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HomeMy WebLinkAbout20050701Gale Direct.pdf"" r f 'r' t..LCI\/t. l;' ILE::O 10115 Jut - I Pt~1 4:4' InllHO PUBLiC UTILl,.-IES C OHHiSSION BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IN THE MATTER OF THE PETITION OF IDAHO POWER COMPANY FOR AN ORDER TEMPORARILY SUSPENDING IDAHO POWER'S PURPA OBLIGATION TO ENTER INTO CONTRACTS TO PURCHASE ENERGY GENERATED BY WIND-POWERED SMALL POWER PRODUCTION FACILITIES. ) CAS E IDAHO POWER COMPANY DIRECT TESTIMONY JOHN R. GALE NO. IPC-E- 05 - Please state your name and business address. My name is John R. Gale and my business address is 1221 West Idaho Street, Boise, Idaho. By whom are you employed and in what capacity? I am employed by Idaho Power Company as the Vice President of Regulatory Affairs. and a Masters University. Please describe your educational background. I hold a Bachelors of Business Administration of Business Administration from Boise State I serve as an advisor to the University s College of Business and Economics.Additionally, I have completed the Edison Electric Insti tute ' s Advanced Ratemaking School and the University of Idaho's Public Utility Executive Course. Powe r Company. Please describe your work experience with Idaho In October 1983, I accepted a position as Rate Analyst with Idaho Power Company.In March 1990, I was assigned to the Company s Meridian District Office for one year where I held the position of Meridian Manager.In March 1991, I was promoted to Manager of Rates.In July 1997, I was named General Manager of Pricing and Regulatory Services. March of 2001, I was promoted to Vice President of Regulatory Affairs.As Vice President of Regulatory Affairs, I am responsible for the overall coordination and direction of the GALE, DI Idaho Power Company Pricing & Regulatory Department, including development of jurisdictional revenue requirements and class cost-of~service studies, preparation of rate design analyses, and administration of tariffs and customer contracts.In my current position am also responsible for policy matters related to the economic regulation Idaho Power Company ( " I daho Power"Company Q .What topics will you discuss in your testimony in this proceeding? I will discuss the role of the Integrated Resource Plan ("IRP") at Idaho Power Company, the Company actions to implement the IRP recommendations, the complications encountered in acquiring the wind resources described in the 2004 IRP portfolio , the resulting request for a temporary suspension in wind purchases under the Public Utility Regulatory policies Act of 1978 ("PURPA", and a recommendation on handling transitional PURPA agreements. What is the Integrated Resource Plan? The Integrated Resource Plan is a comprehensive look at Idaho Power's present and future demands for electricity, as well as a plan for meeting those demands.The plan addresses how Idaho Power expects to meet its Idaho and Oregon customers ' growing electrical demand over a 10-year planning horizon.The IRP describes the Company's proj ected GALE, Dr Idaho Power Company need for additional electrici ty and the resources necessary to meet that need while maintaining reliability and efficiency. Both the Idaho and Oregon public utility commissions require state electric utilities to file an IRP every two years.The current plan was filed with the commissions in August 2004. What purpose does the IRP serve at Idaho Power? The IRP is the Company's principal resource planning document and the foundation for making resource acquisition decisions.The near- term action items described in the plan serve as a blueprint for Company action. Obviously, circumstances change over time and these circumstances are considered along wi th the IRP as part of resource acquisition decisions.Nevertheless, the IRP is our starting point. Please generally describe the resul ts of the most recent IRP. The 2004 IRP is the Company s most recently completed plan.The plan examined 12 different resource portfolios and ultimately selected a diversified portfolio wi th nearly equal amounts of renewable generation and tradi tional thermal generation as the preferred resource portfolio.The 2004 IRP has been accepted for filing by the Idaho Public Utili ties Commisslon IPUC"Commission and acknowledged by the Public Utility Commission of Oregon. GALE, DI Idaho Powe r Company the 2004 IRP? What were the near-team actions identified For Fall 2004, the following actions were identified:(1) issue an RFP for 200 MW wind resource,(2 ) issue an RFP for a peaking resource,(3) proceed with the Borah-West transmission upgrade,(4) file a supplement to the 2004 IRP presenting the results of the ongoing demand-side management studies, and (5) file for an energy efficiency tariff rider with the Oregon Public Utilities Commission.For 2005 these additional actions were identified:(1) design demand-side measures in coordination with the Energy Efficiency Advisory Group and the Public