20040504Final Order No 29487.pdf

Office of the Secretary
Service Date
May 4, 2004
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
IDAHO POWER COMPANY FOR APPROVAL
OF AN AGREEMENT FOR SALE AND
PURCHASE OF ELECTRIC ENERGY
BETWEEN IDAHO POWER COMPANY AND
RENEWABLE ENERGY OF IDAHO, INC.
CASE NO. IPC-O4-
ORDER NO. 29487
On February 19, 2004, 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 and Renewable Energy of
Idaho, Inc. (Renewable Energy) dated February 12, 2004. The Commission in this Order
approves the submitted Agreement and reminds the Company of its obligation to follow
Commission orders and to compute avoided cost rates in accordance with Commission approved
avoided cost methodology.
Renewable Energy proposes to design, construct, install, own, operate and maintain a
17.5 megawatt (MW) biomass (primarily wood waste) generating facility to be located at the old
Boise Cascade Plant site near Emmett, Idaho (the Project). The Project will be a qualified small
power production facility (QF) under the Public Utilities Regulatory Policies Act of 1978
(PURP A).
Under the terms of the Agreement, Renewable Energy has elected to contract with
Idaho Power for a 20-year term. The Agreement contains non-Ievelized published avoided cost
rates as currently established by the Commission for energy less than 10 MW and a negotiated
price for energy over 10 MW.
As in recent prior submitted agreements, Idaho Power utilizes a cogeneration small
power producer (CSPP; QF) agreement that is consistent for all CSPP projects regardless of their
resource (wind, hydro, geothermal, wood waste, etc.) and that incorporates (1) current IPUC
Orders, (2) current technologies, and (3) current utility industry standards. The submitted
Agreement, the Company states, contains many of these concepts as well as unique negotiated
provisions due to the fact that the Project wishes to routinely deliver more than 10 MW to Idaho
Power. The following is a brief description of some ofthese concepts and unique provisions:
ORDER NO. 29487
A: Ten MW or Smaller Project Size and Eligibility for the Published Avoided Cost
Rate: Noting that the Commission has established a 10 MW size limit for PURPA projects
eligible for QF published avoided cost rates, Idaho Power points out that the Commission did not
specify how the 10 MW limit was to be measured. Historically, the nameplate rating of the
facility has been considered to be the measurement for this limit. Idaho Power suggests in this
filing that it is reasonable that this limitation be based on that energy delivery to the utility and
not nameplate rating.
Many QF facilities, due to less than 100% capacity factors and unknown incremental
fuel supplies, the Company contends, are not able to commit to a long-term firm commitment of
the incremental energy production above 10 MW. To address this issue, Idaho Power has
developed the concept of "Optional Energy." The concept of Optional Energy, the Company
contends, maintains the integrity of the 10 MW limitation and the QF published avoided cost
rates but also allows the project developer the ability to assess its specific facility s performance
capital cost and other risk/benefit factors in designing the size ofthe QF's individual facilities.
Optional Energy is all energy that the Project delivers to Idaho Power that exceeds
000-kilowatt hours in a single hour, typically non-firm energy, as defined in ~ 1.18 of the
Agreement. Optional Energy is identified through hourly metering. The price of this energy is a
price negotiated between Idaho Power and the specific project. As non-firm energy, Idaho
Power considers the value of this energy to be a variable current month market based price.
Renewable Energy requested that fixed prices be established for its Optional Energy
rather than receiving the monthly variable market prices. Idaho Power and Renewable Energy,
therefore, negotiated fixed prices for the Optional Energy (Section 7.5 of the Agreement) in
consideration of the Project providing year-ahead firm commitments of the monthly Optional
Energy amounts (Section 6.4 of the Agreement).
Also applied to this Optional Energy are Company-developed Shortfall and Surplus
Energy concepts (Sections 7.7 and 7.8 of the Agreement), as previously included in the
Company s Tiber Montana LLC contract approved by the Commission in Order No. 29232 and
the recently submitted Agreement with United Materials of Great Falls Inc. (Case
No. IPC-04-1).
B. Seasonality: As an incentive for Renewable Energy to deliver energy to the
Company during times when it is of greater value to Idaho Power, the Company has refined the
ORDER NO. 29487
seasonal rates to coincide to the months in which Idaho Power has identified actual energy needs
and periods of higher demand. Reference Agreement Sections 6., 7.1 and 7.
