ICIP PostHearingBrief.doc

Peter J. Richardson ISB # 3195
Richardson & O’Leary PLLC
99 East State Street, Suite 200
P.O. Box 1849
Eagle, Idaho 83616
Telephone: [phone]
Fax: [phone]

Attorneys for Industrial Customers of
Idaho Power

BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION

in the matter of the petition of the commission staff requesting that the commission investigate the buy-back rates in the letter agreement entered into by idaho power company and astaris llc )))))
CASE NO. ipc-e-01-43

post hearing brief of the industrial customers of idaho power
COMES NOW the Industrial Customers of Idaho Power by and through its attorney of record, Peter J. Richardson, and hereby lodges the following Post Hearing Brief in the above captioned matter:
I.
THE 50 MW BUYBACK
BETWEEN ASTARIS AND IDAHO POWER IS NOT
SUBJECT TO THIS COMMISSION’S RATEMAKING AUTHORITY

1. Use of the Term “Buyback”
The ICIP purposefully uses the term “buyback” agreement to describe the Letter Agreement (Ex. 111) that is the subject of this case. The ICIP does not do so to be provocative, but solely because that is the term used in the Letter Areement itself to describe the transactions contemplated by that contract.
2. ESA not at Issue in this Matter
There is considerable confusion among the parties as to the nature of the arrangement that was created by the Letter Agreement amending the Electric Service Agreement (ESA) between Idaho Power and Astaris (fka FMC). The ESA is clear enough; it is an agreement whereby Idaho Power provides Astaris a certain amount of electricity at a fixed price. If Astaris chooses not to take that electricity, it still must pay for it. This is known as a take or pay arrangement and was approved by the Commission pursuant to the Commission’s authority to review rates and charges levied by regulated electric utilities operating in Idaho. See Order No. 27436. There is no doubt the Commission has ongoing regulatory authority to police the terms and conditions of the ESA. After all, the ESA provides for a utility service (electricity) to be provided by a regulated electric utility (Idaho Power) to a customer within Idaho (Astaris) – the ICIP does not question the Commission’s right and obligation to regulate the relationship created by the ESA. The terms of the Letter Agreement, on the other hand, present facts that do not implicate commission regulatory authority.
3. The 50 MW Buyback is Outside the Commission’s Regulatory Reach
The Letter Agreement (Exhibit 111), provides, inter alia, for Idaho Power to buy back from Astaris 50 MW of electricity that Astaris is otherwise obligated to purchase from Idaho Power pursuant to the take or pay provisions of the ESA. The term “buyback” is italicized to illustrate the confusion surrounding what to call this transaction. The body of the Letter Agreement does not contain the word “buyback.” However, Schedule A to the Letter Agreement, which must be considered to be a part of the agreement because it contains the only reference to price, which is an essential term to the agreement, is explicit in labeling the transaction as a “buyback” arrangement. Schedule A refers to the “Buyback (MWh),” the “Buyback Amount,” and the “Cummulative [sic] Buyback Amount.” The Commission followed suit in its Notice of Application and Notice of Modified Procedure issued in response Idaho Power’s filing the Letter Agreement for Commission approval. See Order No. 28678 in which the Commission observed:
Idaho Power would buy back 50 MW of power that Astaris would no longer need because of its decision to change its manufacturing process. Under the Letter Agreement, Astaris accelerates its conversion process and is compensated for surrendering its contractual right to 50 MW of power. In turn, Idaho Power is able to obtain 50 MW o f power at a discount from projected market rates. As exhibited by yesterday’s rolling blackouts in California, there remains considerable uncertainty and volatility in the regional power markets.
Id. at 2, emphasis provided.
From the outset, Idaho Power, Astaris, the Commission and the Commission Staff viewed the Letter Agreement as a transaction in which Idaho Power was making a purchase (“buyback”) of electricity from Astaris. Indeed, in its Notice of Modified Procedure, Order No. 28687 the Commission instructed interested persons that it would take comments on only two issues, “(1) whether the payments made by Idaho Power to Astaris for purchases of energy should be . . . flowed through the PCA mechanism; and (2) [derivative cost treatment]” Id. at 3, Emphasis provided.
Staff, in its comments on the initial application filed by Astaris and Idaho Power, interchanged the terms “load reduction payment” and “price of the energy purchased” when describing the payments Idaho Power proposed to make to Astaris in exchange for a reduction in its energy consumption. See Staff Comments at P 3. Staff also referred to the payments as “energy prices under the agreement.” Id.
4. Watts in a Name?
Plenty – according to Idaho Power and the Commission Staff. The transaction described above as a purchase of energy and/or a buyback of energy by Idaho Power from Astaris changed dramatically when the deal became uneconomic from Idaho Power’s perspective. Incredibly Idaho Power, itself, now asserts that:
There is no buy-back. There is no transfer of property. Astaris is not providing a service to Idaho Power. The agreement not to consume is not a service. It is a reduction in consumption which permits Idaho Power to avoid a service commitment. Astaris is not a vendor of a good or service.
Response of Idaho Power Company to Astaris’ Motion to Dismiss at p. 3. Emphasis provided.
Idaho Power also states, “It is unfortunate that the arrangement with Astaris has been referred to as a buy-back program. . . . Astaris then repeats the term ‘buy-back’ over and over as if repeating the term often enough will make it so.” Id. The misfortune is that Idaho Power denies its own pen. Astaris did not make up the term “buyback.” The term first appears in the very Letter Agreement Idaho Power filed with this Commission for approval. The fact is that Idaho Power agreed to pay Astaris $139,000,000 to “buyback” [Idaho Power’s own word] 876,000 MWh. To paraphrase Idaho Power, ‘Denying it agreed to “buyback” electric power from Astaris over and over doesn’t make the word simply go away.’
