01022002_jh.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
BILL EASTLAKE
LOU ANN WESTERFIELD
RANDY LOBB
DON HOWELL
KEITH HESSING
TERRI CARLOCK
TONYA CLARK
BEV BARKER
GENE FADNESS
WORKING FILE
FROM: JOHN HAMMOND
DATE:
JANUARY 2, 2002 RE: THE STAFF’S REQUEST THAT THE COMMISSION INVESTIGATE THE BUY-BACK RATES IN THE LETTER AGREEMENT ENTERED INTO BY IDAHO POWER COMPANY AND ASTARIS. CASE NO. IPC-E-01-43
On December 28, 2001, the Staff of the Idaho Public Utilities Commission filed a petition requesting that the Commission investigate the buy-back rates in the Letter Agreement between Idaho Power Company and Astaris LLC. The Letter Agreement amended certain portions of the 1997 Electric Service Agreement that provides the terms for Idaho Power to supply power to Astaris’s phosphate processing facility in Pocatello, Idaho. Copies of the Petition and supporting materials are available for public inspection.
BACKGROUND
1. The Electric Service Agreement.
On April 27, 1998, the Commission approved the Electric Service Agreement (“ESA”), dated December 30, 1997, between Idaho Power and Astaris. Case No. IPC-E-97-13, Order No. 27463. See also Staff Exh. 109 and 110. The ESA required Idaho Power to supply two large blocks of electric power to Astaris’ phosphate processing facility in Pocatello. ESA at p. 4, § 4.2.1. The first block is for 120,000 kilowatts (“kW”) per hour and is a “take or pay” block (i.e., Astaris must pay for the power whether it uses it or not). ESA at p. 5, § 4.2.2.
The initial term of the ESA was to end on December 31, 2002. ESA at p. 3, § 3.1. Following expiration of the initial term, the ESA would remain in effect until either Idaho Power or Astaris gave written notice of termination. ESA at p. 4, § 3.2. After December 31, 2000, either party could terminate the agreement by delivering a written notice of termination with actual termination to occur two years after the written notice. Id.
In its Order approving the ESA, the Commission observed that “[b]y statute, the Commission has continuing jurisdiction to review existing contracts and on its own motion to investigate rates or practices and to order them changed. Idaho Code § 61-503.” Order No. 27463 at p. 14. Furthermore, and most importantly, the Commission ordered that as a condition of approval of the ESA that it would retain “authority over the [ESA] to insure that, as it is implemented, it does not impair the financial ability of Idaho Power to continue its service nor harm other rate payers.” Order No. 27463 at p. 15 (emphasis added). Neither party to the ESA petitioned the Commission for reconsideration of Order No. 27463 nor moved to void the ESA pursuant to section 14.
2. The Letter Agreement.
In the fall and winter of 2000-2001, three external factors prompted the parties to amend the ESA. First, low water conditions reduced Idaho Power’s hydrogeneration. Second, this low water condition compelled the Company to replace the lost generation with much higher priced power purchased in the volatile regional power market. Third, Astaris desired to discontinue its elemental phosphorus process and switch to a “wet” process. On March 16, 2001, Idaho Power filed an Application requesting approval of a Letter Agreement that would amend certain sections of the ESA. Case No. IPC-E-01-9. See also Staff Exh. 111. Idaho Power represented in the Application that Astaris would greatly accelerate implementation of its committed strategic direction to shift away from reliance on elemental phosphorus toward purified phosphoric acid as its new material base. Application at pp. 1-2. Consequently, Astaris’ need for large amounts of power could be significantly reduced. Furthermore, according to the Letter Agreement “[d]ue to the recent significant increase in electric power prices the parties mutually desire to amend the [ESA][.]” LA at p. 1.
The Letter Agreement proposed that Astaris would consume “no more than 70,000 kW’s of energy per hour” from the First Block, starting from April 1, 2001 and continuing through the term of the Agreement. LA at p. 2, ¶ 3. However, Astaris would continue to pay for 120,000 kW of energy per hour under section 4.2.1 of the ESA. Id. The difference – 50,000 kW or 50 MW – would be made available to Idaho Power for twenty-four (24) months beginning April 1, 2001 and ending March 31, 2003. Idaho Power would “buy-back” or pay Astaris for the 50 MW at then projected market rates, over the entire term of the Letter Agreement, minus a 13.5% discount. See LA, Schedule A. The total buy-back amount for the 50 MW of power was estimated at approximately $140 million over the two years, or about 15.9¢ per kWh ($159 per MWh). Id. Idaho Power also represented that the 15.9¢ proposed buy-back payment would be offset by the Company’s continued recovery of the energy charge for the entire 120,000 kWh in the first block. Finally, Idaho Power requested that the payments it would make to Astaris under the Letter Agreement be treated as a purchased power expense for purposes of Idaho Power’s Power Cost Adjustment (“PCA”) mechanism. Application at p. 2; LA at p. 3, ¶ 7.
The Letter Agreement also provided for the permanent shut down of two of the four furnaces (No. 1 and No. 4) at the Astaris facility in Pocatello. LA at p. 1, ¶ 1. As a result, the contract demand set forth in section 4.2.1 of the ESA would be reduced by 130,000 kW and the charges for the second block demand under section 5.2.4 of the ESA would be reduced accordingly as of April 1, 2001. See ESA at pp. 8-9, § 4.5. The Letter Agreement proposed that the ESA be amended to terminate at midnight on March 31, 2003. LA at p. 1. The Letter Agreement also provided that Idaho Power and Astaris would negotiate in good faith to develop a replacement electric service agreement for the Pocatello facility, which would become effective after the amended termination date of the ESA and its Letter Agreement on March 31, 2003. LA at p. 2, ¶ 5.