Utility Commissions, (2) issue an RFP for 12 MW CHP , and (3) issue an RFP for 100 MW geothermal resource. What specifically did the 2004 IRP call for in the way of wind resources? The 2004 IRP called for 200 MW of wind resources to be implemented via Requests for Proposals RFPs") issued in 2005 and an additional 150 MW of wind resources to be implemented via RFPs issued in 2008.The total amount of wind resources called for during the planning period was 350 MW. Wha t has the Company done to procure the wind resources identified in the 2004 IRP? GALE, DI Idaho Power Company Idaho Power initiated an RFP process to procure 200 MW of wind resource on January 13, 2005.The Company received offers in response to the RFP on March 10, 2005. Has the Company encountered any circumstances that impact the implementation of the 2004 IRP near-term actions, including the procurement of wind resources? Yes.As Idaho Power attempted to execute its RFP for wind resources , it became evident that the prices and contracts available to wind resources under PURPA were influencing the RFP process.Significant amounts of wind generation began to materialize under PURPA at prices above the levels contemplated in the IRP.Bids in the RFP process were much closer to the PURPA price than the IRP price. Additionally, it was evident that unsuccessful RFP bidders could repackage their proj ects to fit PURPA.Once these influences became apparent, Idaho Power realized that it had to act to address the potential of much more wind coming on- line sooner and more expensively than contemplated in the IRP. The concern with wind resources was the possibility of receiving quantities that were too much , too soon, and too expens i ve . Under what authority is Idaho Power obligated to purchase electric energy produced by cogeneration and small production facilities? GALE , DI Idaho Powe r Company Sections 201 and 210 of PURPA require electric utilities to offer to purchase electric energy generated by qualifying cogeneration and small power production facilities. PURPA requires that state commissions set the rates for purchases of power from Qualifying Facilities ("QFs ) at levels that are just and reasonable to the utility customers, in the public interest and that do not discriminate against QFs.PURPA specifies that the purchase rates set by state commissions for electric utility purchases of energy generated by QFs may not exceed the incremental cost to the electric utility of the electric energy which , but for the purchase from such QFs, the utility would generate or purchase from another source. Has the Commission established avoided cost purchase rates or "published rates" which Idaho Power legally obligated to offer QFs? Yes.In Order No. 29646, issued by the IPUC on December 1 , 2004 in Case No. IPC-04-25, the Commission established the published rates that Idaho Power is obligated to offer to QFs that generate less than 10 average MW per mon th What is the current average levelized published rate for 20-year contracts as established by the IPUC? GALE, DI Idaho Powe r Company The current average levelized published rate for a 20-year contract that is scheduled to be online in 2006 is $60.99 per MWh. Before the issuance of Order No. 29646, how many megawatts of QF wind-powered generation did Idaho Power have on contract? Prior to the issuance of Order no. 29646, Idaho Power had less than 1 MW of QF wind-powered generation under PURPA contracts. What was the published rate for 2003 QF contracts? The published rate for 2003 QF contracts set in IPUC Order No. 29124 was approximately $48.61 per MWh for a project scheduled to come online in 2003 which is 25% less than today s levelized published purchase rates. How many megawatts of PURPA resources have been approved by the Commission within the Idaho Power service territory since the issuance of Commission Order No. 29646? Since the issuance of Order No. 29646, 71.5 MW of nameplate capaci ty have been approved by the Commission. Are there any pending applications before the IPUC for approval of additional wind-powered QF contracts? GALE, DI Idaho Power Company Idaho Power presently has applicationsYes. before the Commission for 21 MW of additional wind-powered QF contracts. Has the Company received inquiries from other wind-powered QF developers? Yes.Idaho Power has received numerous inquiries from potential developers of new wind proj ects Based on information presented by the developers to Idaho Power on issues including, but not limited to , site control, equipment supply and wind studies, Idaho Power estimates these inquiries represent an additional 193 MW of wind-powered generation that has the potential of developing into actual QF proj ects In the Company s opinion , are there other factors besides the 2004 published avoided cost rate that has stimulated this sudden increase in wind-powered QF development in Idaho? Certain tax incentives adopted at theYes. state and federal