20030414Decision Memo.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:APRIL 14, 2003
RE:CASE NO. IPC-03-1 (Idaho Power)
PURPA QF CONTRACT WI TIBER MONTANA, LLC
On February 20, 2003, Idaho Power Company (Idaho Power; Company) filed an
Application with the Idaho Public Utilities Commission (Commission) requesting approval of a
Firm Energy Sales Agreement (Agreement) between Idaho Power Company and Tiber Montana
LLC (Tiber).
Tiber proposes to design, construct, install, own, operate and maintain a 7.5 MW
hydroelectric generating facility (project) located on the outlet works of the existing Tiber Dam.
The Tiber Dam is located 15 miles South of the City of Chester in Liberty County, Montana.
Tiber warrants that the project is a "qualifying facility" (QF), as that term is used and defined in
the Public Utilities Regulatory Policies Act of 1978 (PURP A). Tiber has elected an operation
date of May 15 2004.
Agreement
Idaho Power represents that the February 3 , 2003, Agreement with Tiber is pursuant
to rates, terms and conditions approved by the Commission. Reference Case No. GNR-02-
Order Nos. 29069 and 29124. The Agreement is for a 20-year term and commits Tiber to deliver
energy to the Company only during the months of May, June, July, August, September and
October of each contract year. Tiber s project is located outside of Idaho Power s service
territory. The entity transmitting the project's power to Idaho Power s transmission system
(transmitting entity), Northwestern Energy, has purportedly agreed to "firm all energy
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deliveries from Tiber to Idaho Power. Reference Agreement Section 9. This arrangement will
result in flat monthly firm energy being scheduled into the Idaho Power system.
Idaho Power states that certain terms and conditions of the submitted Agreement
reflect updated and/or revised contract language in conformance with current IPUC Orders
current technologies and current utility energy standards. The included changes can be briefly
described as follows:
1. Measurement of the 10 MW rating
In lieu of a reference to nameplate rating, Idaho Power and Tiber have agreed to
include the concept of "optional energy.Optional energy is defined as energy which is
produced by the QF, scheduled by the transmitting entity and delivered to the point of delivery in
an amount that exceeds 10 000 kWh in any single hour. The Agreement provides that Idaho
Power is not obligated to purchase optional energy. Idaho Power contends that this arrangement
allows Tiber to install generating capacity with a nameplate rating of 10 MW or more while still
qualifying to be paid at the posted rates that the Commission has established for projects smaller
than 10MW.
2. Encouraging increased "firmness" of QF contracts.
Although contracts between Idaho Power and QFs have been denominated as "Firm
Energy Sales Agreements , Idaho Power contends that the energy purchased under these
contracts is not firm energy as that term is commonly defined by the electric energy industry.
Firm energy purchases Idaho Power makes from non-QF suppliers specify the amounts to be
delivered during heavy load or light load hours for the term of the contract. If the energy is not
delivered in the specified amounts, at the specified times, liquidated damage provisions in the
purchase agreement allow Idaho Power to acquire the energy from other sources and receive
reimbursement from the defaulting supplier for all the Company s costs.
In Tiber s case, Idaho Power contends that the arrangement with Northwestern
Energy to firm Tiber s generation makes the Agreement more like a true firm energy purchase.
In an effort to bring QF performance more in line with actual firm energy production and to
provide an opportunity for QFs using various generating technologies to receive the posted firm
rates based on a QF's actual performance, Idaho Power and Tiber have included in the
Agreement provisions which encourage Tiber to provide energy with a greater degree of
firmness while at the same time allowing a reasonable amount of flexibility to Tiber in operating
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its facility. Reference Agreement Section 1.15-Surplus Energy and Section 7.Adjustment
to Net Firm Energy Purchase Price.
Under Agreement Section 1.15, each month the actual net kW hours of Tiber
generation will be compared to the monthly kW hours of generation estimated by Tiber (Section
6.2). If Tiber s actual kW hours of generation exceeds 110% of a month's estimated kW hours
of generation, the energy in excess of 110% is valued at the surplus energy price. Reference
Agreement Section 7.2. The surplus energy price is a market-based price.
Under Agreement Section 7.1.2, Tiber s actual net monthly kW hours of generation is
compared to the estimated monthly kW hours of generation as described in Section 6.2. If the
amount of net firm energy is 90% or less of the month's estimated kilowatt hours of generation
all of that month's generation will be deemed to be surplus energy for which Idaho Power will
pay Tiber the surplus energy price.
Under the Agreement, Tiber can reset the monthly estimated generation amounts to
reflect its increased operating experience and to allow Tiber to respond to changes in water
supplies, etc. The only limitation placed on Tiber by the Company is that the net firm energy
estimated for each month cannot exceed the nameplate rating of the generation equipment.
3. Seasonality.
Idaho Power notes that previous Commission Orders and QF Agreements have
recognized that the value of energy generated differs in accordance with the season in which it is
actually delivered to Idaho Power. As an incentive for a QF to deliver energy to the Company
during times when it is of greater value to the Company, the posted rates have historically "been
seasonalized." To better align the seasons with the months in which Idaho Power has identified
actual energy needs, the Agreement modifies the months within each historical "season" to
account for those periods of higher demand. The months of August and September have been
moved to season 3 and the months of November and December have been moved to season 2.
