20040419Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:APRIL 16, 2004
RE:CASE NO. IPC-04-5 (Idaho Power)
FIRM ENERGY SALES AGREEMENT (17.5 MW)
RENEWABLE ENERGY OF IDAHO, INC. (Emmett Facility)
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
power production facility (QF) under the Public Utilities Regulatory Policies Act of 1978
(PURPA).
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
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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 of these concepts and unique provisions:
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 PURP A 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 Company recognizes, 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 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).
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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
seasonalization of rates to coincide to the months in which Idaho Power has identified actual
energy needs and periods of higher demand. Reference Agreement Sections 6.2, 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
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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
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, 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
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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 unnecessarily
unreasonable, the fact remains, however, Staff contends, 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 Company
response to 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 judged
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unreasonable, Staff might agree that an alternate method was warranted. That was not the case
here, however.
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. Idaho Power acknowledges that fact. 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
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resource rather than building another resource or purchasing wholesale power in an amount
equivalent to the QF resources output.
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 oftraining 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, that as soon as
the 2004 IRP process is completed, to turn its full intention to the AURORA model to make a
final determination that (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 ofthat 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 u.S. Forest Service and Bureau of Land Management are relying to
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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
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 requires
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 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 Staff s 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
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rates should be considered by the Commission, Renewable Energy contends, as evidence of the
contract prices being per se reasonable.
COMMISSION DECISION
Idaho Power requests approval of a Firm Energy Sales Agreement with Renewable
Energy. The proposed project is a 17.5 MW biomass generating facility to be located at the old
Boise Cascade Plant site near Emmett, Idaho. The submitted Agreement was not calculated
pursuant to the IRP-based methodology required for large QF projects. Instead, the Agreement
contains non-Ievelized published avoided cost rates for energy less than 10 MW and a negotiated
price for energy over 10 MW. 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
submits that because the purchase rates and Renewable Energy contract in total are less than the
currently approved avoided cost rates for smaller QFs, that the rates are reasonable. The
Company recommends that the Agreement be approved. Renewable Energy contends that it
negotiated in good faith, 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.
developed in that manner, the available rates would be the higher posted rates available to QFs
10 MW and smaller. What are the consequences of not following the Commission-approved
avoided cost methodology? Should the submitted Agreement be approved or rejected?
Scott Woodbury
Vld/M:IPCEO405 sw2
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