The contract Idaho Power signed with Astaris calls for Astaris to be paid in excess of $139 million dollars in cumulative “buyback” amounts. After signing a contract pledging to pay one of its customers over one hundred million dollars for “buyback,” Idaho Power now argues there never was any buyback. Watts in a name? Why does Idaho Power backtrack on buyback? Why deny that the contract it signed with Astaris obligates Idaho Power to pay millions of dollars for “buyback?” We only need to examine Staff’s testimony in light of Idaho Power’s denials cited above, to understand how Idaho Power and the Commission Staff, working in concert, have attempted to weave a fiction by attempting to create a new area of regulatory and contract law to suit Idaho Power’s purposes.
5. Lay Witness Steps in Legal Quagmire - or When is a Contract not a Contract
Most first year law students agonize for a full year (and, if they are honest, for many years thereafter) over such issues as contract formation, offer, acceptance, consideration, reformation and other issue surrounding the centuries old lines of cases dealing with contracts. Not Mr. Hessing. He opens his rebuttal testimony by educating the Commission and the parties about the two different types of contracts in the utility arena. According to Mr. Hessing there are “vendor” contracts and “special” contracts. Tr. 464. Mr. Hessing not only identifies the two types of contracts - he defines their essential terms and explains the Commission’s regulatory authority over each. Id.
According to Mr. Hessing, a “special contract” is a contract between a regulated utility and one of its customers for the supply of utility services. Mr. Hessing instructs that special contracts are subject to Commission approval and oversight over the life of the agreement. Tr. 465. Mr Hessing distinguishes vendor contracts, on the other hand, by noting that a vendor contract supplies goods and services to the regulated utility and is not approved or subject to regulation by the Commission. Id.
On its face, Mr. Hessing’s legal conclusion appears to be logical. A vendor is a vendor after all, and the Commission shouldn’t regulate Idaho Power’s vendor relationships, right? But, we don’t know where Mr. Hessing got his legal advice, if any, because the term “vendor” never once appears in the Idaho Public Utilities Law, Title 61 Idaho Code. Nor does the phrase special contract appear in the Idaho Public Utilities Law, Title 61 Idaho Code. So to the extent the Commission wishes to create some new laws with respect to its regulatory authority, the Staff’s lay (in terms of legal expertise) witness has given it the opportunity to do so.
Although Mr. Hessing, who is not an attorney, testified extensively as to the legal and regulatory implications of the two different types of contracts that he identified, “vendor” and “special,” and although he bases his entire case on the distinction between the two, the witness essentially admits that he made up his own definition of the term “vendor contract.” When asked to describe where the term “vendor contract” as used in his testimony originated, the witness stated: “I guess I don’t recall right off the top of my head where the word “vendor” first came up. It was used to - - well, it was interpreted by me to be what I describe it as in my testimony.” Tr. 503. In his prefiled rebuttal testimony Mr. Hessing confidently concludes that:
On the other hand, “vendor” contracts supplying goods and services to the utility are not approved by the Commission, and therefore, are not subject to on-going Commission oversight to assure that they remain in the public interest.
Tr. 465, emphasis provided.
The “legal” authority Mr. Hessing used to arrive at this definition, as noted above was his own interpretation of some unstated principal of regulatory law; “it was interpreted by me to be what I describe it as in my testimony.” Tr. 503. On the other hand, to the extent, the Commission wishes to apply the well established laws that are already on the books with respect to the extent of its regulatory reach over contracts between utilities and their customers, it need look no further than Idaho Code 61-502.
While written in the prose of the turn of the century (19th) lawmaker, Idaho Code Section 61-502 nevertheless makes it abundantly clear that the Commission has complete authority over the rates and charges received by any member of the public for utility service. Also clear is the Commission’s lack of any authority over the rates and charges paid by a public utility for services it purchases from any other entity (unless, of course that other entity happens to also be a regulated public utility selling utility services - such as Idaho Power purchasing water from United Water). Idaho Code Section 61-502 provides:
Whenever the commission . . . shall find that the rates, fares, tolls, rentals, charges or classifications, or any of them, demanded observed, charged or collected by any public utility for any service or product or commodity, or in connection therewith, . . . , or that the rules, regulations, practices, or contracts or any of them, affecting such rates, fares, tolls, rentals, charges or classifications, or any of them, are unjust, unreasonable, . . . or that such rates, fares, tolls, rentals, charges or classifications are insufficient, the commission shall determine the just, reasonable or sufficient rates tolls, rentals, charges, classifications, rules, regulations, practices or contracts to be thereafter observed and in force and shall fix the same by order . . .
The reach of this section of the Idaho Code is only to those transactions in which the utility is collecting payment from a ratepayer for a utility service. This section does not apply to situations in which the utility is purchasing a product or commodity from an entity that is not also a utility - such as Astaris. The charges in the Letter Agreement (Ex. 111) are assessed by Astaris against Idaho Power. Idaho Power is paying Astaris for a commodity. In other words, Astaris is collecting from Idaho Power. This distinction is significant because there are no . . . :
