20020301Decision Memo.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOUANN WESTERFIELD
TONYA CLARK
DON HOWELL
DAVE SCHUNKE
RICK STERLING
RANDY LOBB
LYNN ANDERSON
GENE FADNESS
WORKING FILE
FROM:
DATE:
MARCH 1, 2002 RE: CASE NO. IPC-E-01-40 (Idaho Power)
SCHEDULE 86—CSPP NON-FIRM ENERGY—AMENDMENT

On November 9, 2001, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) requesting approval of proposed changes and amendments to the Company’s existing tariff rate Schedule 86—Cogeneration and Small Power Production—Non-Firm Energy.
BACKGROUND
On January 22, 1997, the Commission issued Order No. 26750 approving the current Schedule 86. On May 3, 1999, the Commission issued Order No. 28033 approving the current methodology for computing the purchase price, or avoided energy cost, for non-firm purchases under Schedule 86. The purchase price section of Schedule 86 currently provides two options under which PURPA qualifying facilities can sell non-firm energy to the Company:
Option A. The purchase price is an amount equal to the monthly weighted average cost per kilowatt hour of the daily on-peak and off-peak Dow Jones Mid-Columbia Electricity Price Index prices for non-firm energy published in the Wall Street Journal (Mid-C Index) minus $0.004 per kWh.
Option B. The Net Metering Option.

Description of Proposed Changes
Removal of Schedule 86 Option B.

Idaho Power has requested that the Commission approve a new tariff Schedule 84—Net Metering—which would take the place of Option B under Schedule 86. Reference Case No. IPC-E-01-39, Order No. 28951 (issued Feb. 13, 2002).
Tariff Eligibility Criteria
Idaho Power proposes to limit the applicability of Schedule 86 to PURPA qualifying facilities (QFs) with capacity name-plate ratings of less than 1 MW. This change, the Company contends, will bring Schedule 86 into conformity with the Commission’s current policy concerning qualifying facility purchase arrangements. Qualifying facilities smaller than 1 MW are entitled to Commission established published rates; but qualifying facilities larger than 1 MWs, the Company contends, are required to negotiate contracts with Idaho Power and to negotiate appropriate power purchase prices as a part of that contracting process.
Schedule 86 Purchase Price.
Idaho Power proposes to set the purchase price at an amount equal to eighty-five percent (85%) of the monthly weighted average Mid-C Index, consistent with several purchase and sale agreements the Company has recently entered into with various sellers. By establishing the purchase price as a percentage discount from the Mid-C Index, Idaho Power’s customers, the Company contends, can be confident that non-firm energy Idaho Power is obligated to purchase under Schedule 86 can be resold in the wholesale market at a price that will recover Idaho Power’s purchase costs plus transmission costs. Conversely, the Company contends that when Idaho Power desires to retain the non-firm energy delivered by a seller under Schedule 86, Idaho Power can be assured that the purchase price will be at least as beneficial as a wholesale non-firm market purchase.