levels have stimulated wind-powered QF development.Just prior to the issuance of IPUC Order No. 29646, the federal government reinstated the production Tax Credit ("PTC") for wind generation.The reinstated PTC provides proj ect owners a tax credit of approximately $19 per MWh for the first 10 years of the project's operation.That GALE, DI Idaho Power Company production tax credit, together with accelerated depreciation rules and other tax incentives at the federal level, 'has stimulated the development of wind generation.At the state level, the Idaho legislature recently enacted sales tax exemptions (Idaho Code, ~ 63-3622QQ) to encourage the development of alternative generating resources, including wind.In addition, recent IPUC Orders that have increased the term of QF contracts to 20 years (IPUC Order No. 29124) and have made proj ects producing less than 10 average MW per month eligible to receive the published rates (IPUC Order No. 29632) have created a fertile environment for wind development. The combination of federal and state tax incentives, the increase in energy purchase rates established in Order No. 29646, and the favorable contract terms and conditions described above, plus the fact that QF developers retain the right to any green tags associated wi th QF development, have all played a role in the rapid increase in the number of QFs, including wind-powered QFs, seeking contracts to sell their generation to Idaho Power. Has the increased QF activity impacted the responses to a Request for Proposals issued by the Company? I believe so.As previously stated, the 2004 IRP called for 350 MW of wind-powered resources to be acquired in the near term, 200 MW in 2005, and an additional 150 MW in GALE, DI Idaho Power Company 2008.In deciding to move forward with an RFP program to competitively acquire wind resources, Idaho Power was hopeful that a bidding process would allow the Company to take advantage of competition and the economies of scale associated with large-sized wind generation projects.Idaho Power anticipated that this strategy would moderate the total cost of wind energy acquired by averaging the higher cost of smaller QF wind proj ects acquired at the avoided cost rate wi th the presumably lower cost of wind acquired by competi ti ve RFPs . Have these expectations been met? No, these expectations have not been met.The bids received in response to the 2005 RFP are, on average higher than the levelized prices contemplated in the 2004 IRP. Is it possible that the published rates for QFs influenced the bidding? Yes, I believe so. On what basis is Idaho Power establishing this belief? To begin with , Idaho Power s 2004 IRP modeled costs to acquire wind resources was $42.94 per MWh based upon information obtained from public sources and wind developers. The Company also was aware of recent announcements made by other regional utili ties concerning power purchase agreements GALE, DI Idaho Powe r Company they had entered into wi th wind resource developers with substantially lower pricing structures.In the state of Montana, for example, NorthWestern Energy recently received approval from the Public Service Commission of Montana (Final Order No. 6633b, issued on March 31, 2005) for an agreement with Judith Gap LLC under which NorthWestern will purchase 135-150 MW of wind resource at a price of $31.71 per MWh. What impact has the accelerated level of QF wind development had on Idaho Power's recently issued Request for Proposals for 200 MW of wind-powered resources? In light of the large number of MWs of QF wind resources already acquired, approved and proposed, and the high bid prices received in the 2005 RFP , it is almost certain that Idaho Power will reduce the amount of wind generation will obtain through the 2005 RFP.At the same time, it likely that the 2008 RFP will need to be either reduced or eliminated altogether. If Idaho Power reduces or eliminates the amount of wind required in the 2005 and 2008 RFPs, does the possibility exist that wind developers who either responded to or intend to respond to future RFPs will submit applications for QF developments? Yes.That is a real concern to the Company. With only minor modifications, it would not be difficult for a GALE, DI Idaho Power Company larger wind proj ect to be reconf igured into several smaller proj ects each of which would qualify for the published rates. What would be the consequences to Idaho Power and its customers if previous RFP bidders reconfigured their facilities to comport with PURPA requirements and Idaho Power were required to acquire a disproportionate quantity of wind powered generation through PURPA? That scenario would lock the Company and its customers into long- term contracts at prices that the Company asserts are not appropriate for an intermittent energy resource such as wind-powered generation.These circumstances could potentially create an unmanageable influx of intermittent generation on the Company s