20020104Decision Memo.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOU ANN WESTERFIELD
BILL EASTLAKE
DON HOWELL
RANDY LOBB
DAVE SCHUNKE
RICK STERLING
TERRI CARLOCK
TONYA CLARK
BEV BARKER
GENE FADNESS
WORKING FILE
FROM:
DATE:
JANUARY 4, 2002 RE: CASE NO. IPC-E-01-42 (Idaho Power)
POWER PURCHASE AGREEMENT—GARNET ENERGY LLC/IDAHO POWER
PROPOSED ACCOUNTING
On December 14, 2001, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) in Case No. IPC-E-01-42. The Company requests a Commission Order approving as prudent its power purchase arrangements with Garnet Energy LLC, an unregulated affiliate of Idaho Power. The Company also seeks an accounting order authorizing Idaho Power to include the prudently incurred expenses associated with the purchase of capacity and energy from Garnet Energy LLC in the Company’s Power Cost Adjustment (PCA) mechanism.
BACKGROUND
2000 Integrated Resource Plan
In June 2000, Idaho Power filed with the Commission its 2000 Integrated Resource Plan (IRP). Receipt of the plan was acknowledged by the Commission on December 18, 2000. The 2000 IRP concluded that existing resources, along with market purchases of 250 aMW of energy in July and August, and market purchases of 200 aMW of energy in November and December would be sufficient to meet expected load growth until the year 2004. However, beginning in 2004, additional firm resources would be required to serve expected loads.
Because of transmission constraints, the 2000 IRP concluded that the firm resources required in 2004 could not be market purchases from the Northwest. The 2000 IRP further concluded that a generating resource equivalent to a 250 MW simple cycle combustion turbine was the optimal resource to satisfy the seasonal energy deficiencies and peak hour transmission constraint deficiencies identified within the 2000 IRP.
The 2000 IRP stated that the Company would issue a request for proposals (RFP) to determine if the Company could acquire the needed energy from a third party at a cost to Idaho Power that would be less than the cost of constructing a simple cycle combustion turbine (CT) and recovering the cost of the CT by a means of the traditional utility rate base treatment.
RFP Process
On August 4, 2000, Idaho Power issued its request for proposals. Following, what the Company contends was a rigorous review process, Idaho Power selected Garnet Energy LLC (Garnet) as the successful bidder. Garnet is an indirect subsidiary of IdaWest Energy Company (IdaWest). IdaWest is a wholly owned subsidiary of Idacorp Inc. Idaho Power Company is also a wholly owned subsidiary of Idacorp Inc.
Consistent with the RFP, Idaho Power contends, the Company and Garnet have engaged in arms length negotiations to develop a definitive power purchase agreement.

Power Purchase Agreement (dated 12/14/01)
The initial term of the Idaho Power/Garnet Power Purchase Agreement (PPA) is five years. The commencement date is the first date on which energy is produced. The initial termination date is December 31, 2008. The PPA contains options to extend the term of the Agreement for five independent one-year extension terms if Idaho Power determines that such extensions would be prudent.
The PPA provides for a payment for capacity and energy provided by the Garnet facility. The capacity price is determined by the actual capital costs to construct the facility and certain fixed operation and maintenance expenses. The capital recovery charge portion of the capacity cost is expected to be approximately $15.50 per Kw month and is capped at approximately $19.50 per Kw month.
The energy price, the Company states, is based on an arrangement that is commonly called a “tolling” arrangement. Under the tolling arrangement, Idaho Power purchases only the amount of natural gas fuel it needs to generate its expected energy requirements during the periods identified in the PPA. Garnet agrees to convert that natural gas into electricity at the agreed-upon heat rate and price computed in accordance with the PPA.
The PPA allows Idaho Power to receive and pay for capacity and energy in only the months of identified need (June, July, August, December). During the remainder of the year when the Company anticipates having adequate or surplus resources, the Company has no commitment to take or pay for any generation from the Garnet facility. As a result, the Company contends that market risks associated with those periods of time the Garnet facility might be idle due to market conditions will be borne by Garnet, not Idaho Power customers.
The Power Purchase Agreement also contains a number of options which the Company contends provide valuable flexibility to Idaho Power and its customers. Those options include:
1. Right of the First Offer (ROFO). Garnet must offer to sell the output from the Garnet facility to Idaho Power during those months when Garnet is not otherwise obligated to sell the output to Idaho Power before it offers that output to a third party. This ROFO, the Company contends, gives Idaho Power the option to acquire, on a year round basis, up to 250 MW of capacity and energy from a source physically located within the Company’s service territory at prices that are likely to be lower than the delivery price Idaho Power would have paid for comparable market purchases without concerns of transmission import constraints.