[r]ates, fares, tolls, rentals, charges, classifications, rules, regulations, practices or contracts
that are:
demanded, observed, charged, or collected
by Idaho Power from Astaris.
Idaho Power is making payments to Astaris “for purchase of energy.” There is no charge paid by Astaris to Idaho Power. The fact that the Astaris sale to Idaho Power of energy was made via an amendment to an existing agreement (that is subject to Commission jurisdiction) is not relevant. The Commission’s Notice of Application in seeking public comment on the sale by Astaris of 50 MW to Idaho Power made it clear that this is a stand-alone transaction. The Commission did not seek comment on whether the underlying agreement between Astaris and Idaho Power would be in any way affected by the Letter Agreement. Indeed, the only issue the Commission sought comment on was “whether the payments made by Idaho Power to Astaris for purchases of energy should be treated as a purchase power expense” (and the, now, unrelated issue of treatment of derivative costs).
Staff’s position rests on the flawed assumption that the utility/ratepayer relationship between Idaho Power and Astaris colors all transactions between the two entities. That is not so. An example will help illustrate. Assume Boise Cascade has a lumber mill, which is a special contract customer of Idaho Power’s (as that term is used by Mr. Hessing). Assume further that Boise Cascade manufacturers utility poles at its mill and that the utility pole market is wildly out of control. Desperate for new utility poles, Idaho Power asks Boise Cascade to sell it 50 poles at a cost of $159 per pole rather than the $25 the market normally charges for poles. However, making the extra fifty poles would cause Boise Cascade to exceed its special contract KW limit. Boise Cascade says that it can make the extra poles if Idaho Power excuses its excess demand charge for the time period needed to make the extra poles. An agreement to that effect is drawn up and executed. Idaho Power files the agreement with the PUC. It asks the PUC for approval of the waiver of the excess demand charge and for assurance that the high pole costs will be passed on to the ratepayers. The Commission responds by approving the contract and assuring Idaho Power that because of the emergency shortage of poles, the high costs are reasonable and would be the responsibility of the ratepayers.
Lo’ and behold, two weeks after the deal is signed, pole prices plummet and Idaho Power can buy poles for $20 from just about anybody. According to the Staff’s logic, at this point the Commission would be able to step in and regulate the price Idaho Power pays Boise Cascade for poles because the pole purchase was part of an amendment to the underlying special contract for utility services – and the Commission approved the agreement. Of course this expansive view of the Commission’s authority is prohibited by Idaho Code Section 61-502, which provides for the sole remedy available to the Commission. When the Commission determines a rate to be contrary to law, it must adjust the rate that is “demanded, observed, charged or collected” by the public utility. The Commission is not a price control agency that determines what prices utilities pay for goods and services – even goods and services intimately related to the cost of production of the utility service.
The Ag Products line of cases, which will be relied upon heavily by Idaho Power and the Commission Staff are simply inapposite because they address the rates collected by utilities from ratepayers. They do not, indeed cannot, address the prices utilities pay to vendors for services that may or may not benefit the ratepayers. If a utility has a contract for supplies, (from coal to electricity), the cost of which it wishes to pass on to the ratepayers, the Commission must first approve that cost as a legitimate ratepayer expense. The contract for coal or electricity does not, by itself, affect rates. It is the Commission’s action passing the cost of that contract on to the ratepayers that affects rates. Staff wants to treat the symptom (higher rates) and not the cause (the Commission’s approval of the higher rates) by punishing Astaris and other potential vendors to Idaho Power Company who find themselves in similar situations.
II
SUMMARY
Although the Commission Staff is to be commended in their search for ways to keep rates low – turning the PUC into a 1970s style price control agency is not the way to accomplish that goal. The Commission has ample jurisdiction over Idaho Power’s rates and charges to disallow any expense for ratemaking purposes that it finds to be unreasonable. Attacking a non-utility entity providing goods and services to a utility is an unwarranted, unnecessary and dangerous expansion of the Commission’s jurisdiction.
The ICIP is acutely aware that the position it takes in this matter is against its own best financial interest. Indeed, this may be the only pleading filed by the ICIP in which a rate reduction is opposed. Nevertheless, the ICIP is also aware that contracts form the basis of almost all of what the members of the ICIP do. Without the ability to rely on and enforce contracts, the very foundation of our economy would crumble. Idaho Power entered into a contract with Astaris for 50 MW of power. It turned out to be a bad deal. Even the Commission’s Staff admits that if the Astaris deal were not with an Idaho Power customer (Enron or Montana Power for instance) it wouldn’t have had any problem with its enforceability. Tr. 494. Althought the discriminatory treatment seems too obvious to state, it highlights the myriad problems that are implicated if the Commission opens the Pandora’s Box offered to it by Staff.
For all of the foregoing, the INDUSTRIAL CUSTOMERS OF IDAHO POWER respectfully request this Commission issue its order denying the Staff’s Petition and reaffirm Idaho Power’s obligations under the Letter Agreement.
Respectfully submitted this 8th day of March, 2002.
Richardson & O’Leary P.L.L.C.