system. Could the addition of large amounts of QF wind generation adversely affect the reliability of Idaho Power' system? Yes, the addition of large amounts of QF wind generation could adversely affect system reliability.Wind generation is an intermi t tent resource subj ect to the natural variabili ty in the wind.Thus, the energy output from this resource may fluctuate tremendously from hour-to-hour or even minute-to-minute independent of Idaho Power s system needs. For example, a 10 MW wind facility may be at full output at one moment and minutes later be at a very low to no output. GALE , DI Idaho powe r Company As a result of these wind generation fluctuations and to assure system reliability, wind-powered generation must be firmed" by ancillary services. By what means can intermittent wind resources be firmed? Firming of a wind resource can be provided by the purchase of load- following services and reserves from a third party if the ancillary services and transmission are available on a firm, long-term basis.Alternatively, firming can be self-provided by the utility primarily through other resources in the utility s power supply portfolio, such as excess hydro capacity or gas-fired combustion turbines, that the utility can dispatch as necessary. Does the combined cycle combustion turbine, adopted by the Commission as the surrogate avoided cost resource for setting avoided costs, adequately establish the costs of integrating intermi t tent wind resources into Idaho Power's system? No, it does not.That surrogate avoided cost methodology does not consider the costs associated with the ancillary services, described in my earlier testimony, that are required to reliably integrate intermittent wind resources onto the Company s system.Neither the Company nor the GALE , DI Idaho Powe r Company Commission foresaw these consequences when the current process for setting QF rates was established. Is it fair to say that there are costs associated with integrating intermittent wind resources onto Idaho Power s system that are not reflected in the published rates approved by the Commission? Yes, that is a fair statement. Wha t does the Company propose in response to these circumstances? In order to assess if wind resources are impacting Idaho Power's system in a manner that is too much, too soon , and too expens i ve , Idaho Power proposes to seek a temporary suspension on new PURPA wind proj ects until the impacts of integrating these resources onto the Company system can be more thoroughly evaluated from a cost and reliability standpoint.The Company anticipates that there are a number of activities that will facilitate this evaluation. What activities does Idaho Power anticipate will need to be taken during a suspension period if the Commission would approve such request? Idaho Power proposes to undertake the following acti vi ties during a Commission-approved suspension period: (1) the Company would retain an independent third party GALE, DI Idaho Power Company consultant to assist Idaho Power in preparing an analysis which would assess the total amount of addi tional wind resources the Company s system can absorb without adversely affecting the Company s overall power supply costs and system reliability;(2) Idaho Power would prepare and file with the Commission a proposal for computing avoided costs specifically tailored to the attributes of intermittent wind-powered resources, including the addi tional costs attributable to peaking resources required to integrate significant amounts of wind generation into Idaho Power s resource portfolio; and (3) Idaho Power would prepare and present to the Commission a report describing possible steps that could be taken to increase the likelihood that future RFPs for wind resources reflect actual resource costs and market prices for wind resources rather than published avoided cost rates for all types of smaller QF proj ects This analysis would also include a review of the benefits and detriments to Idaho Power of an ownership option for wind resources as a way to provide pricing discipline wi th the RFP process. Historically, avoided cost rates specifically targeted to individual QF generating technologies have not been developed.Why should the Commission consider this practice now? GALE, DI Idaho Power Company Only recently has the Company become aware the unique set of challenges that intermittent wind resources present to Idaho Power's system.As I've already testified, nei ther the Commission nor the Company foresaw the impact intermittent wind resources on a utility s system when the present surrogate avoided cost methodology was established. The Commission should consider a specific wind technology avoided cost rate because of the unique intermittent nature of wind resources and the large number of actual and potential QF wind resources that are seeking PURPA contracts wi th Idaho Power.A reassessment of how the avoided costs should be computed for wind