C. Environmental Attributes: As reflected in Agreement Section 8, Idaho Power
notes that it has filed a Petition with the Commission in Case No. IPC-04-2 seeking a
Commission ruling concerning whether the environmental attributes associated with a QF project
are owned by the project or the utility at the time a utility purchases electricity from a QF
project. The Commission s final Order will be included and become an integral part of the
Agreement. Renewable Energy reserves the right to cancel the Agreement within 30 days of the
Commission s final Order regarding Idaho Power s Petition.
Agreement Section 24 provides that the Agreement will not become effective until
the Commission has approved without change all the Agreement terms and conditions and
declared that all payments that Idaho Power makes for purchases of energy to Renewable Energy
will be allowed as prudently incurred expenses for ratemaking purposes. Should the
Commission approve the Agreement, Idaho Power intends to consider the effective date of the
Agreement to be February 12, 2004. As reflected in the Company s Application, the Agreement
contains non-Ievelized published avoided cost rates in conformity with applicable Commission
Orders.
Idaho Power requests that the Commission issue an Order approving the Firm Energy
Sales Agreement between Idaho Power Company and Renewable Energy of Idaho, Inc. without
change or condition. The Company further requests a Commission finding that all payments for
purchases of energy under the Agreement will be allowed as prudently incurred expenses for
ratemaking purposes.
On March 16, 2004, the Commission issued Notices of Application and Modified
Procedure in Case No. IPC-04-5. The deadline for filing written comments was April 7 2004.
The Commission Staff was the only party to file comments. Reply comments were filed by
Idaho Power and Renewable Energy. The comments can be summarized as follows:
COMMISSION STAFF
Staff contends that the Company has failed to follow the Commission s Orders
regarding how avoided cost rates are to be determined for QFs 10 MW and larger and has
instead negotiated a rate based on comparisons to forward market prices and recent Idaho Power
contract purchases. Because the rates contained in the Agreement have not been determined in
ORDER NO. 29487
accordance with the approved Commission avoided cost methodology, Staff recommends that
the submitted Agreement be disapproved. Staff recommends that Idaho Power be directed to
compute an avoided cost rate in accordance with the prescribed methodology, resume contract
negotiations with Renewable Energy, and submit a revised agreement for Commission
consideration.
The avoided cost methodology for QF projects 10 MW and larger is an IRP-based
methodology requiring the utility to make two runs of its power supply model, one using
assumptions consistent with its most recent IRP, and a second with the proposed QF included as
a no-cost resource. The difference in net power supply cost computed by the model over the
term of the proposed contract represents the value of the QF to the utility and is supposed to
serve as the basis for establishing an avoided cost rate for the proposed QF. The methodology is
intended to capture and fairly value the different individual generation characteristics of
proposed projects. The IRP-based methodology was set forth in a Settlement Stipulation
approved by the Commission in Order No. 26576 issued September, 1996 in Case No. IPC-95-
9. In the same Order accepting the Settlement Stipulation, the Commission also reduced
maximum contract lengths from 20 years to five years. Staff maintains that the Settlement
Stipulation was developed and signed when contract length was still 20 years, and that the
methodology in the Stipulation was clearly designed to be used for long-term, rather than short-
term contracts (e., 20-year rather than 5-year contracts). Staff contends that the IRP
methodology was chosen specifically because the parties felt that it more accurately reflected the
value of a large QF to the utility and was more appropriate than the SAR-based method for large
projects and long-term contracts.
Staff asked Idaho Power specifically to compute rates for Renewable Energy using
AURORA, the power supply model the Company is currently using for various types of
analyses.The Company contends that the AURORA model is currently being extensively
updated for use in the 2004 IRP and is simply not available to perform the requested analysis in
the near future. The Company responded "the process described in the referenced Settlement
Stipulation is not a valid method for setting 20-year avoided costs for QF projects and (the
Company) did not use forecast models to negotiate rates with Renewable Energy.Because
Idaho Power has AURORA, has used it in the past, has used it in its present rate case, and is
ORDER NO. 29487
using it for its upcoming 2004 IRP, Staff sees no acceptable reason why the model cannot be
used in this contract case.
Rather than following the avoided cost methodology prescribed in the Settlement
Stipulation approved in Commission Order No. 26576, Idaho Power offered Renewable Energy a
non-Ievelized published avoided cost rate for the first MW and offered an Optional Energy Rate
for generation above 10 MW. Idaho Power established three criteria to judge the reasonableness
of the negotiated Optional Base Energy price.
1. The Optional Base Energy price must be less than the current non-
levelized published avoided cost;
2. The Optional Base Energy price must not exceed forward price curves for
Idaho Power s system border prices for the years that a forward price
curve is available;
3. The Optional Base Energy price must not exceed Commission-approved
Idaho Power energy purchase prices. The PPL Montana energy purchase
agreement was recently approved by the Commission and was used for
this comparison.
