20040406Comments.pdf

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L..JSCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
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Street Address for Express Mail:
472 W. WASHINGTON
- !30ISE, IDAHO 83702-5983
Attorney for the Commission Staff
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-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Application, Notice of Modified Procedure and Notice of Comment /Protest Deadline issued on
March 16, 2004 submits the following comments.
BACKGROUND
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.
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
STAFF COMMENTS APRIL 6, 2004
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.
The Agreement also contains terms similar to those contained in contracts recently
approved by the Commission. 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 a concept of "Optional Energy." Optional Energy is all energy
that the Project delivers to Idaho Power that exceeds I O OOO-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 for this energy has been negotiated between Idaho Power
and the 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 for its Optional Energy be established
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 ofthe monthly Optional
Energy amounts (Section 6.4 of the Agreement). 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 of the QF's individual facilities.
Also applying 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).
STAFF COMMENTS APRIL 6, 2004
ANALYSIS
Commission-Approved Methodology for Rates for Projects Larger Than 10 MW
Staff opposes approval of this Agreement because the rates contained in the Agreement
have not been determined in accordance with the approved Commission methodology for
projects 10 MW and larger. In Case No. IPC-95-, a Settlement Stipulation was approved by
the Commission and included as part of its final Order. See Order No. 26576 and the Settlement
Stipulation included as Attachment No. I. The Settlement Stipulation describes in detail how
avoided cost rates are to be determined for projects 1 MW and larger. In later Order Nos. 29029
and 29069, the Commission raised the threshold for published avoided cost rates from 1 MW to
10 MW; therefore, since then Staff has assumed that the methodology described in the
Settlement Stipulation is to be used for all projects 10 MW and larger.
Although the Settlement Stipulation is now binding upon all parties, it was signed by
Idaho Power and most other parties in Case No. IPC-95-, thus indicating Idaho Power
endorsement of the methodology. In fact, Case No. IPC-95-9 was initiated by Idaho Power
own application for an Integrated Resource Plan (IRP)-based methodology to be used as a new
basis for avoided cost rate negotiations with QFs larger than I MW. Staffs recollection is that
Idaho Power s own staff was more instrumental than any other party in developing the details of
the methodology.
Basically the IRP-based methodology requires that the utility 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 costs 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.
Since the methodology was adopted, it has only been utilized once to establish a rate for a
project larger than 10 MW because only one contract larger than 10 MW has been sought by a
project owner in the interim. In Case A VU-02-, Potlatch and Avista negotiated an
agreement with rates based on the methodology for Potlatch's 60 MW QF. Avista used the
AURORA model, the same model Idaho Power uses for various purposes including its current
, rate case and its upcoming 2004 IRP.
STAFF COMMENTS APRIL 6, 2004
In production requests, Staff asked Idaho Power to use the IRP-based methodology as
prescribed in the Settlement Stipulation to compute rates for the Renewable Energy of Idaho
contract. In its response, the Company stated:
By way of background, it should be noted that the Commission accepted the
above-referenced Settlement Stipulation in Order No. 26576 dated September 4
1996. It is important to remember that the length of contracts for QF projects at
issue in Order 26576 was limited to five years. Under that condition, the use of
forecasting models to set avoided cost rates did not present much risk of
overpayment or underpayment.
In the same order accepting the settlement Stipulation, the Commission also reduced maximum
contract lengths from 20 years to five years. Staff maintains, however, 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 believes this was the expectation
of other parties in the case as well, since there are other, much better methods for establishing
rates for short-term contracts. Market data are readily available for short-term contracts. For
long-term contracts, such data are not available; therefore, IRPs were used as the basis for
establishing rates because their 20-year planning horizon corresponded to the maximum contract
length available at the time.
Idaho Power s statement about the use of forecasting models to set avoided cost rates not
presenting much risk of overpayment or underpayment if contracts were limited to five years is
very misleading. When the methodology was developed by parties in the case, the assumption
was that maximum contract length would remain at 20 years. The IRP-based 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. The risk of overpayment or underpayment was believed to be less under the
IRP-based methodology, especially for long-term contracts.