generating resources should be undertaken. That analysis, for the first time, would consider the costs of firming and reliably integrating QF wind resources into the Company s system. In the Company s estimation, should the Commission conduct a review of system reliability issues and wind-specific avoided costs without instituting a temporary suspension of mandatory PURPA purchases for new wind QF proj ects? In my Vlew , that approach is neither possible nor prudent.Prior history has shown that when a utility asks the Commission to consider changing avoided cost rates, potential developers inundate the utility with contract and GALE , DI Idaho Power Company interconnection requests in an effort to obtain the rates in effect prior to the potential rescission of those rates and adoption of newer, likely lower rates.A temporary suspens ion of mandatory purchases of wind QF resources is imperative to effectively address this unique issue and to avoid the adverse impacts anticipated should the Company s system become deluged wi th wind resources. Has the Commission authorized temporary suspensions of the PURPA contract obligation in the past? Yes, my legal counsel has advised me that such a suspension is not without precedent.In IPUC Order No. 19348 issued in Case No. U-1500-156, the Commission , on its own motion , imposed a one-year moratorium on purchases from QFs located within the service area of non-investor-owned utilities that purchase energy supplies from Bonneville Power Administration.That moratorium was eventually lifted and Idaho Power is the purchaser of energy from QF proj ects located in the service area of Idaho municipalities and electric co-operatives. Does the Company recommend that the suspension apply to all wind agreements being negotiated between wind developers and Idaho Power prior to the filing of Idaho Power s peti tion in this proceeding? GALE, Dr Idaho Powe r Company Idaho Power is aware that, should the Commission grant the requested temporary suspension , one of the decisions that must be made is how to apply the suspension to those entities interested in the process of having QF contracts negotiated and reviewed.To that end, the Company does not intend to sign any addi tional agreements until the IPUC provides some guidance on the Company s request.The Company calls to the Commission s attention that a very limited number of QF wind projects were in the final stages of negotiations with Idaho Power immediately prior to the filing of the Idaho Power peti tion.One proj ect in particular, Arrow Rock Wind, Inc.Arrow Rock") executed an agreement with the Company prior to the date that Idaho Power filed its petition with the Commission.On June 24, 2005 , the Company received copy of correspondence from Arrow Rock to the IPUC that details the series of events leading to the execution of the agreement.A copy of the agreement is provided as Exhibit No. 1 . Idaho Power concurs wi th the statements made by Arrow Rock contained in Exhibi t No.As noted in that letter, energy deliveries from the Arrow Rock would not be the typical type of intermittent energy generally associated with a wind proj ect Instead, Arrow Rock has secured a firming agreement with another utility.Accordingly, the energy delivered from GALE, DI Idaho Power Company the proj ect to Idaho power will be a flat, firm, monthly schedule of energy. Due to the fact that negotiation of this agreement was completed prior to the filing of the Petition in this proceeding and the fact that the actual energy delivered to Idaho Power will not be of the intermittent nature at issue in this proceeding, the Company respectfully recommends that the Commission consider Idaho Power's agreement with the Arrow Rock Wind, Inc. proj ect as appropriate for exempting from the temporary suspension request sought in this proceeding. How long a suspension does Idaho Power anticipate is needed to complete the above-referenced activities and analyses? It is my understanding that it will take approximately six to nine months to conduct the necessary acti vi ties and analyses. How do you recommend that the Commission proceed In this matter? The Company respectfully requests that the Commission issue its Order temporarily suspending for a period of nine months Idaho Power's obligation under ~~ 201 and 210 of PURPA to enter into new contracts to purchase energy generated by wind-powered QFs in order to permit the Company and the Commission the opportunity to undertake the activities GALE , DI Idaho Power Company and analyses described in this testimony.Should the studies be completed sooner, Idaho Power would be supportive of an earlier end to the suspension period. Does that conclude your testimony? Yes, it does. GALE, DI Idaho Power Company BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION IDAHO POWER COMPANY Case No IPC-E-OS-22 Exhibit No John R. Gale 'ViT B. 0 C ""WV" in. d, I..... 5203 South 11th East Idaho Falls, Idaho 83404 Tel 208-522-8069 fax 208-522-8123 June 24, 2005 Idaho Pubic UtHitics COtl1mission P. O. Box 83720 Boise, ID 83270-0074 Delivered via Facsimile: 208-334-3762 Subject: Arrow Rock Wind -.