate would have proven superior. Given fuel prices of the current year, it is also likely that the value of a five-year contract based on fueled rates beginning in 1998 would be higher than the value of a non-fueled contract. Thus, past history demonstrates that either fueled contracts or non-fueled contracts could result in higher rates, depending on what natural gas prices turn out to be.
Attachment 4 demonstrates the equivalence of non-levelized rates at an assumed escalation rate of six-percent.
Staff has always been aware of the potential discrepancy between fueled and non-fueled rates. While Staff recognized the certainty that fueled and non-fueled rates would never match exactly, it deliberately designed the rates to be equivalent at a fuel cost escalation rate of six percent. The six- percent escalation rate was adopted by the Commission in Case No. IPC-E-93-28, Order No. 25884.
Staff’s initial practice of designating rates as “fueled” or “non-fueled” was never intended to be descriptive 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” are more descriptive and would avoid some confusion.

Recommendations
Because fueled and non-fueled rates are equivalent on a present worth basis at a fuel escalation rate of six percent, 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 a 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, 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, none are less than one megawatt in size.
Although Staff recommends that 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 as a guide. Reference 18 CFR §292.201-292.206. Small power production facilities would be eligible for non-fueled rates and cogeneration facilities would be eligible for fueled rates.

Respectfully submitted this day of November 2001.

___________________________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Rick Sterling

U:\rsterli\ipce01.37swrps

STAFF COMMENTS 3 NOVEMBER 29, 2001