In its response, Idaho Power also states
, "
Order No. 26576 also was predicated on the
discontinuance of the use of a surrogate avoided resource in setting avoided cost rates." Staff
contends that this statement is simply not true. To Staffs knowledge, the Commission has never
considered discontinuing the use of a surrogate avoided resource in setting avoided cost rates.
Idaho Power also states that there are other material differences between the situation that
existed at the time Order No. 26576 was issued in 1996 and the situation that exists today. The
STAFF COMMENTS APRIL 6, 2004
Company does not identify any ofthose differences, however. The Company concluded "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.
Staff also asked Idaho Power specifically to compute rates using AURORA, the power
supply model the Company is currently using for various types of analysis. The Company
responded that
Idaho Power does not have the forecast model upon which the methodology
described in the above-referenced Stipulation was based and the AURORA model
will not calculate avoided costs for a 20-year contract. In addition, 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.
Staff contends that no particular model was specified when the Settlement Stipulation
was adopted. Various models are available and capable of performing the necessary
computations. In fact, for the recently approved Potlatch QF contract, Avista used AURORA in
accordance with the methodology described in the Settlement Stipulation. Because Idaho Power
has AURORA, has used it in the past, has used it in its ongoing rate case, and is using it for its
upcoming 2004 IRP, Staff sees no acceptable reason why it cannot be used in this case.
Idaho Power s Method for Establishing Prices in This Contract
Rather than following the methodology prescribed in the Settlement Stipulation, Idaho
Power offered the non-Ievelized published avoided cost rate for the first 10 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-Ievelized
published avoided cost;
The Optional Base Energy Price must not exceed forward price curves for Idaho
Power system border prices for the years that a forward price curve is available;
and
The Optional Base Energy Price must not exceed recent Commission-approved
Idaho Power energy purchase prices. The PPL Montana energy purchase
agreement was recently approved by the Commission and was used for this
companson.
ST AFF COMMENTS APRIL 6, 2004
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
compansons.
Comparable Border Market price: An Idaho Power system border forward price
curve current at the time of negotiations (January 5, 2004) was used as the initial
data. An annual weighted average of the monthly weighted average of the actual
Heavy and Light Load Hour pricing was calculated.
Comparable recent alternative: The PPL Montana purchase power agreement was
recently approved by the Commission. This transaction is for only Heavy Load
Hours during the months of June, July and August through 2009.
To create a comparable product, it was assumed that the Renewable
Energy project would deliver flat 7 MW of Optional Base Energy for the same
three months (June, July and August). During Heavy Load Hours, the PPL
Montana price was applied and, during Light Load Hours, the estimated Idaho
Power border price was applied to create a weighted average price for the entire
three months of energy deliveries.
The seasonalized prices from the Renewable Energy agreement for the
same months was applied to the same flat 7 MW of generation to produce a
comparable weighted average price for the same three months of energy
deliveries.
Once the comparable products and prices were established, Idaho Power negotiated a
price that met the three initial criteria. Seasonalitity 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.
The contract prices developed by Idaho Power are not necessarily unreasonable, nor are
the criteria used to judge their reasonableness. The fact remains, however, that Idaho Power
failed to follow Commission orders in developing an avoided cost rate. It is presumptuous, to
say the least, for Idaho Power to dismiss the Commission-approved methodology as no longer
valid without even making an attempt to compute rates in accordance with the methodology.
STAFF COMMENTS APRIL 6, 2004
rates had been computed in accordance with the methodology then judged unreasonable, Staff
might agree that an alternate method was warranted. That was not the case here, however.
RECOMMENDATION
Because Idaho Power 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
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.
Respectively submitted this th day of April 2004.
Scott Woodbury
Deputy Attorney General
Technical Staff:Rick Sterling
i: umisc/commen tslipcO4. 5swrps
STAFF COMMENTS APRIL 6, 2004
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 6TH DAY OF APRIL 2004 SERVED
THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-04-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
MONICA MOEN
BARTON L KLINE
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RANDY C ALLPHIN
CONTRACT ADMINISTRATOR
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RICHARD VINSON
PRESIDENT
RENEWABLE ENERGY OF IDAHO INC
320 MOUNTVIEW
MERIDIAN ID 83642
~1fSECRET Y
CERTIFICATE OF SERVICE