The seasonal rates are identified in Section 7 .1 of the Agreement. This adjustment, the
Company contends, does not change the overall annual average payment-the average payment
continues to be the posted rate.
Section 19 of the Agreement provides that the Agreement will not become effective
until the Commission has approved all of the Agreement's terms and conditions and declared
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that all payments Idaho Power makes for purchases of energy to Tiber will be allowed as
prudently incurred expenses for ratemaking purposes.
On March 17, 2003, the Commission issued Notices of Application and Modified
Procedure in Case No. IPC-03-01. The deadline for filing written comments was April 4
2003. The Commission Staff was the only party to file comments.
Staff Comments
Staff finds that the rates contained in the Agreement comport with Order No. 29124
the most recent Commission Order establishing avoided cost rates. Staff additionally addresses
the following terms and conditions of the submitted Agreement:
Measurement of the 10 MW rating
Staff believes that Idaho Power s proposal to use net generation measured on an
hourly basis in determining whether the project is under the 10 MW threshold is reasonable.
Staff believes that net generation of the QF project in a single hour, rather than gross average
generation or nameplate capacity, is what should be used to define its capacity for eligibility of
posted rates. In the present case, because the nameplate rating of the Tiber project is proposed to
be 7.5 MW, Idaho Power believes optional energy is not likely to be an issue. Staff agrees.
With a nameplate capacity of 7.5 MW and considering Northwestern Energy s agreement to firm
the project's output on a montWy basis , Staff contends that unless Tiber expands its capacity at
some point in the future, it would be impossible for net generation measured on an hourly basis
to exceed 10 000 kWh in any hour.
Staff notes that Idaho Power s proposal would allow Tiber (or other QFs if this
provision is included in future contracts) to install generating capacity with a nameplate rating
greater than 10 MW while still qualifying to be paid the posted rates established for projects
smaller 10 MW. In theory, Staff posits, a very large project could elect to sell only 10 MW of its
output under a PURP A contract at the posted rates, leaving the remaining output to be sold in
some other manner. Staff believes the principles outlined in Order No. 26772 (Case No. UPL-
96-, the "Earth Power Case ) should continue to be followed with regard to whether multiple 10
MW contracts, perhaps with different utilities, would be permitted if the proposed Tiber contract
terms are adopted. In Order No. 26772, the Commission ruled that the term "project" equates
with "qualifying facility." Thus, each qualifying facility is only entitled to one PURP A contract.
If this principle were followed with regard to the 10 MW project size threshold, it would
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preclude a large proj ect from breaking the generation into several 10 MW blocks for sale at
posted rates under multiple contracts or to multiple utilities. However, it would not prevent a
large project from selling 10 MW of its output under a single contract to one utility and
marketing the remainder outside ofPURP A.
Encouraging increased "Firmness " of QF contracts
Idaho Power and Tiber have included provisions in the Agreement to bring Tiber
project performance more in line with projects that actually provide firm energy production.
Staff agrees with Idaho Power that the generation provided by many QF projects is not "firm" as
defined by industry standards. Staff also agrees that the posted avoided cost rates adopted by the
Commission are based on the costs of a combined cycle combustion turbine that would provide
firm generation. However, while Staff believes it is reasonable in this case to include contract
provisions regarding project standards of firmness given Tiber s concurrence, Staff notes that
this is not a provision that has been required by the Commission in the past and should be further
evaluated if opposed by developers in the future. Staff notes that there is a wide variation in the
predictability and "firmness" of existing projects. Staff believes that Idaho Power s proposal in
this contract to require the project to commit two years in advance to monthly generation
amounts accomplishes the Company goal of attaining planning certainty, but stops short of
penalizing the project for inability to predict generation hours, days or weeks in advance. As a
result, this project can qualify for firm energy rates if the developer can reasonably predict
monthly generation levels.
Whether the 90% minimum or the 110% cap are the appropriate bands of variance for
projects other than Tiber or whether firmness standards should be required at all should be
determined, Staff believes, at the time other projects seek contracts with Idaho Power.
Seasonality
Idaho Power has seasonalized the rates in this Agreement. The proposed
seasonalization, however, differs from the way that posted rates have historically been
seasonalized by the Company. Staff notes that neither the 2002 Garnet report nor the Company
2002 RFP precisely support the proposed modifications to the months included in each season
although they do support it generally. The fact is, Staff contends, that Idaho Power s months of
greatest need or surplus change over time as new resources are acquired. While the changes
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proposed by the Company may be reasonable at this point in time, Staff contends that different
months may be more appropriate for each season in future contracts.
Staff recommends that the Agreement be approved and that those non-standard terms
unique to this contract (i., measurement of the 10 MW rating, encouraging increased firmness
and seasonality) not be viewed as establishing precedent.
Commission Decision
Idaho Power and Tiber have presented a negotiated PURP A contract for Commission
approval. The contract rates are unlevelized and conform to Commission posted rates for QFs
smaller than 10 MW. Staff recommends that the Agreement be approved and that the non-
standard terms unique to the contract be clearly identified as not establishing precedent. Does
the Commission find it reasonable to approve the contract with the qualified language as
recommended by Staff? Does the Commission agree that payments made under the Agreement
should be allowed as prudently incurred expenses for ratemaking purposes?
Scott Woodbury
VldlM:IPCEO301
DECISION MEMORANDUM