In order to evaluate the negotiated Optional Base Energy price against these three criteria
equivalent energy products and prices had to be established to provide like-kind comparisons.
Once the comparable products and prices were established, Idaho Power negotiated a price that
met the three initial criteria. Seasonality was applied to the negotiated price in the same manner
as it is applied to the non-Ievelized published avoided cost. An annual escalation factor of 1 %
was negotiated for the Optional Base Energy prices. This compares to an annual escalation rate
of approximately 2.3% for the non-Ievelized published avoided costs approved by the
Commission.
While Staff finds that the contract prices and related criteria are not necessarily
unreasonable, Staff contends the fact remains that the Company failed to follow Commission
Orders in developing an avoided cost rate for Renewable Energy s greater than 10 MW project.
Staff contends that it is presumptuous of the Company as set forth in the Company s response to
a Staff production request to dismiss the Commission-approved methodology as no longer valid
without even making an attempt to compute rates in accordance with the methodology. If rates
had been computed in accordance with the methodology and then were judged unreasonable
Staff might agree that an alternate method was warranted. That was not the case here, however.
ORDER NO. 29487
IDAHO POWER REPLY
Idaho Power assures the Commission that it was not the Company s intention in
negotiating rates with Renewable Energy to disregard the Commission s Order No. 26576
avoided cost methodology for projects larger than 10 MW. Staffs Comments, the Company
concedes, correctly note that a Commission Order remains in effect until it is changed by
Commission Order. In the negotiation of the contract with Renewable Energy, the Company
states that it did not utilize the AURORA model to attempt to compute avoided cost rates for
Renewable Energy for two principal reasons:
1. At the time Renewable Energy approached Idaho Power for a contract, the
Company had not utilized the AURORA model to generate avoided costs.
Idaho Power had used the AURORA model for some resource expansion
comparisons but it did not believe that it had sufficient experience with the
AURORA model to rely on the model to accurately determine avoided
costs.
2. Renewable Energy was extremely anxious to execute a contract with Idaho
Power so that it could move forward with the development of its project.
The Company was concerned that taking the time necessary to modify and
test the AURORA model to perform the precise cost-benefit analysis
required by the methodology described in Commission Order No. 26576
would have significantly delayed the development of a contract for the
Renewable Energy project.
For the above reasons, Idaho Power utilized the Commission-approved energy
purchase rates for a QF project smaller than ten (10) MW as the starting point for negotiations
with Renewable Energy. Idaho Power does not know whether making the two AURORA runs in
the manner described in Order No. 26576 would result in energy purchase prices that are higher
or lower than the negotiated purchase prices contained in the Renewable Energy contract filed
with the Commission.
While Idaho Power believes that AURORA can successfully provide the more
general analysis needed for IRP purposes, the Company is not confident that it has sufficiently
tested AURORA to conclude that two runs of the AURORA model, one with the QF project
included and one without, would, in fact, produce pricing and cost data that would precisely
quantify the costs that Idaho Power would avoid over a 20-year period if it acquired a QF
resource rather than building another resource or purchasing wholesale power in an amount
equivalent to the QF resources output.
ORDER NO. 29487
Idaho Power notes that about the time that Renewable Energy approached the
Company concerning the QF contract, the person who was most experienced in operating the
AURORA model had recently left the Company s employment. The Company was in the
process of training new people to operate the AURORA model.
Idaho Power notes also that currently the AURORA model is being run almost
constantly in preparing the Company s 2004 IRP. It is the Company s intention as soon as the
2004 IRP process is completed, to turn its full intention to the AURORA model to make a final
determination whether (1) the AURORA model outputs are sufficiently consistent with actual
system experience that the output of the model would be a reliable predictor of costs a utility can
avoid by adding a specific large QF resource over a 20-year period, or (2) the AURORA model
cannot be used for this purpose and some alternative must be developed. If the Company
ultimately determines that the AURORA model cannot be used in the way contemplated in Order
No. 26576, the Company intends to advise the Commission of that fact and seek modification of
the methodology. The Company acknowledges that Order No. 26576 has not been rescinded or
changed by the Commission and is still in effect.
In the final analysis, the Company states that the Commission must decide if the filed
Agreement between Idaho Power and Renewable Energy is in the public interest. Idaho Power
submits that because the purchased rates in the Renewable Energy contract in total are less than
the currently approved avoided cost rates for smaller QFs, the rates are reasonable. Idaho Power
believes that taken as a whole, the prices, terms and conditions contained in the Renewable
Energy Agreement are reasonable and that the Agreement should be approved.