On November 23, 2001, the Commission issued Notices of Application and Modified Procedure in Case No. IPC-E-01-40. The deadline for filing written comments was December 21, 2001. Comments were filed by the Renewable Northwest Project, Idaho Rivers United, Northwest Energy Coalition, Northwest Sustainable Energy for Economic Development, Climate Solutions, and American Wind Energy Association—collectively the “Renewable Energy Advocates”, the Idaho Rural Council, and Commission Staff. Reply comments were filed by Idaho Power on January 25, 2002, the comments can be summarized as follows:
Renewable Energy Advocates
The Renewable Energy Advocates have no objection to Idaho Power’s proposed removal of Option B from Schedule 86.
However, the Renewable Energy Advocates contend that the Company’s other proposed changes to Schedule 86 to establish a new purchase price for non-firm energy from qualifying facilities smaller than 1MW deserve close review by the Commission. It suggests that the procedures and pricing mechanism provided in the proposed Schedule 86 be extended to all non-firm power purchases from qualifying facilities regardless of size.
Commission Staff
Removal of Schedule 86 Option B
Staff has no objection to eliminating Option B from Schedule 86, assuming the Commission approves a new Schedule 84 with some form of net metering provisions.
Tariff Eligibility Criteria
Staff opposes the Company’s proposal to limit Schedule 86 to projects smaller than one megawatt. Schedule 86 is the only means currently in place for establishing avoided cost rates for non-firm energy. The existing methodologies for smaller and larger than 1 MW facilities are specifically designed for firm energy only. Neither of these methodologies, Staff contends, can fairly determine the value of non-firm energy. Consequently, if Schedule 86 is limited to projects smaller than 1 MW, there will be no consistent means for determining non-firm energy rates for 1 MW and larger facilities. Given that the vast majority of non-firm energy currently purchased from QFs by Idaho Power is from a handful of facilities all larger than 1 MW, Staff contends there must be some tariff or method in place to accommodate these types of non-firm energy sales.
As an alternative to restricting Schedule 86 to projects smaller than 1 MW, Staff suggests that Idaho Power add provisions to Schedule 86 permitting the Company to negotiate non-firm energy rates on a case-by-case basis for projects 1 MW and larger. This would be consistent with the manner in which the Company has handled several recent non-firm energy agreements with large industrial customers. In addition, such a provision explicitly acknowledges Idaho Power’s continuing obligation under PURPA to purchase energy from all QFs. Without such an explicit provision, there could be a perception that the Company is willing to sign non-firm energy contracts with some customers but not with others. Staff believes that the logical starting point for negotiations for 1 MW and larger projects should be the under 1 MW Schedule 86 rates, with discounts or bonuses to this price based on individual characteristics of each large project.
Schedule 86 (Option A) Purchase Price
Staff contends that the value of non-firm generation to Idaho Power varies depending upon whether the Company needs the generation or not. When it needs the generation, the value should be equal to full market price plus the costs of transmission, losses and transaction costs incurred in getting an equivalent amount of energy to Idaho Power’s system. When it does not need the generation, the value is equal to market price minus the costs of transmission, losses and transaction costs incurred in getting the energy to the market. It is not practical, Staff contends, to price customer generation differently depending on whether Idaho Power needs the generation. Similarly, it is not realistic to assume that Idaho Power will always need the generation or that it will need it even half of the time. As a result, Staff believes it is reasonable to price non-firm customer generation at a discount from the non-firm market price. This provides a safeguard that the purchase and subsequent resale of non-firm energy at times when the Company does not actually need the generation will not harm Idaho Power and its customers.
The costs of transmission, losses and transaction costs, Staff states, vary somewhat depending on the amount of energy being considered and the location to/from which it will be purchased/sold. However, these costs are typically in the range of $4 per MWh. For market prices in their current range (approx. $27/MWh on 12/19/01), these costs represent about 15 percent of market price. Consequently, in the range of current market prices, the existing price in Schedule 86 of Mid-C minus 4 mills is approximately equal to 85 percent of market price. Thus, Idaho Power’s new proposed pricing method gives nearly the same price as the pricing method now in effect. Staff believes that 85 percent of market price is fair to customer generators while offering price protection to Idaho Power and its ratepayers in the event the Company is forced to sell customer generation it does not need.
Idaho Rural Council
The Idaho Rural Council although noting the docket number in its comments, offers no specific comments regarding the Company’s proposed changes to Schedule 86.
Reply Comments of Idaho Power
Idaho Power states that its experience has demonstrated that for larger projects, 1 MW and greater, the minimalist tariff process is less than ideal. Larger projects, it states, invariably present more complicated operating issues, interconnection issues, and pricing issues. The Company notes that the 1 MW threshold has traditionally been the break between the standardized posted rates and the rates for larger projects that are subject to negotiation.
The Company agrees with Staff’s alternate proposal. The Company anticipated that projects larger than 1 MW that desire to sell energy to Idaho Power on a non-firm basis would do so based on individual negotiations. Idaho Power suggests that any discussion concerning the obligation to negotiate with larger projects be set forth in the Order issued by the Commission rather than in the tariff which will explicitly apply to projects smaller than 1 MW. Idaho Power agrees with Staff that the starting point for negotiations for contracts to purchase non-firm energy from projects 1 MW and larger should be the Schedule 86 rate calculation methodology.
Commission Decision
Idaho Power has recommended the following changes to Schedule 86:
Removal of Schedule 86 Option B, the Net-Metering Option.
Limiting Schedule 86 tariff eligibility to QFs with capacity nameplate ratings of less than 1 MW, and
Schedule 86 purchase price—setting the purchase at an amount equal to 85% of the monthly weighted average Mid-C Index.
The Company agrees with Staff’s proposal that non-firm energy rates for QF projects greater than 1 MW be individually negotiated, with the starting point being the Schedule 86 rate calculation methodology.

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DECISION MEMORANDUM 4