- QF Contract with Idaho Power Dear Commissioners: This letter is written pursuant to a firm energy sales agreement, which we have negotiated with Idaho .Power. This contract was negotiated over the past several months with Idaho Power. In the normal course of business ldaho Power forwarded a contract for our signature on June 16, 2005. 1 signed this contract on June 18, 2005 and returned it to Idaho Power via overnight nulH, pursuant to Idaho Contract Power Administrator Randy Allphin s letter of June 16 2005, a copy of which is attached. The Idaho Power letter states that Idaho Power would s,ign the contract and forward to pue for approval. On Thursday, June 23, 2005, Arrow Rock was informed by Randy Allphin that Idaho Power had filed a petition to suspend Idaho Power s requirement to sign PURPA wind contracts on June!? 2005 and until such time as Idaho Power received direction from the pue on this petition, Idaho Power would not be signing any wind PU RP A contracts, Generation projects require substantial planning periods and the resulting good faith negotiation for the contract supporting the project was fully concluded and agreed upon on June :14, 2005. Idaho Power negotiated the QF Agreement with Arrow Rock Wind in the nonnal course of business, \\ihiCh included a unique arrangement in which Arrow Rock, rather than Idaho Power would 'be responsible for flfming and shaping the intenllittent nature of the wind resource. The documentation clearly demonstrates that the Arrow Rock project was fully negotiated prior to the June 17th Petition from Idaho Po~er. The "mandatory contracting for purchases of wind QF resources" was completed prior to IdahoPowcr~ s Petition. The Arrow Rock Wind structure demonstrates that firming of 'intermittent resource does not necessarily need to be the sole responsibility of host u6Jity. Therefore the Arrow Rock resource does not maintain the reliability, ancillary service and integration character,istics that are the bas'is of Idaho Power s Petition. The finn~ flat energy delivery to Idaho Power can easily be integTated into thdr system and provides substantial value. In fact, Idaho Power recognized that the June Petition would be limited to ;;'new contracts for purchases of energy from (intennittent) wind- powered QFs. The suspension (request) would not. affect new contract with QFs utilizing other generating technologies. ~~ The firm~ 11at energy structure places the cost of integration upon Arrow Rock and as such mitigates the basis of concerns identified by Idaho Power. Inour opinion the firm flat Arrow Rock project is actuaJly a superior resource to other generation technologies. Exhibit No. Case No. IPC-O5- J. Gale, IPCo Page 1 of 2 -","" ,.. '" ,.. ... n.. Specifically, the Anow Rock Wind project has a very unique arrangement that elevates its energy deliveries to Idaho Power to a signit1cantly more favorable energy product than the typical intermittent energy from a wind facility. As a value-added and innovative solution to the complex nature of intermittent rcsources~ Arrow Rock Wind has! at its sole cost1 secured firming and shaping services to provide a finn, flat delivery, as negotiated, to Idaho Power of9 MW September through February and 7 MW June through August. 'rhercfore Idaho Power ,IS not required to provide ancillary services, integration and reliabj1jty measures. By this same letter, I request that Idaho Power sign this contract within the next seven to ten days and submit to the pue for approval. Your assistance and insight at the rue is sincerely appreciated. :2Y Ted S. Sorenson. President pc. Randy Allphin, Idaho Power Exhibit No. Case No. IPC-O5- J. Gale, IPCo Page 2 of 2 CERTIFICATE OF SERVICE I HEREBY CERTIFY that on this 1st day of July, 2005, r served a true and correct copy of the Direct Testimony of John R. Gale upon the following named parties by the method indicated below, and addressed to the following: Scott Woodbury Deputy Attorney General Idaho Public Utilities Commission 472 West Washington Street P . O. Box 83 72 0 Boise, ID 83720-0074 Peter J. Richardson Richardson & 0' Leary 515 N. 27th Street P . O. Box 7218Boise, ID 83707 PLLC Mr. James T. Carkulis Exergy Development Group 1424 Dodge Avenue P . O. Box 52 Helena, MT 59604 0 f Idaho LLC Richard L. Storro Director, Power Supply Avista Corporation 1411 E. Mission Avenue P . O. Box 3 72 7, MS C - 7 Spokane, WA 99220 - 3727 R. Blair Strong Paine , Hamblen, Coffin , Brooke & Miller 71 7 West Sprague Avenue, Suite 1200 Spokane, WA 99201-3505 Hand Delivered U . S. Mai 1 Overnight Mail FAX Hand Delivered S. Mail Overnight Mail FAX Hand Delivered S. Mail Overnight Mail FAX Hand Delivered U . S. Mai 1 Overnight Mail FAX Hand Delivered U. S. Mail Overnight Mail FAX (J3. MONI CA B. MOEN CERTIFICATE OF SERVICE