RENEWABLE ENERGY REPLY
Renewable Energy expresses concern that its project is in the center of a dispute, not
of its making, between a well-intentioned Staff and Idaho Power. Renewable Energy and Idaho
Power, it states, have been in negotiations over the rates and terms contained in the submitted
Agreement for over seven months at a cost of many thousands of dollars. Many concessions
were made on Renewable Energy s part to expedite the process. The reason for Renewable
Energy s acquiescence is that time is critically important. The proposed project is a wood waste
burning facility on which the US. Forest Service and Bureau of Land Management are relying to
dispose of surplus waste forest materials created as a result of Congress s Healthy Forest
mandate. Delaying the on-line date for this facility could jeopardize the project's viability. Site
ORDER NO. 29487
preparation work has already commenced in Emmett. Renewable Energy urges the Commission
to approve the Agreement based on the good faith efforts of both Idaho Power and Renewable
Energy. If the Commission believes the avoided cost methodology adopted in Order No. 26576
remains applicable, it is recommended the Commission declare it applicable for future contracts
and not apply it retroactively to Renewable Energy s Agreement with Idaho Power.
Renewable Energy states that it has secured sufficient fuel to operate this project at
the 17 MW level.There are no physical or operational constraints, however, that require
Renewable Energy to locate all 17 MW of production at a single location. The economies
captured by Renewable Energy by using a single location for its project, however, are what
permitted Renewable Energy to accept rates that are actually lower than the published avoided
cost rates. In order to keep the project viable and avoid the months of delay that will ensue while
Idaho Power compiles the data necessary to revive the AURORA model, Renewable Energy
states that it is now actively seeking a second site to begin construction of two separate QF
projects. One 10 MW project would be located at the old Boise Cascade Mill Site in Emmett.
The second, a somewhat smaller QF, would be located at a new location. The end result would
be that Renewable Energy would suffer from lost economies caused by consuming its fuel source
at two different sites and that ratepayers would suffer from paying a higher avoided cost rate for
a 10 and 7 MW project. Renewable Energy contends that the 20-year difference in contract and
posted rates is approximately $25 million.
A unique and very beneficial feature of the submitted Agreement, Renewable Energy
contends, is that the QF has agreed to only operate in Seasons Two and Three which are the
seasons Idaho Power is most in need of power in the Treasure Valley. Renewable Energy urges
the Commission to exercise its discretion and approve a negotiated Agreement which provides
benefits to Idaho Power and its ratepayers.
It is Renewable Energy s hope that the Commission will look to the spirit and intent
of its Orders and recognize Staffs comment that "the contract prices developed by Idaho Power
are not necessarily unreasonable." Given the fact that Renewable Energy is actually able to seek
two separate Agreements and therefore legally increase the contract prices to full avoided cost
rates should be considered by the Commission, Renewable Energy contends, as evidence of the
contract prices being per se reasonable.
ORDER NO. 29487
COMMISSION FINDINGS
The Commission has reviewed the filings of record in Case No. IPC-04-5 including
the underlying Agreement, the comments and recommendations of the Commission Staff and the
Reply Comments of Idaho Power and Renewable Energy. Based on our review of the record, we
continue to find it appropriate to process this case pursuant to Modified Procedure. IDAP A
31.01.01.204.
Idaho Power in this case requests Commission approval of a PURP A Firm Energy
Sales Agreement with Renewable Energy of Idaho, Inc. The proposed project is a 17.
megawatt biomass generating facility to be located at the old Boise Cascade Plant site near
Emmett, Idaho. Rates in the submitted Agreement were not calculated pursuant to the IRP-based
methodology established for large QF projects (i., projects greater than 10 MW). Instead, the
Agreement contains non-Ievelized published avoided cost rates for all energy less than 10 MW
and a negotiated price for all energy over 10 MW.
The Commission Staff recommends that the submitted Agreement be disapproved.
Staff recommends that Idaho Power be directed to compute an avoided cost rate in accordance
with the prescribed methodology, resume contract negotiations with Renewable Energy and
submit a revised Agreement for Commission consideration.
Idaho Power acknowledges that the avoided cost methodology established in Order
No. 26576 has not been rescinded or changed by the Commission and is still in effect. The
Company admits that it did not use the methodology in calculating rates and sets forth in its
Reply its reasons for failing to do so. Idaho Power states it does not know whether the rates
would be higher or lower using the IRP-based methodology. Idaho Power submits that because
the purchase rates in the Renewable Energy contract in total are less than the currently approved
avoided cost rates for smaller QFs, the rates are reasonable. The Company recommends that the
Agreement be approved.
