HomeMy WebLinkAbout20031106Application.pdfRECEIVED !:D
BARTON L. KLINE, ISB # 1526
MONICA MOEN , ISB # 5734
Idaho Power Company
1221 West Idaho Street
O. Box 70
Boise, Idaho 83707
Telephone: (208) 388-2682
FAX Telephone: (208) 388-6936
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UTILITIES COi'ii"ilSSION
Attorneys for Idaho Power Company
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF A PETITION FILED BY
IDAHO POWER COMPANY FOR APPROVAL)
OF MODIFICATIONS TO THE SECURITY
PROVISIONS REQUIRED TO BE INCLUDED
IN AGREEMENTS BETWEEN IDAHO
POWER AND CO-GENERATORS
AND SMALL POWER PRODUCERS
CASE NO. IPC-03-
PETITION
COMES NOW Idaho Power Company ("Idaho Power" or the "Company
and , pursuant to RP 53, hereby petitions the Idaho Public Utilities Commission ("IPUC"
or the "Commission ) to issue an Order authorizing Idaho Power to accept modified
insurance and lien rights as satisfactory risk mitigation measures in agreements
between Idaho Power and co-generators and small power producers ("CSPPs ) that
contain levelized avoided cost rates. Without risk mitigation, CSPPs desiring levelized
rates must post liquid funds as security for the overpayments inherent in the levelized
purchase rates.
PETITION -
The proposed modifications , described below, are intended to identify
reasonable and realistic insurance and security alternatives for co-generators and small
power producers that maintain an acceptable level of protection for the Company
ratepayers.This Petition is made on the following grounds and for the following
reasons:
In March 1987 , the Idaho Public Utilities Commission initiated Case No. U-
1006-292 (the "292 Case ) in which the Commission conducted a comprehensive
analysis of the security provisions of Idaho Power Company contracts with
cogeneration and small power producers.1 The principal issue addressed at hearings
conducted on this matter was that of security and assessing the need for and devising a
means of protecting Idaho Power ratepayers from the perceived exposure and risk of
non-recovery of overpayment resulting from the front end loading that occurs with
levelized rates in power purchase contracts.
" .
On January 11 , 1988, in Order No. 21692 in the 292 Case, the
Commission established a requirement that CSPPs choosing to contract to sell power to
Idaho Power at levelized rates must post liquid funds as security for the overpayments
inherent in levelized purchase rates. That Order, as amended , further provides that the
obligation to post liquid funds could be mitigated if certain requirements were met. Two
of the mitigation methods permitted by Order No. 21692 are the purchase of certain
basic insurance policies and the establishment of certain lien rights. Exhibit 1 lists the
Although framed as an Idaho Power case, the Commission noted in Order No. 21446, issued in
the 292 Case, that the implications of that Order had generic consequences for all Idaho-
regulated utilities.
PETITION - 2
types of insurance and levels of coverages and deductibles deemed acceptable in
Order No. 21692 , as amended2, as a substitute for posting a portion of the required
liquid security. Exhibit 2 describes the lien rights of Idaho Power on CSPP projects that
receive levelized purchase rates.
" I.
Idaho Power routinely conducts audits of the Company s various CSPP
projects to assess whether those projects continue to conform with the risk mitigation
requirements of their specific agreements with the Company.When these audits
identify projects that do not conform with their specific requirements, notices of non-
compliance are sent to the applicable projects and Idaho Power works with those
projects to bring the non-compliant items back into conformance.
In the Company s most recent audit , Idaho Power identified numerous
projects that were not in compliance with respect to specific insurance requirements of
the Company s agreements with those projects. Some projects carried no insurance
while numerous others had insurance that were products standard in the insurance
industry but which , in many circumstances, did not conform with the insurance
requirements of the projects' agreements.
Notices were sent to the various projects which were non-compliant with
respect to the insurance requirements and three common responses were received by
Idaho Power from those projects:(1) the specific insurance required within the
agreement is not currently available from the insurance industry; (2) because the
insurance is not available, as a matter of law (the Doctrine of Impossibility), Idaho
Order No. 21692 has been amended by IPUC Order No. 25240 that was issued in Case No. IPC-
93-22 on November 2, 1993.
PETITION - 3
Power cannot enforce these requirements or require alternative security; and (3) the
financing structures of existing projects do not allow Idaho Power to place a second lien
on the project as required in the 292 Case.
Idaho Power contacted various insurance providers and verified the
unavailability of the specified insurance from the insurance industry. Idaho Power also
reviewed the potential application of the Doctrine of Impossibility and recognizes that it
may be a legitimate claim that may be upheld in legal proceedings. Finally, it is possible
that the financing arrangements of existing projects would preclude a subsequent lien
position by Idaho Power or any other party without the consent of the primary lender.
On February 19, 2003 , Idaho Power met with IPUC staff members and
discussed the CSPP insurance and second lien issues. The IPUC staff acknowledged
problems in the insurance industry and agreed with the Idaho Power that, while it is
important to preserve the ratepayers' overpayment protection , it is also important to
structure these products in a manner that is reasonably attainable by the CSPP
projects.
IV.
In certain cases, the financing arrangements of a CSPP do not allow a
second lien position as anticipated in Order No. 21692, as amended. However, where
those restrictions do not exist, the Company either places a second lien on a project at
the time a levelized rate agreement is executed or at the time a project is amended to
conform to the risk mitigation requirements of Order No. 21692 , as amended.
Realistically, however , the value of security obtained by placement of a
second lien on a project is tenuous. Either the value of the equipment , particularly on
PETITION - 4
less sophisticated projects , is negligible since used or rebuilt equipment is utilized (often
non-standard utility equipment, pump motors running in reverse , etc.) or the value of
that equipment is heavily financed and the financial institution has a first lien on those
assets making the value of the second lien marginal. As a project ages and the
financing is either paid or at least reduced, the value of the assets depreciate over the
same time frame.