2. Option to Purchase. As the Company’s load and resource balance changes over time, the Company contends that it may become evident that ownership of the Garnet facility is preferable to continued seasonal purchases of output. A first opportunity to purchase the facility will occur on December 31, 2008. The second opportunity to purchase the facility occurs on December 31, 2013.

3. Right of First Refusal (ROFR). Garnet has agreed not to sell the facility to a third party without Idaho Power’s prior consent. Under this option, Idaho Power has a right to acquire ownership of the Garnet facility by matching the bona fide purchase offer of a third party.

4. Idaho Power also has a ROFR to participate with Garnet in the construction of any additional generation facility constructed in conjunction with the Garnet facility.

Idaho Power contends that the PPA is a unique power purchase arrangement that has a potential to provide substantial benefits to the Company’s customers. As circumstances change in the future, the Company contends that the Garnet contract allows flexibility to respond to those change circumstances.
Generation Interconnection Agreement (GIA)
In order to fully integrate the Garnet facility as a resource on Idaho Power’s system, the Company contends it is necessary to enter into a Generation Interconnection Agreement (GIA) with Garnet. The GIA will establish, among other things, the amounts that Garnet will pay to Idaho Power to reimburse the Company for the cost of interconnecting the Garnet facility with the Company’s transmission system. Definitive studies for determining the cost of interconnection are still under way. The Company has provided a pro forma GIA which it states will be substantially similar to the GIA ultimately signed by Garnet. An executed GIA must be filed and approved by the Federal Energy Regulatory Commission (FERC).
Fuel Management Agreement
A second agreement necessary to fully integrate the Garnet facility as a resource in Idaho Power’s system is a Fuel Management Agreement. Under this agreement Idaho Power will provide fuel transportation and storage to be used by both Idaho Power and Garnet to transport fuel for the Garnet facility. Garnet will reimburse Idaho Power for the cost of fuel transportation and storage outside of the four-month period when Garnet is committed to provide capacity and energy to Idaho Power.
Transmission Services
As reflected in the Application, Garnet will also enter into separate arrangements with Idaho Power to purchase transmission services from Idaho Power to deliver energy from the Garnet facility to points of integration with other regional transmission systems when Garnet is generating energy to sell to parties other than Idaho Power. These arrangements, the Company states, are made under Idaho Power’s Open Access Transmission Tariff and are implemented over Idaho Power’s OASIS website.

Accounting Procedures
Idaho Power in its Application proposes an accounting method and procedure for expenses associated with (1) recording the payment for fuel and transportation charges incurred by Idaho Power for energy generated by Garnet and sold to Idaho Power; (2) recording payment to Garnet Energy for contract charges, which include a capital recovery charge, fixed and variable O&M expenses and an energy purchase charge; (3) recording fuel and transportation and contract charges associated with the Garnet contract to the PCA deferral account, the offset to be to the appropriate operating expense account; and (4) recording interest income on the deferred balance in the regulatory asset account for the program at the appropriate rates.

Idaho Power requests that the matter be processed under Modified Procedure, i.e., by written submission rather than by hearing. Reference Commission Rules of Procedure, IDAPA 31.01.01.201-204.
STAFF ANALYSIS
Staff has reviewed the Company’s Application. The size of the proposed resource acquisition is quite significant. The rate impact to customers is also significant. Staff believes that Modified Procedure is inappropriate. Staff apprises the Commission that it has been contacted by a citizen group (Citizens for Responsible Land Use) that intends to participate in this proceeding. Staff recommends that an intervention deadline be established and that a prehearing conference date be scheduled.
COMMISSION DECISION
The Company recommends that its Application be processed under Modified Procedure. Staff contends that a hearing is necessary. Staff recommends that the Commission establish an intervention deadline and schedule a prehearing conference. How does the Commission wish to process the Company’s Application?

Scott D. Woodbury

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DECISION MEMORANDUM 5