Renewable Energy contends that it negotiated in good faith, and has made
concessions to obtain a speedy contract. If the Agreement is not approved, Renewable Energy
contends that it will incur expenses and that the project's viability may be jeopardized. Site
preparation has already begun in Emmett and the QF is looking for a second site to potentially
develop the project as separate 10 and 7 MW facilities. If developed in that manner, the
available rates for the two facilities would be the higher posted rates available to QFs 10 MW
ORDER NO. 29487
and smaller. The developer estimates the difference in cost to ratepayers (contract rates versus
posted rates) over the 20-year project life is approximately $25 million.
Idaho Power s failure to follow Commission-approved avoided cost methodology for
calculating Renewable Energy rates or request changes in that methodology, we find, is both
unacceptable and inexcusable. The Company and its employees are presumed to be aware of the
requirements in the Commission s Orders and the consequences of failing to follow them. Idaho
Code Title 61 , Chapter 7-Public Utilities Law-Enforcement and Penalties. If the Company
believes that the IRP-based methodology approved in Order No. 26576 is no longer valid, then it
is incumbent upon the Company to make a filing with the Commission and request changes. As
the Company is well aware, utility purchases under PURP A are mandatory. Such purchases
however, are to be priced at the Commission-determined avoided cost rate for QFs smaller than
10 MW or pursuant to approved IRP-based methodology for QFs larger than 10 MW. Should
the Company choose not to follow avoided cost methodology in its contracting practice, it does
so at risk of having the contract regarded by this Commission as a voluntary purchase.
Idaho Power in its Reply states that it does not know whether the IRP-based
methodology would result in a higher or lower rate for Renewable Energy. Weare asked to
accept the rate as being per se reasonable based on a comparison to the posted rate. Such a
comparison, we find, provides only one element of consideration in determining reasonableness.
It is not by itself persuasive. What is persuasive in this case is the unfairness of holding the QF
project hostage for the failure of the utility to follow the Commission-approved avoided cost
methodology. The Project's viability, as configured, is dependent on the timely approval of the
submitted Agreement. An additional persuasive factor in this case is the fall-back option
available to Renewable Energy to change the 17.5 MW project configuration at the Emmett site
to two smaller configurations, each qualifying for posted rates, one at Emmett and the second at
a different site. Clearly this result is in the interest of neither the QF developer who would be
required to develop two project sites and sacrifice economies of scale, nor the Company and/or
its customers who would be required to pay an amount significantly greater than the negotiated
contract price for an equivalent amount of energy over the 20 year contract term.
Of significance also in our decision-making is Staffs assessment that the contract
prices and related criteria are "not necessarily unreasonable." Staff s qualified assessment of the
contract rates is a result of the Company s refusal to provide an IRP-based calculation. We
ORDER NO. 29487
regret that the Company has placed Renewable Energy, Staff and the Commission in this
position. For the reasons cited, however, even though an element of uncertainty exists, we find it
reasonable to approve the submitted Agreement.The Agreement terms we consider are
presented in the context of a negotiated and mutually accepted contract. Our decision in this
case sets no precedent for our future regulation of such Agreements or the utility. We find it
reasonable based on our review of the Agreement and the filings of record to allow payments
made under the Agreement as prudently incurred expenses for ratemaking purposes.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over Idaho Power Company,
an electric utility, pursuant to the authority and power granted it under Title 61 of the Idaho Code
and the Public Utility Policies Act of 1978 (PURP A).
The Commission has authority under PURP A and the implementing regulations of
the Federal Energy Regulatory Commission (FERC) to set avoided costs, to order electric
utilities to enter into fixed term obligations for the purchase of energy from qualified facilities
and to implement FERC rules.
ORDER
In consideration of the foregoing and as more particularly described and qualified
above, IT IS HEREBY ORDERED and the Commission does hereby approve the February 12
2004, Firm Energy Sales Agreement between Idaho Power Company and Renewable Energy of
Idaho, Inc.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) may petition for reconsideration within twenty-one (21) days of the
service date of this Order with regard to any matter decided in this Order. Within seven (7) days
after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code ~ 61-626.
ORDER NO. 29487
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this If
1'J...
day of May 2004.
MARSHA H. SMITH, COMMISSIONER
ENNIS S. HANSE , COMMISSIONER
ATTEST:
~tD.~Je D. Jewell
Commission Secretary
vld/O:IPCE0405 sw
ORDER NO. 29487