Idaho Power and Astaris represented that the Letter Agreement’s terms were conditioned on favorable approval by the Idaho Public Utilities Commission. Id.; see also, LA p. 2, ¶ 6. The Letter Agreement also stated that “[a]ll other terms and conditions of the [ESA] except those expressly modified by this Letter of Understanding shall remain in full force and effect.” LA at p. 3, ¶ 8.
On April 10, 2001, the Commission issued its final Order and approved the Letter Agreement as a system resource and allowed the load reduction to be added to the Company’s resource portfolio. Order No. 28695 at 6. In approving the Letter Agreement, the Commission noted that it could save Idaho Power and ratepayers as much as $21 million if the forward market prices used to establish the prices for the buy-back became a reality. Order No. 28695 at pp. 5-6. The Commission further found that reasonably incurred payments made by Idaho Power to Astaris for purchases of energy should be treated as a purchase power expense and recovered through the Company’s PCA mechanism. Id.
Through December 31, 2001, Astaris is expected to receive $80.4 million in payments from Idaho Power under the Letter Agreement with the balance of $59 million to be paid over the remaining 15 months of the Agreement.
3. Current Market Conditions.
After the Commission approved the Letter Agreement, actual market prices during April and May 2001 continued in the $280-$300 range per MWh, near the levels anticipated in the Letter Agreement. In June, the wholesale market price for power in the West plunged dramatically to under $50 per MWh and remain close to historical levels of $20 to $30 MWh. Even after six months and well into this winter’s peaking months for Idaho Power, prices have remained below $50 per MW. Thus, Staff asserts Idaho Power under the buy-back portion of the Letter Agreement is now paying Astaris 200% to 700% more for 50 MW of power than what it would spend to obtain the same amount of power at current forward market prices, over the remaining term of the contract.
In another development, Astaris LLC announced on October 11, 2001 that the Company would cease elemental phosphorus production and close its operation at the Pocatello plant by year-end. FMC website, http://www.fmc.com; http://www.astaris.com. Following cessation of production by Astaris, FMC would be responsible for the site and decommissioning of the plant.
STAFF PETITION
In its Petition, Staff requests that the Commission initiate an investigation and enter an Order that will abrogate the rates set for remaining months of the buy-back provision. Staff maintains that the Commission has authority to change the rate pursuant to Idaho Code § 61-502; its continuing jurisdiction over the ESA as stated in Order No. 27463; and Idaho Supreme Court precedent. Staff contends in its Petition that the Commission should find the buy-back rates are no longer just and reasonable because the 15.9 ¢ per kilowatt hour (kWh) average price that Idaho Power is paying Astaris over the remaining 15 months of the Letter Agreement for 50 megawatts (MW) of energy is (1) not in the public interest; (2) will impose an “excessive burden” on all of Idaho Power’s ratepayers; and (3) result in an inappropriate preferential windfall to Astaris. Staff also requested that if the Commission abrogates this rate, it should set a new just, reasonable and sufficient rate on a prospective basis. Staff mailed a copy of its Petition on all the parties of record in the 1997 ESA case and the 2001 Letter Agreement case (that includes Idaho Power and Astaris).
Based on these arguments in its Petition and supporting materials, Staff requests that the Commission, pursuant to Idaho Code § 61-502, initiate a case on its own motion to investigate whether the buy-back rates in the Letter Agreement should be abrogated and replaced.
If the Commission decides to open a case to investigate the buy-back rates under the Letter Agreement, Staff contends that it is necessary to process this case in an expedited fashion. Thus, Staff urges the Commission to set a prehearing conference promptly in order to discuss preliminary issues and to set an evidentiary hearing. Staff recommends that the Commission set this prehearing conference to follow its decision meeting on January 14, 2002.
COMMISSION DECISION
1. Does the Commission wish to open a case to investigate on its own motion whether the buy-back rates contained in the Letter Agreement between Idaho Power and Astaris are still just and reasonable?
2. If so, does the Commission wish to set a prehearing conference for January 14, 2002 after the Commission’s decision meeting at 1:30 p.m. to discuss preliminary issues and to set an evidentiary hearing?
3. If so, does the Commission want to set an intervention deadline?
4. If so, does the Commission want to instruct the Commission Secretary to service the Commission’s Order by facsimile and express mail?

John Hammond

vld/M:IPC-E-01-43_jh
The Letter Agreement was approved by Commission final Order No. 28695 in Case No. IPC-E-01-9.
Accompanying Staff’s Petition was the Prefiled Direct Testimony of Keith Hessing, a public utilities engineer.
Agricultural Products Corporation v. Utah Power & Light Company, 98 Idaho 23, 28, 557 P.2d 617, 622 (1976); United States v. Utah Power & Light Company, 98 Idaho 665, 570 P.2d 1353 (1977).

Staff believes that two issues the Commission should take up at the prehearing conference are as follows: whether it is appropriate for Idaho Power to claim that current forward looking prices contained in Staff Exh. 103 and 104 are confidential; and whether Idaho Power should pay Astaris for the 50 MW buy-back at current forward market rates and place the difference between this price and the Letter Agreement price in an escrow-type reserve account.

DECISION MEMORANDUM 1