By
Peter J. Richardson
Attorneys for Industrial Customers of
Idaho Power

CERTIFICATE OF SERVICE

I hereby certify that, on this 8th day of March, 2002, a true and correct copy of the foregoing POST HEARING BRIEF OF THE INDUSTRIAL CUSTOMERS OF IDAHO POWER was e-mailed, as directed in the Notice of Filing Procedures issued by the Commission, in this case, to the following:

LARRY D. RIPLEY BARTON L. KLINE
IDAHO POWER COMPANY IDAHO POWER COMPANY
P O Box 70 P O Box 70
Boise, ID 83707-0070 Boise, ID 83707-0070
e-mail: [e-mail] e-mail: [e-mail]

ROBERT M POMEROY JR MIQUEL F UGARTE
THORVALD A NELSON ASTARIS LLC
HOLLAND & HART LLP 622 EMERSON RD
8390 E CRESCENT PKWY, STE 400 PO BOX 411160
GREENWOOD VILLAGE CO 80111 ST LOUIS MO 63141
e-mail: [e-mail] e-mail: [e-mail]

RICHARD PASQUIER RANDALL C. BUDGE
FMC CORPORATION RACINE OLSON NYE ET AL
1735 Market St P O BOX 1391
PHILADELPHIA PA 19103 POCATELLO ID 83201-6339
e-mail: [e-mail] e-mail: [e-mail]

ANTHONY YANKEL JEAN J. JEWELL
29814 Lake Road COMMISSION SECRETARY
BAY VILLAGE OH 44140 Idaho Public Utilities Commission
e-mail: [e-mail] P O Box 83720
BOISE ID 83720-0074
JOHN R. HAMMOND e-mail: [e-mail]
DEPUTY ATTORNEY GENERAL
Idaho Public Utilities Commission
P O Box 83720
Boise ID 83720-0074
e-mail: [e-mail]

In addition, I hereby certify that, on this 8th day of March, 2002, an original and four (4) copies of the Post Hearing Brief of the Industrial Customers of Idaho Power was hand delivered by Ms. Walters, the former Commission Secretary, to the Commission Secretary, Jean J. Jewell, at the address above, as required by the Notice of Filing Procedures.

Myrna J. Walters
Legal Assistant
e-mail: [e-mail]
The reason Staff’s position appears to be tailored to Idaho Power’s interests is that the interests of the ratepayers are best served in this matter by the simple, straightforward disallowance from rates of costs associated with imprudent contracts. Astaris has historically been Idaho Power’s largest single ratepayer.
Notice of Application . . . Order No. 28678 at p. 3.
Agricultural Products v. UP&L 98 Idaho 23, 552 P.2d 617 (1976)

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Post Hearing Brief
Industrial Customers of Idaho Power

Post Hearing Brief
Industrial Customers of Idaho Power

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