Thus , were a project to default , the value of the assets remaining for the
second lien would be minor due to removal and other costs. Furthermore, the value of
project is generally not the actual value of the physical equipment; instead , the
marketable and bankable value of a project is the value of the projected revenues of the
energy delivered to Idaho Power under the levelized rate agreement. This has been
verified in many historical transactions.When projects have fallen into financial
difficulties, the financial institutions have acquired the project, maintained the CSPP
agreement with Idaho Power and then resold the project (assets and Idaho Power
sales agreement) to a subsequent owner.Clearly, the financial institutions have
identified that the reclaimed assets from these projects are insignificant without the
accompanying energy sales agreement to Idaho Power.
In response to the requirements of the insurance industry and either the
negligible value of second liens on CSPP projects or the Company s inability to obtain a
second lien on a CSPP project, Idaho Power proposes to conform its CSPP contract
requirements to comply with contemporary insurance industry standards and realistic
lien rights. Due to the marginal value of the secondary lien position and the inability of
PETITION - 5
the Company, in some circumstances, to obtain security in the form of a second lien
Idaho Power proposes to delete the secondary lien right as a risk mitigation measure in
levelized rate agreements with CSPPs.
Exhibit 3 shows , in legislative format , the proposed changes to the basic
business insurance requirements that are now deemed by the insurance industry to be
reasonably available to the CSPPs.It appears that the changes to the existing
requirements shown in Exhibit 3 could be made to the required basic business
insurance coverages without imposing substantial additional risk in the event of
default by a CSPP. In addition, by better aligning these requirements with current
insurance industry standards and business practices, enforcement and compliance with
these requirements will be reasonably attainable.
VI.
Service of pleadings , exhibits , orders and other documents relating to this
proceeding should be served on the following;
Barton L. Kline , Senior Attorney
Monica B. Moen , Attorney II
Idaho Power Company
O. Box 70
Boise, Idaho 83707
bkline
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idahopower.com
mmoen
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idahopower.com
Randy C. Allphin
Contract Administrator
Idaho Power Company
O. Box 70
Boise , Idaho 83707
rallphin
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idahopower.com
VII.
NOW WHEREFORE, based on the foregoing, Idaho Power Company
hereby requests that the Commission issue its Order:
(1 )finding that the modified insurance requirements shown in Exhibit 3
would be acceptable as the "basic business insurance" coverages for purposes of risk
PETITION - 6
mitigation as established in Order No. 21690 , as amended , for future CSPP agreements
and for preexisting CSPP projects as their current insurance is renewed; and
(2)finding that the requirement for the establishment of secondary lien
rights in favor of Idaho Power Company as established in Order No. 21690 , as
amended, for future CSPP agreements and for preexisting CSPP projects as their
agreements are amended be rescinded.
Idaho Power Company does not believe that an evidentiary hearing is
necessary to consider the issues presented by this Petition and requests that the matter
be processed under modified procedure.
Respectfully submitted this 4th day of November 2003.
(13.
MONICA B. MOEN
Attorney for Idaho Power Company
PETITION - 7
EXHIBIT
INSURANCE
TYPE LIMITS MAXIMUM
DEDUCTIBLE
Commercial General The greater of 15% of plant 5% of Plant Cost
Liability cost or $1 Milliion/incident
All Risk Property Not less than 90% of Plant Plant Cost
Cost $25 000 whichever
greater
Catastrophic Perils Not less than 60% of 5% of Plant Cost
(Earthquake and Flood)equipment cost
Boiler/Machinery Not less than 90%0% of equipment cost or
equipment cost $25,000 whichever
greater
Loss of Income (Business Not less than 75%30 days of income
Interruption)estimated daily income; not
less than 20% of estimated
annual income
All of the above insurance coverages shall be placed with insurance companies with an
M. Best rating of A- or better.
EXHIBIT 2
SECOND LIEN RIGHTS
The project will provide Idaho Power with adequate security interest in the
project, including, but not limited to:
Deed Of Trust securing the project real property and
improvements;
Title Insurance;
A contractually stipulated first lien amount, if any;
Appropriate U.C. security interests in personal property and
fixtures; and
Assignments for security purposes of all contract rights including
the Firm Energy Sales Agreement, water rights , permits, licenses
easement, etc, relating to the project.
The form of the liens will be tailored to the individual projects depending on the first lien
financing and other individual characteristics of the project. Idaho Power s lien rights
will be subordinated only to the initial long-term financier s lien , if any.
EXHIBIT 3
INSURANCE
TYPE LIMITS MAXIMUM
DEDUCTIBLE
Commercial General The greater of 15% of plant Plant Cost
Liability cost or $1 Mil/Hon/incident Consistent with current
Insurance Industrv Utility
practices for similar
property.
All Risk Property Not less than 9f)% 80% of Plant Cost
Plant Cost $25 000 wh ich lor
greater Consistent with
current Insurance Industrv
Utility practices for a similar
property.
Catastrophic Perils Not less than 6f).% 80%Plant Cost
(Earthquake and Flood)equipment cost Consistent with current
Insurance Industrv Utility
practices for similar
property.
Boiler/Machinery Not less than -9Q.% 80% of 0% of equipment cost or
equipment cost $25 000 whichew3r
greater Consistent with
current Insurance Industrv
Utility practices for a similar
property.
Loss Income (Business Not less than 75%days income
Interruption)estimated daily income; not Consistent with current
less than 20% of estimated Insurance Industrv Utility
annual income practices for similar
property.
All of the above insurance coverages shall be placed with insurance companies with an
AM. Best rating of A- or better.